2014

Harland Clarke Holdings Corp. Reports Third Quarter 2007 Results

    DECATUR, Ga., Nov. 9 /PRNewswire-FirstCall/ -- Harland Clarke Holdings
 Corp. ("Harland Clarke Holdings"), formerly known as Clarke American Corp.,
 today reported results for the third quarter and nine months ended
 September 30, 2007. In addition to the Harland Clarke Holdings Form 10-Q
 filed with the Securities and Exchange Commission today, Harland Clarke
 Holdings' financial results are also consolidated in the quarterly report
 on Form 10-Q filed today by M & F Worldwide Corp. (NYSE:   MFW), which is the
 indirect parent company of Harland Clarke Holdings.
     As previously announced, on May 1, 2007, M & F Worldwide Corp.
 completed the acquisition of John H. Harland Company ("Harland") and
 related financing transactions. Upon the completion of the acquisition,
 Harland became a wholly owned subsidiary of Clarke American Corp., which
 was then renamed Harland Clarke Holdings Corp. Harland Clarke Holdings'
 results for the third quarter and nine months ended September 30, 2007
 reflect Harland results from and after May 1, 2007. As a result of the
 acquisition of Harland, Harland Clarke Holdings now has three business
 lines - Harland Clarke (which is the combination of Clarke American Corp.'s
 check printing, contact center and direct marketing capabilities with
 Harland's corresponding businesses), Harland Financial Solutions and
 Scantron.
     Having completed the Harland acquisition, Harland Clarke Holdings is
 focused on improving operating margins through consolidating facilities and
 reducing duplicative selling, general and administrative expenses and
 executive and shared services costs. Harland Clarke Holdings believes that
 it is on target to achieve cost reduction goals previously disclosed in
 connection with the financing for the Harland acquisition.
     Third Quarter Performance
     Consolidated net revenues for the third quarter of 2007 were $432.8
 million, as compared to $155.3 million for the third quarter of 2006.
 Harland Clarke Holdings' revenues increased by $277.5 million in the third
 quarter of 2007 primarily as a result of the acquisition of Harland, which
 accounted for $263.4 million of the increase. Net income for the third
 quarter of 2007 was $7.5 million, as compared to $7.3 million for the third
 quarter of 2006. The net income in the third quarter of 2007 includes
 pre-tax charges of $4.0 million ($2.4 million after tax) due to non-cash
 fair value purchase accounting adjustments to inventory and deferred
 revenue, $2.0 million ($1.2 million after tax) for restructuring costs and
 $3.1 million ($1.9 million after tax) due to impairment of Alcott Routon
 intangible assets. For the third quarter of 2007, adjusted EBITDA increased
 by $76.3 million to $113.5 million as compared to $37.2 million for the
 third quarter of 2006 primarily as a result of the acquisition of Harland,
 which accounted for $66.0 million of the increase. Adjusted EBITDA is a
 non-GAAP measure that is defined in the footnotes to this release and which
 is reconciled to net income, the most directly comparable GAAP measure, in
 the accompanying financial tables.
     Net revenues from the Harland Clarke segment increased by $177.1
 million to $332.4 million for the third quarter of 2007 from $155.3 million
 in the third quarter of 2006, primarily as a result of the Harland
 acquisition which accounted for $163.1 million of the increase. The
 remaining $14.0 million of the increase was primarily due to an increase in
 revenues from a large client and higher revenues per unit, partially offset
 by a decline in units.
     Net revenues from the Harland Financial Solutions and Scantron segments
 for the third quarter of 2007 were $79.0 million and $21.9 million,
 respectively.
     Year-to-Date Performance
     Consolidated net revenues for the first nine months of 2007 were $937.0
 million, as compared to $474.4 million for the first nine months of 2006.
 Harland Clarke Holdings' revenues increased by $462.6 million in the nine
 months ended September 30, 2007 primarily as a result of the Harland
 acquisition, which accounted for $438.1 million of the increase. Net loss
 for the nine months ended September 30, 2007 was $24.9 million, as compared
 to $17.6 million of net income for the 2006 period. The net loss for the
 nine months ended September 30, 2007 includes a nonrecurring pre-tax loss
 on early extinguishment of debt of $54.6 million ($34.1 million after tax)
 related to refinancing transactions completed in connection with the
 Harland acquisition. The net loss for the nine months ended September 30,
 2007 also includes pre- tax charges of $12.6 million ($8.0 million after
 tax) due to non-cash fair value purchase accounting adjustments to
 inventory and deferred revenue, $2.4 million ($1.4 million after tax) for
 Harland acquisition-related retention bonuses, $4.9 million ($3.1 million
 after tax) for restructuring costs and $3.1 million ($1.9 million after
 tax) due to impairment of Alcott Routon intangible assets. For the nine
 months ended September 30, 2007, adjusted EBITDA increased by $123.9
 million to $236.9 million, as compared to $113.0 million for the 2006
 period, primarily as a result of the Harland acquisition, which accounted
 for $109.2 million of the increase.
     Net revenues from the Harland Clarke segment increased by $298.9
 million to $773.3 million in the nine months ended September 30, 2007 from
 $474.4 million in the first nine months of 2006, primarily as a result of
 the Harland acquisition which accounted for $274.4 million of the increase.
 The remaining $24.5 million of the increase was primarily due to an
 increase in revenues from a large client and an increase in revenues per
 unit, partially offset by a decline in units.
     Net revenues from the Harland Financial Solutions and Scantron segments
 from May 1, 2007, the date of the Harland acquisition, through September
 30, 2007 were $131.1 million and $33.3 million, respectively.
     Harland Acquisition
     As previously announced, on May 1, 2007, M & F Worldwide completed its
 acquisition of Harland at a price per share of Harland common stock of
 $52.75, representing an approximate transaction value of $1.7 billion. In
 connection with the Harland acquisition, Clarke American Corp.'s prior
 senior secured credit facility, Harland's then outstanding credit facility
 and Clarke American Corp.'s prior 11.75% senior notes due 2013 were repaid
 in full. The acquisition and debt repayment were funded with new borrowings
 by Harland Clarke Holdings, consisting of a $1.8 billion senior secured
 term loan and an aggregate $615.0 million principal amount of senior notes
 due 2015, comprised of $310.0 million principal amount of 9 1/2% senior
 fixed rate notes and $305.0 million principal amount of senior floating
 rate notes bearing interest at LIBOR plus 4.75%.
     About Harland Clarke Holdings
     Prior to the acquisition of Harland on May 1, 2007, Clarke American
 Corp. provided checks and related products and direct marketing services
 through two segments: the Financial Institution segment, which was focused
 on financial institution clients and their customers, and the Direct to
 Consumer segment, which was focused on individual customers. As a result of
 the acquisition of Harland, Harland Clarke Holdings reorganized its
 business and corporate structure along three business segments, Harland
 Clarke (which consists of the combined check and related products business
 of Clarke American Corp. and Harland), Harland Financial Solutions, and
 Scantron. Subsequent to the closing of the Harland acquisition, Clarke
 American Corp.'s check printing, contact center and direct marketing
 capabilities have been combined with Harland's corresponding business and
 operate under the name "Harland Clarke." The operations of Harland
 Financial Solutions include core processing, retail and lending software
 solutions as well as maintenance services to financial and other
 institutions. Scantron is a leading provider of data collection and testing
 and assessment products and services sold primarily to educational and
 commercial customers.
     Forward Looking Statements
     This press release contains forward looking statements that reflect
 management's current assumptions and estimates of future performance and
 economic conditions, which are forward-looking statements within the
 meaning of the Private Securities Litigation Reform Act of 1995. These
 statements are subject to a number of risks and uncertainties, many of
 which are beyond Harland Clarke Holdings' control. All statements other
 than statements of historical facts included in this press release,
 including those regarding Harland Clarke Holdings' strategy, future
 operations, financial position, estimated revenues, projected costs,
 projections, prospects, plans and objectives of management, are
 forward-looking statements. When used in this press release, the words
 "believes," "anticipates," "plans," "expects," "intends," "estimates" or
 similar expressions are intended to identify forward-looking statements,
 although not all forward-looking statements contain such identifying words.
 All forward-looking statements speak only as of the date of this press
 release. Although Harland Clarke Holdings believes that its plans,
 intentions and expectations reflected in or suggested by the
 forward-looking statements made in this press release are reasonable, such
 plans, intentions or expectations may not be achieved. The factors which
 may cause Harland Clarke Holdings' actual results, performance or
 achievements to be materially different from any future results,
 performance or achievements expressed or implied by the forward-looking
 statements contained in this press release include: 1) Harland Clarke
 Holdings' substantial indebtedness; 2) covenant restrictions under Harland
 Clarke Holdings' indebtedness that may limit its ability to operate its
 business and react to market changes; 3) the maturity of the principal
 industry in which the Harland Clarke segment operates and trends in the
 paper check industry, including a faster than anticipated decline in check
 usage due to increasing use of alternative payment methods and other
 factors; 4) consolidation among financial institutions and other adverse
 changes among the large clients on which Harland Clarke Holdings depends,
 resulting in decreased revenues; 5) the ability to retain Harland Clarke
 Holdings' clients and the ability to retain Harland Clarke Holdings' key
 employees and management; 6) lower than expected cash flow from operations;
 7) significant increases in interest rates; 8) intense competition in all
 areas of Harland Clarke Holdings' business; 9) interruptions or adverse
 changes in Harland Clarke Holdings' supplier relationships, technological
 capacity, intellectual property matters, and applicable laws; 10)
 variations in contemplated brand strategies, business locations, management
 positions and other business decisions in connection with integrating
 Harland; 11) Harland Clarke Holdings' ability to successfully integrate
 Harland into its business and manage future acquisitions; 12) Harland
 Clarke Holdings' ability to implement any or all components of its business
 strategy or realize all of its expected cost savings or synergies from the
 Harland acquisition; and 13) the acquisition of Harland otherwise not being
 successful from a financial point of view, including, without limitation,
 due to any difficulties with Harland Clarke Holdings servicing its debt
 obligations.
     You should read carefully the factors described in Harland Clarke
 Holdings' Quarterly Report on Form 10-Q for the quarter ended June 30, 2007
 for a description of risks that could, among other things, cause actual
 results to differ from these forward looking statements.
     Non-GAAP Financial Measures
     In this release, Harland Clarke Holdings presents certain adjusted
 financial measures that are not calculated according to generally accepted
 accounting principles in the United States ("GAAP"). These non-GAAP
 financial measures are designed to complement the GAAP financial
 information presented in this release because management believes they
 present information regarding Harland Clarke Holdings that management
 believes is useful to investors. The non-GAAP financial measures presented
 should not be considered in isolation from or as a substitute for the
 comparable GAAP financial measure.
     EBITDA represents net income before interest income and expense, income
 taxes, depreciation and amortization (other than amortization related to
 upfront contract payments). Harland Clarke Holdings presents EBITDA because
 it believes it is an important measure of its performance and believes it
 is frequently used by securities analysts, investors and other interested
 parties in the evaluation of companies in Harland Clarke Holdings'
 industries.
     Harland Clarke Holdings believes EBITDA provides useful information
 with respect to its ability to meet its future debt service, capital
 expenditures, working capital requirements and overall operating
 performance although EBITDA should not be considered as a measure of
 liquidity. In addition, Harland Clarke Holdings utilizes EBITDA when
 interpreting operating trends and results of operations of its business.
     Harland Clarke Holdings also uses EBITDA for the following purposes:
 Harland Clarke Holdings' senior credit facilities use EBITDA (with
 additional adjustments) to measure compliance with financial covenants such
 as debt incurrence. Harland Clarke Holdings' executive compensation is
 based on EBITDA (with additional adjustments) performance measured against
 targets. EBITDA is also widely used by Harland Clarke Holdings and others
 in its industry to evaluate and value potential acquisition candidates.
 EBITDA has limitations as an analytical tool, and you should not consider
 it in isolation or as a substitute for analysis of our results as reported
 under GAAP. See below for a description of these limitations. Because of
 these limitations, EBITDA should not be considered as a measure of
 discretionary cash available to Harland Clarke Holdings to invest in the
 growth of its business.
     In addition, in evaluating EBITDA, you should be aware that in the
 future Harland Clarke Holdings may incur expenses such as those excluded in
 calculating it. Harland Clarke Holdings' presentation of this measure
 should not be construed as an inference that its future results will be
 unaffected by unusual or nonrecurring items.
     EBITDA has limitations as an analytical tool, and you should not
 consider it in isolation or as substitutes for analysis of our results as
 reported under GAAP. Some of these limitations are:
      -- it does not reflect Harland Clarke Holdings' cash expenditures and
         future requirements for capital expenditures or contractual
         commitments;
 
      -- it does not reflect changes in, or cash requirements for, Harland
         Clarke Holdings' working capital needs;
 
      -- it does not reflect the significant interest expense or the cash
         requirements necessary to service interest or principal payments on
         Harland Clarke Holdings' debt;
 
      -- although depreciation and amortization are noncash charges, the assets
         being depreciated and amortized will often have to be replaced in the
         future, and EBITDA does not reflect any cash requirements for such
         replacements;
 
      -- it is not adjusted for all non-cash income or expense items that are
         reflected in Harland Clarke Holdings' statements of cash flows; and
 
      -- other companies in Harland Clarke Holdings' industry may calculate
         EBITDA differently from Harland Clarke Holdings, limiting its
         usefulness as a comparative measure.
     Because of these limitations, EBITDA should not be considered as a
 measure of discretionary cash available to us to invest in the growth of
 Harland Clarke Holdings' business or as a measure of cash that will be
 available to Harland Clarke Holdings to meet its obligations. You should
 compensate for these limitations by relying primarily on Harland Clarke
 Holdings' GAAP results and using EBITDA only supplementally.
     Harland Clarke Holdings presents Adjusted EBITDA as a further
 supplemental measure of its performance. Harland Clarke Holdings prepares
 Adjusted EBITDA by adjusting EBITDA to reflect the impact of a number of
 items it does not consider indicative of Harland Clarke Holdings' ongoing
 operating performance. Such items include restructuring costs,
 non-recurring purchase accounting adjustments, an earnout related to the
 Alcott Routon acquisition and other non-recurring acquisition related
 expenses. You are encouraged to evaluate each adjustment and the reasons
 Harland Clarke Holdings considers them appropriate for supplemental
 analysis. As an analytical tool, Adjusted EBITDA is subject to all of the
 limitations applicable to EBITDA. In addition, in evaluating Adjusted
 EBITDA, you should be aware that in the future, Harland Clarke Holdings may
 incur expenses, including cash expenses, similar to the adjustments in this
 presentation. Harland Clarke Holdings' presentation of Adjusted EBITDA
 should not be construed as an inference that its future results will be
 unaffected by unusual or non-recurring items.
                 Harland Clarke Holdings Corp. And Subsidiaries
                     Consolidated Statements of Operations
                                 (in millions)
                                  (unaudited)
 
 
                                          Three Months Ended  Nine Months Ended
                                               September 30,     September 30,
                                               2007    2006     2007     2006
 
     Product revenues, net                   $367.2  $154.8   $831.2   $473.0
     Service revenues, net                     65.6     0.5    105.8      1.4
        Total net revenues                    432.8   155.3    937.0    474.4
     Cost of products sold                    226.6    95.6    513.9    292.3
     Cost of services provided                 33.2     0.4     58.5      1.1
        Total cost of revenues                259.8    96.0    572.4    293.4
     Gross profit                             173.0    59.3    364.6    181.0
     Selling, general and administrative
      expenses                                106.3    35.8    232.8    110.5
     Restructuring costs                        2.0     1.0      4.9      1.9
        Operating income                       64.7    22.5    126.9     68.6
     Interest income                            2.0       -      3.3        -
     Interest expense                         (52.6)  (15.4)  (113.1)   (44.6)
     Loss on early extinguishment of debt         -       -    (54.6)       -
     Other income (expense), net                0.1       -      0.2        -
        Income (loss) before income taxes      14.2     7.1    (37.3)    24.0
     Provision (benefit) for income taxes       6.7    (0.2)   (12.4)     6.4
        Net income (loss)                    $  7.5  $  7.3   $(24.9)  $ 17.6
 
 
 
                 Harland Clarke Holdings Corp. And Subsidiaries
                          Business Segment Information
                                 (in millions)
                                  (unaudited)
 
 
                                          Three Months Ended  Nine Months Ended
                                                September 30,    September 30,
                                                2007    2006     2007    2006
     Net revenues
          Harland Clarke segment              $332.4  $155.3   $773.3  $474.4
          Harland Financial Solutions
           segment                              79.0       -    131.1       -
          Scantron segment                      21.9       -     33.3       -
          Eliminations                          (0.5)      -     (0.7)      -
     Total revenue                            $432.8  $155.3   $937.0  $474.4
 
     Operating income (loss)
          Harland Clarke segment              $ 55.4  $ 22.5   $122.8  $ 68.6
          Harland Financial Solutions
           segment                               9.6       -     13.5       -
          Scantron segment                       4.7       -      1.6       -
          Corporate                             (5.0)      -    (11.0)      -
     Total operating income (loss)            $ 64.7  $ 22.5   $126.9  $ 68.6
 
 
     Reconciliation of net income to EBITDA and EBITDA to Adjusted EBITDA (in
     millions) (unaudited):
 
 
                                          Three Months Ended  Nine Months Ended
                                              September 30,     September 30,
                                             2007      2006     2007     2006
 
     Net income (loss)                     $  7.5    $  7.3   $(24.9)  $ 17.6
     Interest expense, net                   50.6      15.4    109.8     44.6
     Loss on early extinguishment of debt       -         -     54.6        -
     Provision (benefit) for income taxes     6.7      (0.2)   (12.4)     6.4
     Depreciation and amortization           39.6      13.5     86.8     40.7
     EBITDA                                 104.4      36.0    213.9    109.3
     Adjustments:
      Restructuring (a)                       2.0       1.0      4.9      1.9
      Alcott Routon earn-out (b)                -       0.3        -      0.7
      Impairment of intangible assets (c)     3.1         -      3.1        -
      Transaction related expenses (d)          -         -      2.4        -
      Impact of purchase accounting
       adjustments (e)                        4.0      (0.1)    12.6      1.1
 
     Adjusted EBITDA                       $113.5    $ 37.2   $236.9   $113.0
 
     (a) Reflects restructuring expenses, including adjustments, recorded in
         accordance with GAAP, consisting primarily of severance, post-closure
         facility expenses and other related expenses, which could not be
         recorded in purchase accounting.  The expenses recorded in the three
         months ended September 30, 2007 primarily relate to closures of
         facilities and other restructuring activities in connection with the
         Harland acquisition.  The expenses recorded in the nine months ended
         September 30, 2007 and 2006 include expenses related to restructuring
         activities in Harland Clarke Holdings' business that were not related
         to the Harland acquisition.
 
     (b) Reflects charges accrued under an earnout arrangement recorded as
         SG&A expense resulting from the 2004 purchase of Alcott Routon, Inc.
         In accordance with the agreement, the maximum of $3.0 million was paid
         in 2007.
 
     (c) Reflects a non-cash impairment charge from the write-down of Alcott
         Routon intangible assets.
 
     (d) Reflects non-recurring employee retention bonuses incurred in
         connection with the Harland acquisition.
 
     (e) Reflects the negative effect on net income primarily from the non-cash
         fair value inventory and deferred revenue adjustments related to
         purchase accounting.  The charges incurred in the nine months ended
         September 30, 2006 are related to the acquisition of Clarke American
         Corp. by M & F Worldwide in December 2005.
 
 

SOURCE Harland Clarke Holdings Corp.

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