Harland Clarke Holdings Corp. Reports Q3 Results

Harland Clarke Holdings Corp. to Participate in M & F Worldwide Corp. Conference Call on November 12, 2009

DECATUR, Ga., Nov. 6 -- Harland Clarke Holdings Corp. ("Harland Clarke Holdings" or the "Company") today reported results for the third quarter and nine months ended September 30, 2009. In addition to the Harland Clarke Holdings quarterly report on 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.

M & F Worldwide will host a conference call to discuss its third quarter and year-to-date 2009 results on November 12, 2009, at 9:00 a.m. (EST). The conference call will be accessible by dialing (800) 230-1951 in the United States and (612) 288-0337 internationally. For those unable to listen live, a replay of the call will be available by dialing (800) 475-6701 in the United States and (320) 365-3844 internationally; Access Code: 120099. The replay will be available from 11:00 a.m. (EST) Thursday, November 12, 2009, through 11:59 p.m. (EST) Thursday, November 26, 2009.

Third Quarter 2009 Highlights

-- Net revenues of $425.7 million, down 6.2% as compared to the third quarter of 2008

-- Operating income of $86.5 million, up 22.2% as compared to the third quarter of 2008

-- Non-GAAP adjusted net income of $33.4 million, excluding the impact of a gain on early extinguishment of debt

Third Quarter 2009 Performance

Consolidated Results

Consolidated net revenues decreased by $28.3 million, or 6.2%, to $425.7 million for the third quarter of 2009 from $454.0 million for the third quarter of 2008. The decrease was primarily due to a decrease in net revenues for the Harland Clarke segment of $17.7 million.

Non-GAAP adjusted net income was $33.4 million for the third quarter of 2009, excluding the impact of a gain on early extinguishment of debt. Net income increased by $18.2 million, or 117.4%, to $33.7 million for the third quarter of 2009 from $15.5 million for the third quarter of 2008. The increase in net income reflected an increase in operating income of $15.7 million ($9.6 million after tax), primarily due to reductions in selling, general and administrative expenses and a decrease in interest expense of $12.6 million ($7.7 million after tax), primarily due to lower interest rates on variable rate debt.

Adjusted EBITDA increased by $15.4 million, or 13.3%, to $131.4 million for the third quarter of 2009 from $116.0 million for the third quarter of 2008. Adjusted EBITDA is a non-GAAP measure that is defined in the footnotes to this release and reconciled to net income, the most directly comparable GAAP measure, in the accompanying financial tables.

Segment Results

Net revenues for the Harland Clarke segment decreased by $17.7 million, or 5.5%, to $305.0 million for the third quarter of 2009 from $322.7 million for the third quarter of 2008. The decrease in net revenues was primarily due to volume declines from check and related products, which the Company believes was partially affected by the economic downturn. Declines in volumes were partially offset by increased revenues per unit. Operating income for the Harland Clarke segment increased by $12.4 million, or 21.8%, to $69.4 million for the third quarter of 2009 from $57.0 million for the third quarter of 2008. The increase in operating income was largely driven by increased revenues per unit, reductions in labor, general overhead and integration-related costs, and a decrease in depreciation and amortization, which more than offset volume declines, inflation in delivery and materials costs, and a $2.8 million increase in restructuring costs. Operating income for the third quarter of 2009 and 2008 includes restructuring costs of $3.4 million and $0.6 million, respectively.

Net revenues for the Harland Financial Solutions segment decreased by $4.9 million, or 6.7%, to $67.9 million for the third quarter of 2009 from $72.8 million for the third quarter of 2008. Net revenues from the enterprise solutions product lines decreased $3.0 million, primarily due to declines in license, hardware, and professional services revenues. Additionally, there was a decrease in early termination fees in the third quarter of 2009 as compared to the third quarter of 2008. Net revenues from the risk management product lines decreased $1.4 million, primarily due to declines in lending products. The Company believes the declines were partially affected by the economic downturn, which has negatively affected information technology purchases by financial institutions. Operating income for the Harland Financial Solutions segment increased by $1.5 million, or 18.8%, to $9.5 million for the third quarter of 2009 from $8.0 million for the third quarter of 2008. The increase in operating income was primarily due to labor cost reductions, decreases in general overhead costs, and a $1.3 million reduction in compensation expense related to an incentive agreement from an acquisition, partially offset by the decrease in net revenues and a $0.8 million increase in restructuring costs. Operating income for the third quarter of 2009 includes charges of $0.8 million for compensation expense related to an incentive agreement from an acquisition and $0.9 million for restructuring costs. Operating income for the third quarter of 2008 includes charges of $2.1 million for compensation expense related to an incentive agreement from an acquisition and $0.1 million for restructuring costs.

Net revenues for the Scantron segment decreased by $5.7 million, or 9.7%, to $52.9 million for the third quarter of 2009 from $58.6 million for the third quarter of 2008. The decrease in net revenues was primarily due to volume declines in hardware and forms products and a decrease in service and maintenance revenues. The Company believes these product lines and services were partially affected by the economic downturn. Operating income for the Scantron segment increased by $2.1 million, or 23.3%, to $11.1 million in the third quarter of 2009 from $9.0 million in the third quarter of 2008. The increase in operating income was primarily due to cost reductions and a decrease in integration-related costs from the Data Management acquisition and other restructuring activities and a $0.7 million decrease in restructuring costs, partially offset by volume declines. Operating income for the third quarter of 2008 includes restructuring costs of $0.7 million.

Year-to-Date 2009 Performance

Consolidated Results

Consolidated net revenues decreased by $65.2 million, or 4.8%, to $1,290.7 million for the nine months ended September 30, 2009 from $1,355.9 million for the nine months ended September 30, 2008. The decrease was primarily due to a decrease in net revenues for the Harland Clarke segment of $57.4 million, partially offset by an increase in net revenues of $14.6 million due to the acquisition of Data Management I LLC by the Scantron segment on February 22, 2008.

Non-GAAP adjusted net income was $70.3 million for the nine months ended September 30, 2009, excluding the impact of gain on early extinguishment of debt. Net income increased by $71.3 million, or 191.2%, to $108.6 million for the nine months ended September 30, 2009 from $37.3 million for the nine months ended September 30, 2008. Net income for the nine months ended September 30, 2009 includes a $62.0 million ($38.3 million after tax) gain on early extinguishment of debt related to the purchase of $116.2 million principal amount of the Company's Senior Notes for aggregate consideration of $50.6 million. The increase in net income also reflects a decrease in interest expense of $33.4 million ($20.4 million after tax), primarily due to lower interest rates on variable rate debt, and an increase in operating income of $14.1 million ($8.6 million after tax), primarily due to reductions in selling, general and administrative expenses, partially offset by an increase in restructuring costs of $22.3 million ($13.6 million after tax).

Adjusted EBITDA increased by $26.4 million, or 7.7%, to $368.9 million for the nine months ended September 30, 2009 from $342.5 million for the nine months ended September 30, 2008. Adjusted EBITDA is a non-GAAP measure that is defined in the footnotes to this release and reconciled to net income, the most directly comparable GAAP measure, in the accompanying financial tables.

Segment Results

Net revenues for the Harland Clarke segment decreased by $57.4 million, or 5.8%, to $926.4 million for the nine months ended September 30, 2009 from $983.8 million for the nine months ended September 30, 2008. The decrease in net revenues was primarily due to volume declines from check and related products, which the Company believes was partially affected by the economic downturn, as well as one less production day in the nine months ended September 30, 2009. Declines in volumes were partially offset by increased revenues per unit. Additionally, there was $0.7 million of revenue from contract termination fees for the nine months ended September 30, 2009 compared to $2.3 million for the nine months ended September 30, 2008. Operating income for the Harland Clarke segment decreased by $0.8 million, or 0.5%, to $172.6 million for the nine months ended September 30, 2009 from $173.4 million for the nine months ended September 30, 2008. The decrease in operating income was largely driven by a $20.4 million increase in restructuring costs, volume declines, inflation in delivery and materials costs, one less production day in the nine months ended September 30, 2009 and a $1.6 million reduction in revenue from contract termination fees, which were essentially offset by increased revenues per unit, and reductions in labor, general overhead and integration-related costs, and a decrease in depreciation and amortization. Operating income for the nine months ended September 30, 2009 and 2008 includes restructuring costs of $21.8 million and $1.4 million, respectively.

Net revenues for the Harland Financial Solutions segment decreased by $11.1 million, or 5.1%, to $206.8 million for the nine months ended September 30, 2009 from $217.9 million for the nine months ended September 30, 2008. Net revenues from the enterprise solutions product lines decreased $9.5 million, primarily due to declines in license, hardware, and professional services revenues. Additionally, there was a decrease in early termination fees for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. Net revenues from the risk management product lines decreased $1.0 million, primarily due to declines in mortgage products, partially offset by organic growth in lending products. The Company believes the declines were partially affected by the economic downturn, which has negatively affected information technology purchases by financial institutions. Operating income for the Harland Financial Solutions segment increased by $7.3 million, or 35.1%, to $28.1 million for the nine months ended September 30, 2009 from $20.8 million for the nine months ended September 30, 2008. The increase in operating income was primarily due to labor cost reductions, decreases in general overhead costs and a $4.3 million decrease in compensation expense related to an incentive agreement for an acquisition, partially offset by the decrease in net revenues and a $1.1 million increase in restructuring costs. Operating income for the nine months ended September 30, 2009 includes charges of $2.9 million for compensation expense related to an incentive agreement from an acquisition and $4.1 million for restructuring costs. Operating income for the nine months ended September 30, 2008 includes charges of $7.2 million for compensation expense related to an incentive agreement from an acquisition and $3.0 million for restructuring costs.

Net revenues for the Scantron segment increased by $3.1 million, or 2.0%, to $158.0 million for the nine months ended September 30, 2009 from $154.9 million for the nine months ended September 30, 2008. The Data Management acquisition accounted for an increase of $14.6 million. The remaining $11.5 million decrease was as a result of volume declines in hardware and forms products, partially offset by organic growth in software products. The Company believes the hardware and forms product lines were partially affected by the economic downturn. Operating income for the Scantron segment increased by $5.4 million, or 28.1%, to $24.6 million for the nine months ended September 30, 2009 from $19.2 million for the nine months ended September 30, 2008. The increase in operating income was partially due to the Data Management acquisition, which accounted for an increase of $1.9 million. The remaining $3.5 million increase was primarily due to cost reductions and a decrease in integration-related costs from the Data Management acquisition and other restructuring activities, partially offset by volume declines and a $0.8 million increase in restructuring costs. The nine months ended September 30, 2009 includes $1.3 million in one-time expenses related to a contractual obligation owing to a former employee upon termination of employment. Operating income for the nine months ended September 30, 2009 and 2008 includes restructuring costs of $3.1 million and $2.3 million, respectively.

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.

Non-GAAP Adjusted Net Income

Non-GAAP adjusted net income represents GAAP net income, adjusted to eliminate the gain on early extinguishment of debt and related taxes from the repurchases of the Senior Notes at a discount to their principal amount. Harland Clarke Holdings is presenting non-GAAP adjusted net income as a measure of its financial performance because it believes presenting non-GAAP adjusted net income will allow investors to better understand the operating results of Harland Clarke Holdings, since the gain on early extinguishment of debt does not result from changes in the underlying business operations of Harland Clarke Holdings. Management of Harland Clarke Holdings uses non-GAAP adjusted net income to evaluate the operational results and financial performance of Harland Clarke Holdings in a manner similar to the manner in which it uses GAAP net income.

EBITDA and Adjusted EBITDA

EBITDA represents net income before interest income and expense, income taxes, depreciation and amortization (other than amortization related to contract acquisition 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 non-recurring items.

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. 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 non-cash 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' industries 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 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 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, but are not limited to, gain on early extinguishment of debt, restructuring costs, deferred purchase price compensation related to an acquisition and non-recurring purchase accounting adjustments. 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.

About Harland Clarke Holdings

Harland Clarke Holdings has three business segments, which are operated by Harland Clarke, Harland Financial Solutions, and Scantron. Harland Clarke provides checks and related products and direct marketing services to financial institutions and their customers. The operations of Harland Financial Solutions include core processing, retail and lending software solutions. Scantron is a leading provider of data management solutions and testing and assessment products and services sold primarily to educational and commercial customers.