Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion regarding our financial condition and results of operations for the three and nine months ended September 30, 2009 and 2008 should be read in conjunction with the more detailed financial information contained in our consolidated financial statements and their notes included elsewhere in this quarterly report.
Overview of Business
M & F Worldwide Corp. ("M & F Worldwide" and, together with its subsidiaries, the "Company") is a holding company that conducts its operations through its indirect wholly owned subsidiaries, Harland Clarke Holdings and Mafco Worldwide. The Company's businesses are organized along four business segments together with a corporate group for certain support services.
The Harland Clarke segment offers checks and related products, forms and treasury supplies, and related delivery and fraud prevention services. It also provides specialized marketing and contact center services to its financial and commercial institution clients. Harland Clarke's marketing offerings include turnkey marketing solutions, checkbook messaging and e-mail marketing. Through its contact centers, Harland Clarke provides financial institutions with both inbound and outbound support for their clients, including sales and ordering services for checks and related products and services, customer care, banking support and marketing services.
The Harland Financial Solutions segment provides financial technology products and services including lending and mortgage origination and servicing applications, business intelligence solutions, customer relationship management software, Internet banking solutions, mobile banking, branch automation solutions and core processing systems and services, principally targeted to community banks and credit unions.
The Scantron segment provides testing and assessment solutions to schools in North America, offers specialized data management solutions to educational, commercial and governmental entities worldwide and collects and manages survey information for a wide variety of Fortune 1000 and other organizations. Scantron's products and services include scannable forms, scanning equipment, survey services, testing software and related services, and field maintenance services.
The Licorice Products segment, which is operated by Mafco Worldwide, produces a variety of licorice products from licorice root, intermediary licorice extracts produced by others and certain other ingredients. Approximately 66% of Mafco Worldwide's licorice product sales are to the worldwide tobacco industry for use as tobacco flavor enhancing and moistening agents in the manufacture of American blend cigarettes, moist snuff, chewing tobacco and pipe tobacco. In addition, Mafco Worldwide manufactures and sells natural products for use in the tobacco industry. Mafco Worldwide also sells licorice to confectioners, food processors, cosmetic companies and pharmaceutical manufacturers for use as flavoring or masking agents, including its Magnasweet brand flavor enhancer, which is used in various brands of chewing gum, energy bars, non-carbonated beverages, lip balm, chewable vitamins, aspirin and other products. Mafco Worldwide sells licorice root residue as garden mulch under the name Right Dress.
The Transaction Holdings Acquisition
On December 31, 2008, the Company's indirect wholly owned subsidiary, Harland Clarke Corp., acquired Transaction Holdings Inc. ("Transaction Holdings") for total cash consideration of $8.2 million (the "Transaction Holdings Acquisition"). Transaction Holdings produces personal and business checks, payment coupon books, promotional checks and provides direct marketing services to financial institutions, as well as individual consumers and small businesses.

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M & F Worldwide Corp. and Subsidiaries The Data Management Acquisition
On February 22, 2008, the Company's indirect wholly owned subsidiary, Scantron Corporation, purchased all of the limited liability membership interests of Data Management I LLC ("Data Management") from NCS Pearson for $218.7 million in cash, after giving effect to working capital adjustments of $1.6 million (the "Data Management Acquisition"). Data Management designs, manufactures and services scannable data collection products, including printed forms, scanning equipment and related software, and provides survey consulting and tracking services, including medical device tracking, as well as field maintenance services to corporate and governmental clients. The Company financed the Data Management Acquisition and related fees and expenses with cash on hand at Harland Clarke Holdings.
With these and previous acquisitions, the Company is focused on improving operating margins by reducing selling, general and administrative expenses, shared services costs and cost of sales.
Economic and Other Factors Affecting the Businesses of the Company Harland Clarke
While total non-cash payments - including checks, credit cards, debit cards and other electronic forms of payment - are growing, the number of checks printed continues to decline. Harland Clarke believes the number of checks printed is driven by the number of checks written, the number of new checking accounts opened and reorders reflecting changes in consumers' personal situations, such as name or address changes. In recent quarters, Harland Clarke has experienced check unit declines at a higher rate than in the past, as evidenced by recent period-over-period declines in Harland Clarke revenue, which are discussed in more detail in this report. Harland Clarke is unable to determine at this time whether these higher rates of decline are attributable to recent economic and financial market difficulties, the depth and length of the economic recession, higher unemployment, decreased openings of checking accounts, decreased consumer spending and/or a further acceleration in the use of alternative non-cash payments. Harland Clarke expects that check unit volume will continue to decline at rates that are higher than it had previously experienced in recent years, resulting in a corresponding decrease in check revenues and depending on the nature and the relative magnitude of the causes for the decreases, such decreases may not be mitigated when overall economic conditions improve. Harland Clarke is focused on growing its non-check related products and services, including marketing services, and optimizing its existing catalog of offerings to better serve its clients, as well as managing its costs, overhead and facilities to reflect the declines in check unit volumes. Harland Clarke does not believe that revenues from non-check related products and services will fully offset revenue declines from declining check unit volumes. In the future, Harland Clarke may not be able to mitigate the revenue declines from declining check unit volumes through cost management, which could negatively affect Harland Clarke's margins.
The financial institution outsourcing services industry is highly competitive and fragmented. Quality and breadth of service offerings and strength of customer relationships are among the key competitive factors. Within this category, Harland Clarke competes with large outsourcing service providers that offer a wide variety of services, and some compete with Harland Clarke's primary offerings - specifically payment services, marketing services and teleservices. Other competitors specialize in providing one or more of these services.
The Harland Clarke segment's operating results are also affected by consumer confidence and employment. Consumer confidence directly correlates with consumer spending, while employment also affects revenues through the number of new checking accounts being opened. The Harland Clarke segment's operating results have been negatively affected by slow or negative growth of, or downturns in, the United States economy. Business confidence also affects a portion of the Harland Clarke segment. In addition, as Harland Clarke's financial institution customers fail or merge with other financial institutions, Harland Clarke may lose some or all revenues from such financial institutions and/or experience further pricing pressure, which would negatively affect Harland Clarke's operating results.

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M & F Worldwide Corp. and Subsidiaries Harland Financial Solutions
Harland Financial Solutions' operating results are affected by the overall demand for our products, software and related services which is based upon the information technology budgets of our clients and prospects. Economic downturns in one or more of the countries in which we do business and enhanced regulatory burdens, including through increased fees and assessments charged to financial institutions by the FDIC and NCUA in the wake of the financial crisis, could result in reductions in the information technology budgets for some portion of our clients and potentially longer lead-times for acquiring Harland Financial Solutions products and services. In addition, as Harland Financial Solutions' financial institution customers fail or merge with other financial institutions, Harland Financial Solutions may lose some or all revenues from such financial institutions and/or experience further pricing pressure, which would negatively affect Harland Financial Solutions' operating results.
The markets for our Harland Financial Solutions products are affected by technological change, evolving industry standards, regulatory changes in client requirements and frequent new product introductions and enhancements. The markets for providing technological solutions to financial institutions and other enterprises require that we continually improve our existing products and create new products, while controlling costs to remain price competitive.
The market for providing technological solutions to financial institutions is highly competitive and fragmented. Harland Financial Solutions competes with several domestic and international companies. Some competitors offer one or more specialized products or services that compete with Harland Financial Solutions. Certain competitors have advantages over Harland Financial Solutions due to their significant worldwide presence, longer operating and product development history, larger installed client base, and substantially greater financial, technical and marketing resources. In response to competition, Harland Financial Solutions has been required in the past, and may be required in the future, to furnish additional discounts to clients, otherwise modify pricing practices, or offer more favorable payment terms or more favorable contractual implementation terms.
Scantron
While the number of tests given annually in K-12 and higher education markets continues to grow, the demand for Optical Mark Reader paper based testing has declined and is expected to continue to decline. Changes in educational funding can affect the rate at which schools adopt new technology thus slowing the decline for paper based testing but also slowing the demand for Scantron's on-line testing products. Educational funding changes may also reduce the rate of consumption of Scantron's forms and purchase of additional hardware to process these forms. Scantron's education-based customers may turn to lower cost solutions for paper-based forms and hardware in furtherance of addressing their budget needs. A weak economy in the United States may negatively affect education budgets and spending, which would have an adverse impact on Scantron's operating results. Data collection is also experiencing a conversion to non-paper based methods of collection. Scantron believes this trend will also continue as the availability of these alternative technologies becomes more widespread. While Scantron's non-paper data collection business could benefit from this trend, Scantron's paper-based data collection business could be negatively affected by this trend. Changes in the overall economy can impact the demand for data collection as companies look for ways to adjust their expenditures.
Mafco Worldwide
Developments and trends within the tobacco industry may have a material effect on the operations of Mafco Worldwide. Worldwide consumption of American blend cigarettes has declined approximately 2% to 3% per year for the past five years; however, this decline has accelerated recently to approximately 5%. Changing public attitudes toward tobacco products, an increased emphasis on the public health aspects of consumption of tobacco products, an increase in excise and other taxes on cigarettes and a constant expansion of tobacco regulations in a number of countries have contributed significantly to this worldwide decline in consumption. Consumption of chewing tobacco and moist snuff is concentrated primarily in the United States. Domestic consumption of chewing tobacco products has declined by approximately 5% per year over the past five years. Moist snuff consumption has increased approximately 6% per year over the past five years due at least in part to the shift away from cigarettes and other types of smoking and smokeless

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M & F Worldwide Corp. and Subsidiaries tobacco. Declines in tobacco product consumption have an indirect, negative effect on Mafco Worldwide's sales to the tobacco industry.
Producers of tobacco products are subject to regulation in the United States at the federal, state and local levels, as well as in foreign countries. On June 22, 2009, the United States government enacted the Family Smoking Prevention and Tobacco Control Act, which provides greater regulatory oversight for the manufacture of tobacco products, including the ability to regulate tobacco product additives. The United States Food & Drug Administration will now have the power to limit the type or quantity of additives that may be used in the manufacture of tobacco products in the United States. Recent foreign tobacco legislation has included restrictions on where tobacco may be sold and used, imposition of warning labels and other graphic packaging images, product constituent limitations and a general increase in taxes.
Over the years, there has been substantial litigation between tobacco product manufacturers and individuals, various governmental units and private health care providers regarding increased medical expenditures and losses allegedly caused by use of tobacco products. In part as a result of settlements in certain of this litigation, the cigarette companies have significantly increased the wholesale price of cigarettes in order to recoup the cost of the settlements.
The tobacco industry, including cigarettes and smokeless tobacco, has been subject to federal, state, local and foreign excise taxes for many years. In recent years, federal, state, local and foreign governments have increased such taxes as a means of both raising revenue and discouraging the consumption of tobacco products. In February 2009, the United States government enacted the State Children's Health Insurance Program (SCHIP). The health programs in this legislation are being funded by raising the federal tax on cigarettes to $1.00 per pack from the previous $0.39 per pack and by significantly increasing federal taxes on cigars and other tobacco products. Other proposals to increase taxes on tobacco products are also pending in both the United States and in foreign countries.
Asset Impairments
Changes in estimates and assumptions used in the Company's financial projections resulting from the factors discussed above for any of the Company's business segments could have a material impact on the fair value of goodwill, indefinite-lived intangible assets or other long-lived assets in future periods, which may result in material asset impairments, as more fully described in Item 1A, "Risk Factors - Weak economic conditions, further acceleration of check unit declines and further consumption declines in tobacco products using licorice may continue to have an adverse effect on our revenues and profitability and could result in impairment charges."
Restructuring
Harland Clarke Holdings has taken restructuring actions in the past in an effort to achieve manufacturing and contact center efficiencies and other cost savings. Past restructuring actions have related to both acquisitions and ongoing cost reduction initiatives and have included manufacturing plant closures, contact center closures and workforce rationalization. Harland Clarke Holdings anticipates future restructuring actions, where appropriate, to realize process efficiencies, to continue to align our cost structure with business needs and remain competitive in the marketplace. Harland Clarke Holdings expects to incur severance and severance-related costs, facilities closures costs and other costs such as inventory write-offs, training, hiring and travel in connection with future restructuring actions. Consolidated Operating Results
The Company has organized its businesses along four reportable segments together with a corporate group for certain support services. The Company's operations are aligned on the basis of products, services and industry. Management measures and evaluates the reportable segments based on operating income.

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M & F Worldwide Corp. and Subsidiaries Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008 The operating results for the three months ended September 30, 2009, as reflected in the accompanying consolidated statements of income and described below, include the operating results of the acquired Transaction Holdings business in the Harland Clarke segment from December 31, 2008, the date of the Transaction Holdings Acquisition. Net Revenues: Three Months Ended September 30, $ in millions 2009 2008 Consolidated Net Revenues: Harland Clarke segment $ 305.0 $ 322.7 Harland Financial Solutions segment 67.9 72.8 Scantron segment 52.9 58.6 Licorice Products segment 25.0 28.3 Eliminations (0.1 ) (0.1 ) Total $ 450.7 $ 482.3

Net revenues decreased by $31.6 million, or 6.6%, to $450.7 million in the 2009 period from $482.3 million in the 2008 period.
Net revenues for the Harland Clarke segment decreased by $17.7 million, or 5.5%, to $305.0 million in the 2009 period from $322.7 million in the 2008 period. The decrease 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.
Net revenues for the Harland Financial Solutions segment decreased by $4.9 million, or 6.7%, to $67.9 million in the 2009 period from $72.8 million in the 2008 period. Net revenues from the enterprise solutions product lines decreased $3.0 million in the 2009 period compared to the 2008 period. The decrease was primarily due to declines in license, hardware and professional services revenues. Additionally, there was a decrease in early termination fees in the 2009 period as compared to the 2008 period. Net revenues from the risk management product lines decreased $1.4 million in the 2009 period compared to the 2008 period. The decrease was 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.
Net revenues for the Scantron segment decreased by $5.7 million, or 9.7%, to $52.9 million in the 2009 period from $58.6 million in the 2008 period. The decrease 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.
Net revenues for the Licorice Products segment decreased by $3.3 million, or 11.7%, to $25.0 million in the 2009 period from $28.3 million in the 2008 period. Pure licorice derivative sales decreased by $0.6 million and sales of licorice extract to the worldwide tobacco industry decreased by $2.0 million, primarily as the result of a decline in shipment volumes to licorice derivative and tobacco customers. Sales of licorice extract to non-tobacco customers decreased by $0.7 million as a result of lower shipment volumes and the unfavorable impact of the U.S. dollar translation of Mafco Worldwide's Euro denominated sales due to the stronger dollar in the 2009 period versus the 2008 period, which were not fully offset by price increases. The decline in shipment volumes for the 2009 period compared to the 2008 period for all of Mafco Worldwide's products was primarily the result of order shipment timing, continued worldwide consumption declines in tobacco products using licorice and the continued rationalization of inventories by Altria, Inc. ("Altria") and Philip Morris International, Inc. ("PMI") subsequent to Altria's spin-off of PMI in 2008.

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M & F Worldwide Corp. and Subsidiaries

Cost of Revenues: Three Months Ended September 30, $ in millions 2009 2008 Consolidated Cost of Revenues: Harland Clarke segment $ 186.1 $ 206.1 Harland Financial Solutions segment 30.3 32.2 Scantron segment 28.3 32.8 Licorice Products segment 14.2 16.7 Eliminations (0.1 ) (0.1 ) Total $ 258.8 $ 287.7

Cost of revenues decreased by $28.9 million, or 10.0%, to $258.8 million in the 2009 period from $287.7 million in the 2008 period.
Cost of revenues for the Harland Clarke segment decreased by $20.0 million, or 9.7%, to $186.1 million in the 2009 period from $206.1 million in the 2008 period. The decrease was primarily due to lower volumes, which resulted in decreases in delivery, materials, and other variable overhead costs. Labor costs also decreased due to cost reduction and restructuring activities. Decreases in travel expenses and depreciation also contributed to the decrease in cost of revenues. These decreases were partially offset by inflation in delivery and materials expenses, as well as an increase in the amortization of intangible assets of $1.1 million. Cost of revenues as a percentage of revenues for the Harland Clarke segment was 61.0% in the 2009 period as compared to 63.9% in the 2008 period.
Cost of revenues for the Harland Financial Solutions segment decreased by $1.9 million, or 5.9%, to $30.3 million in the 2009 period from $32.2 million in the 2008 period. The decrease was primarily due to lower hardware and other third-party costs related to volume declines. Labor cost decreases related to cost reduction activities and decreases in depreciation and amortization also contributed to the decrease in cost of revenues. Cost of revenues as a percentage of revenues for the Harland Financial Solutions segment was 44.6% in the 2009 period as compared to 44.2% in the 2008 period.
Cost of revenues for the Scantron segment decreased by $4.5 million, or 13.7%, to $28.3 million in the 2009 period from $32.8 million in the 2008 period. The decrease was primarily due to volume declines and cost reductions related to the Data Management Acquisition, in addition to other restructuring activities. Cost of revenues as a percentage of revenues for the Scantron segment was 53.5% in the 2009 period as compared to 56.0% in the 2008 period.
Cost of revenues for the Licorice Products segment was $14.2 million in the 2009 period and $16.7 million in the 2008 period, a decrease of $2.5 million, or 15.0%. This decrease was due to the decrease in sales and a change in the mix of products sold partially offset by increased raw material costs. Cost of revenues as a percentage of revenues for the Licorice Products segment was 56.8% in the 2009 period as compared to 59.0% in the 2008 period.

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M & F Worldwide Corp. and Subsidiaries Selling, General and Administrative Expenses: Three Months Ended September 30, $ in millions 2009 2008 Consolidated Selling, General and Administrative Expenses: Harland Clarke segment $ 46.1 $ 59.0 Harland Financial Solutions segment 27.2 32.5 Scantron segment 13.5 16.1 Licorice Products segment 2.8 2.5 Corporate 6.4 6.4 Total $ 96.0 $ 116.5

Selling, general and administrative expenses decreased by $20.5 million, or 17.6%, to $96.0 million in the 2009 period from $116.5 million in the 2008 period.
Selling, general and administrative expenses for the Harland Clarke segment decreased by $12.9 million, or 21.9%, to $46.1 million in the 2009 period from $59.0 million in the 2008 period. The decrease was primarily due to labor cost reductions and lower integration-related and travel expenses. Selling, general and administrative expenses as a percentage of revenues for the Harland Clarke segment was 15.1% in the 2009 period as compared to 18.3% in the 2008 period.
Selling, general and administrative expenses for the Harland Financial Solutions segment decreased by $5.3 million, or 16.3%, to $27.2 million in the 2009 period from $32.5 million in the 2008 period. The decrease was primarily due to labor cost reductions, a reduction in compensation expense related to an incentive agreement for an acquisition and reductions in occupancy and travel expenses. Selling, general and administrative expenses in the 2009 and 2008 periods included charges of $0.8 million and $2.1 million, respectively, for compensation expense related to an incentive agreement for an acquisition. Selling, general and administrative expenses as a percentage of revenues for the Harland Financial Solutions segment was 40.1% in the 2009 period as compared to 44.6% in the 2008 period.
Selling, general and administrative expenses for the Scantron segment decreased $2.6 million, or 16.1%, to $13.5 million in the 2009 period from $16.1 million in the 2008 period. The decrease was primarily due to cost reductions related to the Data Management Acquisition, in addition to other restructuring activities and a decrease in integration-related expenses. Selling, general and administrative expenses as a percentage of revenues for the Scantron segment was 25.5% in the 2009 period as compared to 27.5% in the 2008 period. . . .