Scan-Tron Operations Consolidated in Tustin : Sales Soaring at Test-Scoring Equipment Firm

Jeff Rowe is a free-lance writer

Your attention please.

Using a No. 2 pencil, add Scan-Tron Corp. to the list of companies that have moved or consolidated operations in the sunny climes of Orange County.

The company makes the test-scoring equipment that made the No. 2 pencil famous. It also makes hospital menu systems and forms used in both machines. Scan-Tron recently consolidated its Santa Ana, Carson and Long Beach operations in new quarters.

"We looked at facilities from Cypress to north San Diego County," said John Saunders, president and chief executive. The company studied the labor pool, plotted where its 350 employees live and settled on leasing a 75,000-square-foot building in Tustin.

Scan-Tron has a 10-year lease and an option to buy the facility and space for its rapidly growing operations to expand.

Income Predictions

By any measure, the company has experienced robust growth in recent years and figures to continue brisk expansion.

For its fiscal year ended June 30, 1985, Scan-Tron reported net income of $2.2 million. And company officials say they expect net income for fiscal year 1986, which ended Monday, to be greater. "The question is how much," Saunders said. For the nine months ending March 31, the company reported net income of $1.65 million on sales of $17.9 million, compared to net income of $1.29 million on sales of $13 million the previous year.

Most of Scan-Tron's business normally comes in its fiscal fourth quarter when schools order the test-scoring machines and answer forms for the upcoming school year.

Sales for fiscal 1985 totaled $19.5 million, and the company expects the fiscal 1986 figures to continue the growth that has continued since Scan-Tron's birth in 1972.

In a recommendation published earlier this year, Morgan Stanley & Co., a New York brokerage, forecast 25% annual sales and earnings growth for Scan-Tron, which recently completed a $10-million offering of 6 3/4% convertible subordinated debentures and has about 3.4 million common shares outstanding, trading over the counter.

Sanders Remains Chairman

Scan-Tron was founded by William Sanders, an electronics equipment salesman who calculated there would be a demand for equipment to help teachers score their classroom tests. Sanders remains as chairman, but he turned the day-to-day operation of the company over to John Saunders in 1983, shortly after the company completed its first public offering.

Until Scan-Tron and its principal competitor, Minneapolis-based National Computer Systems Inc. came along, electronic scoring of tests had largely been confined to the standardized examinations that were sent off to a remote site to be scored.

With the Scan-Tron system, however, a teacher simply makes an answer key and runs it through the scoring machine. Students' test papers are then fed into the machine, which flags incorrect answers and prints the number of correct responses at the top of the answer sheet. A stack of test papers that would take an hour to mark by hand are scored in minutes by the machine. The scoring machines generally are loaned to schools, which then keep Scan-Tron's bookkeepers happy by purchasing reams of special test forms from the company.

Schools account for about 80% of Scan-Tron's business, but the company's hospital menu systems are a fast-growing part of its business.

Currently, less than 1% of Scan-Tron's business is in the menu systems. But the company figures there are about 3,500 hospitals in the nation large enough to be able to benefit from investing $12,000 to $14,000 in the necessary equipment. The system--which allows patients to order just what they want, reducing the number of half-eaten trays of food sent back to the kitchen--typically pays for itself in labor and food savings in less than a year, Saunders said.

Analyst's Opinion

Analysts seem to like Scan-Tron's decision to mix schools and hospitals in its business plan.

"The company is better managed and balanced than ever," said Bob Sullivan, an analyst with Paine Webber Inc. in New York.

After it loans the machine to a school or sells a machine to a hospital, revenue keeps flowing to Scan-Tron. That is because Scan-Tron prints the forms that must be used in the machines. The company's presses typically run two shifts a day, churning out millions of forms each month.

Last year, the company printed about 250 million forms; this year the figure will be in excess of 350 million, Saunders said. Scan-Tron's profit margin on the forms is about 70%.

Thus far, Scan-Tron has placed about 17,000 test-scoring machines in schools around the nation and figures there are at least 100,000 schools that do not have any type of test-scoring system.

Loaning rather than selling the machines to schools is a key part of Scan-Tron's strategy. Equipment purchases are typically made at the school district level, where such requests collide with other tugs on the budget. But test forms are normally bought by individual schools, so the company sidesteps the district bureaucracy. On average, Scan-Tron sells about $800 worth of test forms to each school that has a machine.

Most Scan-Tron salespeople are familiar with both classroom needs and administrator's budget limitations because about 65% of them were teachers before joining the company, said Dave Auerbach, vice president of sales.

Untapped Market

In its report earlier this year, Morgan Stanley said Scan-Tron "should be able to place 3,500 additional machines annually in the schools for the next several years."

The hospital market is similarly untapped, analysts believe.

Scan-Tron has also entered the data entry business, making and selling machines that are used for attendance reporting, inventory control and employee testing. The market for such machinery is "less than 10% penetrated," said a recent report on the company completed by the Chicago Corp.

"The applications for this technology are endless," Saunders said.

Last year, the company completed the acquisition of American Testronics Co., a developer of standardized tests, which it also scores. This year, Scan-Tron is working with several textbook publishers who are developing end-of-chapter tests that can be scored on Scan-Tron machines.

Saunders, formerly president of Endevco Inc., a San Juan Capistrano-based maker of medical and aerospace instruments, presides over the growing Scan-Tron empire by marching double time from point to point in the building. He meets with small groups of employees each month, and he said that quality circles--groups of employees who meet to discuss problems associated with product quality--are in the planning stages. In all, the company has about 350 employees, including 105 salespeople.

Ban on Smoking

Those employees work in a smoke-free environment. After consulting with workers before the move to the new building, Scan-Tron banned smoking in the new building.

Not one to miss an opportunity, Saunders muses that perhaps the company can now get a break on its janitorial fees. The company also saved money outfitting its new quarters by buying near-new furniture at greatly reduced prices from Butterfield Savings & Loan after it was taken over by federal regulators last year.

Such attention to dollar-saving detail has helped Scan-Tron achieve its 30% growth in recent years.

No one suggests Scan-Tron will have to watch its pennies anytime soon, but tougher competition does loom. National Computer Systems is easing into the test-scoring business while Scan-Tron has dipped a corporate toe into the business of processing large volumes of paper work, a traditional NCS stronghold.

Still, Morgan Stanley's analysts say there is enough of a market, particularly in education, for both companies to continue expansion.

That should be good news to makers of No. 2 pencils, which make the best marks on machine-read forms.

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