Harte Hanks, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; comparisons are with the same 2019 periods. Harte Hanks provides data-driven marketing, customer relationship and logistics services, and reports as one operating segment.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $47.7m | $51.4m | $129.8m | $165.3m |
| Operating income (loss) | $0.8m | $(4.5)m | $(10.2)m | $(22.0)m |
| Operating margin | 1.6% | (8.7)% | (7.9)% | (13.3)% |
| Net income (loss) | $(1.6)m | $(6.0)m | $(2.7)m | $(23.3)m |
| Loss attributable to common stockholders | $(1.7)m | $(6.1)m | $(3.1)m | $(23.7)m |
| Loss per common share | $(0.27) | $(0.97) | $(0.48) | $(3.77) |
| Cash flow from operations | Not separately presented for the quarter | $(11.4)m | $9.4m |
All amounts are in millions except per-share data. The filing does not present a gross margin measure. Q3 operating expenses fell 16.1% year over year, more than the 7.2% revenue decline, bringing the quarter to operating profit. Nine-month expenses fell 25.2%, while revenue fell 21.4%; the operating loss narrowed.
Material changes and balance sheet
- Q3 revenue declined $3.7m. Growth in B2B (+51%) and consumer brands (+26%) was offset by lower revenue in financial services (−44%), retail (−39%), transportation (−84%) and healthcare (−22%). Contact center revenue rose to $21.0m from $14.6m, while direct mail, logistics and fulfillment revenue fell to $16.6m from $23.8m.
- For the first nine months, the largest vertical declines were retail (−$17.7m), financial services (−$15.3m) and transportation (−$9.5m), partly offset by B2B and consumer brands growth. Management attributed declines mainly to lost clients and lower existing-client volumes.
- At September 30, cash and cash equivalents were $29.3m and restricted cash was $2.5m, for combined cash of $31.8m. Total current assets were $91.6m and current liabilities $50.0m.
- Total debt was $27.1m: $17.1m drawn under the revolving facility and a $10.0m PPP loan. The facility had $0.1m of additional borrowing availability and matures in April 2022. Total lease liabilities were $17.6m; pension liabilities were $68.3m. Stockholders’ deficit was $49.0m.
- Operating cash use was $11.4m for nine months, versus $9.4m provided in 2019. Investing activities provided $0.5m and financing activities provided $7.5m. Cash and restricted cash decreased $2.3m from year-end.
Outlook, risks and unusual items
- COVID-19: Customers reduced work, sought payment extensions or agreement changes, and some entered bankruptcy; the company expects additional customer bankruptcies may occur. Conversely, contact center wins and demand increased. Management said there had been no material adverse effect on operations, liquidity or covenant compliance to date, but warned future effects could be material and could not be reasonably estimated.
- Liquidity outlook: Management believes available cash, operating cash flow and facility borrowings will fund obligations for at least the next 12 months, and said there was no substantial doubt about going concern. The revolving facility was nearly fully drawn, making cash generation and access to other liquidity important.
- PPP loan: The company anticipated full forgiveness and expected to apply in Q4 2020; forgiveness and timing were not assured. Without forgiveness, approximately $6.7m was due within 12 months of September 30, 2020.
- Restructuring and footprint: Nine-month restructuring expense was $8.0m, including lease impairments, severance, facility costs and asset disposal losses. The company expected another $1.2m through year-end 2020; its stated total restructuring charges for the initiative were approximately $21.0m through 2020. Actions included exiting the Jacksonville direct-mail facility, consolidating locations and moving fulfillment operations to a new Kansas City facility.
- Asset sale: Jacksonville equipment sales generated $2.0m of proceeds, alongside a strategic partnership with Summit Direct Mail. The transaction also led to impairment and disposal charges included in restructuring expense.
- Tax benefit: The nine-month $12.9m income tax benefit, producing an 82.4% effective tax rate, mainly reflected CARES Act NOL carrybacks to higher-rate tax years. The company reported receiving $3.3m of tax refunds and expected additional refunds of $6.6m in 2020 and $2.9m in 2021.
- Other items: Q3 other expense included increased currency revaluation expense; nine-month foreign-currency transaction losses were $1.0m. The 2019 comparison included a $5.0m earn-out gain from the sale of 3Q Digital, which did not recur.
- No formal revenue or earnings guidance is provided in the filing. Management cited discretionary client marketing budgets, competition, customer financial health, mail transportation costs, COVID-19 developments and remote-work/IT security issues as risks.
Important facts for investors to verify
- Progress, timing and final approval of PPP loan forgiveness, and the cash impact if any portion is not forgiven.
- Whether operating cash flow improves and whether the company can maintain liquidity with only $0.1m of reported availability under its revolving facility.
- Revenue trends in declining verticals, the durability of contact center growth, and the effects of customer losses or bankruptcies.
- Actual restructuring costs and savings, including the Kansas City transition and Summit partnership economics.
- Receipt and timing of expected CARES Act tax refunds and any effects on reported tax benefits or liquidity.