Harte Hanks, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2019. Harte Hanks provides data-driven marketing, customer relationship and logistics services and reports as one segment. Financial statements are unaudited.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $51.4 million | $63.6 million | $165.3 million | $214.4 million |
| Operating loss | $4.5 million | $10.4 million | $22.0 million | $21.7 million |
| Net income (loss) | $(6.0) million | $(10.0) million | $(23.3) million | $15.9 million |
| Loss (earnings) per common share, diluted | $(0.97) | $(1.62) | $(3.77) | $2.18 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $9.4 million | $(7.0) million |
Q3 operating margin was negative 8.7%, versus negative 16.3% a year earlier; nine-month operating margin was negative 13.3%, versus negative 10.1%. The filing does not provide a clear gross margin value. Q3 net loss improved, but the company remained loss-making. Nine-month 2018 earnings included a $31.0 million gain from the 3Q Digital sale; 2019 included a separate $5.0 million contingent payment from that sale.
Balance sheet and liquidity
- At September 30, 2019, cash and cash equivalents were $31.7 million, up from $20.9 million at year-end 2018. Current assets were $78.8 million and current liabilities $45.0 million.
- Long-term debt was $18.7 million, up from $14.2 million at year-end. The $22.0 million secured revolving facility matures April 17, 2021; only $0.5 million of additional borrowing capacity remained. Outstanding letters of credit were $2.8 million.
- Operating and finance lease liabilities totaled $22.6 million. Pension liabilities were $61.5 million. Stockholders’ deficit was $40.4 million.
- Nine-month operating cash flow of $9.4 million included the benefit of approximately $20.5 million in income-tax refunds. Management said it expects to meet obligations for at least the next 12 months using cash, operating cash flow and available borrowing capacity, and reported no substantial doubt about going concern over that period.
Changes, outlook and key risks
- Revenue fell 19.1% in Q3 and 22.9% in the first nine months. Management cited lost clients and lower existing-client volumes across most verticals; healthcare revenue increased. Nine-month comparisons also reflect the 2018 sale of 3Q Digital, which reduced 2019 revenue by $6.9 million versus the prior-year period.
- Lower labor, production and distribution, and selling and administrative expenses helped narrow the Q3 operating loss. For nine months, expense reductions broadly offset lower revenue, leaving operating loss slightly higher than in 2018.
- The company recorded restructuring expense of $3.1 million in Q3 and $10.9 million year to date, including database-build write-offs, contract termination costs, severance and facility-related charges. Management identified over $20 million in potential annual savings, with some already recognized, and expected approximately $14 million of total restructuring charges through 2020. Three production facilities were scheduled to close by year-end 2019.
- Wipro-related service terminations generated charges; the company disclosed $3.3 million in annual savings from new agreements and additional Q3 termination costs. Wipro is a related party and preferred-stock investor.
- Marketing budgets are discretionary, and management cited challenging competition, client retention and acquisition, economic conditions, and transportation costs as business risks. Management provided no specific revenue or earnings guidance in this filing.
- Disclosure controls were deemed ineffective at September 30 because of material weaknesses in information and communication/control activities and revenue-recognition controls. Management expected to remediate them by year-end 2019 but gave no assurance of successful or timely remediation. Legal matters are described as ordinary-course; management considered material losses beyond recorded accruals remote, while certain indemnity exposures are not reasonably estimable.
Important facts for investors to verify
- Whether declining revenue and client losses stabilize, and whether stated cost savings translate into sustainable operating improvement.
- How much of reported operating cash flow reflects recurring operations versus the one-time tax refunds, and the company’s ongoing cash requirements.
- Remaining credit-facility availability, covenant compliance and capacity to fund obligations given limited undrawn borrowing capacity and secured debt.
- Actual restructuring charges, facility closures, savings achieved and any further Wipro-related termination costs.
- Progress and evidence of remediation of the disclosed material weaknesses, particularly revenue-recognition controls.
- Potential consequences of the substantial pension obligation, lease commitments and preferred stock’s conversion and liquidation rights.