Harte Hanks, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Harte Hanks provides multichannel marketing, database, direct-mail and logistics, and contact-center services. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $81.2 | $94.9; down 14.4% |
| Operating expenses | $86.2 | $101.2; down 14.8% |
| Operating loss / margin | $(5.0) / (6.2)% | $(6.3) / (6.7)% |
| Net income (loss) | $32.6 | $(7.4) |
| Diluted EPS | $4.67 | $(1.20) |
| Cash from operating activities | $2.8 | $(0.5) |
- Q1 net income included a $31.0 million pretax gain on the sale of 3Q Digital; the reported profit and EPS therefore do not reflect recurring operating performance. The company’s operating loss improved by $1.3 million year over year despite lower revenue.
- Cash and cash equivalents were $22.8 million at March 31, versus $8.4 million at December 31, 2017. Current assets were $101.4 million and current liabilities $52.9 million. Total liabilities were $116.5 million.
- No long-term debt was outstanding at quarter-end. The revolving credit facility had $22 million of borrowing capacity and matures April 17, 2020; $2.8 million of letters of credit were supported by cash collateral, with no amounts drawn. The facility is secured by substantially all company assets.
- Net cash from investing activities was $2.3 million, including $3.9 million of disposition proceeds; capital expenditures were $1.6 million. Financing activities provided $9.5 million, mainly reflecting $9.7 million of preferred-stock proceeds, partly offset by borrowing and repayment activity.
- The pension liability was $59.1 million. The company reported a stockholders’ deficit of $0.6 million, in addition to $9.7 million of preferred stock classified as temporary equity.
Changes, transactions, and accounting
- Revenue declined across all reported industry verticals, primarily due to lost clients and lower volumes from existing clients. Retail had the largest stated decline: $7.4 million, or 32.1%.
- Expense reductions included lower labor costs (down $9.7 million), production and distribution costs (down $2.7 million), and selling, general and administrative costs (down $1.8 million). Management attributed these changes to cost actions and lower activity-related costs.
- On February 28, 2018, Harte Hanks sold 3Q Digital for $5.0 million cash, subject to working-capital adjustments, and potential additional consideration of up to $5.0 million if the business is sold again. The buyer assumed the company’s $35.0 million contingent-consideration obligation related to the 2015 acquisition. The sale generated a $31.0 million pretax gain. 3Q Digital represented less than 10% of 2017 revenue.
- On January 30, Harte Hanks issued Wipro 9,926 Series A convertible preferred shares for $9.9 million. The shares accrue cumulative dividends at 5% annually, are convertible into approximately 1.0 million common shares, and have specified liquidation and other rights. Wipro can designate a board observer or director under the agreement.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $0.6 million and increased Q1 revenue and net income by approximately $0.6 million versus the prior accounting guidance. The filing cautions that 2018 and 2017 revenue are reported under different accounting standards.
- A 1-for-10 reverse stock split was completed January 31, 2018; share and per-share data were adjusted retroactively in the statements.
Outlook, risks, and controls
- No specific revenue, earnings, or margin guidance is provided. Management described a challenging competitive environment and ongoing efforts to prioritize investment, reduce costs, improve offerings, and strengthen liquidity. It expects targeted-media trends may benefit the business over the long term, but results depend on client retention, new business, marketing budgets, and economic conditions.
- Management stated it did not believe conditions raised substantial doubt about the company’s ability to continue as a going concern for the 12 months following issuance of the financial statements.
- The $8.8 million Q1 income-tax benefit produced a 106.2% effective tax benefit rate. The company attributed the unusual rate primarily to a capital loss from the 3Q Digital sale that would be available for carryback, and used a discrete quarterly tax-rate method. Tax Reform Act accounting remained subject to revision under the measurement-period process.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2018 because of material weaknesses in the control environment and revenue-recognition controls. Remediation work was underway, expected to continue through 2018, and was not assured of success or timely completion.
- Management reported no material change to the risk factors in the 2017 Form 10-K. Legal matters include ordinary-course claims and client indemnification obligations; management said material losses beyond recorded accruals were considered remote, while certain maximum exposures could not be reasonably estimated.
Most important facts for investors to verify
- How much of reported profit, cash generation, and future liquidity depends on the 3Q Digital sale and the release from its contingent-consideration obligation, rather than ongoing operations.
- Whether revenue declines, client losses, and lower existing-client volumes continue, and whether cost reductions can offset them without impairing service or growth.
- The terms and potential dilution, dividend accumulation, and governance effects of Wipro’s convertible preferred investment, along with the company’s continuing related-party service relationship with Wipro.
- Progress and independent testing of remediation for the disclosed material weaknesses, particularly revenue-recognition controls.
- Availability and covenant status of the secured credit facility, the company’s pension funding obligations, and the assumptions underlying management’s 12-month liquidity assessment.