Harte Hanks, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; filed August 17, 2017. Dollar figures below are in millions unless stated otherwise. Harte Hanks provides multichannel marketing and customer interaction services. Trillium, sold in December 2016, is presented as discontinued operations; results below are for continuing operations.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Revenue | $94.9 | $99.6 | Down 4.7% |
| Operating expenses | $101.2 | $108.1 | Down 6.4% |
| Operating loss | $(6.3) | $(8.5) | Improved; operating margin was (6.7)% vs. (8.6)% |
| Loss from continuing operations | $(7.4) | $(6.7) | Loss widened |
| Net loss | $(7.4) | $(5.6) | Prior period included $1.1 of discontinued-operations income |
| Diluted loss per share | $(0.12) | $(0.09) | Continuing-operations loss per share was $(0.12) vs. $(0.11) |
| Cash from operating activities | $(0.5) | $5.4 | Declined $5.9, principally because prior-year discontinued operations provided $6.3 |
Lower labor, general and administrative, and production and distribution costs helped narrow the operating loss, but revenue fell and higher other expense and a smaller income tax benefit contributed to the larger continuing-operations net loss. Q1 2017 interest expense was $1.0, primarily from accretion on contingent consideration; other expense was $1.5, compared with other income of $0.2 in Q1 2016. The income tax benefit was $1.5, an effective rate of 16.7%, versus a $2.6 benefit and 27.8% rate in Q1 2016.
At March 31, cash was $43.6, down from $46.0 at year-end. Current assets were $133.2 and current liabilities $93.5. The company reported no long-term debt outstanding at quarter-end; it had $4.1 of cash-collateralized letters of credit with no amounts drawn. Total liabilities were $199.5, exceeding total assets of $195.7, and stockholders’ equity was a deficit of $3.8. Capital expenditures were $1.7; cash decreased by $2.4 during the quarter. No dividend was declared in Q1 2017.
Material changes and management commentary
- Revenue declined 4.7%. Management attributed weakness primarily to lost clients and reduced client marketing spend: retail revenue fell $3.1 (11.7%), healthcare $2.9 (33.4%), and consumer $0.9 (3.9%). B2B and financial services rose $0.7 and $1.4, respectively, from existing-client expansion; transportation was flat.
- The company continued workforce reductions and back-office and IT consolidation, and closed its Baltimore direct-mail facility in Q1. Management said the actions were beginning to help and expected to continue expense-reduction efforts through 2017. It also described investments in product offerings intended to support growth. No quantified revenue or earnings guidance is provided.
- After quarter-end, Harte Hanks obtained a two-year, $20 million revolving credit facility from Texas Capital Bank, secured by substantially all company assets and supported by a Shelton-family entity. The facility has variable-rate borrowing terms and a quarterly $0.1 fee for collateral support.
- A May 1 agreement deferred up to $35 million of potential 3Q Digital contingent consideration, subject to revenue-growth targets, until April 1, 2019 or a sale of the business, whichever occurs first. Unpaid amounts after March 1, 2018 accrue interest at 8.5%; the agreement also provides for sale-related bonus arrangements. The liability was $30.8 at March 31, including $1.0 of quarterly interest accretion.
- On April 18, the company announced it would seek strategic alternatives for 3Q Digital. Management stated that the new credit facility and contingent-payment deferral, together with available liquidity, meant it did not believe substantial doubt existed about its ability to continue as a going concern for the 12 months following issuance.
- Trillium’s 2016 sale generated approximately $112 million gross proceeds and an after-tax loss of $39.9 million. Q1 2016 discontinued operations included $11.2 of revenue and $1.1 of net income; Q1 2017 had none.
Risks, contingencies, and unusual items
- Management cited more than five consecutive years of declining continuing-operations revenue and losses in the preceding two years, and said reversing these trends and returning to revenue growth were essential. Client marketing budgets are discretionary and can be reduced; the business is also seasonal.
- The 3Q Digital contingent consideration is a significant Level 3 fair-value estimate sensitive to revenue projections and other unobservable assumptions. Legal indemnities and other claims are discussed; management said appropriate accruals were recorded and material loss beyond accruals was considered remote, while noting outcomes cannot be predicted.
- Disclosure controls were not effective as of March 31, 2017 because of material weaknesses involving the control environment, revenue recognition, contingent consideration, goodwill impairment, deferred tax assets, and financial close and reporting. Management was pursuing remediation but gave no assurance as to timing or success.
- Subsequent-event disclosures report that the company failed to file its quarter-ended June 30, 2017 financial reports within the required 45-day period; Texas Capital Bank waived the resulting noncompliance on August 14, 2017. The filing also reports an August 9 NYSE notice that the share price had averaged below $1 for 30 consecutive trading days, with a six-month period to regain compliance or face suspension and delisting procedures.
Most important facts for investors to verify
- Whether cost reductions can offset continued revenue pressure and lead to sustainable positive operating cash flow.
- Availability and covenant compliance under the $20 million Texas Capital facility, including requirements after the waiver expires.
- The likelihood, amount, timing, and sale-related costs of the 3Q Digital contingent consideration and any strategic transaction.
- Progress in remediating the disclosed material weaknesses and the implications of the late filing for reporting reliability.
- Whether the company regained NYSE minimum-share-price compliance within the stated cure period.