Harte Hanks, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report. Results below distinguish continuing operations from discontinued Trillium operations.
Business context and key financial metrics
Harte Hanks provides multichannel marketing services, including agency and digital work, database marketing, direct mail, and contact centers. It sold Trillium Software on December 23, 2016, and reports Trillium as discontinued operations.
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue, continuing operations | $404.4 million | $444.2 million |
| Operating income (loss), continuing operations | $(55.8) million | $(203.3) million |
| Operating margin, continuing operations | (13.8)% | Not clearly stated in the filing text |
| Loss from continuing operations | $(89.8) million | $(181.1) million |
| Net income (loss), including discontinued operations | $(130.9) million | $(170.9) million |
| Diluted loss per share, continuing operations | $(1.46) | $(2.94) |
| Cash and cash equivalents at year-end | $46.0 million | $16.6 million |
| Net cash from operating activities | $14.6 million | $33.3 million |
| Debt at year-end | $0 | $77.1 million |
| Total stockholders’ equity at year-end | $2.7 million | $140.3 million |
Cash from investing activities was $99.7 million, primarily reflecting the Trillium sale; cash used in financing activities was $85.3 million. Current assets were $149.4 million and current liabilities were $104.7 million. Contractual obligations included $30.1 million of operating leases, $1.6 million of capital leases, and $17.4 million of unfunded pension benefit payments.
Material changes versus the prior comparable period
- Continuing-operations revenue fell 9.0% year over year. Management attributed declines mainly to client losses and reduced marketing/mail volumes in healthcare and pharmaceuticals, retail, financial services, technology, and select markets. Auto and consumer brands revenue rose slightly.
- Continuing-operations operating loss narrowed, largely because the 2015 period included a $209.9 million goodwill impairment, compared with a $38.7 million impairment in 2016. The 2016 impairment left $34.5 million of goodwill on the balance sheet.
- Operating cash flow decreased by $18.7 million; management attributed the decline primarily to a $51.3 million decrease in cash provided by discontinued operations.
- The Trillium sale generated gross cash proceeds of approximately $112.0 million and an after-tax loss of $39.9 million (pre-tax loss of $44.5 million). Sale proceeds were used to repay the Wells Fargo credit facility.
- Revenue had declined for more than five consecutive years, according to management. The company also recorded a full $40.1 million valuation allowance against deferred tax assets in 2016.
Outlook, risks, contingencies, and unusual items
- Liquidity and going concern: The company reported no debt at December 31, 2016, but disclosed sustained operating losses, declining revenue, reduced operating cash flow, and prior covenant breaches. Management said that, considering the then-current liquidity, the April 2017 credit facility, and the contingent-payment deferral, it did not believe substantial doubt existed about its ability to continue as a going concern for the 12 months after issuance of the statements.
- Subsequent financing: In April 2017, Harte Hanks entered into a two-year, secured $20 million revolving facility with Texas Capital Bank, guaranteed by HHS Guaranty, an entity formed by certain Shelton family members. The facility is for working capital and general corporate purposes.
- 3Q Digital: In April 2017, the company announced its intention to sell 3Q Digital. A May 2017 agreement deferred up to $35 million of contingent consideration until the earlier of a sale or April 1, 2019, if payment conditions are met. The filing does not establish that a sale was completed.
- Cost actions: Management described workforce reductions, further support-function cuts planned for 2017, and closure of the Baltimore direct-mail facility, with anticipated benefits beginning in the first half of 2017. It also cited targeted investment in offerings intended to support growth; no quantified earnings or revenue guidance was provided.
- Reporting controls and filing status: Management and the auditor identified material weaknesses in internal control over financial reporting, including revenue recognition, contingent consideration, goodwill impairment, deferred tax assets, and financial close/reporting. Controls were deemed ineffective as of year-end; remediation was continuing and expected to incur costs. The 10-K was filed late, and the company disclosed NYSE listing and capital-markets access risks associated with late filings.
- Other material risks: Client engagements are often cancelable on short notice; the ten largest clients generated 42.9% of 2016 revenue, and traditional retail represented 26.9%. The filing also highlights competitive and pricing pressure, privacy/data-security regulation and breach exposure, technology change, postal and paper cost risks, and international and foreign-exchange exposure.
- Capital returns: The company paid only its first-quarter 2016 dividend, or $0.09 per share for the year, and does not expect to pay future dividends. It made no share repurchases under its program in 2016.
Most important facts for investors to verify
- Whether the Texas Capital facility remains available on its stated terms and whether borrowing, covenant, or collateral conditions have changed.
- Whether 3Q Digital was sold, the sale proceeds and terms, and the final contingent-consideration and sale-bonus obligations.
- Progress in remediating the material weaknesses, and whether subsequent filings report control deficiencies or financial-statement revisions.
- Whether revenue declines and operating cash generation improved after 2016, including results following the Baltimore facility closure and workforce reductions.
- The status of NYSE listing compliance and timely SEC filings, and the company’s ability to meet lease, pension, and other obligations while maintaining liquidity.