Harte Hanks, Inc. — Q3 2015 Form 10-Q
Business context and reporting period
The filing covers the three and nine months ended September 30, 2015. Harte Hanks provides multichannel marketing services through Customer Interaction and data-quality software and services through Trillium Software. Customer Interaction generated about 90% of revenue.
Financial results and liquidity
- Q3 revenue: $122.0 million, down 9.1% from $134.1 million. Operating loss was $205.4 million, including a $209.9 million goodwill impairment; net loss was $170.9 million, or $2.77 per diluted share, versus net income of $6.4 million, or $0.10 per share, in Q3 2014.
- First nine months: Revenue was $365.5 million, down 10.2% from $407.2 million. Operating loss was $194.4 million, compared with operating income of $26.1 million in 2014. Net loss was $173.5 million, or $2.81 per diluted share, versus net income of $13.9 million, or $0.22 per share.
- Margins and segments: Customer Interaction revenue fell 10.2% in Q3 and 10.9% year to date; its reported operating loss included the impairment. Trillium revenue rose 1.1% in Q3 but declined 4.5% year to date; operating margin was 26.6% in Q3 and 29.0% year to date, versus 25.4% and 24.1% in 2014.
- Cash flow: Nine-month operating cash flow was $29.2 million, versus $18.0 million in 2014. Investing used $32.0 million, including the 3Q Digital acquisition; financing used $28.0 million, including $16.0 million of dividends. Cash declined $32.0 million to $24.7 million.
- Debt and liquidity: Debt was $75.9 million at September 30, versus $82.7 million at year-end 2014. All debt was classified current because the facilities mature August 16, 2016; working capital was negative $14.1 million. The company reported $66.3 million of unused revolver capacity and compliance with covenants. Current assets were $160.8 million and current liabilities $174.9 million.
- Taxes and equity: The nine-month tax benefit was $34.3 million, largely related to the impairment; the reported effective tax rate was 16.5%. Stockholders’ equity fell to $136.8 million from $326.7 million, primarily reflecting the impairment-driven loss.
Material changes, outlook, and risks
- Customer Interaction goodwill was impaired by $209.9 million after a sustained market-capitalization decline below book value and weaker operating performance. Management’s valuation used significant Level 3 assumptions. Trillium goodwill was not impaired.
- Revenue declines reflected lost clients, reduced client marketing spending, and the B2B research business sale. The company sold that business in April, recording a $9.5 million pretax loss; it represented less than 5% of 2014 revenue. A working-capital settlement could create further expenses.
- Harte Hanks acquired 3Q Digital in March for $30.2 million cash, plus contingent consideration valued at $17.9 million at acquisition and $19.5 million accrued at September 30. Potential undiscounted earnout payments range from $0 to $35.0 million in 2017.
- Management said cash, operating cash flow, and revolver availability were expected to fund operations and planned needs for the next 12 months, but this expectation depends on extending, replacing, or otherwise refinancing facilities that mature in August 2016. Replacement financing could have less favorable terms; inability to obtain it could materially harm liquidity.
- Management cited cost reductions and continued investment in multichannel capabilities, and believes these measures may improve future profitability. The filing provides no specific numerical earnings or revenue guidance. Marketing budgets, client demand, economic conditions, competition, mail-supply-chain costs, and client retention remain risks.
- CEO Robert Philpott resigned in July; Karen Puckett became CEO in September and received inducement equity awards. Management reported disclosure controls effective at a reasonable-assurance level and no material change in internal control over financial reporting. Pending legal matters were not considered reasonably likely to have a material adverse effect, though outcomes remain uncertain.
Important facts for investors to verify
- Progress and terms for refinancing or extending the credit facilities before their August 2016 maturity, including covenant headroom.
- Whether Customer Interaction revenue stabilizes and whether the assumptions underlying the $209.9 million goodwill impairment remain appropriate.
- Actual operating performance and cash contribution from 3Q Digital, and the eventual contingent-consideration payment.
- Further client losses, marketing-budget reductions, B2B sale-related settlements, and any additional restructuring or legal costs.
- The sustainability of operating cash flow, dividend and repurchase spending, and management’s stated 12-month liquidity outlook.