Harte-Hanks, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Harte-Hanks provides multichannel direct and digital marketing services and shopper advertising through its Direct Marketing and Shoppers segments.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $195.2 million | $200.3 million | Down 2.6% |
| Operating income | $12.9 million | $14.3 million | Down 9.7% |
| Operating margin | 6.6% | 7.1% | Down about 0.5 percentage points |
| Net income | $6.8 million | $7.9 million | Down 14.2% |
| Diluted EPS | $0.11 | $0.12 | Down 8.3% |
| Cash from operations | $13.0 million | $(1.2) million | Improved $14.1 million |
Operating expenses decreased 2.0% to $182.2 million, but fell less than revenue. Interest expense increased 60.2% to $1.0 million, contributing to lower net income. The effective tax rate was 39.8%, compared with 39.6% in Q1 2011.
Direct Marketing revenue declined 1.2% to $139.5 million and operating income declined 2.0% to $15.7 million. Financial and high-tech revenue weakened; pharmaceutical and retail revenue grew, while the select vertical was flat. Shoppers revenue fell 5.9% to $55.7 million and operating income fell 83.9% to $0.2 million, reflecting broad sales declines in established markets.
Cash, debt and liquidity
- Cash and cash equivalents were $30.4 million at March 31, down $56.4 million from year-end 2011. Financing used $66.5 million, primarily reflecting repayment of the $60.0 million 2008 term loan at maturity; operating activities provided $13.0 million and investing activities used $3.0 million.
- Total debt was $117.9 million, down from $179.4 million at December 31, 2011. The balance was under the 2011 term loan, bearing an effective rate of 2.24% and due in 2016. The company had no revolver borrowings and $59.9 million of available capacity after letters of credit.
- Management reported compliance with all credit-facility covenants and expected cash, operating cash flow and revolver availability to fund operations, planned capital expenditures, debt service, dividends and pension contributions for the next 12 months.
- Capital expenditures were $3.1 million. Dividends paid were $5.4 million. The filing reports current assets of $195.7 million and current liabilities of $121.7 million.
Material changes, outlook and risks
- Management described continued difficult economic conditions in California and Florida, with little evidence of improvement, as a drag on Shoppers. Shoppers circulation was approximately 11.3 million addresses weekly; the company continued to evaluate circulation and said further reductions were possible.
- Direct Marketing faced uneven client demand and a longstanding retail customer shifting from direct mail to broadcast. Management said it remained committed to multichannel investment and cost adjustments; it cited digital revenue growth in Shoppers. No specific revenue or earnings guidance was provided.
- Management warned that prolonged weak markets could lead to restructuring costs or impairment charges for goodwill, intangible assets or long-lived assets. Goodwill was $565.7 million. After a qualitative review prompted by Shoppers’ continued decline and weakness in California and Florida, management concluded a quantitative impairment test was not required at March 31.
- Postage rates rose in January 2012 and newsprint prices continued to increase; the company expected newsprint prices to rise slightly further during 2012. A 1-percentage-point interest-rate change was estimated to affect quarterly net income by approximately $0.2 million. Foreign-currency transaction losses were $0.4 million pretax; the company had no currency hedges.
- The filing states a planned 2012 contribution of approximately $6.4 million to the funded pension plan, but its listed quarterly contribution schedule appears inconsistent with that total. The supplemental plan was expected to pay $1.2 million in benefits, with no planned contributions other than those needed for payments.
- The previously disclosed $7.0 million class-action settlement was paid in 2011, and settlement payments concluded. Management said other current legal matters were not considered reasonably likely to have a material adverse effect, while noting outcomes remain uncertain.
Important facts for investors to verify
- Whether Shoppers’ revenue and operating income continue to deteriorate, and whether weak California and Florida markets trigger cost cuts, circulation reductions or impairment charges.
- Whether Direct Marketing can offset weakness in financial, high-tech and changed-client activity with growth in other verticals and digital services.
- The pension contribution forecast: reconcile the stated approximately $6.4 million annual plan with the quarterly schedule disclosed in the filing.
- Cash generation, working-capital trends and the ability to maintain covenant compliance and liquidity while servicing debt and funding dividends and pension obligations.