HHS

Harte-Hanks, Inc. 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Harte-Hanks, Inc., a worldwide direct and targeted marketing company, for the period ended September 30, 2009. The company operates through two primary segments: Direct Marketing (providing services to retail, financial, healthcare, and other verticals) and Shoppers (owner and operator of weekly advertising publications in California and Florida). The reporting period reflects continued challenges due to the economic recession, resulting in reduced client marketing expenditures and pricing pressures.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 22.4% in Q3 2009 and 21.0% for the nine months ended September 30, 2009, compared to the same periods in 2008.
  • Direct Marketing: Revenues fell 22.9% (Q3) and 20.4% (YTD), with declines of at least 20% across all vertical markets, most notably financial services (down >30%).
  • Shoppers: Revenues fell 21.6% (Q3) and 22.1% (YTD), driven by weak local economies in California and Florida and circulation curtailments of approximately 1.5 million addresses.
• Profitability: Operating income decreased 23.5% in Q3 and 31.8% YTD. Net income decreased 15.4% in Q3 and 29.3% YTD.
  • Operating expenses decreased 22.3% (Q3) and 19.6% (YTD) due to aggressive cost-cutting measures, including headcount reductions, facility consolidations, and lower logistics costs.
  • Cost reductions were partially offset by a significant increase in pension expense ($1.8M in Q3, $5.3M YTD) due to declines in the market value of pension plan assets in 2008.
• Liquidity: Cash and cash equivalents increased to $83.0 million from $30.2 million at year-end 2008, driven by strong operating cash flow ($94.6 million YTD) and reduced capital expenditures.

Outlook, Risks, and Management Commentary

• Economic Outlook: Management anticipates continued negative impacts from the economic recession on client marketing budgets. The outlook for the remainder of 2009 remains uncertain.
• Cost Management: The company is actively aligning its expense base to reduced revenue levels through headcount reductions, wage freezes, facility closures, and tightened controls on accounts receivable.
• Liquidity and Debt:
  • The company maintains a $125 million Revolving Credit Facility (maturing August 2010) with $112.2 million available. No amounts were drawn as of September 30, 2009.
  • Term loans total approximately $249.3 million. The company is in compliance with all debt covenants.
  • Management believes current cash and credit facilities are sufficient to fund operations and obligations for at least the next 12 months.
• Legal Contingencies: A putative class action lawsuit regarding employee expense reimbursement (Gattuso v. Harte-Hanks Shoppers) is ongoing. A trial is set for April 2010. No accrual has been made as the company believes it has meritorious defenses, though an adverse outcome could impact future results.
• Accounting Changes: The company adopted new accounting standards (ASC 805, ASC 815, ASC 820) in 2009, which did not materially affect financial statements but will impact future acquisition accounting and disclosures.

Investor Verification Checklist

• Verify the sustainability of the 22% revenue decline and whether cost-cutting measures can maintain margins if revenue recovery is delayed.
• Monitor the Revolving Credit Facility maturing in August 2010 and the company's ability to refinance or extend it given credit market conditions.
• Assess the potential financial impact of the pending class action lawsuit regarding employee expense reimbursement.
• Review the pension plan asset performance and its continued impact on operating expenses and cash flow requirements.
• Track the effectiveness of circulation curtailments in the Shoppers segment to stabilize profitability in California and Florida markets.