HHS

Harte-Hanks, Inc. 10-Q Summary

Business Context and Reporting Period

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

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 21.5% in Q2 2009 and 20.2% for the six months ended June 30, 2009, compared to the prior year periods.
  • Direct Marketing: Revenues fell 20.2% (Q2) and 19.1% (YTD). The financial services vertical was the most impacted, declining over 35%. Retail and select verticals declined approximately 20%.
  • Shoppers: Revenues fell 24.0% (Q2) and 22.4% (YTD). This was driven by decreased sales in California and Florida and the curtailment of approximately 1.5 million circulation addresses since July 2008.
• Expense Reductions: Operating expenses decreased 20.5% (Q2) and 18.2% (YTD), largely due to headcount reductions, lower outsourced costs, reduced logistics volumes, and travel restrictions.
  • Pension Impact: Cost reductions were partially offset by increased pension expense ($1.7 million in Q2, $3.4 million YTD) due to declines in the market value of pension plan assets in 2008.
• Liquidity Improvement: Cash and cash equivalents increased significantly to $74.9 million from $30.2 million at year-end 2008, driven by strong operating cash flow ($71.3 million YTD) and reduced capital expenditures.
• Debt Reduction: Total debt decreased to $256.4 million from $270.6 million at December 31, 2008, due to lower outstanding borrowings and lower interest rates.

Outlook, Risks, and Management Commentary

• Economic Outlook: Management expects financial performance to continue to be negatively impacted by the ongoing economic recession. Marketing budgets remain discretionary and subject to reduction. The company faces an uncertain revenue outlook for the remainder of 2009.
• Cost Actions: The company is continuing to align its expense base with the economic environment through headcount reductions, facility consolidations, wage freezes, and tightened capital spending controls.
• Liquidity Position: The company believes its cash on hand ($74.9 million) and unused borrowing capacity under its $125 million Revolving Credit Facility (maturing August 2010) are sufficient to fund operations and obligations for at least the next 12 months. However, disruptions in credit markets could impact the ability to refinance the revolving facility.
• Legal Contingencies: A putative class action lawsuit regarding employee expense reimbursement (Gattuso v. Harte-Hanks Shoppers) remains pending. The California Supreme Court remanded the case for further proceedings on class certification. No accrual has been made as the loss is not considered probable or estimable.
• Goodwill: Management reviewed goodwill for impairment triggers due to economic uncertainty but determined no triggering events occurred during the first half of 2009 requiring an assessment.

Investor Verification Checklist

• Revenue Trajectory: Verify if the decline in the financial services vertical (over 35%) stabilizes or worsens in upcoming quarters.
• Shoppers Circulation: Monitor further announcements regarding circulation curtailments in California and Florida, which directly impact revenue and production costs.
• Debt Maturity: Assess the company's ability to refinance or extend the $125 million Revolving Credit Facility maturing in August 2010 amidst potential credit market disruptions.
• Pension Liability: Track the impact of market volatility on pension plan assets and the resulting periodic benefit costs.
• Legal Resolution: Watch for developments in the Gattuso class action lawsuit, specifically regarding the trial court's ruling on class certification.