HHS

Harte-Hanks, Inc. 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2005. Harte-Hanks, Inc. is a targeted media company operating in two primary segments: Direct Marketing (database management, data analysis, and program execution) and Shoppers (owner and distributor of weekly advertising publications in California and Florida). As of June 30, 2005, the company had 84,288,113 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 11.7% in Q2 2005 and 12.6% for the six-month period compared to 2004.
  • Direct Marketing: Revenues rose 8.9% (Q2) and 13.0% (6mo), driven by growth in financial services, high-tech/telecom, and retail verticals, as well as acquisitions of Postfuture, Inc. and Communiqué Direct.
  • Shoppers: Revenues rose 16.1% (Q2) and 12.0% (6mo), significantly aided by the April 2005 acquisition of The Tampa Flyer ($7.3M revenue contribution) and circulation growth in California and Florida.
• Profitability: Net income increased 14.0% in Q2 and 22.3% for the six-month period. Diluted EPS grew 17.2% (Q2) and 26.0% (6mo).
  • Operating income margins improved due to revenue growth outpacing expense increases in both segments.
  • Effective tax rates were lower than prior year periods (38.1% in Q2 vs. 39.9% in Q2 2004) due to a favorable resolution of a state tax matter.
• Acquisitions: The company acquired The Tampa Flyer in April 2005 for approximately $61.7 million, adding $41.6 million in goodwill and $15.9 million in intangible assets to the Shoppers segment.
• Cost Pressures: Operating expenses increased due to higher labor costs, increased fuel prices impacting logistics, and rising newsprint costs for the Shoppers segment.

Outlook, Risks, and Management Commentary

• Liquidity and Capital: The company maintains a $125 million revolving credit facility with $82.0 million of unused capacity as of June 30, 2005. The facility matures in October 2005, and management is in the final stages of replacing it with a new five-year facility expected in Q3 2005.
• Stock Repurchases: The company repurchased 469,921 shares in Q2 2005 at an average price of $28.79. Approximately 4.48 million shares remain available under the current repurchase plan.
• Key Risks:
  • Postal Rates: Standard postage rates are expected to increase in Q1 2006, which will impact Shoppers production costs.
  • Input Costs: Newsprint prices have risen and are expected to continue increasing through 2005 and into 2006.
  • Regulatory/Privacy: Potential legislation regarding consumer privacy could restrict data collection and usage, impacting the Direct Marketing segment.
  • Interest Rates: The company has exposure to variable interest rates (EUROLIBOR) on its credit facility.
• Accounting Changes: The company is preparing to adopt SFAS No. 123R (Stock-Based Compensation) effective January 1, 2006, which will require recognizing compensation expense for stock options, potentially reducing reported net income.

Investor Verification Checklist

• Acquisition Integration: Verify the integration progress and revenue contribution of The Tampa Flyer and other recent acquisitions (Postfuture, Communiqué Direct).
• Cost Inflation: Monitor the impact of rising newsprint prices and fuel costs on Shoppers and Direct Marketing margins, respectively.
• Debt Refinancing: Confirm the successful execution of the new five-year credit facility replacement before the October 2005 maturity of the current line.
• Stock-Based Compensation Impact: Assess the projected reduction in net income upon the adoption of SFAS 123R in 2006.
• Postal Rate Hikes: Evaluate the company's strategy to mitigate the anticipated Q1 2006 increase in Standard Mail postage rates.