HHS

Harte-Hanks, Inc. 10-Q Summary: Period Ended September 30, 1998

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1998, and the nine months ended on that date. Harte-Hanks, Inc. operates primarily in direct marketing and shopper publications. A significant structural change occurred in the prior year when the company sold its newspaper and television operations (KENS-TV, KENS-AM, and newspaper assets) to the E.W. Scripps Company on October 15, 1997. Consequently, results for these segments are reported as discontinued operations for 1997, and the current filing focuses on continuing operations.

Key Financial Metrics

Note: The company retired all long-term debt ($306.3 million) in October 1997 using proceeds from the divestiture of its newspaper and TV operations. Current liabilities include $22.4 million in customer deposits and unearned revenue.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 18.3% in the third quarter and 23.3% for the nine-month period compared to 1997. This growth was driven by both new and existing customers in direct marketing and shopper segments.
• Profitability: Net income from continuing operations surged 61.6% in the third quarter and 80.3% for the nine-month period. This was fueled by operating income growth and a shift from interest expense to significant interest income ($2.8 million in Q3 1998 vs. $1.9 million expense in Q3 1997) due to the investment of divestiture proceeds.
• Segment Performance:
  • Direct Marketing: Revenues grew 13.8% (Q3) and 18.8% (9mo), aided by acquisitions (Mercantile Software Systems, Cornerstone Integrated Services) and growth in database marketing.
  • Shoppers: Revenues grew 27.8% (Q3) and 32.5% (9mo), primarily due to the September 1997 acquisition of the ABC Shopper Group, partially offset by the sale of the Dallas-Fort Worth Shoppers Guide.
• Cash Flow: Net cash used in operating activities was $191.1 million for the nine months ended September 30, 1998. This outflow was primarily due to a $265.7 million income tax payment in the first quarter related to the 1997 divestiture gain.

Outlook, Risks, and Management Commentary

• Liquidity: Management believes remaining proceeds from the 1997 divestiture, combined with operating cash flows, are sufficient to fund operations and capital needs. The company has no outstanding long-term debt.
• Acquisitions: The company continues to pursue acquisition opportunities. Recent activity includes the acquisition of Cornerstone Integrated Services (August 1998) and Printing Management Systems, Inc. (November 1998).
• Year 2000 (Y2K) Compliance: A significant risk factor identified is the Year 2000 issue. The company has expensed $1.5 million to date, with an estimated remaining cost of $2.5 million. Remediation is ongoing, with testing and certification targeted for completion by March 31, 1999. Failure to remediate could disrupt operations.
• Operational Risks: Key risks include competition in direct marketing and shopper media, fluctuations in newsprint prices, and potential increases in postal rates (expected January 1, 1999).
• Stock Repurchases: The board authorized an additional 3,000,000 shares for repurchase in September 1998. The company repurchased $66.5 million of treasury stock in the first nine months of 1998.

Investor Verification Checklist

• Verify the sustainability of revenue growth in the Direct Marketing and Shopper segments excluding the impact of the ABC Shopper Group acquisition.
• Confirm the status and estimated costs of the Year 2000 remediation plan, specifically the timeline for testing and certification.
• Monitor the impact of the upcoming January 1, 1999, postal rate increase on the Shopper segment's margins.
• Review the integration progress of recent acquisitions (Cornerstone Integrated Services, Printing Management Systems) and their contribution to future earnings.
• Assess the company's cash deployment strategy, balancing stock repurchases against potential future acquisition opportunities.