Harte Hanks, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Harte Hanks provides multichannel marketing services through Customer Interaction and data-quality software and services through Trillium Software. Financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Revenue | $121.2 | $132.7; down 8.7% |
| Operating income and margin | $3.0; 2.5% | $4.6; 3.4% |
| Net income | $1.6 | $1.8 |
| Diluted EPS | $0.03 | $0.03 |
| Operating cash flow | $20.4 | $6.7 |
| Capital expenditures | $2.7 | $2.6 |
| Cash and cash equivalents | $33.2 | $56.7 at Dec. 31, 2014 |
| Total debt | $78.1 | $82.7 at Dec. 31, 2014 |
| Working capital | $47.4 | $82.2 at Dec. 31, 2014 |
Operating cash flow rose primarily because of working-capital movements, including an $18.6 million reduction in receivables; it was more than offset by $29.9 million of acquisition cash outflow, $2.7 million of capital spending, debt repayments and dividends. Cash declined by $23.6 million during the quarter. The company paid $5.3 million in dividends, or $0.085 per share.
At March 31, the company had $73.8 million of unused revolving-credit capacity. Its $78.1 million term loan carried an effective rate of 2.18%; no revolving borrowings were outstanding. The term loan and revolver mature in August 2016. The company reported compliance with its credit-facility covenants.
Changes versus the prior-year quarter
- Revenue fell in both segments: Customer Interaction declined 7.9% to $109.3 million, and Trillium Software declined 15.3% to $11.9 million.
- Management attributed Customer Interaction weakness mainly to lost clients and lower client marketing spend in retail and auto/consumer brands. Select markets also declined following a large, nonrecurring prior-year contact-center project.
- Trillium’s decline reflected a large software-license sale in Q1 2014 that did not recur, along with lower professional-services revenue.
- Operating expenses decreased 7.8%, including lower labor and production/distribution costs, but not enough to offset lower revenue. General and administrative costs rose 10.8%, primarily from acquisition-related legal and professional fees.
- Other income improved by $1.1 million year over year, principally due to foreign-currency transaction gains; this helped limit the decline in pretax income. The effective tax rate was 42.6%, versus 41.7%.
Acquisition, outlook and risks
- On March 16, Harte Hanks acquired digital marketing agency 3Q Digital for $30.2 million in cash, plus contingent consideration estimated at $17.9 million at acquisition. Additional cash payments of up to $35.0 million could be due in 2017, depending on revenue goals. The purchase-price allocation is preliminary and includes $41.8 million of goodwill; acquired operations are included in Customer Interaction from the acquisition date.
- On April 14, after quarter-end, the company sold Aberdeen Group and Market Intelligence for approximately $9.0 million, subject to a working-capital adjustment. It expects a pretax charge of about $10.5 million and an after-tax loss of about $7.8 million in Q2 2015.
- No numerical revenue or earnings guidance is provided. Management said cash, operating cash flow and available revolver capacity should fund operations, planned capital expenditures, debt service, dividends and pension contributions for the next 12 months.
- Management intends to continue investing in its multichannel strategy and adjusting costs, and believes these actions can improve future profitability. It warned that marketing budgets are discretionary and that a prolonged economic downturn, client spending reductions, competition and rising mail-supply-chain rates could adversely affect results.
- The company plans an additional $3.0 million contribution to its qualified pension plan during the remainder of 2015. Goodwill impairment is a continuing risk if adverse business or market events arise; no new impairment trigger was identified in Q1.
- Management said existing legal proceedings were not considered reasonably likely to materially harm financial position or results, while noting that outcomes and timing remain uncertain. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether revenue declines and lower segment operating income persist, particularly in retail and auto/consumer brands, and whether cost actions restore margins.
- The 3Q Digital acquisition’s performance against earnout targets, the final purchase-price allocation and the potential cash obligation of up to $35.0 million.
- The Q2 accounting and final proceeds for the Aberdeen and Market Intelligence divestiture, including the estimated loss.
- Liquidity and covenant headroom as the term loan and revolver approach their August 2016 maturities; monitor cash generation, pension funding and dividend capacity.
- The filing’s liquidity discussion cites operating cash flow of $20.7 million and investing outflow of $32.9 million in one passage, while the cash-flow statement reports $20.4 million and $32.6 million, respectively. Confirm the intended figures.
- The acquisition note’s preliminary allocation table reports total recognized assets and liabilities of $50.5 million against total consideration of $48.2 million, while accompanying text describes fair value of net tangible, identifiable intangible assets and goodwill as $48.2 million. Clarify the reconciliation in subsequent filings.