Harte Hanks, Inc. — FY 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; it is not a standalone fourth-quarter report. Harte Hanks provides data-driven marketing, customer relationship, contact center, fulfillment, and logistics services. The company reports one operating segment.
Financial performance and position
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $217.6 million | $284.6 million |
| Operating loss | $21.6 million | $26.0 million |
| Operating margin | (9.9)% | (9.1)% |
| Net income (loss) | $(26.3) million | $17.6 million |
| Diluted EPS | $(4.26) | $2.38 |
| Cash from (used in) operating activities | $12.1 million | $(9.2) million |
| Cash and cash equivalents at year-end | $28.1 million | $20.9 million |
| Restricted cash at year-end | $6.0 million | None reported |
| Debt at year-end | $18.7 million | $14.2 million |
- Revenue fell 23.6%, with declines across most verticals. Retail revenue decreased 37.6%, B2B 25.0%, consumer brands 19.7%, transportation 38.9%, and financial services 14.7%; healthcare increased 9.7%.
- Operating expenses declined 23.0%, including lower labor and production costs, but the operating margin weakened by 0.8 percentage points as revenue contracted faster than expenses.
- FY 2019 net cash from operations included a $15.9 million federal tax refund and a $5.0 million 3Q Digital earn-out receipt, as well as working-capital movements. Investing cash outflow was $2.6 million and capital expenditures were $2.9 million.
- Current assets were $79.3 million and current liabilities $45.5 million. The $6.0 million restricted cash balance is customer-program funding and is not freely available for general use.
- The $22 million Texas Capital revolving facility had $18.7 million drawn and $1.6 million additional borrowing capacity at year-end; $2.8 million of letters of credit were outstanding. The facility matures April 17, 2021, is secured by substantially all company assets, and is guaranteed by an affiliate of an equity holder and director.
- The pension deficit recognized on the balance sheet was $71.7 million, up from $63.9 million. The company expected to contribute $6.4 million to its qualified pension plan in 2020.
Material changes versus prior year
- Revenue decreased by $67.1 million. The 2018 sale of 3Q Digital accounted for $6.9 million of the year-over-year revenue decline; non-renewing clients and lower existing-client volumes also contributed.
- Operating loss narrowed by $4.4 million despite the revenue decline, as operating expenses fell by $71.5 million. FY 2019 included $11.8 million of restructuring charges; FY 2018 included $4.9 million of asset impairment charges.
- Net results reversed from $17.6 million income to a $26.3 million loss. FY 2018 included a $31.0 million pre-tax gain on the 3Q Digital sale and an $18.1 million income tax benefit. FY 2019 included a $5.5 million gain related to 3Q Digital, principally the earn-out receipt, and $1.8 million of tax expense.
- Operating cash flow improved from a $9.2 million use to $12.1 million provided, substantially reflecting the tax refund and earn-out proceeds alongside working-capital changes.
- In 2019 the company adopted lease accounting requirements, recognizing operating right-of-use assets and lease liabilities. The filing says this materially affected the balance sheet but not operating results or operating cash flows.
Outlook, commentary, and risks
- Management identified more than $20 million in potential annual cost savings, with some already recognized. The company recorded $11.8 million in 2019 restructuring charges and expected approximately $14.0 million of total charges through the end of 2020. Three production facilities were closed and their work consolidated.
- No specific revenue, earnings, or margin guidance is provided. Management said it expected to meet liquidity needs and fixed obligations for at least 12 months using cash, operating cash flow, and facility borrowings, and stated it did not believe conditions raised substantial doubt about going concern during that period. Elsewhere, the filing warns that continued losses could require new capital, asset sales, or scaling back or ceasing operations.
- Andrew Benett became Executive Chairman and CEO in November 2019; Brian Linscott became COO and Lauri Kearnes was promoted to CFO.
- Key risks include declining demand and discretionary client marketing budgets, cancelable client engagements, customer concentration, competitive and pricing pressure, pension funding, liquidity constraints, and privacy, data-security, and regulatory exposure. The largest client represented 8% of revenue, the ten largest 44%, and the largest 25 clients 64%.
- The company cited uncertainty from the COVID-19 outbreak as of the report date, including potential effects on clients, demand, operations, and the global economy. It also reported that it had not regained NYSE market-capitalization listing compliance as of March 13, 2020 and was exploring alternative listing venues.
- Management reported that prior-period material weaknesses in internal control over financial reporting had been remediated by December 31, 2019. The auditor issued an unqualified opinion on the 2019 financial statements; it did not audit internal-control effectiveness.
- Management considered potential losses beyond recorded legal accruals remote, while noting that the company could not predict developments in pending or future claims. No dividends were paid in 2019, and the company said it did not expect to pay them in the foreseeable future.
Important facts for investors to verify
- Whether the stated cost savings are realized, and whether they offset continuing revenue declines and restructuring expenses.
- Cash availability after excluding restricted funds, pension contributions, lease commitments, and other fixed obligations; also confirm borrowing availability and facility terms.
- The sustainability of operating cash flow, given the material contribution of one-time tax and earn-out receipts in 2019.
- Client retention, revenue trends by vertical, and exposure to large clients and traditional retail.
- Progress on NYSE listing compliance and the potential effect of delisting on liquidity and access to capital.
- The effects of COVID-19, privacy regulation, cybersecurity risks, and pension funding assumptions on future results and liquidity.