Harte Hanks, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Harte Hanks provides multichannel marketing services, including agency and digital services, database marketing, direct mail/logistics/fulfillment, and contact centers. This unaudited filing covers the quarter and nine months ended September 30, 2018. The company sold 3Q Digital in February 2018 and adopted ASC 606 revenue accounting on January 1, 2018; 2017 results use legacy accounting.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $63.6 million | $94.4 million | $214.4 million | $284.0 million |
| Operating income (loss) | $(10.4) million | $1.0 million | $(21.7) million | $(7.2) million |
| Operating margin | (16.3)% | 1.0% | (10.1)% | (2.5)% |
| Net income (loss) | $(10.0) million | $(2.5) million | $15.9 million | $(12.5) million |
| Cash from operations | Not stated for quarter | Not stated for quarter | $(7.0) million | $(42.0) million |
- Q3 revenue fell 32.7%; nine-month revenue fell 24.5%. Management attributed declines across all verticals to the 3Q Digital sale, lost clients, and lower existing-client volumes.
- Nine-month 2018 net income included a $31.0 million pretax gain on the 3Q Digital sale and a $10.8 million income tax benefit. The company otherwise reported a nine-month operating loss.
- Q3 included a $3.8 million impairment charge for an internally developed database-management platform after declining sales and customer demand reduced expected cash flows.
- Cash was $10.4 million at September 30, up from $8.4 million at year-end 2017. Current assets were $87.1 million and current liabilities $52.9 million.
- No long-term debt was outstanding. The secured $22 million revolving facility matured April 17, 2020; $2.8 million of letters of credit were open and $19.2 million remained available to borrow.
- Stockholders’ deficit was $18.5 million; pension liabilities were $58.6 million. Wipro invested $9.9 million gross in convertible preferred stock, recorded at $9.7 million net of fees. It carries a 5% cumulative dividend and is convertible into approximately 1.0 million common shares.
Material changes, outlook, and risks
- Operating expenses declined year over year, but by less than revenue, and operating performance deteriorated. The 3Q Digital sale reduced nine-month revenue by approximately $19.5 million versus the prior period; it also eliminated a contingent consideration liability of approximately $34.6 million and related accretion expense.
- The company recorded a $0.3 million restructuring charge after workforce reductions approved in September. It expects approximately $3.0 million in annualized savings and approximately $2.0 million of additional annual savings from discretionary expense cuts by early 2019.
- CEO Karen Puckett departed in August; a temporary Office of the CEO was established. The filing provides no specific revenue or earnings forecast. Management said it believed available cash, operating cash flow, and revolver borrowings would meet liquidity needs for at least 12 months, while noting unforeseen circumstances could require alternative liquidity.
- Management cited challenging competition and exposure to economic conditions, discretionary customer marketing budgets, client retention and volumes, and mail-transportation costs. The company reported no substantial doubt about its ability to continue as a going concern for the 12 months following issuance.
- The NYSE notified the company on October 31, 2018 that it did not meet continued-listing market-capitalization and stockholders’ equity requirements. Failure to regain compliance could lead to suspension and delisting.
- Disclosure controls were deemed ineffective due to previously identified material weaknesses in the control environment and revenue-recognition controls. Remediation was underway, but the company could not assure when it would be completed or successful.
- The company stated that appropriate legal accruals had been made and that the probability of material loss beyond recorded amounts was remote. Adoption of ASC 606 did not significantly affect the reported income statement or operating cash flow, but changed certain balance-sheet amounts.
Important facts for investors to verify
- Whether revenue declines, customer losses, and lower client volumes continue, and whether cost reductions offset the resulting operating losses.
- Progress and financial impact of the restructuring and planned expense savings, including the timing and realization of the stated annualized amounts.
- NYSE compliance-plan status and the company’s ability to meet the market-capitalization requirement and avoid suspension or delisting.
- Liquidity and cash generation, including revolver availability, secured-facility terms, and the substantial pension liability.
- Whether internal-control material weaknesses are remediated, and whether future filings report any changes to the impairment, tax-benefit, or sale-related estimates.