Harte-Hanks, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2011, compared with the corresponding 2010 periods. Harte-Hanks operates Direct Marketing and Shoppers, its shopper-publication and advertising business. Amounts below are in millions except per-share data.
Financial performance
- Second quarter: Revenue was $213.0, up 2.6%; operating income was $16.5, down 26.7%; net income was $9.4, down 29.7%; diluted EPS was $0.15 versus $0.21. Operating margin was approximately 7.8%, compared with 10.9% a year earlier; net margin was 4.4%, versus 6.5%.
- First half: Revenue was $413.4, up 1.4%; operating income was $30.9, down 24.5%; net income was $17.3, down 28.3%; diluted EPS was $0.27 versus $0.38. Operating margin was approximately 7.5%, versus 10.0%; net margin was 4.2%, versus 5.9%.
- Segments, Q2: Direct Marketing revenue grew 8.4% to $152.7 and operating income rose 1.8% to $20.4. Shoppers revenue fell 9.5% to $60.3 and recorded an operating loss of $1.1, compared with income of $5.3. For the first half, Direct Marketing revenue rose 6.7% to $293.8, while operating income slipped 1.4% to $36.3; Shoppers revenue declined 9.7% to $119.6 and operating income was $0.1 versus $9.4.
- Cash flow and investment: First-half operating cash flow was $18.0, versus $37.7 in 2010. Capital expenditures were $11.4, versus $8.3. Cash ended June at $47.9, down $38.1 from year-end 2010. Financing used $45.2, including $27.5 of net debt repayments, $8.4 of treasury-stock purchases and $10.3 of dividends.
- Debt and liquidity: Total debt was $165.5 at June 30, down from $193.0 at December 31; all was classified as current. Current assets of $227.5 were below current liabilities of $291.2 (current ratio approximately 0.78). The undrawn revolving facility had $58.2 available after letters of credit. The company reported compliance with debt covenants.
Material changes and management commentary
- Direct Marketing’s growth reflected strength in select, retail and financial markets, partly offset by weakness in high-tech; Information Arts, acquired in 2010, also contributed. Higher labor, outsourced production and transportation-related mail supply-chain costs outpaced revenue growth and weighed on margins.
- Shoppers continued to face weak California and Florida markets, with declines in most revenue categories. The company recognized $3.3 of Q2 and $4.1 of first-half restructuring, retirement and severance-related charges. Management said it was reducing costs while continuing digital investment; it reported no noticeable improvement in the regional economies and expected further challenges.
- Management said cash, operating cash generation and available revolver capacity should fund operations, planned capital spending, debt service and dividends through year-end 2011. However, the $97.5 2006 term loan was due in September 2011 and the $68.0 2008 term loan in March 2012. Management expected to replace the 2006 facility but cautioned that disruption in credit markets could prevent refinancing on acceptable terms or at all.
- The company paid $7.0 into a court-approved class-action settlement fund in June; it reduced the related accrual by $1.3 based on claims received and recorded a $1.3 receivable. Other pending legal matters were not considered likely to have a material adverse effect, according to management.
- Despite Shoppers’ continuing revenue decline and Q2 charges, management’s interim goodwill review found no impairment, citing expected savings from recent actions. Further deterioration could lead to restructuring or impairment charges. Newsprint costs were expected to continue rising in the second half of 2011.
Important facts for investors to verify
- Progress, terms and timing of refinancing the term loans, and liquidity after the September 2011 maturity.
- Whether Shoppers’ revenue declines stabilize and whether planned cost reductions and digital investments improve segment profitability; monitor goodwill impairment indicators.
- Whether Direct Marketing growth can offset rising labor, outsourced-service and transportation costs and restore operating margins.
- Cash conversion and working-capital trends: first-half operating cash flow fell substantially, with lower cash also reflecting debt repayment, capital spending, repurchases and dividends.
- Potential settlement-fund developments and the recoverability of the recorded receivable.