Harte Hanks, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results. Unless noted, financial figures are for continuing operations and are in U.S. dollars. Share and per-share figures reflect the 1-for-10 reverse split effective January 31, 2018.
Business context and reporting period
Harte Hanks provides multichannel marketing services, including agency and digital services, database marketing and lead generation, direct mail, logistics and fulfillment, and contact centers. Its results are exposed to discretionary client marketing budgets, mail volumes, competition, and seasonal increases in fourth-quarter activity.
The company reported continuing operations after selling Trillium in December 2016. In February 2018, after the reporting period, it also sold 3Q Digital.
Financial performance and position
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $383.9 million | $404.4 million |
| Operating expenses | $424.8 million | $458.2 million |
| Operating loss | $40.9 million | $53.8 million |
| Operating margin | (10.6)% | (13.3)% |
| Loss from continuing operations | $41.9 million | $89.8 million |
| Diluted loss per share from continuing operations | $6.76 | $14.60 |
| Net cash from (used in) operating activities | $(30.8) million | $14.6 million |
| Cash and cash equivalents at year-end | $8.4 million | $46.0 million |
| Total assets | $130.8 million | $213.4 million |
| Total stockholders’ equity (deficit) | $(34.6) million | $2.7 million |
FY 2017 included a $34.5 million goodwill impairment charge, which eliminated the remaining goodwill. Other expense was $10.9 million, including $4.8 million of net interest expense. The company recorded a $9.9 million income tax benefit; this included tax-reform-related deferred tax adjustments.
Revenue declined 5.1% year over year, principally from lower mail volumes in retail, healthcare, and B2B-related verticals. Lower costs—especially labor, production and distribution, and goodwill impairment—reduced the operating loss despite the revenue decline. The filing attributes the operating-cash-flow outflow chiefly to income tax payments related to the Trillium sale.
At December 31, 2017, the company had no debt outstanding. It had a $20 million revolving credit facility, amended in January 2018 to increase availability to $22 million and extend maturity to April 17, 2020. The facility is secured by substantially all company assets. Current assets were $103.2 million and current liabilities were $67.2 million. Contractual obligations included $31.5 million of operating leases, $17.5 million of unfunded pension benefit payments, and $1.0 million of capital leases. The pension plans were underfunded by $61.0 million.
Fourth-quarter 2017 revenue was $99.9 million, compared with $110.1 million in fourth-quarter 2016. The quarterly operating loss was $33.7 million versus $34.5 million, and the loss from continuing operations was $29.3 million versus $72.9 million.
Material changes and notable developments
- Revenue fell from $444.2 million in 2015 to $404.4 million in 2016 and $383.9 million in 2017. Continuing-operations losses persisted, although the reported loss narrowed in 2017, partly reflecting lower impairment charges.
- The 2017 goodwill impairment was $34.5 million, compared with $38.7 million in 2016. Management cited declining projected cash flows and business performance.
- Operating cash flow swung from $14.6 million provided in 2016 to $30.8 million used in 2017; year-end cash fell by $37.6 million during 2017.
- On January 23, 2018, Wipro invested $9.9 million for preferred shares convertible into 16% of common stock on a pre-closing basis. The preferred shares accrue a 5% annual dividend, and Wipro received specified board observer or director designation rights. Wipro is also a significant service provider to the company.
- On February 28, 2018, Harte Hanks sold 3Q Digital for $5 million in cash, subject to working-capital adjustments, plus potential additional consideration of up to $5 million if the business is resold. The buyer assumed the company’s contingent consideration obligation relating to the 2015 acquisition, relieving Harte Hanks of that obligation.
- The January 2018 reverse split was undertaken after NYSE notices concerning the minimum share-price requirement. The company said it had cured that requirement; continued listing also depended on meeting other NYSE standards.
Outlook, risks, contingencies, and unusual items
Management described a strategy of focusing investment on its core customer-interaction and omnichannel business, restructuring its workforce, investing selectively in product offerings, and reducing expenses. The filing gives no quantified revenue, earnings, or cash-flow guidance. Management stated that it did not believe the aggregate conditions raised substantial doubt about the company’s ability to continue as a going concern for the 12 months after issuance of the financial statements. Separately, the risk disclosures warn that continued operating losses may require additional capital and that funding may not be available on acceptable terms.
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of material weaknesses across all five COSO components and in controls over revenue and related accounts. Deloitte issued an adverse opinion on ICFR, while issuing an unqualified opinion on the financial statements. Remediation was ongoing into 2018 and could incur additional cost.
- Revenue transition: The company planned to adopt ASC 606 from January 1, 2018 using the modified retrospective method. Its impact assessment was not complete; management said adoption could materially affect the financial statements.
- Customer and market exposure: The ten largest clients accounted for 43.2% of 2017 revenue; the largest client accounted for 9%, and traditional consumer retail accounted for 24.9%. Many engagements can be cancelled on short notice and lack minimum-volume commitments.
- Regulatory and data risks: Privacy, data-security, marketing-communications, and cybersecurity requirements may increase costs or restrict services. The EU GDPR was due to take effect in May 2018. The company also relies on third-party service and data providers, including Wipro.
- Other obligations and contingencies: Year-end contingent consideration was $33.9 million before the 3Q Digital sale and assignment of the obligation. The company also disclosed $2.8 million of letters of credit, client indemnification commitments with no reasonably estimable maximum exposure, and routine legal proceedings that management did not consider likely to have a material adverse effect.
- Capital allocation: No common dividends were paid in 2017; management did not expect to resume dividends. No shares were repurchased under the public program during 2017.
Important facts for investors to verify
- Whether operations can return to positive operating cash flow and maintain adequate liquidity, including actual use and availability of the amended revolving facility.
- Progress in remediating material weaknesses, particularly revenue controls, and the results of subsequent auditor assessments.
- The final quantified effect of ASC 606 adoption and any resulting changes to revenue timing, contract balances, or reported results.
- Revenue trends, client retention, and exposure to large clients and traditional retail, including whether reduced mail volumes continue.
- Final 3Q Digital sale proceeds and adjustments, and confirmation that the contingent consideration obligation was fully transferred.
- Compliance with NYSE continued-listing requirements and the terms, dilution, and governance effects of Wipro’s preferred investment.