Harte Hanks, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; comparative period is FY 2017. The filing also reports fourth-quarter results. Harte Hanks provides data-driven marketing, customer relationship, contact center, direct mail, fulfillment and logistics services. It operates as one reportable segment.
Financial performance and liquidity
- Revenue: $284.6 million, down 25.9% from $383.9 million. Revenue declined across all reported verticals; the 3Q Digital sale accounted for $29.2 million of the reduction, with lost clients and lower existing-client volumes also contributing.
- Operating results: Operating loss was $26.0 million, versus $40.9 million in 2017. Operating margin improved to negative 9.1% from negative 10.6%, as operating expenses fell 26.9% to $310.7 million—more than the decline in revenue.
- Net results: Net income was $17.6 million, compared with a $41.9 million net loss. This does not indicate operating profitability: results included a $31.0 million pretax gain on the 3Q Digital sale and an $18.1 million income-tax benefit. Loss before income taxes was $0.6 million. Diluted EPS was $2.38, versus a loss of $6.76 per share.
- Fourth quarter: Revenue was $70.2 million, down from $99.9 million in Q4 2017. Operating loss was $4.3 million versus $33.7 million; net income was $1.6 million versus a $29.3 million loss.
- Cash flow: Operating activities used $9.2 million, improved from $30.8 million used in 2017. Investing activities used $0.1 million. Financing activities provided $22.7 million, largely from revolver borrowings and preferred-stock proceeds. Cash increased to $20.9 million from $8.4 million.
- Debt and liquidity: Year-end debt was $14.2 million, all under a secured revolving facility expiring April 2020; the company reported up to $5 million of additional borrowing capacity. The facility is secured by substantially all company assets. Current assets were $105.0 million and current liabilities $54.2 million. Stockholders’ deficit was $19.2 million.
- Other obligations: The pension liability was $63.9 million; management estimated $2.2 million of 2019 contributions to the qualified pension plan. Contractual cash obligations totaled $78.3 million, including operating leases, debt, capital leases, purchase obligations and pension payments.
Material changes and unusual items
- Harte Hanks sold 3Q Digital in February 2018 for $5.0 million cash, subject to working-capital adjustments, plus possible additional consideration. The sale generated a $31.0 million pretax gain and transferred the former $35.0 million contingent earn-out obligation to the buyer.
- Wipro invested $9.9 million in Series A convertible preferred stock, convertible into 16% of common stock on a pre-closing basis. The preferred stock carries a 5% annual dividend rate and gives Wipro specified board-observer or, in certain circumstances, board-appointment rights. Wipro is also a significant technology-services provider; related expense was $12.3 million in 2018.
- Workforce reductions incurred approximately $0.9 million in severance charges. Management estimated annualized savings of $7.5 million, with a further approximately $2.0 million in annual non-labor expense reductions targeted from 2019.
- The company adopted the new revenue-recognition standard in 2018 using the modified retrospective method; management said its income-statement and operating-cash-flow impacts were not significant.
- Management changes after year-end included Bant Breen’s appointment as CEO, Andrew Harrison’s promotion to President and COO, Mark Del Priore’s appointment as CFO, and Martin Reidy’s appointment to lead marketing services.
Outlook, risks and controls
- Management cited a difficult competitive environment and discretionary client marketing budgets, and said it is focusing on core services, targeted investments and cost reductions. No specific revenue or earnings guidance was provided.
- Management stated it believed liquidity sources—including cash, operating cash flow, a significant tax refund receivable and available facility borrowings—would meet requirements for at least 12 months, and that conditions did not raise substantial doubt about going concern for that period. Separately, the filing warns that ongoing operating losses may require additional funding; financing may not be available on acceptable terms.
- Client engagements are generally cancellable on short notice and often lack minimum purchase commitments. The ten largest clients represented 44% of revenue; traditional consumer retail represented 23%. Competition, declining demand, pricing pressure and dependence on key partners, especially Wipro, are material risks.
- Privacy and data-security regulation, including GDPR, cyber incidents, pension funding, postal and paper cost changes, and the ability to retain clients and employees are additional risks. The company also faced NYSE market-capitalization listing noncompliance; the exchange accepted a compliance plan in January 2019, subject to monitoring and potential suspension or delisting if targets are missed.
- Management and Deloitte identified material weaknesses in internal control over financial reporting, including revenue-data completeness and accuracy, revenue review precision, and information and communication controls. Deloitte issued an adverse opinion on internal controls, while giving an unqualified opinion on the financial statements. Remediation was continuing into 2019.
Important facts for investors to verify
- Whether revenue declines stabilize and cost reductions translate into sustainable operating improvement, excluding the 3Q Digital gain and tax benefits.
- Cash conversion, the timing and collectability of the tax refund receivable, and remaining borrowing availability under the secured facility.
- Progress against the NYSE compliance plan and the company’s ability to maintain the required market capitalization.
- Remediation of material weaknesses, particularly controls over revenue recognition and related accounts.
- Actual realization of restructuring savings, pension contributions, and the effect of lease obligations and other contractual commitments on liquidity.
- The terms and potential dilution of Wipro’s convertible preferred stock, and the company’s operational dependence on Wipro-provided services.