Harte Hanks, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Harte Hanks provides multichannel marketing services, including digital and agency services, database marketing, direct mail, and contact centers. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $94.4m | $97.4m | $284.0m | $294.3m |
| Operating income (loss) | $1.0m | ($4.1m) | ($7.2m) | ($19.3m) |
| Operating margin | 1.0% | (4.2%) | (2.5%) | (6.6%) |
| Loss from continuing operations | ($2.5m) | ($4.3m) | ($12.5m) | ($16.9m) |
| Net loss | ($2.5m) | ($3.0m) | ($12.5m) | ($12.9m) |
| Loss per share from continuing operations | ($0.04) | ($0.07) | ($0.20) | ($0.27) |
Cash flow and balance sheet: Nine-month operating cash flow was a use of $42.0m, versus $26.5m provided in 2016; investing activities used $4.1m and financing activities provided $10.8m. Cash declined to $11.4m from $46.0m at year-end 2016. At September 30, current assets were $121.5m and current liabilities $71.5m, or working capital of approximately $50.0m. Debt was $12.0m, drawn under a $20.0m revolving facility. Stockholders’ equity was negative $6.4m.
Interest expense was $1.3m in Q3 and $3.5m for the nine months. Nine-month other expense was $5.1m. The filing does not report a standalone cash balance forecast or numeric full-year guidance.
Changes versus comparable periods
- Q3 revenue declined 3.1%; nine-month revenue declined 3.5%. Management attributed declines principally to lost clients and lower client marketing spend. Q3 retail, B2B, and consumer revenue fell; financial services increased. For the nine months, retail, healthcare, and B2B declined, partly offset by growth in consumer and financial services.
- Operating expenses fell 7.9% in Q3 and 7.1% for the nine months, reflecting lower labor, general and administrative, production and distribution, and depreciation/amortization costs. Q3 operating results improved to income from a loss a year earlier, but the company remained loss-making for the nine-month period.
- Continuing-operations losses narrowed year over year, while net loss comparisons also reflect that Trillium was sold in December 2016 and is presented as discontinued operations in 2016. The 2016 comparison includes Trillium income; 2017 does not.
- Operating cash flow worsened sharply, primarily due to changes in operating assets and liabilities, including tax paid on the 2016 Trillium sale and lower cash provided by receivables amid declining revenue.
Outlook, liquidity, and key risks
- Management said revenue declines had abated over the prior three quarters and that it believed actions underway could return the business to revenue growth and profitability. It provided no quantified forecast and cautioned that quarterly results are affected by seasonality, particularly holiday-related retail marketing.
- Cost actions include workforce reductions, back-office and IT consolidation, and closure of the Baltimore direct-mail facility. Management reported favorable early effects and intended to continue expense reductions through the end of 2017, while investing in offerings including its database platform and DataView marketing data facility.
- The Texas Capital revolving facility, entered into in April 2017, provides up to $20m, matures April 17, 2019, and is secured by substantially all company assets. At September 30, $12m was drawn. Letters of credit totaled $3.8m, including $3.3m cash-collateralized.
- Management stated that cash, the credit facility, and deferral of 3Q Digital contingent consideration meant there were no conditions or events that, in aggregate, raised substantial doubt about the company’s ability to continue as a going concern for the 12 months after issuance of the statements. This assessment is subject to the company’s operating and liquidity risks.
- Contingent consideration for the 3Q Digital acquisition was recorded at $32.8m; the company expected payment at the maximum potential $35m. An agreement defers payment until April 1, 2019, or sale of the business, whichever occurs first. Amounts unpaid after March 1, 2018 accrue interest at 8.5%. Harte Hanks was seeking strategic alternatives for 3Q Digital.
- Disclosure controls were reported ineffective at September 30, 2017, due to material weaknesses involving the control environment, revenue recognition, contingent consideration, goodwill impairment, deferred tax assets, and financial close/reporting. Remediation was expected to continue through 2018; success and timing were not assured.
- The NYSE notified the company that its average share price had fallen below $1.00. The company had until February 9, 2018 to regain compliance or face suspension and delisting proceedings. Management also cited other NYSE continued-listing requirements.
- Other exposures include demand sensitivity to discretionary client marketing budgets, pressure in retail and printed marketing, foreign-exchange movements, and legal and indemnification contingencies. Management said material losses beyond recorded legal accruals were remote, but outcomes remain uncertain.
Investor verification checklist
- Track revenue trends by vertical, client losses and spend reductions, and whether cost cuts translate into sustained positive operating income and cash flow.
- Verify cash burn, revolver availability and covenant compliance, including the impact of letters of credit and any future borrowing needs.
- Monitor the 3Q Digital strategic-alternatives process and the contingent consideration balance, payment timing, and interest accrual.
- Check progress in remediating the disclosed material weaknesses and whether the company regains NYSE minimum-share-price compliance by the stated deadline.
- Assess the effect of the Trillium sale and related tax payments when comparing continuing operations and cash flows with 2016.