Business context and reporting period
Harte-Hanks, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2014. The company provides multichannel marketing services, including agency and digital services, database marketing, data-quality software, direct mail, and contact-center services. California Shoppers was sold in September 2013; its results are reported as discontinued operations, so the period comparisons below primarily reflect continuing operations.
Financial performance and position
- Revenue: $132.7 million, up 0.3% year over year.
- Profitability: Operating income was $4.6 million, down 51.3%; operating margin was approximately 3.4%, versus 7.1% a year ago. Continuing-operations net income was $1.8 million versus $6.3 million; diluted continuing-operations EPS was $0.03 versus $0.10. Net income was $1.8 million versus $6.7 million, which included $0.3 million from discontinued operations.
- Costs and other items: Operating expenses rose 4.2% to $128.1 million. Net interest expense was $0.7 million. Other expense was $0.7 million, compared with $1.2 million of other income in Q1 2013.
- Cash flow: Operating cash flow was $6.7 million, down from $12.1 million. Capital expenditures were $2.6 million. Cash declined $4.2 million during the quarter to $84.5 million, after $5.4 million of dividends and $3.1 million of debt repayments.
- Liquidity and debt: Current assets were $224.2 million and current liabilities were $131.5 million. Total debt was $94.9 million, including $16.8 million classified as current; cash was $84.5 million. The company reported $72.5 million of unused revolving-credit capacity. It was in compliance with its credit covenants.
- Other balance-sheet metrics: Total assets were $668.9 million and stockholders’ equity was $346.2 million. Goodwill was $398.2 million.
Material changes versus the prior comparable period
- Revenue was essentially flat, but operating expenses increased $5.2 million, principally from higher labor and production/distribution costs. Labor included approximately $1.0 million of severance; management expected benefits from the related headcount reductions from April onward.
- Revenue growth in select markets, automobile/consumer brands, and pharmaceuticals was partly offset by declines in retail, high tech, and financial services. Select-markets growth included nonrecurring streaming-enrollment work for a contact-center customer.
- Other income/expense swung by $1.9 million year over year, reflecting a $1.0 million change in foreign-currency transaction gains and losses and a $0.9 million gain on a Belgium facility sale in Q1 2013.
- Cash from operations decreased $5.4 million, attributed primarily to lower net income and working-capital changes. Q1 2014 included a $5.4 million dividend payment; the comparable 2013 dividend had been paid in December 2012.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management said cash on hand, operating cash generation, and revolver availability should fund operations, anticipated capital expenditures, debt service, dividends, and pension contributions for the next 12 months.
- Management described economic conditions in served markets as uneven, with modest but uncertain growth. Marketing budgets are discretionary, and a prolonged recession could materially harm business, financial position, or results. Future performance also depends on retaining and growing clients, winning new business, and controlling labor and mail-supply-chain costs.
- Variable-rate debt exposes earnings to interest-rate changes; management estimated a one-percentage-point rate change would have affected Q1 net income by approximately $0.1 million. The company had no interest-rate or foreign-exchange hedges and reported $0.4 million of pretax currency transaction losses.
- The company contributed $1.1 million to its funded frozen pension plan in Q1 and expected another $3.7 million of contributions during 2014. Effective April 1, it froze benefits under its supplemental pension plan; management expected a $0.4 million reduction in remaining-2014 expense and a $1.1 million reduction in the projected benefit obligation.
- No goodwill impairment trigger was identified as of March 31, though management said future triggering events could require testing and potentially result in impairment. Management did not consider pending legal matters reasonably likely to have a material adverse effect; certain client indemnification commitments have no stated maximum exposure.
- Disclosure controls were judged effective at a reasonable-assurance level, with no material change in internal control over financial reporting reported during the quarter.
Important facts for investors to verify
- Whether the revenue contributions from select markets and other growing verticals are sustainable, particularly given the disclosed nonrecurring contract work.
- Whether severance-related cost reductions and investments in key personnel improve operating performance enough to offset expense growth and weaker verticals.
- Cash conversion and working-capital trends, including collections, customer deposits, and the effect of dividends, scheduled debt repayments, and pension contributions on liquidity.
- Compliance with the credit-facility leverage and interest-coverage covenants, and continued availability of the revolving facility.
- The effects of variable interest rates, foreign-exchange movements, and future pension-plan accounting and contributions.
- Potential goodwill impairment indicators and developments in litigation or indemnification exposures.