Harte-Hanks, Inc. — Q1 2013 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2013; comparisons are with the three months ended March 31, 2012 unless noted. Harte-Hanks provides direct and digital marketing services and shopper advertising. Continuing operations comprise Direct Marketing and California-based Shoppers. The Florida Shoppers business was sold on December 31, 2012 and is reported as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $178.3 million | $186.0 million; down 4.1% |
| Operating income | $10.2 million; 5.7% margin | $14.0 million; 7.5% margin; down 27.2% |
| Income from continuing operations | $6.7 million | $7.4 million; down 10.3% |
| Net income | $6.7 million | $6.8 million, including a $0.6 million discontinued-operations loss |
| Diluted EPS | $0.11 | $0.11 total; continuing-operations EPS was $0.12 in 2012 |
| Operating cash flow | $14.9 million | $13.0 million |
| Capital expenditures | $4.6 million | $3.1 million |
- Direct Marketing revenue was $132.4 million, down 5.1%, and operating income was $12.8 million, down 18.1%. Shoppers revenue was $46.0 million, down 1.3%, and operating income was $0.8 million, down 38.2%.
- Cash and cash equivalents were $61.0 million at March 31, up from $49.6 million at year-end. Current assets were $222.4 million and current liabilities $128.0 million; the calculated current ratio was approximately 1.74.
- Total debt was $107.2 million, down from $110.3 million at year-end; $12.3 million was classified as current. Cash exceeded debt by approximately $46.2 million. The $107.2 million term loan bore an effective rate of 2.20%.
- The company had $60.5 million of unused revolving-credit capacity, after $9.5 million of letters of credit. The revolver matures August 12, 2013.
Material changes and unusual items
- Direct Marketing’s pharmaceutical revenue fell 32%, reflecting reduced volume from a long-standing customer and the loss of another customer. Automotive and consumer brands, select, and high-tech revenues also declined; financial and retail grew.
- Shoppers continued to face weak California market conditions. Lower in-book advertising was partly offset by distribution-product growth. Segment operating income fell despite a small reduction in revenue.
- Operating expenses declined 2.3%, less than revenue, contributing to lower operating income. Direct Marketing cost savings included lower temporary labor and mail-supply-chain costs; Shoppers faced increased printing, outsourced, and postage costs.
- Other income, net, was $1.2 million versus $0.7 million of expense in Q1 2012. Q1 2013 included a $0.9 million gain on sale of the Belgium facility and improved foreign-currency results. The sale generated $4.6 million net proceeds; investing cash flow also included $4.6 million of property-sale proceeds.
- The effective tax rate declined to 37.2% from 39.7%, partly due to reduced foreign-subsidiary tax accruals and tax credits made available by the American Taxpayer Relief Act of 2012.
- Comprehensive income was $6.5 million, down from $8.6 million, including a $1.1 million foreign-currency translation loss.
Outlook, risks, and contingencies
- Management expected cash, operating cash flow, and available revolver capacity to fund operations, planned capital expenditures, debt service, dividends, and pension contributions for the next 12 months. It believed it could obtain a replacement revolver of similar size and terms, but gave no assurance; failure to refinance on acceptable terms could pressure liquidity.
- Management cited continued economic uncertainty and weak California conditions, with possible adverse effects on client marketing budgets and Shoppers advertising. A prolonged or worsening downturn could lead to restructuring or impairment charges, including goodwill impairment; goodwill was $408.7 million.
- The company planned to consolidate Shoppers production facilities from four plants to three and expected to close its Northern California facility in mid-2013. Management expected cost reductions, while continuing investment in digital offerings such as PowerSites.
- Credit facilities require minimum interest coverage of 2.75 to 1 and maximum debt-to-EBITDA of 3.0 to 1. The company reported compliance at March 31, 2013. Management estimated a one-percentage-point interest-rate change would have changed Q1 net income by approximately $0.2 million.
- Management said pending legal proceedings were not currently expected to have a material adverse effect. Client indemnification commitments for intellectual-property claims may be uncapped; no related liability was recorded.
- The company repurchased 58,619 shares under its public program during the quarter; $5.2 million remained authorized at March 31. It accelerated payment of its regular Q1 2013 dividend into December 2012.
Important facts for investors to verify
- Whether the August 2013 revolving facility was renewed and on what terms, and whether covenant headroom remained adequate.
- Whether Direct Marketing customer losses and pharmaceutical weakness persisted, and whether growth in financial and retail verticals offset declines elsewhere.
- Whether California Shoppers revenue and profitability stabilized and whether the planned plant consolidation delivered savings without material costs.
- Whether operating cash flow remains sustainable after working-capital movements, and whether pension contributions, capital spending, and debt repayments align with management’s liquidity expectations.
- Whether further deterioration in operating performance triggers goodwill, intangible, or long-lived-asset impairment charges.