Harte-Hanks, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. Although the request references 2012 Q4, this filing reports the full fiscal year; unaudited fourth-quarter results are also summarized below. Harte-Hanks provides direct and digital marketing services and shopper advertising through Direct Marketing and Shoppers. Following its December 31 sale of the Florida Shoppers assets, Shoppers operated only in California.
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $767.7 million | $811.6 million |
| Operating income (loss) | $(89.9) million | $78.1 million |
| Continuing-operations income (loss) | $(73.1) million | $45.9 million |
| Net income (loss), including discontinued operations | $(83.4) million | $44.2 million |
| Diluted EPS from continuing operations | $(1.16) | $0.72 |
| Operating cash flow | $76.3 million | $60.7 million |
| Capital expenditures | $13.9 million | $21.0 million |
| Cash and cash equivalents, year-end | $49.6 million | $86.8 million |
| Total debt, year-end | $110.3 million | $179.4 million |
- Revenue declined 5.4%. Direct Marketing revenue fell 5.4% to $581.1 million; Shoppers revenue fell 5.4% to $186.6 million.
- The reported operating loss includes a $156.9 million Shoppers goodwill impairment charge. Excluding that charge, management reported continuing-operations income of $39.0 million and diluted EPS of $0.62, versus $45.9 million and $0.72 in 2011. Excluding the impairment, operating income was approximately $67.0 million, or 8.7% of revenue.
- Direct Marketing operating income was $75.4 million, down 9.7%; Shoppers reported an operating loss of $152.6 million, principally reflecting the impairment. Shoppers’ operating loss excluding the impairment was approximately $4.3 million.
- Operating cash flow increased by $15.6 million, with management attributing the increase mainly to working-capital changes. Investing activities used $13.8 million; financing activities used $99.8 million, including debt repayments, dividends, and share repurchases.
- At year-end, current assets were $225.5 million and current liabilities were $140.2 million. The company had $60.5 million of unused revolver capacity, after letters of credit, under a facility maturing in August 2013.
- All $110.3 million of debt carried variable interest rates; the term loan’s effective rate was 2.21%. The company reported compliance with its debt covenants at year-end.
- Quarterly dividends totaled $0.43 per share in 2012, including an accelerated dividend; the company did not anticipate a first-quarter 2013 dividend and planned, subject to board approval, $0.085 per share in each of Q2–Q4 2013. Capital returns also included $4.4 million of share repurchases during 2012.
Material changes and fourth-quarter results
- In Q2 2012, the company recorded a $156.9 million impairment of Shoppers goodwill following continuing revenue declines and adverse regional economic conditions. The impairment was a major driver of the annual reported loss.
- On December 31, 2012, the company sold its Florida Shoppers assets for approximately $2.0 million in a secured promissory note, subject to working-capital adjustments. The note was fully reserved because collectability was in doubt; the sale produced an after-tax loss of $2.7 million. Florida operations are presented as discontinued operations.
- Q4 revenue was $204.8 million versus $215.1 million in Q4 2011. Operating income was $22.1 million versus $24.6 million; net income was $10.7 million versus $14.7 million.
- Direct Marketing’s decline reflected reduced direct-mail spending by a large retail client that shifted toward broadcast, along with pressure in high-tech and pharmaceutical markets. Shoppers continued to face weak local advertising demand in California.
Outlook, commentary and risks
- Management gave no specific revenue or earnings guidance. It said cash, operating cash flow, and available revolver capacity were expected to fund operations, planned capital spending, debt service, dividends, and pension contributions over the next 12 months.
- The August 2013 revolver maturity was a key near-term financing consideration. Management expected to obtain a replacement facility on similar terms but cautioned that disruption in credit markets could prevent refinancing on acceptable terms or at all.
- Management expected continued challenges before Shoppers performance improved, despite seeing some improvement in California’s economy. It planned to close the Northern California production facility in Q3 2013 and continued to pursue cost reductions while investing in selected digital offerings, including PowerSites.
- Key risks include discretionary client marketing budgets and economic weakness; Shoppers’ concentration in California; competitive and technology shifts; privacy, data-security and direct-marketing regulation; access to third-party data; paper and postage cost increases; variable-rate debt; and potential further impairment charges. Goodwill and other intangible assets totaled approximately $414.0 million at year-end.
- The company’s pension plans were underfunded by $76.9 million at year-end. Management planned $4.6 million of 2013 contributions to the frozen pension plan. The filing also reports $49.3 million of future operating-lease payments and $28.2 million of unfunded pension benefit payments in its contractual-obligations table.
- KPMG gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded internal controls were effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether Direct Marketing can stabilize revenue after major client spending shifts and declines in high-tech and pharmaceutical markets.
- Whether California Shoppers revenue and operating performance improve, and whether the planned facility closure delivers expected savings.
- Whether the company refinanced or replaced the revolver before its August 2013 maturity, and how subsequent liquidity and covenant headroom developed.
- Whether actual collection of the Florida sale note differs from the full reserve recorded at the sale.
- Whether impairment assumptions, pension funding requirements, and variable-rate debt costs change materially in subsequent filings.