Harte-Hanks, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Financial amounts below are in millions of dollars unless otherwise noted. Harte-Hanks operates Direct Marketing and Shoppers segments.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $199.1 | $213.0 | $394.3 | $413.4 |
| Operating income (loss) | $(152.7) | $16.5 | $(139.7) | $30.9 |
| Net income (loss) | $(109.7) | $9.4 | $(102.9) | $17.3 |
| Diluted EPS | $(1.74) | $0.15 | $(1.63) | $0.27 |
| Operating cash flow | Not separately stated | Not separately stated | $26.6 | $18.0 |
- Results included a $165.3 million non-cash impairment charge in Q2, comprising $156.9 million of Shoppers goodwill and $8.4 million of Shoppers intangible assets. Excluding the charge, management reported Q2 net income of $7.0 million and diluted EPS of $0.11; for the first half, $13.8 million and $0.22.
- Revenue fell 6.5% in Q2 and 4.6% for the first half year over year. Direct Marketing revenue declined 6.5% and 3.9%, respectively; Shoppers declined 6.6% and 6.3%.
- Excluding the impairment, operating expenses declined 5.1% in Q2 and 3.6% in the first half. Cost reductions were partly offset by lower revenue and higher corporate costs.
- Cash and cash equivalents were $34.4 million at June 30, down $52.4 million from year-end 2011. First-half cash use included $73.3 million in financing activities, principally $63.1 million of debt repayments and $10.8 million of dividends. Capital expenditures were $5.6 million.
- Total debt was $116.4 million, all under the 2011 term loan; $12.3 million was classified as current maturities. The company had no revolver borrowings and reported $59.9 million of available capacity after letters of credit. It was in compliance with credit covenants.
- Current assets were $195.8 million and current liabilities $119.2 million. Stockholders’ equity was $335.9 million.
Business changes and management commentary
- Direct Marketing was affected by a longstanding retail client shifting spend from direct mail to broadcast, as well as weakness across pharmaceutical, high-tech, financial and retail clients. Select vertical revenue was flat.
- Shoppers continued to face weak local economies and declining advertising sales in California and Florida. Management reported little, if any, expected near-term economic improvement and said further performance challenges were likely.
- Shoppers cost actions included restructuring, headcount and pay reductions, and discontinuing unprofitable digital initiatives, including SaverTime and mobile apps. The company continued investment in digital products, particularly PowerSites, where it reported good revenue growth.
- Management said cash on hand, operating cash flow and revolver availability were expected to fund operations, planned capital expenditures, debt service, dividends and pension contributions for the next 12 months, based on current plans. No specific revenue or earnings guidance was provided.
Liquidity, risks and unusual items
- The $60.0 million 2008 term loan matured and was repaid in March 2012 using cash on hand. The remaining $116.4 million term loan matures in August 2016; the unused revolver matures in August 2013.
- The company planned $4.0–$6.0 million of contributions to its funded frozen pension plan in the second half of 2012. It expected $0.6 million of benefit payments under its supplemental pension plan in that period.
- The impairment valuation relied on significant unobservable assumptions, including discount rates, revenue growth, operating margins, customer attrition and royalty rates. Management said further impairment testing or charges could result from adverse business conditions, operating performance or changes in projections. Annual impairment testing was planned for Q4 2012.
- Management warned that a prolonged U.S. or international recession, continued weakness in California and Florida, changes in client marketing spending, and cost pressures such as postage and newsprint could adversely affect results, cash flows and financial position.
- The company reported $0.1 million of pre-tax foreign currency transaction losses in Q2 and $0.5 million for the first half, and had no currency hedges. A one-percentage-point interest-rate change was estimated to affect net income by approximately $0.2 million for the quarter and $0.4 million for the first half, using actual borrowing levels.
- Management said other pending legal matters were not then considered reasonably likely to have a material adverse effect. Disclosure controls were deemed effective at a reasonable-assurance level, with no material second-quarter changes to internal control over financial reporting.
Important facts for investors to verify
- Whether Shoppers revenue and operating trends improve, and whether subsequent impairment testing leads to further charges.
- Whether Direct Marketing can stabilize client spending and replace or offset the lost retail direct-mail business.
- Cash generation, working-capital movements, debt repayments, revolver availability and continued compliance with loan covenants.
- Whether planned pension contributions, dividends and other cash needs remain supportable under the company’s operating outlook.
- The key assumptions and sensitivity of the Shoppers impairment valuation, particularly revenue growth, margins and discount rates.