Harte-Hanks, Inc. 10-Q Summary: Quarter Ended September 30, 2010
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2010, for Harte-Hanks, Inc., a worldwide direct and targeted marketing company. The company operates through two primary segments: Direct Marketing (providing multichannel marketing solutions) and Shoppers (owner and operator of weekly advertising publications in California and Florida). The filing is an unaudited Form 10-Q.
Key Financial Metrics
| Metric (in thousands) | Q3 2010 | Q3 2009 | 9 Months 2010 | 9 Months 2009 |
|---|---|---|---|---|
| Operating Revenues | $216,745 | $209,318 | $624,533 | $642,654 |
| Operating Income | $25,055 | $23,913 | $65,944 | $62,603 |
| Net Income | $13,815 | $14,050 | $38,000 | $34,223 |
| Diluted EPS | $0.22 | $0.22 | $0.59 | $0.54 |
| Cash and Equivalents | $76,305 | $86,598 (Dec 2009) | N/A | |
| Total Debt Outstanding | $206,500 | $239,688 (Dec 2009) | N/A | |
| Operating Cash Flow (9mo) | N/A | $62,717 | $94,630 |
Margins (Q3 2010): Operating margin was approximately 11.6%. The effective income tax rate was 38.7% for the quarter and 39.2% for the nine-month period.
Material Changes vs. Prior Period
- Revenue Trends: Consolidated revenue increased 3.5% in Q3 2010 compared to Q3 2009, driven by a 7.3% increase in the Direct Marketing segment. This growth was partially offset by a 4.2% decline in the Shoppers segment due to difficult economic conditions in California and Florida. For the nine months ended September 30, 2010, total revenue decreased 2.8% year-over-year.
- Profitability: Operating income increased 4.8% in Q3 and 5.3% for the nine-month period. Net income for the nine months increased 11.0% to $38.0 million, primarily due to increased operating income from the Shoppers segment and significantly lower interest expense.
- Interest Expense: Interest expense decreased 71.3% in Q3 and 71.8% for the nine months compared to the prior year. This reduction is attributed to lower interest rates following the expiration of an interest rate swap in September 2009 and lower outstanding debt levels.
- Acquisition: On August 31, 2010, the company acquired Information Arts (UK) Limited for a preliminary goodwill recognition of $13.0 million. This acquisition contributed slightly to Direct Marketing revenue growth.
Guidance, Outlook, and Risks
- Economic Outlook: Management notes that while economic uncertainty remains, they have seen improvement in both business segments over recent quarters. However, the difficult economic environment in the U.S. and internationally continues to impact marketing budgets and demand.
- Shoppers Segment: The Shoppers business continues to face headwinds from the real estate and financing markets in California and Florida. The company curtailed over 1.4 million unprofitable circulation addresses in 2008 and 2009 and may make further reductions.
- Liquidity: As of September 30, 2010, the company had $76.3 million in cash and $57.2 million in unused borrowing capacity under a new $70 million revolving credit facility. Management believes these resources are sufficient to fund operations and obligations for the next 12 months.
- Legal Contingency: The company reached an agreement in principle to settle a class-action lawsuit regarding employee expense reimbursement for $7.0 million. The full amount was accrued in the fourth quarter of 2009. Final approval is pending court action.
- Debt Maturity: A significant principal payment of $97.5 million is due on the 2006 Term Loan Facility in September 2011. The company plans to fund this using cash on hand and revolver availability.
Investor Verification Checklist
- Verify the sustainability of the Direct Marketing revenue growth, noting the impact of a large, one-time project expected to conclude in Q4 2010.
- Monitor the Shoppers segment's ability to maintain profitability amidst continued economic weakness in California and Florida and potential further circulation cuts.
- Confirm the status of the $7.0 million class-action settlement and any potential for additional legal costs or liabilities.
- Assess the company's liquidity position relative to the $97.5 million debt maturity in September 2011.
- Review the impact of rising mail supply chain costs and potential future postal rate increases on the Shoppers segment's margins.