Harte-Hanks, Inc. 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2002. Harte-Hanks, Inc. operates as a targeted media company with two primary segments: Direct and Interactive Marketing (CRM and Marketing Services) and Shoppers (local advertising publications). The company adopted SFAS No. 142 regarding goodwill accounting on January 1, 2002, eliminating goodwill amortization.
Key Financial Metrics
| Metric (in thousands) | Q2 2002 | Q2 2001 | 6 Months 2002 | 6 Months 2001 |
|---|---|---|---|---|
| Operating Revenues | $227,879 | $228,654 | $442,786 | $460,774 |
| Operating Income | $39,981 | $36,559 | $73,442 | $68,411 |
| Net Income | $24,090 | $20,836 | $44,358 | $39,199 |
| Diluted EPS | $0.25 | $0.21 | $0.46 | $0.40 |
| Cash from Operations (6mo) | $75,026 (2002) vs $82,225 (2001) | |||
| Long-Term Debt | $10,666 (June 30, 2002) vs $48,312 (Dec 31, 2001) | |||
| Cash & Equivalents | $17,023 (June 30, 2002) vs $30,468 (Dec 31, 2001) |
Margins (Q2 2002): Operating margin was approximately 17.5%. Net income margin was approximately 10.6%.
Material Changes vs. Prior Period
- Revenue: Consolidated revenue declined 0.3% in Q2 and 3.9% for the six months ended June 30, 2002, compared to the prior year.
- Segment Performance:
- Direct Marketing: Revenues declined 4.0% in Q2 and 8.8% for the six months, driven by weakness in financial services, pharmaceutical/healthcare, and retail sectors.
- Shoppers: Revenues increased 6.3% in Q2 and 5.8% for the six months, driven by geographic expansion in California and growth in in-book advertising.
- Profitability: Despite revenue declines in the Direct Marketing segment, Net Income increased 1.2% in Q2 and 13.2% for the six months (restated for SFAS 142). This was primarily due to the cessation of goodwill amortization and reduced interest expenses.
- Debt Reduction: Long-term debt decreased significantly from $48.3 million at year-end 2001 to $10.7 million by June 30, 2002, following net repayments of $38 million in the first half of the year.
- Accounting Change: The adoption of SFAS No. 142 eliminated goodwill amortization expense, which was $4.2 million in Q2 2001 and $8.4 million for the six months of 2001.
Outlook, Risks, and Management Commentary
- Liquidity: The company maintains two unsecured credit facilities totaling $200 million, with $193 million of unused capacity as of June 30, 2002. Management believes cash flow and credit facilities are sufficient for operations and acquisitions.
- Cost Management: Operating expenses decreased in the Direct Marketing segment due to staff reductions and lower volumes, partially offset by increased logistics costs.
- Risks:
- Legislation: Potential adverse impact from consumer privacy laws restricting data collection.
- Postal Rates: Standard postage rates increased in Q3 2002, expected to moderately increase costs for the Shoppers segment.
- Competition: Intense competition in both direct marketing (technological changes) and shoppers (local media alternatives).
- Economic Conditions: Sensitivity to national and local advertising expenditures.
- Stock Split: A 3-for-2 stock split was effected in May 2002; all share data has been restated.
Investor Verification Checklist
- Verify the sustainability of revenue growth in the Shoppers segment given the offsetting declines in the larger Direct Marketing segment.
- Confirm the impact of rising postage rates on Shoppers' operating margins in upcoming quarters.
- Review the company's ability to refinance its credit facilities maturing in late 2002, as noted in management's intent to refinance.
- Assess the long-term viability of the Direct Marketing verticals (financial services, healthcare) which are currently experiencing revenue declines.
- Monitor the effectiveness of cost-cutting measures (staff reductions) in maintaining operating margins if revenue declines persist.