Harte Hanks, Inc. — Q2 2019 Form 10-Q
Business context and period. Harte Hanks provides data-driven marketing, customer relationship, contact-center, fulfillment, and logistics services. It reports as one operating segment. This filing covers the three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $54.7 million | $69.6 million | $113.8 million | $150.8 million |
| Operating loss | $6.6 million | $6.3 million | $17.6 million | $11.3 million |
| Operating margin | (12.1)% | (9.1)% | (15.4)% | (7.5)% |
| Net income (loss) | $(3.8) million | $(6.7) million | $(17.3) million | $25.9 million |
| Net income (loss) attributable to common stockholders | $(3.9) million | $(6.9) million | $(17.6) million | $22.6 million |
| Basic and diluted EPS | $(0.63) | $(1.10) | $(2.80) | $3.64 basic; $3.62 diluted |
- Cash flow: Six-month operating cash flow was $15.3 million, versus $2.5 million in 2018. Investing activities used $1.3 million; financing activities provided $3.7 million. Cash increased by $18.1 million to $39.0 million.
- Liquidity and debt: Current assets were $87.6 million and current liabilities $49.8 million at June 30. Borrowings under the Texas Capital facility were $18.7 million, up from $14.2 million at year-end; the company reported only $0.5 million of remaining borrowing capacity. The facility matures April 17, 2021, is secured by substantially all company assets, and is guaranteed by HHS Guaranty, LLC. Letters of credit totaled $2.8 million.
- Other balance-sheet items: Total assets were $126.2 million, total liabilities $151.2 million, and stockholders’ deficit $34.6 million. Adoption of lease accounting resulted in $24.1 million of total operating lease liabilities and $23.0 million of operating lease right-of-use assets. Pension liabilities were $62.1 million.
- Margins and expenses: Q2 operating expenses fell 19.3% to $61.3 million, less than the 21.5% revenue decline; six-month expenses fell 19.0%, versus a 24.5% revenue decline. Restructuring expense was $3.3 million in Q2 and $7.8 million for the first half.
Material changes versus prior period
- Q2 revenue declined $14.9 million (21.5%), with decreases in retail, consumer brands, B2B, financial services, and transportation; healthcare revenue increased. Management cited lost clients and lower volumes from existing clients.
- Six-month revenue declined $37.0 million (24.5%). The 2018 sale of 3Q Digital accounted for $6.9 million of the comparison decline; non-renewing clients and lower existing-client volumes also contributed.
- Despite lower expenses, operating losses worsened by $0.3 million in Q2 and $6.3 million for the first half, and operating margins contracted. The prior-year first-half results included a $31.0 million gain on the 3Q Digital sale, while 2019 included a $5.0 million contingent payment related to that sale.
- Q2 net loss improved year over year, reflecting in part the $5.0 million contingent-payment gain and lower operating expenses. The first-half comparison shifted from net income to a net loss, primarily because of the prior-year disposition gain and weaker operating results.
- Cash and cash equivalents increased from $20.9 million at December 31, 2018. Management attributed much of first-half operating cash flow to tax refunds; it reported receiving a $15.9 million federal refund on June 26 and described the year-over-year cash-flow benefit as including a $20.5 million tax refund.
Outlook, commentary, risks, and unusual items
- Management identified more than $20 million in potential annual savings and expects approximately $12 million of total restructuring charges through 2020. A major initiative to combine smaller production environments was approved by the board on August 1, 2019. In Q1, the company terminated certain Wipro contracts and entered new agreements expected to yield $3.3 million in annual savings; the first-half restructuring charges included a $2.1 million contract termination charge.
- The company stated it expects to meet liquidity needs for at least the next 12 months using cash, operating cash flow, and facility borrowings, and said it did not believe substantial doubt existed about its ability to continue as a going concern. However, remaining facility availability was limited to $0.5 million at quarter-end.
- Marketing budgets are discretionary, and management cited challenging competition, client losses, reduced client volumes, economic conditions, and transportation costs as factors affecting results. The filing provides no specific revenue or earnings guidance.
- CEO Bant Breen stepped down in May; President Andrew Harrison assumed the principal executive officer role. Wipro is a related party and provided $8.6 million of technology-related and facility services in the first half, including the $2.1 million termination charge; $2.2 million was payable to Wipro at quarter-end.
- Disclosure controls were deemed ineffective at June 30 due to material weaknesses in information and communication/control activities and revenue-recognition controls. Management reported remediation progress and expected to remediate the weaknesses by year-end 2019, but gave no assurance of timely or successful completion.
- Management said legal accruals were adequate and believed the probability of a material loss beyond recorded amounts was remote. Certain client indemnification commitments have no estimable aggregate maximum exposure; no liability was recorded for them.
Important facts for investors to verify
- Whether revenue declines, client attrition, and volume weakness continue, and whether planned savings are sufficient to restore positive operating performance.
- How much of the reported operating cash flow and cash balance reflects tax refunds and other working-capital changes, versus recurring cash generation.
- Facility availability, borrowing-base constraints, covenant compliance, and the company’s ability to fund debt service, lease payments, and required pension contributions.
- Actual restructuring costs, timing, and realized recurring savings, including the production-site consolidation initiative.
- Progress in remediating the material weaknesses, especially revenue-recognition controls, and confirmation of the stated year-end remediation target.
- The terms and obligations associated with Wipro-related transactions, preferred stock rights, and the secured credit-facility guarantee.