Harte Hanks, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. Harte Hanks provides multichannel marketing and customer interaction services, alongside enterprise data-quality software and services.
Financial results and liquidity
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $122.3 | $140.3 | $243.5 | $273.0 |
| Operating income | $8.1 | $11.0 | $11.1 | $15.6 |
| Operating margin | 6.6% | 7.8% | 4.5% | 5.7% |
| Net income (loss) | $(4.2) | $5.6 | $(2.6) | $7.5 |
| Diluted EPS | $(0.07) | $0.09 | $(0.04) | $0.12 |
- Q2 revenue fell 12.8% year over year; first-half revenue fell 10.8%. Operating income declined 26.7% and 28.9%, respectively.
- Q2 included a $9.5 million pretax loss on the B2B research business sale. Without this unusual item, the reported net loss would have been less severe; the filing does not provide an adjusted earnings figure.
- Cash and equivalents were $31.2 million at June 30, down from $56.7 million at year-end 2014. Current assets were $161.4 million and current liabilities $115.3 million (working capital $46.1 million; current ratio about 1.40).
- Total debt was $73.5 million, down from $82.7 million at December 31, 2014. The term loan bears variable interest and matures August 16, 2016. The company reported no revolver borrowings and $73.8 million of unused borrowing capacity. It was in compliance with its credit covenants.
- First-half cash flow reporting contains an apparent inconsistency: the cash-flow statement line for operating activities displays $(27.0) million, while MD&A describes $27.0 million provided by operations, and the reported beginning-to-ending cash change reconciles to positive $27.0 million. The source text does not resolve the sign discrepancy.
- Investing activities used $30.0 million, including the 3Q Digital acquisition; financing activities used $22.5 million, including $10.7 million in dividends and $9.2 million in debt repayments.
Material changes and business developments
- Customer Interaction: Q2 revenue decreased 14.3% to $109.2 million and operating income fell 45.1% to $5.0 million. First-half revenue decreased 11.2% and operating income 41.0%. Management cited lost clients, reduced client marketing spend, the B2B sale, and the absence of a large prior-year contact-center project.
- Trillium Software: Q2 revenue increased 1.4% to $13.2 million, partly due to a non-recurring software license event; operating income increased 66.1% to $4.6 million. First-half revenue declined 7.2%, primarily from lower software license revenue, while operating income rose 19.5%.
- On March 16, Harte Hanks acquired 3Q Digital for $30.2 million in cash, plus contingent consideration initially valued at $17.9 million. Potential additional cash payments range from $0 to $35.0 million, dependent on revenue goals. The earnout liability was $18.8 million at quarter-end; the purchase price allocation remains preliminary.
- On April 14, the company sold its B2B research business, which represented less than 5% of 2014 revenue. It recorded a $9.5 million pretax loss and noted potential future working-capital settlement expenses.
Outlook, risks, and other items
- No quantified revenue or earnings guidance is provided. Management said it expects cash on hand, operating cash flow, and available revolver capacity to fund operations, capital spending, debt service, dividends, and pension contributions for the next 12 months.
- Management intends to continue investing in its multichannel strategy and adjusting costs, and believes these actions can improve future profitability. It also sees potential long-term benefit from marketing spending shifting toward targeted media.
- Key risks include discretionary client marketing budgets, weak economic conditions, client losses and lower spending, rising mail-supply-chain costs, variable-rate debt, foreign-exchange exposure, and possible future goodwill impairment. Q2 included $1.3 million of foreign-currency transaction losses. The company reported no goodwill impairment trigger during the quarter.
- The company planned an additional $2.0 million contribution to its funded pension plan during the remainder of 2015. Its supplemental pension plan must be fully funded upon a qualifying change of control.
- After quarter-end, CEO Robert A. Philpott resigned effective July 7, 2015; Douglas C. Shepard became interim CEO effective immediately. The company expected a post-tax severance charge of approximately $2.0–$2.5 million.
- Management stated that pending legal matters were not then considered reasonably likely to materially adversely affect financial position or results, while noting that future developments could affect quarterly results. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Reconcile the operating cash flow sign discrepancy between the cash-flow statement and MD&A.
- Track revenue trends, client retention and marketing-spend reductions, especially in Customer Interaction, and distinguish recurring from non-recurring Trillium license revenue.
- Monitor 3Q Digital performance, contingent earnout estimates, and any purchase-price allocation or working-capital adjustments related to the acquisition and B2B sale.
- Assess liquidity and covenant headroom against the August 2016 debt maturity, variable interest rates, planned pension contributions, and dividend and repurchase commitments.
- Confirm the financial impact of the CEO transition and subsequent severance charge in later filings.