Harte-Hanks, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This annual filing also reports unaudited fourth-quarter results. Harte-Hanks provides direct and targeted marketing services through Direct Marketing and Shoppers, a local advertising business concentrated in California and Florida.
Financial performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Revenue | $850.8 million | $860.5 million | -1.1% |
| Operating income | $75.4 million | $91.1 million | -17.2% |
| Operating margin | 8.9% | 10.6% | Down 1.7 percentage points |
| Net income | $44.2 million | $53.6 million | -17.5% |
| Diluted EPS | $0.70 | $0.84 | -16.7% |
| Operating cash flow | $60.7 million | $95.9 million | Down $35.2 million |
| Capital expenditures | $21.0 million | $17.4 million | Up $3.6 million |
- Segments: Direct Marketing revenue rose 2.2% to $614.3 million, while operating income fell 3.8% to $83.5 million. Excluding a large one-time pharmaceutical recall project in 2010, Direct Marketing revenue increased 5.0% in 2011. Shoppers revenue fell 8.8% to $236.5 million and operating income fell 79.8% to $3.1 million.
- Fourth quarter: Revenue was $224.6 million versus $236.0 million in Q4 2010; operating income was $23.8 million versus $25.1 million; net income was $14.7 million versus $15.6 million. Q4 2011 was the company’s highest-revenue quarter in three years.
- Liquidity and balance sheet: Year-end cash was $86.8 million; unused revolver capacity was $59.9 million. Current assets were $275.5 million and current liabilities $205.1 million. Total debt was $179.4 million, down from $193.0 million, and stockholders’ equity was $446.4 million. Debt carried variable interest rates.
- Margins and costs: Operating expenses increased 0.8% despite lower revenue. Direct Marketing costs rose with staffing, transportation and mail-supply-chain activity; Shoppers reduced costs but was affected by restructuring charges and weaker volumes. The effective tax rate rose to 40.3% from 37.9%.
- Capital returns: The company paid $0.32 per share in dividends during 2011 and repurchased approximately 1.0 million shares for $8.4 million. Management planned quarterly dividends of $0.085 per share in 2012, subject to Board approval.
Changes, outlook and key risks
- Shoppers continued to face weak local advertising demand in California and Florida; management saw little improvement in California and only slightly better conditions in Florida, and warned that further challenges could persist. The company reduced Shoppers headcount and other costs, incurring $4.1 million of related charges in 2011, and continued investment in digital offerings.
- Direct Marketing had six consecutive quarters of year-over-year growth, excluding the 2010 one-time project. A top customer notified the company in Q4 2011 of a change in advertising strategy expected to reduce or eliminate some volumes in 2012; the customer was expected to remain a top-ten client.
- Management said available cash, operating cash flow and revolver capacity were expected to fund operations, anticipated capital expenditures, debt service and dividends for the next 12 months. A $60.0 million 2008 term loan matured March 7, 2012; aggregate first-quarter 2012 principal payments were expected to be $61.5 million. The filing’s debt maturity schedule lists $69.2 million of total principal due in 2012.
- Risks include continued economic weakness and discretionary marketing cuts; competition and pricing pressure; Shoppers’ California/Florida concentration; privacy, data-security and marketing regulation; reliance on USPS, paper prices and third-party data; and variable-rate debt. The company reported compliance with debt covenants at year-end, which require interest coverage of at least 2.75:1 and debt-to-EBITDA no greater than 3.0:1.
- Goodwill and other intangibles totaled $580.6 million, a substantial portion of assets. Annual impairment testing found no impairment, but valuation depends on assumptions about future cash flows and economic conditions. The frozen pension plan was underfunded by $67.2 million; the company planned $6.4 million of contributions in 2012.
- Unusual items included a $2.3 million gain on sale of land and a $1.3 million reduction of the Shoppers legal accrual after unclaimed class-settlement funds reverted to the company. The class settlement was approved and payments concluded in 2011. Management said other pending legal matters were not then expected to have a material adverse effect.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether the top customer’s advertising change and continued Shoppers weakness reduce 2012 revenue or profitability more than expected.
- How the company funded and completed the March 2012 term-loan maturity and whether liquidity and covenant headroom remain adequate.
- Whether lower operating cash flow, slower customer collections (DSO increased to 64 days from 59), and planned pension contributions affect cash available for debt service and dividends.
- Whether Shoppers’ cost reductions and digital growth can offset declining print advertising, postal-rate increases and newsprint costs.
- Whether economic or operating deterioration triggers goodwill impairment, given the size of goodwill and other intangibles relative to total assets.