Harte Hanks, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Harte Hanks provides data-driven marketing, customer relationship and logistics services and reports as one segment. Amounts below are in U.S. dollars.
Financial results and liquidity
- Revenue: $40.5 million, down 31.5% from $59.2 million in Q1 2019. Revenue declined across every reported vertical, most sharply in transportation (down 84.2%) and retail (down 57.3%).
- Operating result: Operating loss was $5.1 million versus $10.9 million a year earlier; operating margin improved to negative 12.6% from negative 18.5%. Lower expenses more than offset part of the revenue decline.
- Net result: Net income was $5.1 million versus a $13.5 million net loss. The 2020 result included an $11.3 million income tax benefit; income attributable to common shareholders was $4.3 million, or $0.68 basic and $0.67 diluted per share.
- Cash flow: Operating cash use was $4.0 million, compared with $2.9 million in Q1 2019. Investing cash use was $0.6 million; financing cash use was $0.2 million. Capital expenditures were $0.8 million.
- Cash and working capital: Cash and cash equivalents were $23.5 million and restricted cash was $5.3 million at March 31, 2020, totaling $28.7 million. Current assets were $82.6 million and current liabilities were $44.4 million.
- Debt and obligations: Long-term debt was $18.7 million under the secured Texas Capital facility; $1.7 million of letters of credit were outstanding and reported additional borrowing availability was $1.6 million. Pension liabilities were $69.0 million. Lease liabilities totaled $22.4 million.
- Equity: Stockholders’ deficit was $44.3 million. Series A preferred stock carried $1.1 million of cumulative dividends payable upon a qualifying liquidation, subject to the stated terms.
Material changes versus Q1 2019
- Revenue fell $18.6 million, primarily due to lost clients and lower existing-client volumes. Expense reductions, including lower labor and production costs, helped reduce the operating loss by $5.8 million.
- Restructuring expense declined to $1.4 million from $4.5 million. The prior-year quarter included a $2.2 million customer-database impairment and a $2.1 million contract termination charge; Q1 2020 charges mainly involved facilities, asset impairment and severance.
- The reported swing to net income was principally tax-related, not an operating profit: the company recorded a substantial CARES Act-related tax benefit.
Outlook, risks and notable events
- COVID-19: Management said the pandemic had not materially affected operations or liquidity through the filing, but some customers reduced work, sought payment-term or contract accommodations, and some filed for bankruptcy. The company reported contact-center wins, while warning that further effects could materially reduce revenue, profitability and cash flow.
- Restructuring: The company identified more than $20 million in potential annual savings and expected approximately $17.4 million of total restructuring charges through the end of 2020. It had recorded $11.8 million in 2019 and $1.4 million in Q1 2020.
- Liquidity outlook: Management believed available cash, operating cash flow and facility borrowings would cover obligations for at least the next 12 months and stated it saw no conditions that raised substantial doubt about going concern. This outlook is subject to pandemic-related uncertainty.
- Tax refunds: The company expected approximately $8.8 million in 2020 and $2.4 million in 2021 from CARES Act net operating loss carrybacks.
- Subsequent events: On April 20, 2020, Harte Hanks received a $10 million Paycheck Protection Program loan. Forgiveness depends on meeting program conditions; any unforgiven amount is payable over two years at 1% interest. On April 24, it sold most Jacksonville production equipment for $1.5 million and entered a direct-mail partnership with Summit. On May 11, it extended the Texas Capital facility maturity to April 17, 2022, while reducing borrowing capacity to $19 million.
- Other risks and contingencies: Marketing budgets are discretionary and sensitive to economic conditions. The company disclosed ordinary-course legal matters and client indemnification commitments; management said material losses beyond recorded accruals were remote. The credit facility is secured by substantially all company assets, and its interest rate is variable.
Key facts investors should verify
- Whether COVID-19-related client reductions, customer credit deterioration and bankruptcies further affect revenue, receivables and cash flow after March 31.
- Actual cash generation, use of the $10 million PPP loan, and whether the loan qualifies for full or partial forgiveness.
- Receipt and timing of the expected tax refunds, and the extent to which the Q1 tax benefit is nonrecurring.
- Progress and realized savings from restructuring, remaining charges, and effects of the Jacksonville equipment sale and Summit partnership.
- Remaining liquidity under the amended credit facility, covenant compliance, and ability to meet debt, pension and lease obligations.