Harte Hanks, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Harte Hanks provides data-driven marketing, customer relationship, contact-center, direct-mail, fulfillment and logistics services. It reports as one operating segment.
Financial results and position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $59.2 million | $81.2 million |
| Operating loss | $10.9 million | $5.0 million |
| Operating margin | (18.5%) | (6.2%) |
| Net income (loss) | $(13.5) million | $32.6 million |
| Loss/income per common share, diluted | $(2.18) | $4.67 |
| Cash from (used in) operations | $(2.9) million | $2.8 million |
- Revenue declined 27.2%. The company attributed the decline to the 2018 sale of 3Q Digital, lost clients and lower volumes from existing clients.
- Q1 2018 results included a $31.0 million pretax gain on the 3Q Digital sale; the prior-year profit comparison is therefore significantly affected by this unusual item.
- Cash and cash equivalents were $20.9 million at March 31, 2019, essentially unchanged from year-end. Investing activities used $1.1 million; financing activities provided $4.1 million, including $4.5 million of borrowings.
- Borrowings under the Texas Capital facility were $18.7 million, up from $14.2 million at year-end. The facility had $22 million of capacity; $2.8 million of letters of credit were outstanding and undrawn. The facility is secured by substantially all company assets and guaranteed by HHS Guaranty, LLC.
- Current assets were $92.9 million and current liabilities $54.8 million. Total liabilities were $155.9 million; stockholders’ deficit was $32.0 million. Pension liabilities were $62.5 million.
- Adoption of lease accounting added $23.5 million of right-of-use assets and $23.3 million of operating lease liabilities. Management said adoption materially affected the balance sheet but not the income statement or operating cash flow.
Material changes and unusual items
- Operating expenses fell 18.7% to $70.1 million, less than the revenue decline. Labor expense fell 33.2%, reflecting lower payroll, cost reductions and the 3Q Digital sale, partly offset by severance.
- Q1 2019 operating expenses included approximately $2.1 million in one-time Wipro contract termination charges and a $2.3 million asset impairment, largely for capitalized labor on a database platform the company decided not to pursue. The income statement reports $4.4 million for asset impairment and contract termination combined.
- The company reported $6.3 million of Q1 expense for technology-related services and facility lease expense from Wipro, including the termination charge. It says new agreements are expected to save $3.3 million annually. Wipro is also a preferred-stock investor and related party.
- The company recorded $0.8 million of income tax expense despite a pretax loss, citing valuation allowances on deferred tax assets. Q1 2018 included an $8.8 million tax benefit related primarily to the 3Q Digital sale.
- Adoption of ASU 2018-02 reclassified $11.4 million of stranded tax effects from accumulated other comprehensive loss to retained earnings. This affected reported comprehensive loss and equity presentation.
Outlook, risks and contingencies
- No specific revenue, earnings or cash-flow guidance is provided. Management described a challenging competitive environment and said marketing budgets are discretionary and may be reduced by clients.
- Management cited cost actions including workforce reductions, vendor savings and lower discretionary spending. It expects further workforce reductions to cost about $0.5 million in severance and yield $3.4 million in annual savings, and is pursuing an additional $3 million in annual vendor-related savings. Earlier actions were expected to yield about $7.5 million in annual savings, plus a targeted $2 million reduction in non-labor discretionary costs.
- Management stated it expects to meet liquidity needs and fixed obligations for at least the next 12 months using cash, operating cash flow and credit-facility borrowings, and said it saw no conditions raising substantial doubt about going concern. This outlook depends in part on operating performance and facility availability.
- After quarter-end, the credit facility maturity was extended to April 17, 2021; the company received a $5 million contingent payment related to the 3Q Digital sale; and CEO Bant Breen announced his departure, with President Andrew Harrison assuming the principal executive officer role.
- Disclosure controls were deemed ineffective at March 31, 2019 because of material weaknesses in information and communication/control activities and revenue-recognition controls. Management reported remediation progress but said further work remained and offered no assurance of timing or success.
- Management said legal accruals were adequate and material losses beyond recorded amounts were remote; certain client indemnification exposures have no reasonably estimable maximum. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue declines and client losses continue, and whether cost reductions can offset lower business volumes.
- Whether the stated workforce and vendor savings are achieved, and how much additional restructuring expense is incurred.
- Cash generation, borrowing needs and compliance with credit-facility terms; the facility is secured and borrowings increased during the quarter.
- Progress in remediating material weaknesses in internal controls, especially revenue recognition and information/control activities.
- The effects of the CEO transition, Wipro-related transactions and the company’s large pension and lease obligations.