Harte Hanks, Inc. — Q2 2017 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2017. Harte Hanks provides multichannel marketing and customer-interaction services. Comparisons are for continuing operations; the Trillium business was sold in December 2016 and is presented as discontinued operations.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $94.7m | $97.3m | $189.6m | $196.9m |
| Operating loss | ($1.8m) | ($6.7m) | ($8.1m) | ($15.2m) |
| Operating margin | (1.9%) | (6.9%) | (4.3%) | (7.7%) |
| Continuing-operations net loss | ($2.7m) | ($6.9m) | ($10.0m) | ($13.9m) |
| Diluted loss per share, continuing operations | ($0.04) | ($0.11) | ($0.16) | ($0.23) |
- Cash flow: First-half operating cash use was $41.8m, versus $21.8m provided in the prior-year period. The company attributed the decline mainly to tax payments related to the Trillium sale and lower cash generated from receivables. Investing cash use was $3.0m; financing provided $11.3m.
- Liquidity and debt: Cash was $13.1m at June 30, down from $46.0m at year-end. Current assets were $114.1m and current liabilities $63.4m. Long-term debt was $12.1m, drawn under a new $20m revolving facility expiring April 2019. Stockholders’ equity was a $5.0m deficit. Pension liabilities were $60.1m.
- Other: The company recorded a first-half income tax benefit of $3.7m. No dividends were paid in 2017; management said it did not expect to pay dividends. No shares were repurchased under the public repurchase plan during the quarter.
Changes versus prior period
- Revenue declined 2.7% in Q2 and 3.7% in the first half, while operating losses narrowed as operating expenses fell 7.2% and 6.8%, respectively.
- Retail and healthcare were the largest sources of revenue weakness. Q2 declines in those verticals were 8.2% and 30.7%; first-half declines were 10.0% and 32.2%. Management cited lost clients and reduced client marketing spend. Consumer and financial services revenue increased, supported by existing-client work.
- Interest expense declined year over year, reflecting lower debt and rates, partly offset by accretion on 3Q Digital contingent consideration. Other expense increased, including from foreign currency effects and higher pension expense.
Outlook, risks and unusual items
- Management said revenue declines had abated over the prior three quarters and that cost reductions were beginning to have favorable effects. Workforce reductions, back-office and IT consolidation, and closure of the Baltimore direct-mail facility were among the actions taken; further expense reductions were planned through 2017. No numerical revenue or earnings guidance was provided.
- Management stated that the $20m Texas Capital revolving facility and deferral of the 3Q Digital contingent consideration meant no aggregate conditions raised substantial doubt about going concern for the 12 months after issuance of the statements. The company was seeking strategic alternatives for 3Q Digital.
- The 3Q Digital contingent-consideration liability was $31.8m; the company expected payment at the maximum $35m. Payment was deferred until April 1, 2019 or an earlier sale of 3Q Digital. Unpaid amounts after March 1, 2018 accrue interest at 8.5%; a sale before April 1, 2019 may also trigger bonus payments.
- On August 9, 2017, the company received an NYSE notice that its 30-trading-day average share price was below $1. It had until February 9, 2018 to regain compliance or face suspension and delisting procedures.
- The company reported it was not in compliance with the credit facility’s timely-filing covenant as of August 9; the lender waived the breach on August 14. Future covenant compliance remains required after the waiver.
- Disclosure controls were deemed ineffective due to material weaknesses involving the control environment, revenue recognition, contingent consideration, goodwill impairment, deferred taxes, and financial close/reporting. Management said remediation was expected to continue through 2018, with no assurance of successful or timely completion.
- Management described marketing budgets as discretionary and identified competitive pressure and weakness in retail demand as risks. It also noted $0.6m of first-half pretax foreign-currency transaction losses. Legal contingencies include client indemnification commitments whose maximum exposure is not reasonably estimable; management said material losses beyond recorded accruals were remote.
Important facts for investors to verify
- Cash runway, facility availability and covenant compliance after the lender’s filing waiver, especially given first-half operating cash use.
- Whether revenue stabilizes and cost reductions restore operating profitability, particularly in retail and healthcare.
- The amount, timing and financing of the expected 3Q Digital contingent payment, and the outcome of the strategic-alternatives process.
- Progress toward remediating material weaknesses and restoring effective disclosure controls.
- NYSE minimum-share-price compliance and any additional listing requirements, including the company’s stockholders’ equity position.