Harte Hanks, Inc. — FY 2015 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2015; it is not a standalone fourth-quarter filing. Harte Hanks provides multichannel marketing services through Customer Interaction and enterprise data-quality software and services through Trillium Software. Results exclude the Shoppers business, sold in 2013.
Financial performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $495.3 million | $553.7 million |
| Operating income (loss) | $(187.6) million | $40.8 million |
| Net income (loss) from continuing operations | $(170.9) million | $24.0 million |
| Diluted EPS from continuing operations | $(2.77) | $0.38 |
| Cash provided by operating activities | $30.9 million | $25.6 million |
| Capital expenditures | $11.6 million | $11.3 million |
| Cash and cash equivalents at year-end | $17.6 million | $56.7 million |
| Total debt at year-end | $77.3 million | $82.7 million |
- Revenue fell 10.5%. Operating loss included a $209.9 million non-cash Customer Interaction goodwill impairment. Excluding that charge, operating income was approximately $22.4 million, equivalent to an approximately 4.5% margin, versus a 7.4% reported margin in 2014.
- Customer Interaction revenue declined 11.1% to $444.2 million. Trillium revenue fell 5.7% to $51.1 million; segment operating income rose to $14.0 million from $13.3 million, with margin improving to 27.5% from 24.6%.
- Operating cash flow increased by $5.4 million year over year. Investing activities used $36.2 million, including $29.9 million net cash for acquisitions; financing activities used $31.9 million. Cash declined by $39.1 million over the year.
- Current assets were $151.7 million and current liabilities $97.4 million at year-end. Stockholders’ equity declined to $140.3 million from $326.7 million, principally reflecting the impairment and net loss.
Material changes and unusual items
- Revenue decreased $58.4 million. The largest stated declines included auto and consumer brands, down $16.9 million, retail, down $15.4 million, and technology, down $14.2 million. Drivers included reduced mail volumes, database losses, loss of agency work for a luxury auto manufacturer, and the B2B research-business disposition.
- The company acquired digital marketing agency 3Q Digital in March 2015 for $30.2 million cash, plus contingent consideration valued at $17.9 million at acquisition. The year-end earnout liability was $20.3 million; possible additional payments range up to $35.0 million in 2018.
- Harte Hanks sold its B2B research business in April 2015 and recorded a $9.5 million pre-tax loss. It also received $5.0 million in net disposition proceeds.
- The $209.9 million impairment followed a sustained decline in market capitalization below book value and recent operating performance. It reduced goodwill substantially; additional impairment charges remain possible if assumptions or business conditions deteriorate.
- FY 2015 income tax benefit was $31.9 million, partly offset by $36.7 million of tax impact associated with nondeductible goodwill impairment. The effective tax benefit rate was 15.7%.
- Fourth-quarter 2015 revenue was $129.8 million, operating income $6.8 million, and net income $2.5 million; the third quarter included the impairment and reported a $205.4 million operating loss.
Liquidity, debt, outlook, and risks
- At December 31, 2015, debt consisted of $64.3 million under the term loan and $13.0 million under the revolving facility. The company reported covenant compliance at year-end and $60.6 million of unused revolver capacity, before the subsequent refinancing.
- On March 10, 2016, the company entered a new secured facility with a $65.0 million revolving line and a $45.0 million term loan, using proceeds to repay the prior facilities. The new term loan carries a 7.22% LIBOR margin, and the facilities impose financial, spending, and other restrictions. Management anticipated no dividends or share repurchases for the foreseeable future.
- Management said cash, operating cash generation, and availability under the new facilities should fund operations, expected capital expenditures, and debt service for the next 12 months. No numerical revenue or earnings guidance is provided in the supplied filing text.
- Management plans to continue investing in its multichannel strategy while adjusting costs. It believes targeted marketing may gain share over time, but near-term results depend on client retention, winning new business, economic conditions, and marketing budgets.
- Key risks include declining demand and pricing pressure; short-notice cancellation of many client engagements; concentration (the ten largest clients generated 38% of revenue, and the largest 25 generated 57%); execution of the strategy and retention of leaders and skilled employees; privacy, data-security and regulatory exposure; variable-rate debt and covenant constraints; and pension obligations. The pension plans were underfunded by $57.0 million at year-end.
- Other commitments include $43.0 million of operating-lease payments and $17.0 million of unfunded pension benefit payments in the contractual-obligations schedule. Legal matters were not considered reasonably likely to cause a material adverse effect by management; the filing also describes client intellectual-property indemnities whose maximum exposure cannot be reasonably estimated.
Important facts for investors to verify
- Whether revenue declines stabilized after 2015, particularly in Customer Interaction, retail, automotive, and technology, and whether client losses were replaced profitably.
- The sustainability of operating cash flow and liquidity under the March 2016 secured facility, including compliance with its covenants and borrowing-base requirements.
- The assumptions supporting goodwill valuation and whether further impairment is warranted, given the large remaining goodwill balance and weak operating performance.
- 3Q Digital’s performance against earnout targets and the resulting contingent payment liability; also, any additional costs or working-capital settlements from the B2B disposition.
- Management’s decision to suspend dividends and repurchases, and the impact of this capital-allocation change on shareholders.
- Progress on privacy and cybersecurity controls, pension funding exposure, and any developments in legal, regulatory, or client concentration risks.