Harte-Hanks, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Harte-Hanks provides multichannel direct and digital marketing services. Florida Shoppers was sold in December 2012 and California Shoppers was sold on September 27, 2013; both are reported as discontinued operations.
Financial performance
Amounts below are in millions, except per-share data. Continuing-operations comparisons exclude Shoppers.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $135.0 | $141.0 | $407.4 | $423.2 |
| Operating income | $8.4 | $15.6 | $30.2 | $41.6 |
| Operating margin | 6.2% | 11.1% | 7.4% | 9.8% |
| Continuing net income | $4.5 | $8.9 | $17.7 | $23.3 |
| Diluted continuing EPS | $0.07 | $0.14 | $0.28 | $0.37 |
| Consolidated net income (loss) | $(8.2) | $8.9 | $6.8 | $(94.0) |
| Operating cash flow | Not separately provided | Not separately provided | $34.7 | $39.9 |
Q3 consolidated loss included a $12.6 million loss from discontinued operations, primarily associated with the California Shoppers sale. For the first nine months, discontinued operations generated a $10.9 million loss in 2013, compared with a $117.3 million loss in 2012, which included a substantial impairment charge.
Cash, debt and liquidity
- At September 30, 2013, cash and cash equivalents were $76.8 million, versus $49.4 million at December 31, 2012. Cash exceeded total debt by approximately $24.3 million.
- Total debt was $101.1 million, down from $110.3 million at year-end 2012; the balance was under the 2011 term loan. The company had no revolver borrowings and $70.5 million of available capacity after letters of credit.
- Current assets were $223.1 million and current liabilities were $123.5 million. Total liabilities were $342.2 million.
- Nine-month investing cash flow was $14.4 million, including proceeds from the California Shoppers and Belgium facility sales; capital expenditures were $12.8 million. Financing cash outflow was $21.3 million, including $10.7 million of dividends and $9.2 million of debt repayments.
Material changes and unusual items
- Continuing revenue declined 4.3% in Q3 and 3.7% for the first nine months. Q3 weakness included financial and high-tech customer reductions; select markets grew on a new fulfillment client. Nine-month declines included pharmaceutical, high-tech, and automotive and consumer brands.
- Operating income fell 46.4% in Q3 and 27.5% year to date. A $2.8 million non-cash impairment of the Aberdeen trade name was recorded in Q3 after a significant decrease in forecast revenue. Excluding this charge, management reported Q3 continuing income of $7.2 million and diluted EPS of $0.11.
- California Shoppers was sold for approximately $22.5 million cash, with the buyer also assuming certain liabilities. The sale resulted in a $12.4 million after-tax loss, including approximately $2.6 million of transaction costs.
- The company entered a new $80 million revolving credit facility maturing in August 2016. It reported compliance with its credit covenants at quarter-end.
- Nine-month results included a $0.9 million gain on sale of the Belgium facility. General corporate expense increased, partly due to former CEO retirement compensation, CEO and board searches, and higher legal costs.
Outlook, risks and contingencies
Management said available cash, operating cash generation, and revolving-credit availability should be sufficient for operations, planned capital expenditures, debt service, dividends, and pension contributions over the next 12 months. The filing provides no specific revenue or earnings guidance. Management plans to continue investing in its multichannel strategy and adjusting costs, and believes these efforts can improve future profitability.
Key risks include weaker economic conditions and reduced client marketing budgets, client retention and acquisition, customer and industry concentration, and variable mail supply-chain costs. Debt covenants require minimum interest coverage of 2.75 to 1 and maximum debt-to-EBITDA of 2.25 to 1. A one-percentage-point interest-rate change was estimated to affect net income by about $0.2 million for Q3 and $0.5 million for the first nine months. The company had no interest-rate or foreign-exchange hedges. Management stated that pending legal proceedings were not expected to have a material adverse effect, but client indemnification exposure could not be reasonably quantified. Disclosure controls were considered effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether continuing-revenue declines and customer reductions persisted after quarter-end, particularly in pharmaceutical, financial, and high-tech markets.
- The assumptions supporting the Aberdeen impairment valuation and any subsequent impairment indicators.
- The final economics and remaining liabilities or cash-flow effects of the California Shoppers divestiture.
- Ongoing cash generation, working-capital trends, capital spending, dividends, and progress in reducing term debt.
- Headroom under credit covenants and the effect of variable interest rates and foreign-currency movements.