Harte-Hanks, Inc. — Second-quarter 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Harte-Hanks provides direct and targeted marketing services and shopper advertising. Continuing operations comprise Direct Marketing and California-based Shoppers; Florida Shoppers was sold at the end of 2012 and is reported as discontinued operations.
Financial performance
Amounts below are in millions of dollars unless stated otherwise. Financial statements are unaudited.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $188.3 | $189.6 | $366.6 | $375.7 |
| Operating income (loss) | $14.3 | $(143.4) | $24.5 | $(129.4) |
| Continuing-operations income (loss) | $8.3 | $(104.6) | $15.0 | $(97.2) |
| Net income (loss) | $8.3 | $(109.7) | $15.0 | $(102.9) |
| Diluted continuing-operations EPS | $0.13 | $(1.66) | $0.24 | $(1.54) |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $31.6 | $26.6 |
- Revenue declined 0.7% in Q2 and 2.4% in the first half. Calculated operating margins were about 7.6% for Q2 and 6.7% for the first half of 2013.
- Prior-year operating results included a $156.9 million Shoppers goodwill impairment. Excluding that charge, Q2 2012 operating income was about $13.5 million, versus $14.3 million in Q2 2013; first-half 2012 operating income was about $27.5 million, versus $24.5 million in first-half 2013. The company reported first-half continuing income of $15.0 million versus $14.9 million in 2012 excluding the impairment, and diluted EPS of $0.24 in both periods.
- Q2 Direct Marketing revenue was $140.1 million, down 1.9%; operating income was $18.0 million, up from $16.6 million. Shoppers revenue was $48.2 million, up 2.8%; operating income was $1.9 million, compared with a prior-year loss that included the impairment.
- First-half Direct Marketing revenue was $272.5 million, down 3.5%, and operating income was $30.8 million, down 4.4%. Shoppers revenue was $94.1 million, up 0.8%, and operating income was $2.7 million, compared with a prior-year impairment-driven loss.
- Cash and equivalents were $63.9 million at June 30, up from $49.6 million at year-end. First-half investing cash outflow was $4.5 million, including capital expenditures of $9.4 million and proceeds from asset sales of $4.9 million. Financing cash outflow was $12.3 million, including $6.1 million of debt repayments and $5.4 million of dividends.
- Total debt was $104.1 million, all under the term loan, down from $110.3 million at year-end. Cash exceeded debt by approximately $40.3 million. Current assets of $228.0 million and current liabilities of $134.1 million imply a current ratio of about 1.70.
Material changes and management commentary
- Direct Marketing revenue weakness reflected reduced work from a mail-supply-chain customer, a contact-center price reduction, and pharmaceutical-client losses or volume reductions. Financial and retail verticals provided offsets. Management cited discretionary client marketing budgets and economic conditions as factors affecting demand.
- Shoppers growth came from distribution products, partly offset by lower in-book advertising. Management noted some improvement in California’s economy but continued challenges, including weakness in real estate and education advertising.
- The company was consolidating Shoppers production from four plants to three and expected to close its Northern California facility in Q3 2013, with anticipated cost savings later in 2013. It continued investment in PowerSites and other digital offerings and said future circulation reductions remained possible.
- General corporate expense rose, primarily due to about $2.0 million of compensation expense related to the former CEO’s retirement, CEO-search professional fees, director-search costs, and increased legal expenses. A separate $1.0 million of additional stock-based compensation was recorded on the former CEO’s retirement.
- The Belgium facility sale generated $4.6 million net proceeds and a $0.9 million gain in Q1. First-half other income also reflected changes in foreign-currency transaction results.
- First-half 2013 operating cash flow increased $5.0 million year over year. Management attributed the improvement mainly to working-capital changes and higher income excluding impairment-related effects.
Outlook, liquidity, and risks
- No specific revenue, earnings, or margin guidance is provided. Management stated that cash, operating cash flow, and borrowing availability—including availability under a replacement revolving facility—were expected to fund operations, capital expenditures, debt service, dividends, and pension contributions for the next 12 months.
- The $70 million revolving credit facility matured August 12, 2013. At June 30, the company had no revolver borrowings, $9.5 million of letters of credit, and $60.5 million of available capacity. Management expected to obtain a replacement facility with similar size and terms, but warned that disruption in credit markets could prevent refinancing on acceptable terms or at all.
- The $104.1 million term loan carried a 2.20% effective rate and matured in August 2016. Credit agreements required interest coverage of at least 2.75:1 and total debt-to-EBITDA of no more than 3.0:1; the company reported compliance at quarter-end.
- Key operating risks include continued weakness in California advertising, further Direct Marketing client or volume losses, economic uncertainty, postage and production-cost changes, and possible additional impairment or restructuring charges. The company also faces variable-rate debt and foreign-exchange exposure and had no interest-rate or foreign-currency hedges in place.
- Management considered pending legal matters not reasonably likely to have a material adverse effect, while noting that certain client indemnities have no estimable maximum exposure. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Harte-Hanks completed replacement of the revolver before its August 12, 2013 maturity, and the new facility’s terms and covenant headroom.
- Whether Direct Marketing revenue declines continued, especially in pharmaceutical and select verticals, and whether client concentration or losses affected subsequent results.
- Whether Shoppers’ California revenue trends and planned facility consolidation delivered the expected savings without further impairment or restructuring charges.
- Whether operating cash flow remained sufficient to support debt service, dividends, capital spending, and planned pension contributions.
- The post-quarter CEO transition, including the July 2013 inducement equity awards, and any resulting compensation expense or dilution.