Harte-Hanks, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results. Unless noted, financial amounts are in millions of dollars and reflect continuing operations; Shoppers is reported as discontinued operations.
Business context
Harte-Hanks provides multichannel marketing, digital and agency services, database marketing, data-quality software, direct mail and contact-center services. It sold its California Shoppers business in September 2013, following the Florida Shoppers sale in 2012, and no longer operates the Shoppers business. The largest client represented 6% of 2013 revenue; the largest 25 represented 42%.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $559.6 | $581.1 | -3.7% |
| Operating income | $42.7 | $62.7 | -31.9% |
| Operating margin | 7.6% | 10.8% | -3.2 percentage points |
| Continuing-operations income | $24.4 | $35.4 | -30.9% |
| Diluted EPS from continuing operations | $0.39 | $0.56 | -30.6% |
| Net income (loss), including discontinued operations | $13.4 | $(83.4) | Improved |
| Operating cash flow | $59.6 | $76.4 | -$16.8 |
| Capital expenditures | $15.9 | $13.5 | +$2.4 |
At year-end, cash was $88.7, total debt was $98.0, and unused revolving-credit capacity was $72.5. Current assets of $239.3 compared with current liabilities of $140.8. Debt was variable-rate and due under the term loan by August 2016; the company reported compliance with its credit covenants. The company reported total assets of $685.5 and stockholders’ equity of $349.1. Its funded pension plans had a $40.8 underfunded status, improved from $76.9 in 2012.
Material changes and unusual items
- Revenue fell $21.5 million. Retail revenue declined 5%, chiefly as two large customers moved to less expensive mailing formats; select markets declined 8%, primarily after losing two customers. Financial revenue increased 3%; pharmaceutical, high-tech, and automotive/consumer brands declined.
- Operating income declined more sharply than revenue. Labor expense rose $3.3 million, including $2.0 million associated with the former CEO’s retirement and successor’s hiring. Production and distribution expense fell $10.5 million. General and administrative expense excluding impairment rose $3.2 million, including $2.5 million for a legal settlement and related fees and $1.7 million for strategy consulting.
- A $2.8 million noncash impairment was recorded for the Aberdeen trade name following lower revenue forecasts. Goodwill and other intangibles were approximately $400.5 million at year-end, making future impairment testing relevant.
- The California Shoppers sale generated $22.5 million gross proceeds and a $12.4 million after-tax loss. The Florida sale generated $2.0 million gross proceeds in the form of a note receivable; the note was fully reserved because of collectability concerns. Discontinued operations produced an $11.1 million loss in 2013, compared with a $118.7 million loss in 2012, which included substantial Shoppers impairment charges.
- Cash increased by $39.4 million to $88.7 million. Operating cash flow included $15.5 million from discontinued operations; continuing-operations operating cash flow was $44.1 million. Investing cash flow benefited from the $22.5 million California sale proceeds.
Fourth-quarter snapshot
Fourth-quarter 2013 revenue was $152.2 million versus $157.8 million in the prior-year quarter. Operating income was $12.5 million versus $21.1 million, and continuing-operations income was $6.7 million versus $12.1 million.
Outlook, risks and contingencies
Management said it was developing a new strategy to announce and begin implementing in 2014; no specific revenue or earnings guidance is provided in the filing. Management expected cash, operating cash flow and available revolver capacity to fund operations, planned capital expenditures, debt service, dividends and pension contributions for the next 12 months, while cautioning that a prolonged economic downturn could materially harm results. The company planned quarterly dividends of $0.085 per share in 2014, subject to board approval.
- Key risks include declining or discretionary client marketing budgets, customer concentration and loss of clients, competition and pricing pressure, and the need to execute the new strategy and retain key personnel.
- Privacy, data-protection and security rules—or a breach involving the company, its clients or service providers—could raise costs, restrict data use, cause liability or damage reputation. The company also depends on third-party data suppliers.
- All $98.0 million of year-end debt bore variable rates. Management estimated a one-percentage-point interest-rate change would have changed 2013 net income by approximately $0.6 million. The company had no interest-rate or foreign-exchange hedges and reported $0.6 million of pretax currency transaction losses in 2013.
- Contractual cash obligations totaled $161.2 million, including $38.9 million of operating leases and $16.3 million of unfunded pension benefit payments. A $5.6 million contribution to the frozen pension plan was planned for 2014.
- Management said pending legal matters were not then considered reasonably likely to materially affect consolidated financial position or results. Client intellectual-property indemnities may have no stated maximum exposure; no related liability was recorded.
Important facts for investors to verify
- Whether revenue declines stabilize, particularly in retail and select markets, and whether customer transitions affect future volumes and margins.
- Progress and costs of the 2014 strategy, including whether consulting, restructuring or investment needs increase.
- Continuing-operations cash generation, working-capital movements and the extent to which reported cash flow depends on discontinued operations or asset-sale proceeds.
- Debt covenant headroom, variable-rate exposure, scheduled repayments through 2016 and continued access to the revolver.
- Potential additional goodwill or intangible impairments, given the large balance relative to total assets and the Aberdeen revenue decline.
- Collectability of the reserved Florida sale note, pension funding requirements, and any material developments in legal, privacy or data-security matters.
The independent auditor issued an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective as of December 31, 2013.