Harte-Hanks, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Harte-Hanks provides direct and digital marketing services and shopper advertising through its Direct Marketing and Shoppers segments.
Financial performance
| Metric | Q3 2012 | Q3 2011 | First 9 months 2012 | First 9 months 2011 |
|---|---|---|---|---|
| Revenue | $195.8 million | $212.8 million | $590.1 million | $626.1 million |
| Operating income (loss) | $16.2 million | $20.7 million | $(123.5) million | $51.6 million |
| Net income (loss) | $8.9 million | $12.1 million | $(94.0) million | $29.5 million |
| Diluted EPS | $0.14 | $0.19 | $(1.49) | $0.46 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $41.0 million | $33.8 million |
- Q3 operating margin was approximately 8.3%, versus 9.7% a year earlier. Q3 revenue declined 8.0%; operating income declined 21.7% and net income declined 26.9%.
- For the first nine months, revenue declined 5.8%. Results included a $165.3 million noncash impairment charge in Q2: $156.9 million of Shoppers goodwill and $8.4 million of Shoppers intangible assets. Excluding this charge, nine-month operating income was approximately $41.8 million and the company reported net income of $22.6 million, or diluted EPS of $0.36.
- Cash and equivalents were $35.8 million at September 30, down $51.0 million from year-end 2011. Current assets were $205.5 million and current liabilities $125.8 million.
- Total debt was $113.3 million, down from $179.4 million at December 31, 2011, largely following repayment of the $60.0 million 2008 term loan at maturity. The 2011 term loan carried an effective rate of 2.22%; $101.1 million was classified as long-term debt. The company had $60.1 million of unused revolving capacity, with the facility maturing August 2013.
- Capital spending was $8.5 million for the first nine months. Financing cash outflow was $83.7 million, including $66.1 million of debt repayments and $16.2 million of dividends. The company repurchased $2.0 million of shares during the period.
Segment trends and changes
- Direct Marketing: Q3 revenue fell 7.2% to $141.0 million and operating income fell 8.7% to $18.7 million. A major retail customer shifted spending from direct mail toward broadcast. Q3 declines were also reported in pharmaceutical, high-tech, select and retail markets; financial revenue increased 5%.
- Shoppers: Q3 revenue fell 9.9% to $54.8 million and operating income fell 80.1% to $0.6 million. Weak local economies in California and Florida continued to weigh on advertising sales. Nine-month segment results included the impairment charge; excluding it, Shoppers operating income was approximately $0.2 million, versus $3.2 million in 2011.
- Management cited continuing cost reductions, including restructuring and discontinuation of unprofitable digital initiatives, while continuing to invest in digital products such as PowerSites. It reported little, if any, improvement in the California and Florida economies.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said cash, operating cash flow and available revolver capacity were expected to cover operations, capital expenditures, debt service, dividends and pension contributions for the next 12 months.
- Management warned that prolonged economic weakness could adversely affect results and liquidity and could lead to further restructuring or impairment charges. The next annual impairment test was planned for Q4 2012; additional impairment testing or charges could result from adverse business developments or changes in assumptions.
- Management anticipated a Shoppers postage-rate increase of approximately 2.8% in January 2013. Newsprint prices were expected to remain at current levels through Q4 2012 and 2013.
- The company reported compliance with credit-facility covenants at September 30. It was subject to minimum interest coverage and maximum debt-to-EBITDA requirements.
- Other expense included foreign-currency transaction losses of $0.4 million in Q3 and $0.9 million for the first nine months. The filing reported other legal proceedings but said management did not consider them reasonably likely to have a material adverse effect; outcomes remain uncertain.
Investor verification points
- Track Shoppers revenue, margins and local-market conditions, and review the assumptions and results of the Q4 impairment test.
- Assess whether Direct Marketing can stabilize client spending, particularly the effects of the retail customer shift and declines across verticals.
- Monitor cash generation, working capital, debt repayments and the August 2013 revolver maturity and renewal or replacement.
- Verify the sustainability of dividends and repurchases against operating cash flow, pension funding needs and covenant headroom.
- Review the full 10-K risk factors and subsequent filings for developments in economic conditions, litigation and potential impairment exposure.