Business context and reporting period
Harte-Hanks, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2011. The company operates in Direct Marketing, which provides multichannel marketing and data services, and Shoppers, which publishes and distributes local advertising publications, principally in California and Florida. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $212.8 | $216.7 | $626.1 | $624.5 |
| Operating income | $20.7 | $25.1 | $51.6 | $65.9 |
| Operating margin | 9.7% | 11.6% | 8.2% | 10.6% |
| Net income | $12.1 | $13.8 | $29.5 | $38.0 |
| Diluted EPS | $0.19 | $0.22 | $0.46 | $0.59 |
| Cash from operations | Not separately presented for quarter | $33.8 | $62.7 |
- Quarterly revenue fell 1.8%; nine-month revenue edged up 0.3%. Operating income declined 17.3% for the quarter and 21.8% year to date; net income fell 12.2% and 22.4%, respectively.
- Direct Marketing revenue rose 0.6% in Q3 and 4.5% year to date, but operating income declined 10.8% and 5.0%. Excluding a large 2010 healthcare project, Direct Marketing revenue grew 4.9% in Q3 and 6.1% year to date.
- Shoppers revenue declined 7.4% in Q3 and 8.9% year to date; operating income fell 41.5% and 78.2%. Local economic weakness and lower advertising sales weighed on results.
- Operating cash flow was $33.8 million, down $28.9 million year over year, primarily due to working-capital movements and lower net income. Capital expenditures were $16.4 million; dividends paid were $15.3 million and treasury-share purchases were $8.4 million.
Balance sheet, debt and liquidity
- At September 30, cash was $71.8 million, total assets $907.0 million, current assets $248.4 million and current liabilities $191.2 million. Current assets exceeded current liabilities by $57.2 million.
- Total debt was $185.0 million, down from $193.0 million at December 31, 2010. Cash less debt was approximately negative $113.2 million. Debt included $121.0 million under a new five-year term loan and $64.0 million under the 2008 term loan; the revolving facility had no borrowings and $59.2 million available after letters of credit.
- The new $122.5 million term facility, entered into in August 2011, refinanced the 2006 facility; proceeds above the $97.5 million payoff were intended for general corporate purposes. The $64.0 million 2008 term loan was due March 2012. The filing classified $71.7 million of debt as current and said scheduled principal payments of that amount were due over the following six months.
- Management reported compliance with credit covenants and expected cash, operating cash flows and revolver availability to fund operations, planned capital spending, debt service and dividends for the next 12 months.
Outlook, commentary and risks
- No specific revenue, earnings or margin guidance is provided. Management described Direct Marketing as having delivered five consecutive quarters of year-over-year growth, excluding the prior-year one-time project, and expected continued challenges in Shoppers before California and Florida economies improve.
- Management said cost reductions and digital investment were intended to improve Shoppers efficiency and position the business for an eventual recovery. Shoppers had approximately 11.2 million weekly circulation and about 6,800 PowerSites.
- Key risks include prolonged economic weakness and reduced marketing spending, particularly in California and Florida; ongoing declines in Shoppers; rising mail-supply-chain and newsprint costs; and variable-rate debt exposure. Management estimated a one-percentage-point interest-rate change would have affected net income by about $0.3 million in Q3 and $0.8 million for the first nine months.
- Management warned that further deterioration could lead to restructuring charges or impairment of goodwill, intangibles or long-lived assets. Goodwill was $565.7 million; the company reported no impairment from its Q2 review and its Q3 qualitative assessment concluded no further test was needed.
- The Gattuso class-action settlement received final court approval in May 2011. Shoppers funded a $7.0 million settlement; $1.3 million of unclaimed funds reverted to the company in August. Management said other pending legal matters were not considered reasonably likely to have a material adverse effect.
- Unusual items included $4.1 million of Shoppers cost-reduction charges in the first half of 2011, primarily related to the Shoppers president’s retirement and severance, partly offset by a $1.3 million reduction in a legal accrual. Foreign-currency transactions contributed gains of $0.8 million in Q3 and $0.5 million for the nine months.
Important facts for investors to verify
- Whether Shoppers revenue and operating income stabilize, and whether planned cost savings offset continued local-market weakness.
- Repayment or refinancing of the $71.7 million of scheduled near-term principal payments, including the March 2012 maturity, and ongoing covenant compliance.
- Whether operating cash flow recovers from the year-over-year decline while supporting capital spending, dividends and debt service.
- Potential impairment indicators for the $565.7 million goodwill balance and any further restructuring or litigation costs.
- The durability of Direct Marketing growth after excluding the nonrecurring 2010 healthcare project and the effect of rising delivery and production costs.