Harte-Hanks, Inc. 2010 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: Harte-Hanks, Inc.
Reporting Period: Fiscal year ended December 31, 2010
Business Overview: A worldwide direct and targeted marketing company operating through two segments: Direct Marketing (70% of revenue), providing multichannel, data-driven solutions globally, and Shoppers (30% of revenue), the largest owner of shopper publications in California and Florida. The company serves retail, high-tech, financial services, and healthcare verticals.
Key Financial Metrics (2010)
| Metric | 2010 Value | 2009 Value |
|---|---|---|
| Total Revenues | $860.5 million | $860.1 million |
| Operating Income | $91.1 million | $82.4 million |
| Net Income | $53.6 million | $47.7 million |
| Diluted EPS | $0.84 | $0.75 |
| Operating Margin | 10.6% | 9.6% |
| Cash and Cash Equivalents | $86.0 million | $86.6 million |
| Total Debt | $193.0 million | $239.7 million |
| Unused Borrowing Capacity | $58.2 million | N/A |
Material Changes vs. Prior Period
- Revenue Stability: Consolidated revenues remained flat ($0.4 million increase) due to a 2.6% increase in Direct Marketing offset by a 5.4% decline in Shoppers. Direct Marketing growth was driven by the pharma/healthcare vertical (aided by a one-time recall project) and the acquisition of Information Arts. Shoppers declined due to difficult economic conditions in California and Florida.
- Profitability Improvement: Operating income increased 10.5% and Net Income increased 12.3%. This was driven by cost reductions in the Shoppers segment (excluding a $7.0 million legal settlement in 2009), lower general corporate expenses, and significantly reduced interest expense (down 65.3% due to lower debt levels and rates).
- Debt Reduction: Total debt decreased by approximately $46.7 million as the company focused on paying down term loans.
Outlook, Risks, and Management Commentary
- Economic Environment: Management notes that while signs of improvement exist, 2011 is expected to remain challenging due to the ongoing economic downturn affecting marketing budgets and local economies in California and Florida.
- Liquidity and Debt Maturity: A significant liquidity risk exists as all $193.0 million of outstanding debt is scheduled to mature within the next 15 months (specifically September 2011 and March 2012). The company plans to use cash on hand and its $70 million revolving credit facility to meet these obligations.
- Legal Contingency: A $7.0 million class action settlement regarding employee automobile expense reimbursement was accrued in 2009. The agreement was finalized in early 2010, but final court approval was pending at the time of filing.
- Dividends: The company paid $0.30 per share in 2010 and plans to increase the quarterly dividend to $0.08 per share in 2011.
Investor Verification Checklist
- Debt Refinancing: Verify the company's ability to refinance or repay the $133 million debt maturing in 2011 and the $60 million maturing in 2012 given the tight liquidity window.
- Shoppers Segment Viability: Assess the sustainability of the Shoppers segment given continued revenue declines and the heavy reliance on the California and Florida real estate markets.
- One-Time Items: Confirm the extent to which Direct Marketing revenue growth was driven by the non-recurring voluntary recall project.
- Legal Settlement Finalization: Monitor the status of the $7.0 million class action settlement to ensure no additional liabilities arise.
- Goodwill Impairment: Review the annual goodwill impairment testing results, as $565.7 million in goodwill represents a significant portion of total assets ($926.9 million).