HHS

Harte-Hanks, Inc. 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Harte-Hanks, Inc., a worldwide direct and targeted marketing company, for the period ended June 30, 2008. The company operates through two primary segments: Direct Marketing (providing data-driven marketing services) and Shoppers (owner and operator of shopper publications in California and Florida).

Key Financial Metrics

All figures in thousands, except per share data.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 5.3% in Q2 2008 and 5.2% for the first half of 2008 compared to the prior year periods.
• Segment Performance:
  • Shoppers: Revenues dropped 20.0% in both Q2 and the first half of 2008 due to difficult economic conditions in California and Florida, declining ad sales, and circulation reductions initiated in late 2007. Operating income for this segment fell 42.4% (Q2) and 50.3% (6mo).
  • Direct Marketing: Revenues increased 4.4% (Q2) and 4.5% (6mo), driven by double-digit growth in high-tech/telecom and select markets, partially offset by declines in the pharma/healthcare vertical.
• Profitability: Net income decreased 20.4% in Q2 and 26.4% for the first half of 2008. Operating income declined 16.4% (Q2) and 22.1% (6mo).
• Cost Management: Operating expenses decreased 3.4% (Q2) and 2.6% (6mo), primarily due to cost-cutting measures and reduced circulation volumes in the Shoppers segment. The Shoppers workforce was reduced by more than 9% in the first half of 2008.
• Debt and Interest: Interest expense increased 9.6% (Q2) and 17.3% (6mo) due to higher outstanding debt levels from share repurchases and the acquisition of Mason Zimbler.

Outlook, Risks, and Management Commentary

• Shoppers Outlook: Management notes that economic conditions in California and Florida remain "extremely challenging." In July 2008, the company further reduced Shoppers circulation by approximately 250,000 per week, primarily in unprofitable areas. Despite this, they believe in the long-term viability of the business.
• Direct Marketing Outlook: The segment is expected to benefit from the shift of marketing expenditures to targeted media. However, rising postage rates (increased in May 2008) could impact demand.
• Liquidity: The company maintains $96.0 million of unused borrowing capacity under its Revolving Credit Facility. Management believes current cash and credit facilities are sufficient to fund operations, capital expenditures, and dividends for at least the next 12 months.
• Legal Contingencies: A putative class action lawsuit regarding employee expense reimbursement (Gattuso v. Harte-Hanks Shoppers) is ongoing. The California Supreme Court remanded the case for further proceedings on class certification. No accrual has been made as the loss is not considered probable or estimable.
• Market Risk: The company uses an interest rate swap ($150 million notional) to hedge variable-rate debt exposure. Foreign exchange risk is monitored but not considered significant.

Investor Verification Checklist

• Verify the sustainability of the 20% revenue decline in the Shoppers segment and the impact of the July 2008 circulation reduction on future earnings.
• Monitor the Direct Marketing pharma/healthcare vertical, which experienced double-digit revenue declines, to assess if this trend is reversing.
• Review the status of the Gattuso class action lawsuit for potential future liabilities regarding employee expense reimbursements.
• Assess the impact of rising postage rates on the Direct Marketing segment's cost structure and client demand.
• Confirm compliance with debt covenants (interest coverage ratio of 2.75:1 and debt-to-EBITDA of 3.0:1) given the increased debt load from the 2008 Term Loan Facility.