Harte Hanks, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Harte Hanks provides multichannel marketing and customer interaction services and enterprise data-quality software through Customer Interaction and Trillium Software.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $110.7 million | $121.2 million |
| Operating income (loss) | $(6.4) million | $3.0 million |
| Operating margin | (5.8)% | 2.5% |
| Net income (loss) | $(5.6) million | $1.6 million |
| Diluted earnings (loss) per share | $(0.09) | $0.03 |
| Operating cash flow | $6.4 million | $20.4 million |
| Capital expenditures | $4.6 million | $2.7 million |
Revenue fell 8.6% year over year. Labor costs rose 5.7%, while production and distribution costs declined 16.2%; total operating expenses decreased just 0.9%. Interest expense increased to $1.4 million from $0.6 million. The Q1 2016 tax benefit was $2.0 million, using a discrete tax-rate method; the effective rate was 26.1%.
Customer Interaction revenue declined 8.9% to $99.6 million and recorded a $7.9 million operating loss, versus $1.5 million operating income a year earlier. Trillium Software revenue declined 5.9% to $11.2 million; operating income decreased 25.6% to $2.2 million. Its lower non-recurring software license sales and reduced maintenance and services were partly offset by higher SaaS revenue.
Balance sheet, cash and debt
At March 31, 2016, cash was $11.7 million, down $5.9 million from year-end. Current assets were $125.5 million and current liabilities $86.4 million. Operating cash flow was $6.4 million, including a $22.0 million decrease in receivables, while accounts payable declined $10.2 million. Investing used $8.1 million, including the $3.5 million Aleutian Consulting acquisition and $4.6 million of capital expenditures. Financing used $3.8 million, including $5.3 million of dividends.
Reported debt was $78.8 million, net of $2.2 million in unamortized debt discount and issuance costs. The new secured facilities comprise a $45 million term loan and a revolving facility of up to $65 million; $36.0 million was drawn on the revolver, leaving $8.8 million of available capacity at quarter-end. The facilities mature March 10, 2021, carry variable rates, and are secured by substantially all company assets and certain domestic subsidiaries.
Material developments, outlook and risks
- The company completed its $3.5 million cash acquisition of Aleutian Consulting on March 4, recording $3.5 million of goodwill.
- Revenue declines reflected lost clients, reduced client marketing spending, and the prior-year sale of the B2B research business. Technology, healthcare and pharmaceuticals, retail, and financial services were among the weaker verticals.
- The company failed its minimum fixed-charge coverage covenant at March 31: 0.9-to-1 versus a 1.0-to-1 minimum. Wells Fargo waived the violation. The facilities also impose leverage, recurring-revenue and capital-expenditure tests and restrict dividends, buybacks and other actions.
- Management anticipated no dividends or share repurchases for the foreseeable future due to facility terms. The company had paid a $0.09-per-share dividend in the quarter.
- Management stated that cash, operating cash flow and available revolver capacity should fund operations, planned capital expenditures, and debt service under current plans. No quantified revenue or earnings guidance was provided. Management expects cost-structure adjustments and multichannel investments to support future profitability, but results depend on client retention, marketing budgets, economic conditions and execution.
- Risks include weak economic conditions and discretionary client marketing spending, variable-rate debt, foreign exchange movements, and potential future goodwill impairment. Management reported no material change to previously disclosed risk factors. It did not consider current legal proceedings likely to have a material adverse effect, although client indemnification exposure cannot be reasonably estimated.
- The 3Q Digital acquisition earnout liability was $20.4 million at quarter-end; additional cash payments could range from $0 to $35 million in 2018, depending on revenue goals. Changes in its fair value depend on significant unobservable assumptions.
Key investor verification points
- Review subsequent covenant compliance and whether the company maintains adequate revolver availability; the quarter-end covenant breach was waived, not cured in the reported period.
- Track revenue trends, client losses and spending, especially in Customer Interaction and the weaker industry verticals, alongside whether cost reductions improve margins.
- Assess cash conversion and working-capital movements, capital spending, debt service and the remaining $8.8 million of reported revolver availability.
- Confirm the effect of dividend and buyback restrictions on capital returns, and monitor the 3Q Digital earnout valuation and potential payments.