Harte Hanks, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Harte Hanks provides data-driven marketing, customer relationship and logistics services and reports as one operating segment. Financial amounts below are in U.S. dollars; “million” amounts are rounded.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $41.6m | $54.7m | $82.1m | $113.8m |
| Operating loss | $5.9m | $6.6m | $11.0m | $17.6m |
| Operating margin | (14.1)% | (12.1)% | (13.3)% | (15.4)% |
| Net loss | $6.2m | $3.8m | $1.1m | $17.3m |
| Loss per common share | $0.99 | $0.63 | $0.21 | $2.80 |
| Operating cash flow | Not provided for quarter | $(7.4)m | $15.3m |
- Q2 revenue declined 23.9%; six-month revenue fell 27.9%. Q2 declines were concentrated in retail, financial services, transportation and healthcare, partly offset by growth in B2B and consumer brands.
- Q2 operating expenses fell 22.5%, less than the revenue decline, and operating margin narrowed. For the first half, expense reductions exceeded the revenue decrease and operating loss improved. Q2 net loss worsened partly because Q2 2019 included a $5.0m earn-out gain from the sale of 3Q Digital.
- Six-month net loss was substantially lower than 2019 mainly because of a $12.8m income tax benefit, principally related to CARES Act NOL carrybacks and valuation allowance changes. The tax benefit is not evidence of improved operating profitability.
- At June 30, cash and cash equivalents were $30.1m and restricted cash was $6.4m. Current assets were $93.5m versus current liabilities of $52.7m. Stockholders’ deficit was $49.3m.
- Total debt was $27.2m: $17.2m under the revolving credit facility and a $10.0m PPP loan. Only $0.1m remained available under the $19m revolver; it matures April 2022 and is secured by substantially all company assets. Pension liabilities were $68.6m.
- Six-month operating cash flow was $(7.4)m; investing cash flow was $1.8m and financing cash flow was $8.0m. Cash and restricted cash together totaled $36.4m at period end.
Material developments, outlook and risks
- COVID-19: Management said the pandemic had not materially affected operations, liquidity or covenant compliance through the filing date, but customers reduced work, sought payment extensions or agreement changes, and some entered bankruptcy. The company also reported new contact-center wins and increased volumes for some existing clients. Future effects were described as uncertain and potentially material.
- Restructuring and asset sale: Q2 restructuring expense was $5.2m and first-half expense was $6.6m, including facility lease impairments and terminations, asset disposal losses and severance. The company sold most Jacksonville production equipment to Summit for $1.5m in April and entered a partnership under which Summit performs direct-mail campaigns. It recorded a $1.9m facility impairment and a $1.2m disposal loss associated with the transaction. Management expects a further $2.5m of restructuring charges through year-end 2020.
- PPP and liquidity: The $10.0m PPP note bears 1% interest, with payments scheduled to begin in October 2020. Management anticipated full forgiveness but could not estimate timing and offered no assurance of forgiveness. Without forgiveness, approximately $5.0m would be due within 12 months. The company reported receiving a $3.3m federal tax refund on August 5, 2020, after quarter-end, and expected additional refunds of $5.7m in 2020 and $3.6m in 2021.
- Management believed available cash, operating cash flows and borrowing capacity would meet obligations for at least 12 months and stated it saw no conditions raising substantial doubt about continued operations. No specific revenue or earnings guidance was provided.
- Other risks include discretionary client marketing budgets, customer creditworthiness, potential further COVID-19 disruption, remote-work and cybersecurity risks, variable-rate debt, foreign exchange exposure and substantial pension obligations. A $6.0m minimum qualified pension contribution was required for 2020.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter. Legal matters were described as ordinary-course matters, with management considering material loss beyond recorded accruals remote.
Important facts for investors to verify
- Whether the PPP loan qualifies for full forgiveness, and the timing and accounting treatment of any forgiveness.
- Whether expected CARES Act tax refunds are received as projected, and the sustainability of the unusually large first-half tax benefit.
- Customer retention, collection of receivables and revenue trends in the most affected verticals, particularly retail, financial services and transportation.
- Progress and cash costs of restructuring, expected savings, and the economics and revenue recognition of the Summit partnership.
- Liquidity headroom given negative operating cash flow, only $0.1m of remaining revolver availability, debt obligations and pension funding requirements.