Harte Hanks, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing reports full-year results; fourth-quarter figures are noted separately. Financial comparisons are for continuing operations unless stated otherwise. Harte Hanks provides multichannel marketing services through Customer Interaction and enterprise data-quality software and services through Trillium Software. Shoppers operations were sold in 2012 and 2013 and are reported as discontinued operations.
Financial performance and position
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $553.7 million | $559.6 million | -1.1% |
| Operating income | $40.8 million | $42.7 million | -4.5% |
| Operating margin | 7.4% | 7.6% | Down 0.3 percentage points |
| Income from continuing operations | $24.0 million | $24.4 million | -1.8% |
| Diluted EPS from continuing operations | $0.38 | $0.39 | -1.6% |
| Net cash from operating activities | $25.6 million | $59.6 million | Down $34.0 million |
| Capital expenditures | $11.3 million | $15.9 million | Down $4.6 million |
| Cash and cash equivalents at year-end | $56.7 million | $88.7 million | Down $32.0 million |
| Total debt at year-end | $82.7 million | $98.0 million | Down $15.3 million |
Operating cash flow less capital expenditures was approximately $14.3 million in 2014, compared with $43.7 million in 2013; the latter includes $15.5 million of cash from discontinued operations. Continuing-operations cash flow was $25.6 million in 2014 versus $44.1 million in 2013. The company attributed the decline primarily to working-capital movements and the absence of discontinued-operations cash. Receivables rose, and days sales outstanding increased from 72 to 78.
Current assets were $206.5 million and current liabilities $124.3 million at year-end, a current ratio of approximately 1.66. Stockholders’ equity was $326.7 million, down from $349.1 million. The pension deficit increased to $66.7 million from $40.8 million, largely reflected in a $17.3 million after-tax pension adjustment in other comprehensive income. Goodwill and other intangible assets totaled $400.4 million, approximately 62% of total assets.
Customer Interaction generated $499.4 million of revenue and $29.8 million of operating income; revenue declined 0.9% and operating income 7.0%. Trillium Software generated $54.2 million of revenue and $13.3 million of operating income; revenue declined 2.9% and operating income 13.3%. Fourth-quarter revenue was $146.5 million versus $152.2 million a year earlier; operating income was $14.7 million versus $12.5 million, and continuing-operations income was $10.1 million versus $6.7 million.
Material changes and notable items
- Revenue has declined for three consecutive years: $581.1 million in 2012, $559.6 million in 2013, and $553.7 million in 2014. Operating income fell from $62.7 million in 2012 to $40.8 million in 2014.
- Retail was the largest source of revenue pressure. Customer Interaction retail revenue fell 12.8%, or $19.9 million, as clients shifted to lighter, less expensive mail formats, alongside mail/database losses and reduced contact-center support from an online retailer. Select markets grew substantially, partly due to nonrecurring streaming enrollment work.
- Trillium’s 2014 revenue was lower following two large bank software-license sales in the fourth quarter of 2013.
- In the second quarter of 2014, the company reorganized into Customer Interaction and Trillium Software and adopted them as reportable segments. It announced a new strategy, with stated plans to invest in multichannel capabilities while adjusting costs in slower-growing areas.
- No continuing-operations goodwill impairment was recorded in 2014. A $2.8 million noncash Aberdeen Group trade-name impairment was recorded in 2013; 2012 included a large Shoppers impairment and discontinued-operations losses.
Liquidity, debt, outlook and risks
At December 31, 2014, the company had $82.7 million of variable-rate term debt, no revolver borrowings, and $73.8 million of unused revolver capacity after letters of credit. The term loan and revolving facility mature August 16, 2016. The effective term-loan rate was 2.17%. The company reported compliance with its debt covenants. It expects to meet operations, capital spending, debt service, dividends and pension contributions for the next 12 months using cash, operating cash flow and revolver availability, while cautioning that a deep or prolonged recession could materially harm results.
Management planned to continue quarterly dividends of $0.085 per share in 2015, subject to board approval. The company repurchased $7.9 million of shares in 2014 and had $16.1 million remaining under its $20 million current authorization at year-end. It planned $4.0 million of 2015 contributions to the qualified pension plan; expected 2015 supplemental-plan benefit payments were approximately $1.5 million.
Key risks include discretionary client marketing budgets and economic weakness; intense competition, pricing pressure and technological change; execution of the new strategy and retention of key personnel; privacy, data-security and marketing regulation; reliance on third-party data and service providers; postal and transportation costs; and foreign-exchange exposure. All debt was variable-rate, and the company had no interest-rate or foreign-currency hedges. A one-percentage-point change in average interest rates was estimated to change 2014 net income by approximately $0.6 million. Debt covenants, including leverage and interest-coverage requirements, may constrain flexibility. Goodwill is significant relative to assets and remains exposed to impairment if forecasts or business conditions weaken.
Other disclosed items include $34.3 million of operating-lease obligations and $16.6 million of unfunded pension benefit payments in contractual obligations. The Florida Shoppers sale note was fully reserved due to collectability concerns. Management said pending legal matters were not currently considered reasonably likely to have a material adverse effect; client indemnification exposure was not reasonably estimable. The company reported effective disclosure controls and internal control over financial reporting; its auditor issued unqualified opinions.
Important facts for investors to verify
- Whether Customer Interaction can stabilize retail-related losses and whether the new strategy produces sustainable revenue and margin improvement.
- Cash conversion and working-capital trends, particularly receivables and days sales outstanding; compare operating cash flow excluding discontinued-operation effects.
- Debt repayment and refinancing plans ahead of the August 2016 facility maturities, covenant headroom, and exposure to variable rates.
- Pension funding status, required contributions and sensitivity to discount-rate and asset-return assumptions.
- Goodwill valuation assumptions and impairment sensitivity given goodwill and other intangibles of $400.4 million.
- Dividend and repurchase sustainability relative to operating cash flow, capital needs and debt reduction.
- Any subsequent developments in privacy/data-security compliance, customer concentration, legal contingencies or the reserved Florida sale note.