Harte-Hanks, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unaudited results are for continuing operations unless noted. Amounts are in millions, except per-share data.
Business context
Harte-Hanks provides multichannel marketing services through Customer Interaction and enterprise data-quality software and services through Trillium Software. In Q2 2014, the company reorganized into these two reportable segments. The California Shoppers business was sold in September 2013; its prior-period results are presented as discontinued operations.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $140.3 | $140.1 | $273.0 | $272.5 |
| Operating income | $11.0 | $12.4 | $15.6 | $21.8 |
| Operating margin | 7.8% | 8.9% | 5.7% | 8.0% |
| Continuing-operations income | $5.6 | $6.9 | $7.5 | $13.3 |
| Diluted EPS, continuing operations | $0.09 | $0.11 | $0.12 | $0.21 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $11.8 | $23.6 |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $4.8 | $9.1 |
Q2 revenue was nearly flat, but operating income fell 11.5%. First-half revenue increased 0.2%, while operating income declined 28.7%. Higher labor, outsourced services, maintenance, and other operating costs, together with less favorable other income and expense, weighed on earnings. First-half 2013 also benefited from a $0.9 million gain on a Belgium facility sale and favorable tax items.
- Segments: Q2 Customer Interaction revenue was $127.3 million, up 0.3%, and operating income was $9.2 million, down 9.3%. Trillium revenue was $13.0 million, down 1.2%, and operating income was $2.7 million, down 19.4%.
- For the first half, Customer Interaction revenue was $246.1 million, down 0.2%, and operating income was $11.1 million, down 34.6%. Trillium revenue rose 4.3% to $27.0 million, while operating income fell 9.9% to $6.3 million.
- Balance sheet at June 30: Cash and equivalents were $77.0 million; total debt was $91.9 million, down from $98.0 million at year-end 2013. Current maturities were $18.4 million. The company had $72.5 million of unused revolver capacity. Current assets were $220.1 million and current liabilities $131.5 million.
- Cash uses: First-half financing outflows were $19.4 million, including $10.8 million of dividends and $2.1 million of treasury-stock purchases. Cash declined $11.7 million from year-end to $77.0 million.
Changes, outlook, and risks
- Q2 select-markets revenue rose substantially, primarily from non-recurring streaming enrollment work for a large contact-center customer. Management cautioned that this work was not necessarily recurring. Healthcare, financial services, and retail were among the weaker verticals; Trillium license sales were delayed by clients moving projects into the second half.
- First-half foreign-currency transaction results were less favorable than in 2013; Q2 included $1.1 million of other expense, including a $0.4 million pretax currency transaction loss. The filing attributes the first-half earnings decline partly to foreign currency and the absence of the prior-year Belgium facility gain.
- Management said cash, operating cash generation, and revolver availability should fund operations, anticipated capital expenditures, debt service, dividends, and pension contributions for the next 12 months. No specific revenue or earnings guidance was provided. Management described economic growth in served markets as modest but uncertain and noted that client marketing budgets may be cut in weak conditions.
- Debt facilities mature August 16, 2016. Required covenants include minimum interest coverage of 2.75:1 and maximum total debt-to-EBITDA of 2.25:1; the company reported compliance at June 30. Variable-rate debt exposes earnings to interest-rate changes; management estimated a one-percentage-point rate change would affect Q2 net income by about $0.1 million.
- The company froze benefits under its unfunded supplemental pension plan effective April 1, reducing projected benefit obligations by $1.2 million and expected plan expense by $0.4 million over the rest of 2014. It planned $1.7 million of additional contributions to its funded plan in the remainder of 2014.
- Goodwill was $398.2 million. Following the segment reorganization, management performed a preliminary impairment assessment and found no indication of impairment, but warned future triggering events could require testing and result in charges. Management reported no material change in previously disclosed risk factors and no pending legal matter then considered reasonably likely to materially harm results or financial position. Certain client indemnification commitments have no stated maximum exposure; aggregate exposure cannot be reasonably estimated.
Important facts for investors to verify
- Whether the non-recurring contact-center work is replaced by durable revenue and whether weaker verticals recover.
- Whether operating costs and segment margins improve after the reorganization, particularly in Customer Interaction and Trillium.
- Whether cash generation remains adequate as working-capital movements, dividends, debt repayments, and pension contributions affect liquidity; days sales outstanding rose to approximately 74 days from 71 at year-end.
- Ongoing covenant compliance and the effect of variable interest rates and foreign-currency movements.
- Whether business performance, market capitalization, or other developments trigger further goodwill impairment testing.