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HHS > SEC Filings for HHS > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for HARTE HANKS INC

Form 10-Q for HARTE HANKS INC


6-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This report, including this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), contains "forward-looking statements" within the meaning of the federal securities laws. All such statements are qualified by this cautionary note, which is provided pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may also be included in our other public filings, press releases, our website and oral and written presentations by management. Statements other than historical facts are forward-looking and may be identified by words such as "may," "will," "expects," "believes," "anticipates," "plans," "estimates," "seeks," "could," "intends," or words of similar meaning. Examples include statements regarding (1) our strategies and initiatives, (2) adjustments to our cost structure and other actions designed to respond to market conditions and improve our performance, and the anticipated effectiveness and expenses associated with these actions, (3) our financial outlook for revenues, earnings per share, operating income, expense related to equity-based compensation, capital resources and other financial items, (4) expectations for our businesses and for the industries in which we operate, including with regard to the negative performance trends in our Shoppers business and the adverse impact of continuing economic uncertainty in the United States and other economies on the marketing expenditures and activities of our Direct Marketing clients and prospects, (5) competitive factors, (6) acquisition, disposition of assets and development plans, (7) our stock repurchase program, (8) expectations regarding legal proceedings and other contingent liabilities, and (9) other statements regarding future events, conditions or outcomes.

These forward-looking statements are based on current information, expectations and estimates and involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results to vary materially from what is expressed in or indicated by the forward-looking statements. In that event, our business, financial condition, results of operations or liquidity could be materially adversely affected and investors in our securities could lose part or all of their investments. Some of these risks, uncertainties, assumptions and other factors can be found in our filings with the Securities and Exchange Commission, including the factors discussed under "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 (2011 Form 10-K) and in the "Cautionary Note Regarding Forward-Looking Statements" in our third quarter 2012 earnings release issued on October 25, 2012. The forward-looking statements included in this report and those included in our other public filings, press releases, our website and oral and written presentations by management are made only as of the respective dates thereof, and we undertake no obligation to update publicly any forward-looking statement in this report or in other documents, our website or oral statements for any reason, even if new information becomes available or other events occur in the future.

Overview

The following MD&A section is intended to help the reader understand the results of operations and financial condition of Harte-Hanks, Inc. (Harte-Hanks). This section is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements contained elsewhere in this report and our MD&A section, financial statements and accompanying notes to financial statements in our 2011 Form 10-K. Our 2011 Form 10-K contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates, and contractual obligations.


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Harte-Hanks is a worldwide direct and targeted marketing company that provides multichannel direct and digital marketing services and shopper advertising opportunities to a wide range of local, regional, national and international consumer and business-to-business marketers. We manage our operations through two operating segments: Direct Marketing and Shoppers.

Our Direct Marketing services offer a wide variety of integrated, multichannel, data-driven solutions for top brands around the globe. We help our clients gain insight into their customers' behaviors from their data and use that insight to create innovative multichannel marketing programs to deliver a return on marketing investment. We believe our clients' success is determined not only by how good their tools are, but how well we help them use the tools to gain insight and analyze their consumers. This results in a strong and enduring relationship between our clients and their customers. We offer a full complement of capabilities and resources to provide a broad range of marketing services and data management software, in media from direct mail to email, including:

†          agency and digital services;

†          database marketing solutions;

†          data quality software and services with Trillium Software;

†          direct mail and supply chain management;

†          fulfillment and contact centers; and

†          lead generation.

Revenues from the Direct Marketing segment represented approximately 72% of our total revenues for the three months and nine months ended September 30, 2012.

Harte-Hanks Shoppers is North America's largest owner, operator and distributor of shopper publications (based on weekly circulation and revenues). Shoppers are weekly advertising publications delivered free by mail to households and businesses in a particular geographic area. Through print and digital offerings, Shoppers is a trusted local source for saving customers money and helping businesses grow. Shoppers offer advertisers a geographically targeted, cost-effective local advertising system, with virtually 100% penetration in their area of distribution. Shoppers are particularly effective in large markets with high media fragmentation in which major metropolitan newspapers generally have low penetration. Our Shoppers segment also provides online advertising and other services through our websites, PennySaverUSA.com® and TheFlyer.com®, as well as business websites and search-engine marketing. Our websites are online advertising portals, bringing buyers and sellers together through our online offerings, such as local classifieds, business listings, coupons, special offers and PowerSites. PowerSites are templated websites for our customers, optimized to help small and medium-sized business owners establish a web presence and improve their lead generation. At September 30, 2012, we were publishing approximately 6,700 PowerSites weekly.

At September 30, 2012, our Shoppers publications were zoned into approximately 950 separate editions with total circulation of approximately 11.2 million shopper packages in California and Florida each week. Our distribution products can be zoned even tighter, into approximately 2,400 subzones. Shoppers are delivered in five major markets covering the greater Los Angeles market, the greater San Diego market, Northern California, South Florida and the greater Tampa market.

Revenues from the Shoppers segment represented approximately 28% of our total revenues for the three months and nine months ended September 30, 2012.

We derive revenues from the sale of direct marketing services and shopper advertising services.

As a worldwide business, Direct Marketing is affected by general national and international economic and business conditions. Direct Marketing revenues are also affected by the economic fundamentals of each industry


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that we serve, various market factors, including the demand for services by our clients, and the financial condition of and budgets available to specific clients, among other factors. We remain committed to making the investments necessary to execute our multichannel strategy while also continuing to adjust our cost structure to reduce costs in the parts of the business that are not growing as fast. We believe these actions will improve our profitability in future periods.

Our Shoppers operate in regional markets in California and Florida and are greatly affected by the strength of the state and local economies. Revenues from our Shoppers business are largely dependent on local advertising expenditures in the areas of California and Florida in which we operate. During the first nine months of 2012, the poor economic conditions that we have experienced since the second half of 2007 in California and Florida continued. These conditions were initially created by weakness in the real estate and associated financing markets and have spread and persist across virtually all categories. As a result of management's evaluation of the Shoppers business, we recorded a $165.3 million impairment loss in the second quarter of 2012 related to Shoppers' goodwill and other intangible assets. We see little, if any, improvement in the California and Florida economies and we expect to have further challenges before our performance improves. In response, during the first nine months of 2012, we continued our efforts to reduce expenses in the Shoppers business, primarily through organizational restructuring and the discontinuance of a number of unprofitable digital initiatives, including SaverTime and mobile apps. We continue to invest in online offerings, particularly our PowerSites, where we are seeing good revenue growth and are adding capabilities that provide value for our readers and advertisers, and in other profitable digital initiatives. We believe the steps we are taking to improve overall efficiency, combined with our continued investments in digital initiatives, will improve our Shoppers performance in the long term.

Our principal operating expense items are labor, postage and transportation.

Results of Operations



Operating results were as follows:



In thousands, except                        Three months ended                                             Nine months ended
per share amounts        September 30, 2012      September 30, 2011       Change       September 30, 2012      September 30, 2011       Change
Revenues                $            195,799    $            212,788           -8.0 %  $           590,108    $            626,141           -5.8 %
Operating expenses                   179,587                 192,073           -6.5 %              713,629                 574,561           24.2 %
Operating income
(loss)                  $             16,212    $             20,715          -21.7 %  $          (123,521 )  $             51,580         -339.5 %

Net income (loss)       $              8,863    $             12,128          -26.9 %  $           (94,049 )  $             29,470         -419.1 %

Diluted earnings
(loss) per share        $               0.14    $               0.19          -26.3 %  $             (1.49 )  $               0.46         -423.9 %

3rd Quarter 2012 vs. 3rd Quarter 2011

Revenues

Consolidated revenues decreased 8.0%, to $195.8 million, due to decreased revenues of $11.0 million, or 7.2%, from our Direct Marketing segment and decreased revenues of $6.0 million, or 9.9%, from our Shoppers segment. Direct Marketing results reflect the impact of a large, long standing retail customer which changed its marketing strategy to emphasize broadcast at the expense of direct mail. Direct Marketing experienced decreased revenues from our pharmaceutical, high-tech, select and retail verticals, and increased revenues from our financial vertical compared to the prior year quarter. Shoppers revenue performance reflects the continued impact that the difficult economic environments in California and Florida are having on our Shoppers business. The decrease in revenues was the result of decreased sales in established markets, including declines in most revenue categories.

Operating Expenses

Overall operating expenses decreased 6.5%, to $179.6 million, in the third quarter of 2012 compared to the third


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quarter of 2011. This $12.5 million decrease in operating expenses was driven by decreased operating expenses in Direct Marketing of $9.2 million, or 7.0%, and decreased operating expenses of $3.5 million, or 6.1%, in Shoppers, partially offset by an increase in general corporate expense of $0.2 million, or 8.3%. The decrease at Direct Marketing was primarily due to reductions in temporary labor, incentive compensation and headcount, all as a result of revenue performance, decreased mail supply chain costs resulting from decreased volumes, and decreased outsourced costs resulting from decreased outsourced volumes. The decrease at Shoppers was due to lower payroll costs from lower ad sales and headcount reductions, decreases in newsprint and job paper expenses due to declines in volumes, decreased facility lease expense, decreased bad debt expense and lower credit card processing fees. The overall decrease at Shoppers was partially offset by an increase in postage costs resulting from the January 2012 postage rate increase, an increase in outsourced costs due to increased outsourced volumes, and an increase in offload printing costs due to an increase in heatset volumes.

Net Income/Earnings Per Share

Net income decreased 26.9%, to $8.9 million, and diluted earnings per share decreased 26.3%, to $0.14 per share, in the third quarter of 2012 when compared to the third quarter of 2011. The decrease in net income was a result of decreased operating income from both Direct Marketing and Shoppers and changes in net foreign currency transaction gains and losses.

First Nine Months 2012 vs. First Nine Months 2011

Revenues

Consolidated revenues decreased 5.8%, to $590.1 million, due to decreased revenues of $22.5 million, or 5.1%, from our Direct Marketing segment and decreased revenues of $13.5 million, or 7.5%, from our Shoppers segment. Direct Marketing results reflect the impact of a large, long standing retail customer which changed its marketing strategy to emphasize broadcast at the expense of direct mail. Direct Marketing experienced decreased revenues from all of our verticals, with the high-tech vertical representing the largest revenue decrease. Shoppers revenue performance reflects the continued impact that the difficult economic environments in California and Florida are having on our Shoppers business. The decrease in revenues was the result of decreased sales in established markets, including declines in most revenue categories.

Operating Expenses

Overall operating expenses were $713.6 million in the first nine months of 2012, compared to $574.6 million in the first nine months of 2011. This $139.1 million year over year increase was a result of the impairment charges of $165.3 million discussed above. Excluding this impairment loss, operating expenses decreased $26.3 million, or 4.6%, compared to the first nine months of 2011. This $26.3 million decrease in operating expenses was driven by decreased operating expenses in Direct Marketing of $16.6 million, or 4.3%, and decreased operating expenses of $10.5 million, or 5.9%, in Shoppers (excluding the impairment charge), partially offset by an increase in general corporate expense of $0.9 million, or 10.1%. The decrease at Direct Marketing was primarily due to decreased outsourced costs resulting from decreased outsourced volumes, decreased mail supply chain costs resulting from decreased volumes, and reductions in temporary labor, incentive compensation and headcount, all as a result of revenue performance. The decrease at Shoppers was due to decreased severance costs, decreased stock-based compensation, lower payroll costs due to lower ad sales and headcount reductions, a decrease in facility lease expense, and lower credit card processing fees. The overall decrease at Shoppers was partially offset by legal accrual reductions in the first half of 2011, an increase in postage costs due to the January 2012 postage rate increases, and the write-off of software related to various digital initiatives in the second quarter of 2012.

Net Income/Earnings Per Share

We recorded a net loss of $94.0 million, and diluted loss per share of $1.49, in the first nine months of 2012. Excluding the impairment loss, net income and diluted earnings per share for first nine months of 2012 would have been $22.6 million and $0.36, respectively. These results, excluding the impairment loss, compare to net income of $29.5 million, and diluted earnings per share of $0.46 in the first nine months of 2011. The decrease in net income, excluding the impairment loss, is primarily a result of decreased operating income from both Direct


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Marketing and Shoppers, changes in net foreign currency transaction gains and losses, and an increase in general corporate expense.

Direct Marketing



Direct Marketing operating results were as follows:



In thousands, except                    Three months ended                                     Nine months ended
per share amounts       September 30, 2012     September 30, 2011    Change    September 30, 2012     September 30, 2011    Change

Revenues               $            140,993   $            151,974     -7.2 % $            423,243   $            445,776     -5.1 %
Operating expenses                  122,273                131,460     -7.0 %              372,292                388,926     -4.3 %
Operating income       $             18,720   $             20,514     -8.7 % $             50,951   $             56,850    -10.4 %

3rd Quarter 2012 vs. 3rd Quarter 2011

Revenues

Direct Marketing revenues decreased $11.0 million, or 7.2%, in the third quarter of 2012 compared to the third quarter of 2011. Direct Marketing results reflect the impact of a large, long standing retail customer which changed its marketing strategy to emphasize broadcast at the expense of direct mail. Revenues from our pharmaceutical vertical decreased 16% compared to the third quarter of 2011. Our high-tech vertical experienced a 12% revenue decline, our select vertical declined 9%, and our retail vertical declined 4%. Our financial vertical increased 5% compared to the prior year quarter. Revenues from our vertical markets are impacted by, among other things, the economic fundamentals of each industry, various market factors, including the demand for services by our clients, and the financial condition of and budgets available to specific clients.

Future revenue performance will depend on, among other factors, the overall strength of the national and international economies and how successful we are at maintaining and growing business with existing clients, acquiring new clients and meeting client demands. We believe that, in the long-term, an increasing portion of overall marketing and advertising expenditures will be moved from other advertising media to the targeted media space, and that our business will benefit as a result. Targeted media advertising results can be more effectively tracked, enabling measurement of the return on marketing investment.

Operating Expenses

Operating expenses decreased $9.2 million, or 7.0%, in the third quarter of 2012 compared to the third quarter of 2011. Labor costs decreased $3.9 million, or 5.6%, primarily due to a reduction in temporary labor, incentive compensation and headcount, all as a result of revenue performance, partially offset by an increase in severance costs. Production and distribution costs decreased $5.1 million, or 10.6%, due to decreased mail supply chain costs resulting from decreased volumes, and decreased outsourced costs resulting from decreased outsourced volumes. General and administrative expense decreased $0.4 million, or 3.5%, due primarily to decreases in promotion expense and bad debt expense, partially offset by an increase in professional services. Depreciation and software amortization expense increased $0.1 million, or 2.4%, due to increased capital expenditures in 2011. Intangible asset amortization was up slightly.

Direct Marketing's largest cost components are labor, outsourced costs and mail supply chain costs. Each of these costs is somewhat variable and tends to fluctuate with revenues and the demand for our direct marketing services. Mail supply chain rates have increased over the last few years due to demand and supply issues within the transportation industry. Future changes in mail supply chain rates will continue to impact Direct Marketing's total production costs and total operating expenses, and may have an impact on future demand for our supply chain management. Postage costs of mailings in our Direct Marketing business are borne by our clients and are not directly reflected in our revenues or expenses.


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First Nine Months 2012 vs. Nine Months 2011

Revenues

Direct Marketing revenues decreased $22.5 million, or 5.1%, in the first nine months of 2012 compared to the first nine months of 2011. Direct Marketing results reflect the impact of a large, long standing retail customer which changed its marketing strategy to emphasize broadcast at the expense of direct mail. Revenues from our pharmaceutical vertical decreased 10% compared to the first nine months of 2011. Our high-tech vertical declined 8%, our financial vertical declined 6%, our select vertical declined 3% and our retail vertical declined 2%.

Operating Expenses

Operating expenses decreased $16.6 million, or 4.3%, in the first nine months of 2012 compared to the first nine months of 2011. Labor costs decreased $2.1 million, or 1.0%, primarily due to reductions in temporary labor, incentive compensation and headcount, all as a result of revenue performance. This increase was partially offset by costs related to the departure of our Direct Marketing President. Production and distribution costs decreased $14.4 million, or 10.4%, due to decreased outsourced costs resulting from decreased outsourced volumes, decreased mail supply chain costs resulting from decreased volumes, and lower facility lease costs. General and administrative expense decreased $0.5 million, or 1.4%, due primarily to decreases in promotion expense and facilities costs, partially offset by increases in travel, employee recruiting, professional services and royalties. Depreciation and software amortization expense increased $0.4 million, or 3.1%, due to increased capital expenditures in 2011. Intangible asset amortization increased slightly.

Shoppers



In thousands, except                           Three months ended                                             Nine months ended
per share amounts           September 30, 2012      September 30, 2011       Change       September 30, 2012      September 30, 2011       Change

Revenues                   $             54,806    $             60,814           -9.9 %  $           166,865    $            180,365           -7.5 %
Operating expenses                       54,192                  57,729           -6.1 %              331,996                 177,151           87.4 %

Operating income (loss) $ 614 $ 3,085 -80.1 % $ (165,131 ) $ 3,214 -5,237.9 %

3rd Quarter 2012 vs. 3rd Quarter 2011

Revenues

Shoppers revenues decreased $6.0 million, or 9.9%, in the third quarter of 2012 compared to the third quarter of 2011. These results reflect the continued impact that the difficult economic environments in California and Florida are having on our Shoppers business. The decrease in revenues was the result of decreased sales in established markets, including declines from most revenue categories. Revenues from in-book advertising decreased at a higher rate than revenues from distribution products. At September 30, 2012, our Shoppers circulation reached approximately 11.2 million addresses each week. While we have not made any significant changes to our circulation in the last several years, we continue to evaluate all of our circulation performance and may make circulation reductions in the future as part of our efforts to address the difficult economic conditions in California and Florida.

Future revenue performance will depend on, among other factors, the overall strength of the California and Florida economies, as well as how successful we are at maintaining and growing business with existing clients, and acquiring new clients.

Operating Expenses

Shoppers operating expenses decreased $3.5 million, or 6.1%, in the third quarter of 2012 compared to the third quarter of 2011. Total labor costs decreased $2.0 million, or 11.5%, due to lower payroll costs from lower ad sales, headcount reductions and pay rate reductions. Total production costs were flat compared to the prior year quarter, due to an increase in postage costs resulting from the January 2012 postage rate increase, an increase in outsourced costs due to increased outsourced volumes, and an increase in offload printing costs due to an increase


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in heatset volumes, offset by decreases in newsprint and job paper expenses due to declines in volumes, and a decrease in facility lease expense. Total general and administrative costs decreased $1.2 million, or 24.3%, due to decreased bad debt expense and lower credit card processing fees. Depreciation and software amortization expense decreased $0.3 million, or 23.2% due to writing off software related to various digital initiatives in the second quarter of 2012. Intangible asset amortization was flat compared to the prior year quarter.

Shoppers' largest cost components are labor, postage and paper. Shoppers' labor costs are partially variable and tend to fluctuate with the number of zones, circulation, volumes and revenues. Standard postage rates have increased in recent years, most recently in April 2011 and January 2012. Shoppers' postage rates increased by less than 1.0% as a result of the April 2011 rate increase, and increased by approximately 2.1% as a result of the January 2012 rate increase. We believe the next postal rate increase will occur in January of 2013 and will increase Shoppers' postage rates by approximately 2.8%. This anticipated postage rate increase, and any additional future changes in postage rates will affect Shoppers' distribution costs. The U. S. Postal Service has also proposed various changes in its services to address its financial performance, such as delivery frequency and facility access. At this point we do not believe the proposed changes will have a material impact on our Shoppers business. Newsprint prices increased steadily over the last two years before leveling off in the third quarter of 2012. Newsprint prices are expected to continue to remain at the current rates during the fourth quarter of 2012 and . . .

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