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HHS > SEC Filings for HHS > Form 10-Q on 4-Aug-2014All Recent SEC Filings

Show all filings for HARTE HANKS INC

Form 10-Q for HARTE HANKS INC


4-Aug-2014

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


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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 the impact of economic conditions of the markets we serve on the marketing expenditures and activities of our clients and prospects,
(5) competitive factors, (6) acquisition 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, 2013 and in the "Cautionary Note Regarding Forward-Looking Statements" in our second quarter 2014 earnings release issued on July 31, 2014. 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 2013 Form 10-K. Our 2013 Form 10-K contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates, and contractual obligations.

Harte Hanks is one of the world's leading, insight-driven multi-channel marketing organizations, delivering impactful business results for some of the world's best-known brands. Through strategic agencies and our core marketing services, we develop integrated solutions that connect brands with prospects and customers, moving them beyond awareness to transactions and brand loyalty.

Our Customer Interaction services offer a wide variety of integrated, multi-channel, 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 multi-channel 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 and business-to-business lead generation;

direct mail; and


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contact centers.

Revenues from the Customer Interaction segment represented approximately 91% of our total revenues for both the three months and six months ended June 30, 2014, respectively.

Trillium Software, A Harte Hanks Company, is a leading enterprise data quality solutions provider. Our data quality specialists help organizations achieve increased business from their data management initiatives and existing business-critical processes by providing enterprise data profiling and data cleansing software and services. We offer industry-specific business solutions that help solve data problems experienced by financial services, banking, compliance, insurance, risk and retail professionals. Our full complement of technologies and services includes global data profiling, data cleansing, enrichment, and data linking for e-business, customer relationship management, data governance, enterprise resource planning, supply chain management, data warehouse, and other enterprise applications. Revenues from the Trillium Software segment are comprised primarily of software, maintenance and professional services, and represented approximately 9% of our total revenues for both the three months and six months ended June 30, 2014.

We derive revenues by providing Customer Interaction services and Trillium Software sales and services.

General corporate expense consists primarily of pension and workers compensation expense related to employees from former operations.

Previously, Harte Hanks also provided shopper advertising opportunities through our Shoppers segment, which operated in certain California markets. On September 27, 2013 we sold the assets of our California Shoppers operations, The Pennysaver, for gross proceeds of $22.5 million. This transaction resulted in an after-tax loss of $12.4 million. Because Shoppers represented a distinct business unit with operations and cash flows that can clearly be distinguished, both operationally and for financial purposes, from the rest of Harte Hanks, the results of the Shoppers operations are reported as discontinued operations for all periods presented. Results of the remaining Harte Hanks business are reported as continuing operations. After this sale, Harte Hanks no longer has any Shoppers operations or circulation.

With business operations in several countries, we are affected by the general local, national and international economic and business conditions in the markets where we and our customers operate. Marketing budgets are often discretionary in nature, and are easier to reduce in the short-term than other expenses in response to weak economic conditions. Our revenues are also affected by the economic fundamentals of each industry 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 principal operating expense items are labor, outsourced costs and mail supply chain management.

Results of Continuing Operations

As discussed in Note M, Discontinued Operations, we sold the assets of our California Shoppers operations on September 27, 2013. Therefore, the operating results of our California Shoppers are being reported as discontinued operations in the Condensed Consolidated Financial Statements, and are excluded from management's discussion and analysis of financial condition and results of operations below.

Operating results from our continuing operations were as follows:


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                           Three months ended June 30,                    Six months ended June 30,
In thousands, except
per share amounts             2014              2013         % Change        2014            2013        % Change
Revenues                  $     140,310     $     140,105        0.1%    $     273,037     $  272,457        0.2%
Operating expenses              129,323           127,692        1.3%          257,471        250,640        2.7%
Operating income          $      10,987     $      12,413      -11.5%    $      15,566     $   21,817      -28.7%

Income from continuing
operations                $       5,637     $       6,936      -18.7%    $       7,482     $   13,256      -43.6%

Diluted EPS from
continuing operations     $        0.09     $        0.11      -19.0%    $        0.12     $     0.21      -43.8%

2nd Quarter 2014 vs. 2nd Quarter 2013

Revenues

Consolidated revenues increased 0.2 million, or 0.1%, in the second quarter of 2014 compared to the second quarter of 2013 due to increased revenues of $0.4 million, or 0.3%, from our Customer Interaction segment offset by decreased revenues of $0.2 million, or 1.2%, from our Trillium Software segment.

These results reflect the impact of our select markets vertical increasing $6.8 million, or 62%, compared to the second quarter of 2013. This is primarily due to non-recurring streaming enrollment services from a large contract with a contact center customer. In addition, our automobile and consumer brands vertical increased $0.7 million, or 3%, over the prior year quarter, due to additional work with an existing contact center customer and a large Trillium Software license, and our technology vertical increased $0.4 million, or 1%, due to a new contract center client and expansion of services with an existing customer. Our healthcare and pharmaceuticals, financial services and retail verticals decreased 2%, 9% and 15%, respectively.

Operating Expenses

Overall operating expenses were $129.3 million in the second quarter of 2014, compared to $127.7 million in the second quarter of 2013.

Labor costs were relatively flat with a decrease of $0.2 million, or 0.2%, compared to the second quarter of 2013. Production and distribution expenses increased $1.6 million, or 3.9% over the prior year quarter primarily due to an increase in outsourced services to support additional revenues and software service contracts repairs and maintenance costs. General and administrative expense, increased $0.3 million, or 2.2%, compared to prior year, reflecting increased promotion expense related to rebranding and various increased business services expenses. Depreciation and intangible asset and software amortization expense decreased $0.1 million, or 2.1%, compared to the prior year, primarily related to decreased software depreciation.

Our 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 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 our total production costs and total operating expenses, and may have an impact on future demand for our supply chain management.

Postage costs of mailings are borne by our clients and are not directly reflected in our revenues or expenses.

First Half 2014 vs. First Half 2013

Revenues

Revenues increased $0.6 million, or 0.2%, in the first half of 2014 compared to the first half of 2013. Customer Interaction revenues decreased $0.5, million, or 0.2%, and Trillium Software revenues increased $1.1 million, or 4.3%. These results reflect the impact of our select markets vertical increasing $9.9 million, or 46%, compared to the second quarter of 2013, primarily due to non-recurring streaming enrollment services from a large contract with an existing contact center customer. In addition, our automobile and consumer brands vertical increased $3.7 million, or 8.0%, over the prior year, due to additional work with an existing contact center customer, and our healthcare and pharmaceuticals vertical increased $2.1 million, or 10.2%, due to new


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mail business with an existing customer. Our technology, financial services and retail verticals decreased 4.0%, 9.0% and 11.0%, respectively. 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.

Operating Expenses

Overall operating expenses were $257.5 million in the first half of 2014, compared to $250.6 million in the first half of 2013.

Labor costs increased $3.7 million, or 2.7%, compared to the first half of 2013, primarily due to an increase in salaries and wages related to an investment in key personnel to generate additional future revenues, as well as headcount additions. Production and distribution costs increased $2.9 million, or 3.6%, due to increased outsourced services to support additional revenues and software service contracts repairs and maintenance costs. General and administrative expense, increased $0.6 million, or 2.3%, compared to prior year, reflecting increased promotion expense related to rebranding and various increased business services expenses. Depreciation and intangible asset and software amortization expense decreased $0.3 million, or 3.9%, compared to the prior year, primarily related to decreased software depreciation.

Our 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 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 our total production costs and total operating expenses, and may have an impact on future demand for our supply chain management.

Income/Earnings Per Share from Continuing Operation We recorded income from continuing operations of $7.5 million and diluted earnings per share from continuing operations of $0.12 per share in the first half of 2014. These results, compare to income from continuing operations of $13.3 million and diluted earnings per share from continuing operations of $0.21 per share in the first half of 2013. The decrease in income from continuing operations is primarily a result of increased operating expenses as well as an increase in loss from foreign currency translation adjustments. The first half of 2013 included a gain on the sale of our facility in Belgium.

Customer Interaction

Customer Interaction operating results were as follows:

Customer Interaction



                           Three months ended June 30,                    Six months ended June 30,
In thousands                  2014              2013         % Change        2014            2013        % Change
Revenues                  $     127,321     $     126,952        0.3%    $     246,055     $  246,590       -0.2%
Operating expenses              118,129           116,817        1.1%          234,913        229,549        2.3%
Operating income          $       9,192     $      10,135       -9.3%    $      11,142     $   17,041      -34.6%

2nd Quarter 2014 vs, 2nd Quarter 2013

Revenues

Customer Interaction revenues increased $0.4 million, or 0.3%, in the second quarter of 2014 compared to the second quarter of 2013.

These results reflect the impact of our select markets vertical increasing compared to the second quarter of 2013, primarily due to non-recurring streaming enrollment services from a large contract with a contact center customer. In addition, our automobile and consumer brands vertical increased due to a new contact center client and expansion of services with an existing customer. These increases were offset by decrease in our


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healthcare and pharmaceuticals, financial services and retail verticals. 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

Customer Interaction operating expenses increased $1.3 million, or 1.1%, in the second quarter of 2014 compared to the second quarter of 2013. Labor costs increased compared to the first half of 2013, primarily due to an increase in salaries and wages related to an investment in key personnel to generate additional revenues, as well as headcount additions. Production and distribution costs increased due to increased outsourced services to support additional revenues and software service contracts repairs and maintenance costs. General and administrative expense compared to prior year, reflecting increased promotion expense related to rebranding and various increased business services expenses. Depreciation and intangible asset and software amortization expense decreased compared to the prior year, primarily related to decreased software depreciation.

Customer Interaction'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 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 our total production costs and total operating expenses, and may have an impact on future demand for our supply chain management.

First Half 2014 vs. First Half 2013

Revenues

Customer Interaction revenues decreased $0.5 million, or 0.2%, in the second quarter of 2014 compared to the second quarter of 2013. These results reflect the impact of our select markets vertical increasing compared to the second quarter of 2013, primarily due to non-recurring streaming enrollment services from a large contract with an existing contact center customer. In addition, our automobile and consumer brands vertical increased over the prior year quarter, due to additional work with an existing contact center customer and our healthcare and pharmaceuticals vertical increased due to new mail business with an existing customer. These increases were offset by declines in our technology, financial services and retail verticals.

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


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Customer Interaction operating expenses increased $5.4 million, or 2.3%, in the first half of 2014 compared to the first half of 2013. Labor costs increased compared to the first half of 2013, primarily due to an increase in salaries and wages related to an investment in key personnel to generate additional revenues, as well as headcount additions. Production and distribution costs increased due to increased outsourced services to support additional revenues and software service contracts repairs and maintenance costs. General and administrative expense compared to prior year, reflecting increased promotion expense related to rebranding and various increased business services expenses. Depreciation and intangible asset and software amortization expense decreased compared to the prior year, primarily related to decreased software depreciation.

Customer Interaction'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 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 our total production costs and total operating expenses, and may have an impact on future demand for our supply chain management.

Trillium Software



Trillium Software operating results were as follows:





                         Three months ended June 30,                    Six months ended June 30,
In thousands               2014               2013         % Change       2014             2013        % Change
Revenues               $       12,989     $       13,153      -1.2%    $     26,982     $     25,867       4.3%
Operating expenses             10,240              9,743       5.1%          20,638           18,829       9.6%
Operating income       $        2,749     $        3,410     -19.4%    $      6,344     $      7,038      -9.9%

2nd Quarter 2014 vs, 2nd Quarter 2013

Revenues

Trillium Software revenues decreased $0.2 million, or 1.2%, in the second quarter of 2014 compared to the second quarter of 2013. This decrease was primarily related to decreased revenue from sales of software licenses as clients delayed projects into the second half of 2014. Maintenance and professional service revenues were flat compared to the second quarter last year.

Operating Expenses

Trillium Software operating expenses increased $0.5 million, or 5.1%, in the second quarter of 2014 compared to the second quarter of 2013. This increase was primarily related to an increase in labor resulting from the hiring of key personnel to drive additional revenues and severance related to a reduction in headcount.

Trillium Software's largest cost component is development, which is comprised primarily of labor.

First Half 2014 vs. First Half 2013

Revenues

Trillium Software revenues increased $1.1 million, or 4.3%, in the first half of 2014 compared to the first half of 2013. This increase is primarily a result of increased software license revenues related to recently introduced financial market data solutions. Maintenance and professional service revenues were flat compared to the first half of last year.

Operating Expenses

Trillium Software, operating expenses increased $1.8 million, or 9.6%, in the first half of 2014 compared to the first half of 2013. This increase was primarily related to an increase in labor resulting from the hiring of key personnel to drive additional revenues and severance related to a reduction in headcount.


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Trillium Software's largest cost component is development, which is comprised primarily of labor.

General Corporate Expense

2nd Quarter 2014 vs 2nd Quarter 2013

General corporate expense decreased $0.2 million, or 15.7%, in the second quarter of 2014 compared to the second quarter of 2013. This decrease was primarily due to non-recurring costs related to the retirement and hiring of key executives in the prior year, offset by increased consulting fees over 2013 and expenses related to the communication of our new strategy in May 2014.

First Half 2014 vs. First Half 2013

General corporate expense decreased $0.3 million, or 15.1%, in the first half of 2014 compared to the first half of 2013. This is primarily due to costs related to the retirement and hiring of key executives in the prior year, offset by increased consulting fees over 2013 and expenses related to the communication of our new strategy.

Interest Expense

2nd Quarter 2014 vs. 2nd Quarter 2013

Interest expense decreased $0.1 million, or 16.1%, in the second quarter of 2014 compared to the second quarter of 2013.. This was due to a lower average debt balance in the second quarter of 2014. The lower average debt balance in the second quarter of 2014 is a result of scheduled quarterly principal payments on the 2011 Term Loan Facility. See discussion of our credit facilities in the Liquidity and Capital Resources section below.

First Half 2014 vs. First Half 2013

Interest expense decreased $0.2 million, or 14.6%, in the first half of 2014 compared to the first half of 2013. This was due to a lower average debt balance in the first half of 2014. The lower average debt balance in the first half of 2014 is a result of scheduled quarterly principal payments on the 2011 . . .

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