Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A - Overview and Significant Accounting Policies
Background
Harte Hanks, Inc. together with its subsidiaries (“Harte Hanks,” “Company,” “we,” “our,” or “us”) is a leading global customer experience company. With offices in North America, Asia-Pacific and Europe, Harte Hanks works with some of the world’s most respected brands.
Segment Reporting
The Company operates four reportable segments: Marketing Services; Customer Care; Sales Services; and Fulfillment & Logistics Services. Our Chief Executive Officer (“CEO”) is considered to be our chief operating decision maker. Our CEO reviews our operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance by using the two financial measures: revenue and operating income.
Accounting Principles
Our unaudited interim condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 10-K”).
Consolidation
The accompanying unaudited interim condensed consolidated financial statements include the accounts of Harte Hanks, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. As used in this report, the terms “Harte Hanks,” “the Company,” “we,” “us,” or “our” may refer to Harte Hanks, Inc., one or more of its consolidated subsidiaries, or all of them taken as a whole, as the context may require.
Interim Financial Information
The condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Rule 8-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
Use of Estimates
Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from those estimates due to uncertainties. Such estimates include, but are not limited to, estimates related to lease accounting; pension accounting; fair value for purposes of assessing long-lived assets for impairment; revenue recognition; income taxes; stock-based compensation and contingencies. On an ongoing basis, management reviews its estimates and assumptions based on currently available information. Changes in facts and circumstances could result in revised estimates and assumptions.
Operating Expense Presentation in Condensed Consolidated Statements of Comprehensive (Loss) Income
The “Labor” line in the Condensed Consolidated Statements of Comprehensive Loss (Income) includes all employee payroll and benefits costs, including stock-based compensation and temporary labor costs. The “Production and distribution” and “Advertising, selling, general and administrative” lines do not include any labor, depreciation, or amortization expense.
We recognize revenue upon the transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those products or services based on the relevant contract. We apply the following five-step revenue recognition model:
•Identification of the contract, or contracts, with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when (or as) we satisfy the performance obligation
Certain client programs provide for adjustments to billings based upon whether we achieve certain performance criteria. In these circumstances, revenue is recognized when the foregoing conditions are met. We record revenue net of any taxes collected from customers and subsequently remitted to governmental authorities. Any payments received in advance of the performance of services or delivery of the product are recorded as deferred revenue until such time as the services are performed or the product is delivered. Costs incurred for search engine marketing solutions payable to the engine host and postage costs of mailings are billed to our clients and are not directly reflected in our revenue.
Revenue from agency and digital services, direct mail, logistics, fulfillment and contact center is recognized when the work is performed. Fees for these services are determined by the terms set forth in each contract. These fees are typically a set fixed price or rate by transaction occurrence, service provided, time spent, or product delivered.
Fair Value of Financial Instruments
Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 820, Fair Value Measurements and Disclosures, (“ASC 820”) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into three levels:
Level 1
Quoted prices in active markets for identical assets or liabilities.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Because of their maturities and/or variable interest rates, certain financial instruments have fair values approximating their carrying values. These instruments include cash and cash equivalents and restricted cash, accounts receivable, trade payables, and debt. The fair value of the assets in our funded pension plan is discussed in Note H, Employee Benefit Plans.
Leases
We determine if an arrangement is a lease at its inception. Operating and finance leases are included in the lease right-of-use (“ROU”) assets and in the current portion and long-term portion of lease liabilities on our condensed consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of each lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date of each lease to determine the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease, which are included in the lease ROU assets when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain real estate leases, we account for the lease and non-lease components as a single lease component.
In November 2023, the FASB issued accounting standards update (“ASU”) 2023-07, which enhances the disclosures required for reportable segments in annual and interim consolidated financial statements. ASU 2023-07 is effective for the Company for annual reporting periods beginning with the fiscal year ending December 31, 2024, and for interim reporting periods beginning in fiscal year 2025. Early adoption is permitted. The Company is currently evaluating the impact that this update will have on its disclosures in the consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, which requires enhanced income tax disclosures, including disaggregation of information in the rate reconciliation table and disaggregated information related to income taxes paid. The amendments in ASU 2023-09 are effective for the annual periods beginning with the fiscal year ending December 31, 2025. The Company is currently evaluating the impact that this update will have on its disclosures in the consolidated financial statements.
No other new accounting pronouncements recently adopted or issued had or are expected to have a material impact on the condensed consolidated financial statements.
Note C - Revenue from Contracts with Customers
Consistent with GAAP, we present sales taxes assessed on revenue-producing transactions on a net basis.
Disaggregation of Revenue
We disaggregate revenue by four key revenue streams which are aligned with our reportable segments. The nature of the services offered by each key revenue stream is different.The following table summarizes revenue from contracts with customers for the three and nine months ended September 30, 2024 and 2023 by our four reportable segments and the pattern of revenue recognition:
Three Months Ended September 30, 2024
In thousands
Revenue for performance obligations recognized over time
Revenue for performance obligations recognized at a point in time
Total
Marketing Services
$
7,960
$
1,090
$
9,050
Customer Care
13,068
—
13,068
Sales Services
4,205
—
4,205
Fulfillment and Logistics Services
17,644
3,663
21,307
Total Revenues
$
42,877
$
4,753
$
47,630
Three Months Ended September 30, 2023
In thousands
Revenue for performance obligations recognized over time
Revenue for performance obligations recognized at a point in time
Revenue for performance obligations recognized over time
Revenue for performance obligations recognized at a point in time
Total
Marketing Services
$
22,408
$
3,301
$
25,709
Customer Care
37,894
—
37,894
Sales Services
13,281
—
13,281
Fulfillment and Logistics Services
49,901
11,328
61,229
Total Revenues
$
123,484
$
14,629
$
138,113
Nine Months Ended September 30, 2023
In thousands
Revenue for performance obligations recognized over time
Revenue for performance obligations recognized at a point in time
Total
Marketing Services
$
29,321
$
3,430
$
32,751
Customer Care
38,372
—
38,372
Sales Services
7,253
—
7,253
Fulfillment and Logistics Services
52,044
11,581
63,625
Total Revenues
$
126,990
$
15,011
$
142,001
Our contracts with customers may consist of multiple performance obligations. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”) basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. For most performance obligations, we determine SSP based on the price at which the performance obligation is sold separately. Although uncommon, if the SSP is not observable through past transactions, we estimate the SSP taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Further discussion of other performance obligations in each of our major revenue streams follows:
MarketingServices
Our Marketing Services segment delivers strategic planning, data strategy, performance analytics, creative development and execution, technology enablement, marketing automation, and database management. We create relevancy by leveraging data, insight, and our extensive experience in leading clients as they engage their customers through digital, traditional, and emerging channels. We are known for helping clients build deep customer relationships, create connected customer experiences, and optimize each and every customer touch point in order to deliver desired business outcomes.
Most marketing services performance obligations are satisfied over time and often offered on a per project basis. We have concluded that the best approach to measure the progress toward completion of the project-based performance obligations is the input method, which is based on either the costs or labor hours incurred to date depending upon whether costs or labor hours more accurately depict the transfer of value to the customer.
Our database solutions are built around centralized marketing databases with services rendered to build custom database, database hosting services, customer or target marketing lists and data processing services.
These performance obligations, including services rendered to build a custom database, database hosting services, customer or target marketing lists and data processing services, may be satisfied over time or at a point in time. We provide software as a service (“SaaS”) solutions to host data for customers and have concluded that these solutions are stand-ready obligations to be recognized over time on a monthly basis. Our promise to provide certain data related services meets the over-time recognition criteria because our services do not create an asset with an alternative use, and we have an enforceable right to payment. For performance obligations recognized over time, we choose either the input (i.e., labor hour) or output method (i.e., number of customer records) to measure the progress toward completion depending on the nature of the services provided. Some of our other data-related services do not meet the over-time criteria and are therefore, recognized at a point-in-time, typically upon the delivery of a specific deliverable.
Our contracts may include outsourced print production work for our clients. These contracts may include a promise to purchase postage on behalf of our clients. In such cases, we have determined we are an agent, rather than principal and therefore recognize net consideration as revenue.
Customer Care
We deliver customer care services in the United States, Asia, and Europe to provide advanced solutions such as voice, SMS/chat, email, integrated voice response, web self-service, social cloud monitoring, and analytics.
Performance obligations are stand-ready obligations and are satisfied over time. With regard to account management and SaaS, we use a time-elapsed output method to recognize revenue. For performance obligations where we charge customers a transaction-based fee, we use the output method based on transaction quantities. In most cases, our contracts provide us the right to invoice for services provided, therefore, we generally use the “as invoiced” practical expedient to recognize revenue associated with these performance obligations unless significant discounts are offered in a contract and prices for services do not represent their SSPs.
Sales Services
Our Sales Services segment enables customers to optimize their go-to-market function by offering a range of outsourced services including sales process optimization, sales play development, inbound lead qualification and outbound sales prospecting.
Performance obligations are stand-ready obligations and are satisfied over time. With regard to account management and SaaS, we use a time-elapsed output method to recognize revenue. For performance obligations where we charge customers a transaction-based fee, we use the output method based on transaction quantities. In most cases, our contracts provide us the right to invoice for services provided, therefore, we generally use the “as invoiced” practical expedient to recognize revenue associated with these performance obligations unless significant discounts are offered in a contract and prices for services do not represent their SSPs.
Fulfillment&Logistics Services
Our services, delivered internally and with our partners, include printing, lettershop, advanced mail optimization (including commingling services), logistics and transportation optimization, monitoring and tracking, to support traditional and specialized mailings. Our print and fulfillment centers in Massachusetts and Kansas provide custom kitting services, print on demand, product recall support, trade marketing fulfillment, ecommerce product fulfillment, sampling programs, and freight optimization, thereby allowing our customers to efficiently and effectively distribute literature and other marketing materials.
Most performance obligations offered within this revenue stream are satisfied over time and utilize the input or output method, depending on the nature of the service, to measure progress toward satisfying the performance obligation. For performance obligations where we charge customers a transaction-based fee, we utilize the output method based on the quantities fulfilled. Services provided through our fulfillment centers are typically priced at a per transaction basis and our contracts provide us the right to invoice for services provided and reflects the value to the customer of the services transferred to date. In most cases, we use the “as invoiced” practical expedient to recognize revenue associated with these performance obligations unless significant discounts are offered in a contract and prices for services do not represent their standalone selling prices. Our direct mail business contractsmay have included a promise to purchase postage on behalf of our clients; in such cases, we have determined we are an agent, rather than principal and therefore recognize net consideration as revenue.
Transaction Price Allocated to Future Performance Obligations
We have elected to apply certain optional exemptions that limit the disclosure requirements over remaining performance obligations at period end to exclude the performance obligations that have an original expected duration of one year or less, transactions using the “as invoiced” practical expedient, or when a performance obligation is a series and we have allocated the variable consideration directly to the services performed. As of September 30, 2024, we had no transaction prices allocated to unsatisfied or partially satisfied performance obligations.
We record a receivable when revenue is recognized prior to invoicing when we have an unconditional right to consideration (only the passage of time is required before payment of that consideration is due) and a contract asset when the right to payment is conditional upon our future performance such as delivery of an additional good or service (e.g. customer contract requires customer’s final acceptance of custom database solution or the delivery of a final marketing strategy presentation before customer payment is required). If invoicing occurs prior to revenue recognition, the unearned revenue is presented on our Condensed Consolidated Balance Sheet as a contract liability, referred to as deferred revenue.
The following table summarizes our contract balances as of September 30, 2024 and December 31, 2023:
In thousands
September 30, 2024
December 31, 2023
Unbilled accounts receivable
8,952
7,677
Contract assets
308
258
Deferred revenue and customer advances
3,400
3,195
Deferred revenue, included in other long-term liabilities
213
294
Revenue recognized during the nine months ended September 30, 2024 from amounts included in deferred revenue at the beginning of the period was approximately $2.9 million. Revenue recognized during the nine months ended September 30, 2023 from amounts included in deferred revenue at the beginning of the period was approximately $3.9 million.
Costs to Obtain and Fulfill a Contract
We recognize an asset for the direct costs incurred to obtain and fulfill our contracts with customers to the extent that we expect to recover these costs and if the benefit is longer than one year. These costs are amortized to expense over the expected period of the benefit in a manner that is consistent with the transfer of the related goods or services to which the asset relates. We impair the asset when recoverability is not anticipated. We capitalized a portion of commission expense, implementation and other costs that represents the cost to obtain a contract. The remaining unamortized contract costs were $0.3 million and $0.6 million as of September 30, 2024 and December 31, 2023, respectively. They are included in other current assets and other assets on our balance sheet. For the periods presented, no impairment was recognized.
Note D - Leases
We have operating and finance leases for corporate and business offices, service facilities, call centers and certain equipment. Leases with an initial term of 12 months or less are generally not recorded on the balance sheet, unless the arrangement includes an option to purchase the underlying asset, or an option to renew the arrangement, that we are reasonably certain to exercise (short-term lease). Our leases have remaining lease terms of one to eight years, some of which may include options to extend the leases for up to an additional five years.
As of September 30, 2024, assets recorded under finance and operating leases were approximately $0.5 million and $22.4 million, respectively, and accumulated amortization associated with finance leases was $0.2 million. As of December 31, 2023, assets recorded under finance and operating leases were approximately $0.1 million and $25.3 million, respectively, and accumulated amortization associated with finance leases was $0.1 million. Operating lease right of use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The discount rate used to determine the commencement date present value of lease payment is the interest rate implicit in the lease, or when that is not readily determinable, we utilize our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.
There was no impairment of leases during the three and nine months ended September 30, 2024 and 2023.
The maturities of the Company’s finance and operating lease liabilities as of September 30, 2024 are as follows:
In thousands
Operating Leases
Finance Leases
Year Ending December 31,
Remainder of 2024
$
1,398
$
35
2025
4,656
120
2026
4,232
117
2027
4,198
117
2028
4,094
117
2029 and beyond
11,397
32
Total future minimum lease payments
29,975
538
Less: imputed interest
5,196
86
Total lease liabilities
$
24,779
$
452
Note E - Convertible Preferred Stock and Share Repurchase Program
Convertible Preferred Stock
On March 20, 2023, the Company cancelled all shares of Series A Preferred Stock pursuant to the Certificate of Elimination filed with the Secretary of State of Delaware.
Share Repurchase Program
On May 2, 2023, the Board of Directors of Harte Hanks approved a share repurchase program to maximize shareholder value with authorization to repurchase $6.5 million of the Company’s Common Stock. In the three and nine months ended September 30, 2024, we didn't repurchase any shares of common stock. In the three and nine months ended September 30, 2023, we repurchased 0.1 million and 0.4 million shares of Common Stock for $0.5 million and $2.4 million, respectively.
Note F — Debt - Credit Facility
On December 21, 2021, the Company entered into a three-year, $25.0 million asset-based revolving credit facility (the "Credit Facility") with Texas Capital Bank ("TCB"). The Company’s obligations under the Credit Facility are guaranteed on a joint and several basis by the Company’s material subsidiaries (the “Guarantors”). The Credit Facility is secured by substantially all of the assets of the Company and the Guarantors pursuant to a Pledge and Security Agreement, dated as of December 21, 2021, among the Company, TCB and the other Guarantors party thereto (the "Security Agreement"). On December 29, 2023, the Company extended the maturity date for the Credit Facility by a period of six months to June 30, 2025. The extension was executed with substantially similar terms and conditions as the original Credit Facility.
The Credit Facility provides for loans up to the lesser of (a) $25.0 million, and (b) the amount available under a “borrowing base” calculated primarily by reference to the Company's cash and cash equivalents and accounts receivables. The Credit Facility allows the Company to use up to $3.0 million of its borrowing capacity to issue letters of credit.
The loans under the Credit Facility accrue interest at a variable rate equal to the Secured Overnight Financing Rate (SOFR) plus a margin of 2.25% per annum. The interest rate was 7.27% as of September 30, 2024. The outstanding amounts advanced under the Credit Facility are due and payable in full on June 30, 2025. As of September 30, 2024 and December 31, 2023, we had letters of credit outstanding in the amount of $1.0 million and $0.8 million, respectively. No amounts were drawn against these letters of credit at September 30, 2024. These letters of credit exist to support insurance programs relating to worker’s compensation and general liability. Unused commitment balances accrue fees at a rate of 0.25%.
As of September 30, 2024 and December 31, 2023, we had the ability to borrow $24.0 million and $24.2 million, respectively, under the Credit Facility. As of September 30, 2024 and December 31, 2023, we had no borrowings outstanding under the Credit Facility
We maintain stock incentive plans for the benefit of certain officers, directors, and employees. Our stock incentive plans provide for the ability to issue stock options, cash stock appreciation rights, performance stock units, phantom stock units and cash performance stock units. Our cash stock appreciation rights, phantom stock units and cash performance stock units settle solely in cash and are treated as the current liability, which are adjusted each reporting period based on changes in our stock price.
Compensation expense for stock-based awards is based on the fair values of the awards on the date of grant and is recognized on a straight-line basis over the vesting period of the entire award in the “Labor” line of the Condensed Consolidated Statements of Comprehensive Income (Loss). We recognized $0.4 million and $0.2 million of stock-based compensation expense during the three months ended September 30, 2024 and 2023, respectively. We recognized $1.7 million and $1.2 million of stock-based compensation expense during the nine months ended September 30, 2024 and 2023, respectively.
Note H — Employee Benefit Plans
Prior to January 1, 1999, we provided a defined benefit pension plan for which most of our employees were eligible to participate (the “Qualified Pension Plan”). In conjunction with significant enhancements to our 401(k) plan, we elected to freeze benefits under the Qualified Pension Plan as of December 31, 1998.
In 1994, we adopted a non-qualified, unfunded, supplemental pension plan (the “Restoration Pension Plan”) covering certain employees, which provides for incremental pension payments so that total pension payments equal those amounts that would have been payable from the principal pension plan were it not for limitations imposed by income tax regulation. The benefits under the Restoration Pension Plan were intended to provide benefits equivalent to our Qualified Pension Plan as if such plan had not been frozen. We elected to freeze benefits under the Restoration Pension Plan as of April 1, 2014.
At the end of 2020, the Board of Directors of the Company approved the division of the Qualified Pension Plan into two distinct plans, “Qualified Pension Plan I” and “Qualified Pension Plan II.” The assets and liabilities of the Qualified Pension Plan that were attributable to certain participants in Qualified Pension Plan II were spun off and transferred into Qualified Pension Plan II effective as of the end of December 31, 2021, in accordance with Internal Revenue Code section 414(I) and ERISA Section 4044.
In January 2023, the Board of Directors of the Company approved the termination of the Qualified Pension Plan I. The termination process took approximately 18 months and was completed in June 2024, which resulted in the transfer of our obligations pursuant to this pension plan to an insurance company. We made total cash payment of $7.2 million to terminate the Qualified Pension Plan I during the nine months ended September 30, 2024. We made a $6.1 million cash contribution in the three months ended June 30, 2024. This contribution with the liquidation of pension assets was used to purchase annuities from an insurance company, which settled the liabilities for Pension Plan I participants. We paid another $1.1 million during the three months ended September 30, 2024 as the insurance company was onboarding pension participants and final filings were submitted to the Pension Benefit Guaranty Corporation. We recognized $37.5 million of pension termination charges which were reflected in our Condensed Consolidated Statements of Comprehensive Income (Loss) for nine months ended September 30, 2024.
The overfunded or underfunded status of our defined benefit post-retirement plans is recorded as an asset or liability on our condensed consolidated balance sheets. The funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation. Periodic changes in the funded status are recognized through other comprehensive income in the Condensed Consolidated Statements of Comprehensive Income (Loss). We currently measure the funded status of our defined benefit plans as of December 31, the date of our year-end Consolidated Balance Sheets.
Net pension cost for both plans included the following components:
Based on current estimates, we will be required to make a $2.0 million contribution to the combined qualified Pension Plan in 2024. We made $1.6 million of such $2.0 million aggregate contribution in the nine months ended September 30, 2024.
We are not required to make, and do not intend to make, any contributions to our Restoration Pension Plan in 2024 other than to the extent needed to cover benefit payments. We made benefit payments under this supplemental plan of $1.4 million in both the nine months ended September 30, 2024 and 2023.
Note I - Income Taxes
The income tax expense was $0.9 million and $1.9 million for the three months ended September 30, 2024 and 2023, respectively. The provision for income taxes resulted in an effective tax rate of 85.9% for the three months ended September 30, 2024 and 75.6% for the three months ended September 30, 2023. The effective income tax rate for the three months ended September 30, 2024 and 2023 differs from the federal statutory rate of 21%, primarily due to the U.S. state income taxes and the impact of income earned in foreign jurisdictions.
The income tax benefit was $8.2 million and income tax provision was $1.6 million for the nine months ended September 30, 2024 and 2023, respectively. The provision for income taxes resulted in an effective tax rate of 22.8% for the nine months ended September 30, 2024 and 79.9% for the nine months ended September 30, 2023. The effective income tax rate for the nine months ended September 30, 2024 and 2023 differs from the federal statutory rate of 21%, primarily due to the U.S. state income taxes and the impact of income earned in foreign jurisdictions.
Harte Hanks, or one of our subsidiaries file income tax returns in the U.S. federal, U.S. state, and foreign jurisdictions. For U.S. state, federal and foreign returns, we are no longer subject to tax examinations for years prior to 2021. The Company has reviewed all of its tax positions in order to determine whether all, a portion, or none of any related tax benefit should be recognized and has not identified or recorded any ASC 740-10 reserve.
We have elected to classify any interest expense and penalties related to income taxes within income tax expense in our Condensed Consolidated Statements of Comprehensive Income (Loss). We did not have a significant amount of interest or penalties accrued at September 30, 2024 or December 31, 2023.
Note J - Earnings (Loss) Per Share
Basic income (loss) per share (“EPS”) is calculated using income available to common stockholders, divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated using income available to common stockholders divided by the weighted average number of shares of common stock including both shares outstanding and shares potentially issuable in connection with restricted common stock awards and stock option under our stock incentive plans.
Reconciliations of basic and diluted EPS were as follows:
Three months ended September 30,
Nine months ended September 30,
In thousands, except per share amounts
2024
2023
2024
2023
Numerator:
Net income (loss)
$
142
$
618
$
(27,863)
$
407
Denominator:
Basic EPS denominator: weighted-average common shares outstanding
7,324
7,239
7,273
7,340
Diluted EPS denominator
7,398
7,314
7,273
7,509
Basic (loss) income per Common Share
$
0.02
$
0.09
$
(3.83)
$
0.06
Diluted (loss) income per Common Share
$
0.02
$
0.08
$
(3.83)
$
0.05
For the three months ended September 30, 2024 and 2023, respectively, the following shares have been excluded from the calculation of shares used in the diluted EPS calculation: 354,239 and 132,193shares of anti-dilutive market price options; 13,567 and 58,869 of anti-dilutive unvested restricted shares.
For the nine months ended September 30, 2024 and 2023, respectively, the following shares have been excluded from the calculation of shares used in the diluted EPS calculation: 335,431 and 8,098shares of anti-dilutive market price options; 23,114 and 40,389 of anti-dilutive unvested restricted shares.
Note K — Comprehensive Income (Loss)
Comprehensive income (loss) for a period encompasses net income (loss) and all other changes in equity other than from transactions with our stockholders.
Changes in accumulated other comprehensive loss by component were as follows:
In thousands
Defined Benefit Pension Items
Foreign Currency Items
Total
Balance at December 31, 2023
$
(42,456)
$
(1,634)
$
(44,090)
Other comprehensive loss, net of tax, before reclassifications
—
(1,945)
(1,945)
Amounts reclassified from accumulated other comprehensive income, net of tax, to other, net, on the condensed consolidated statements of comprehensive income
29,626
—
29,626
Net current period other comprehensive loss, net of tax
29,626
(1,945)
27,681
Balance at September 30, 2024
$
(12,830)
$
(3,579)
$
(16,409)
In thousands
Defined Benefit Pension Items
Foreign Currency Items
Total
Balance at December 31, 2022
$
(44,120)
$
(4,182)
$
(48,302)
Other comprehensive income, net of tax, before reclassifications
—
1,421
1,421
Amounts reclassified from accumulated other comprehensive income, net of tax, to other, net, on the condensed consolidated statements of comprehensive income
1,645
—
1,645
Net current period other comprehensive income, net of tax
1,645
1,421
3,066
Balance at September 30, 2023
$
(42,475)
$
(2,761)
$
(45,236)
Reclassification amounts related to the defined pension plans are included in the computation of net periodic pension benefit cost (see Note H, Employee Benefit Plans).
Note L — Litigation and Contingencies
In the normal course of our business, we are obligated under some agreements to indemnify our clients as a result of third party claims if the claim alleges that we have infringed upon the proprietary rights of third parties, or alternatively, in some contractual instances, if the third party claims relating to other ad hoc contract obligations.The terms and duration of these indemnity commitments vary and, in some cases may be indefinite, and some of these contractual commitments do not limit the maximum amount of future payments we could become obligated to make thereunder. Accordingly, our actual aggregate maximum exposure related to these types of commitments is not reasonably estimated.Historically, we have not been obligated to make significant payments for obligations of this nature, and no liabilities have been recorded for these obligations in our consolidated financial statements.
We are also subject to various claims and legal proceedings in the ordinary course of conducting our businesses and, from time to time, we may become involved in additional claims and lawsuits incidental to our businesses. We routinely assess the likelihood of adverse judgments or outcomes, as well as ranges of probable losses. To the extent losses are reasonably estimable, we accrue for them. Accruals are recorded for these matters to the extent that management concludes a loss is probable and the financial impact, should an adverse outcome occur, is reasonable estimable.
In the opinion of management, appropriate and adequate accruals for legal matters have been made, and management believes that the probability of a material loss beyond the amounts accrued is remote. Nevertheless, we cannot predict the impact of future developments affecting our pending or future claims and lawsuits. We expense legal costs as incurred, and all recorded legal liabilities are adjusted as required as better information becomes available to us. The factors we
consider when recording an accrual for contingencies include, among others: (i) the opinions and views of our general counsel and outside legal counsel; (ii) our previous experience with similar claims; and (iii) the decision of our management as to how we intend to respond to the complaints.
Note M — Restructuring Activities
During the second half of 2023, we engaged a consulting firm to help review and analyze the structure and operations of the Company. This review included greater than 200 meetings with personnel at all levels of the firm and led to the initiation of our transformation program named "Project Elevate". The program involves the optimization and rationalization of our business resources as well as the partial reinvestment of savings into the Company's sales and marketing team, technology, and strategy. A business transformation office was established at the beginning of 2024 to manage and measure these initiatives. Reorganization cost reductions from Project Elevate during 2024 through 2026 are estimated to be $16.0 million. For the year ended December 31, 2023, we recorded restructuring charges of $5.7 million. We expect to incur total restructuring charges of $10.1 million through the end of 2025.
For the three and nine months ended September 30, 2024, we recorded restructuring charges of $0.8 million and $2.1 million, respectively.
The following table summarizes the restructuring charges which are recorded in “Restructuring Expense” in the Condensed Consolidated Statement of Comprehensive Income (Loss).
In thousands
Three months ended Sep 30, 2024
Nine months ended Sep 30, 2024
Consulting and employee expense
$
215
$
677
Severance
243
1,025
Facility and other expenses
378
414
Total
$
836
$
2,116
The following table summarizes the changes in liabilities related to restructuring activities:
Nine months ended Sep 30, 2024
In thousands
Consulting and Employee Expense
Severance
Facility, asset impairment and other expense
Total
Beginning balance:
$
3,574
$
144
$
38
$
3,756
Additions
673
1,026
263
1,962
Payments and adjustment
(4,247)
(907)
(301)
(5,455)
Ending balance:
$
—
$
263
$
—
$
263
Note N — Segment Reporting
Harte Hanks is a leading global customer experience company. Beginning in 2024, we have organized our operations into four reportable segments based on the types of products and services we provide: Marketing Services, Customer Care, Sales Services and Fulfillment & Logistics Services. The Sales Service is our new reportable segment for 2024 as it has become strategically more important for our company. It was included in Customer Care segment in 2023. 2023 segment reporting has been restated to reflect this change.
Our Marketing Services segment leverages data, insight, and experience to support clients as they engage customers through digital, traditional, and emerging channels. We partner with clients to develop strategies and tactics to identify and prioritize customer audiences in B2C and B2B transactions. Our key service offerings include strategic business, brand, marketing and communications planning, data strategy, audience identification and prioritization, predictive modeling, creative development and execution across traditional and digital channels, website and app development, platform architecture, database build and management, marketing automation, and performance measurement, reporting and optimization.
Our Customer Care segment offers intelligently responsive contact center solutions, which use real-time data to effectively interact with each customer. Customer contacts are handled through phone, e-mail, social media, text messaging, chat and
digital self-service support. We provide these services utilizing our advanced technology infrastructure, human resource management skills and industry experience.
Our Sales Services segment enables customers to optimize their go-to-market function by offering a range of outsourced services including sales process optimization, sales play development, inbound lead qualification and outbound sales prospecting.
Our Fulfillment & Logistics segment consists of mail and product fulfillment and logistics services.We offer a variety of product fulfillment solutions, including printing on demand, managing product recalls, and distributing literature and promotional products to support B2B trade, drive marketing campaigns, and improve customer experience.We are also a provider of third-party logistics and freight optimization in the United States.
There are two principal financial measures reported to our CEO (the chief operating decision maker) for use in assessing segment performance and allocating resources. Those measures are revenue and operating income (loss)”). Operating income for segment reporting disclosed below, is revenues less operating costs and allocated corporate expenses. Segment operating expenses include allocations of certain centrally incurred costs such as employee benefits, occupancy, information systems, accounting services, internal legal staff, and human resources administration. These costs are allocated based on actual usage or other appropriate methods. Unallocated corporate expenses are corporate overhead expenses not attributable to the operating groups. Interest income and expense are not allocated to the segments. The Company does not allocate assets to our reportable segments for internal reporting purposes, nor does our CEO evaluate reportable segments using discrete asset information. The accounting policies of the segments are consistent with those described in the Note A, Overview and Significant Accounting Policies.
The following table presents financial information by segment for the three months ended September 30, 2024:
In thousands
Marketing Services
Customer Care
Sales Services
Fulfillment & Logistics
Restructuring
Unallocated Corporate
Total
Revenue
$
9,050
$
13,068
$
4,205
$
21,307
$
—
$
—
$
47,630
Segment operating expense
6,158
9,995
3,318
19,192
836
5,195
44,694
Contribution margin (loss)
$
2,892
$
3,073
$
887
$
2,115
$
(836)
$
(5,195)
$
2,936
Overhead allocation
792
567
189
775
—
(2,323)
—
Depreciation and amortization
167
44
198
266
—
363
1,038
Operating income (loss)
$
1,933
$
2,462
$
500
$
1,074
$
(836)
$
(3,235)
$
1,898
The following table presents financial information by segment for the three months ended September 30, 2023:
This report, including the 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 Exchange Act. Forward-looking statements will also be included from time to time 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, including actions designed to respond to market conditions and improve our performance, (2) our financial outlook for revenues, earnings (loss) per share, operating income (loss), expense related to equity-based compensation, capital resources and other financial items, if any, (3) 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, (4) competitive factors, (5) acquisition and development plans, (6) expectations regarding legal proceedings and other contingent liabilities, (7) expectations regarding cost savings due to Project Elevate and (8) 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. A discussion of some of these risks, uncertainties, assumptions, and other factors can be found in our filings with the SEC, including the factors discussed under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 10-K”), “Part II - Item 1A. Risk Factors” in this Quarterly Report, and in our other reports filed or furnished with the SEC. 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, except as required by law.
Overview
The following MD&A section is intended to help the reader understand the results of operations and financial condition of Harte Hanks, including any material changes in the Company’s financial condition and results of operations since December 31, 2023, and as compared with the three and six months ended September 30, 2023. This section is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes included herein as well as our 2023 10-K. Our 2023 10-K contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates, and contractual obligations. See Note A, Overview and Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements for further information.
Harte Hanks, Inc. is a leading global customer experience company operating in four reportable segments: Marketing Services, Customer Care, Sales services and Fulfillment & Logistics Services. Our mission is to partner with clients to provide them with a robust customer-experience, or CX, strategy, data-driven analytics and actionable insights combined with seamless program execution to better understand, attract, and engage their customers. Our services include strategic planning, data strategy, performance analytics, creative development and execution; technology enablement; marketing automation; B2B and B2C e-commerce; cross-channel customer care; and product, print, and mail fulfillment.
We are affected by the general, national, and international economic and business conditions in the markets where we and our customers operate. Marketing budgets are largely discretionary in nature and, as a consequence, are easier for our clients to reduce in the short-term than other expenses. 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, the financial condition of and budgets available to our clients, and regulatory factors, among other factors. Due to increases in inflation and interest rates throughout the globe, and other geopolitical uncertainties, including but not limited to the ongoing armed conflicts in multiple regions, there is continued uncertainty and significant volatility and disruption in the global economy and financial markets.We remain committed to making the investments necessary to execute our multichannel strategy while also continuing to adjust our cost structure to appropriately reflect our operations and outlook.
Management is closely monitoring inflation and wage pressure in the market, and the potential impact on our business. While inflation has not had a material impact on our business, it is possible a material increase in inflation could have an impact on our clients, and in turn, on our business.
Recent Developments
Project Elevate
Our management team continuously reviews and adjusts our cost structure and operating footprint to optimize our operations, and invest in improved technology. During the second half of 2023, we engaged a consulting firm to help review and analyze the structure and operations of the Company.This review included greater than 200 meetings with personnel at all levels of the firm and led to the initiation of our transformation program named "Project Elevate".The program involves the optimization and rationalization of our business resources as well as the partial reinvestment of savings into the Company's sales and marketing team, technology, and strategy.A business transformation office was established at the beginning of 2024 to manage and measure these initiatives. We expect to meet our Project Elevate saving target for this year of $6 million and remain confident in our two-year target of exiting 2025 with $16 million in savings.
For the three and nine months ended September 30, 2024, we recorded restructuring charges related to this business transformation effort of $0.8 million and $2.1 million, respectively.
In January 2023, the Board of Directors of the Company approved the termination of the Qualified Pension Plan I. The termination process was completed in June 2024 and resulted in the transfer of our obligations pursuant to this pension plan to an insurance company. We made total cash contributions of $7.2 million to terminate the Qualified Pension Plan I. In connection with this termination, we recognized $37.5 million of pension termination charges which were reflected in our Condensed Consolidated Statements of Comprehensive Income (Loss) for nine months ended September 30, 2024.
Changes in Segment Reporting
Starting in the first quarter of 2024, to improve our strategic posture in terms of go-to-market approach and cost structure, we removed the Sales Services business from the Customer Care segment and made the Sales Services business its own segment.
Results of Operations
Operating results were as follows:
Three months ended September 30,
Nine months ended September 30,
In thousands, except per share amounts
2024
% Change
2023
2024
% Change
2023
Revenue
$
47,630
1.1%
$
47,119
$
138,113
-2.7%
$
142,001
Operating expenses
45,732
3.5%
44,205
134,467
-1.4%
136,364
Operating income
$
1,898
-34.9%
$
2,914
$
3,646
-35.3%
$
5,637
Operating margin
4.0%
-35.6%
6.2%
2.6%
-33.5%
4.0%
Other expense, net
888
384
39,716
3,610
Income tax (benefit) provision
868
1,912
(8,207)
1,620
Net (loss) income
$
142
$
618
$
(27,863)
$
407
Basic and diluted EPS from operations
$
0.02
$
0.09
$
(3.83)
$
0.05
Consolidated Results
Three months ended September 30, 2024 vs. Three months ended September 30, 2023
Revenues
Revenue increased $0.5 million, or 1.1%, to $47.6 million in the three months ended September 30, 2024, compared to the three months ended September 30, 2023 driven by increased revenue in our Customer Care and Sales Services segments which were partially offset by the decreased revenue in Fulfillment & Logistics Services and Marketing Services segments. Those decreases were the result of fluctuations in timing of high volume periods associated with ongoing programs, and the conclusion of relationships with some customers.
Operating Expenses
Operating expenses were $45.7 million in the three months ended September 30, 2024, an increase of $1.5 million, or 3.5%, compared to $44.2 million in the three months ended September 30, 2023.
Labor expense increased $1.2 million, or 5.3%, primarily due to higher labor cost associated with higher revenue.
Production and Distribution expenses decreased$1.0 million, or 6.2%, primarily due to lower volumes of brokered freight and lower fuel charges and production supplies cost as compared to the prior year quarter.
Advertising, Selling, General and Administrative expenses increased$0.3 million, or 6.9%, primarily due to higher sales and marketing expense as compared to the prior year quarter.
The largest components of our operating expenses are labor, transportation expenses and outsourced costs. Each of these costs is, at least in part, variable and tends to fluctuate in line with revenues and the demand for our services. Transportation rates have decreased over the last nine months due to dropping demand and supply fluctuations within the transportation industry. Future changes in transportation expenses will continue to impact our total production costs and total operating expenses, and in turn our margins, and may have an impact on future demand for our supply chain management services. Postage costs for mailings are borne by our clients and are not directly reflected in our revenues or expenses.
Other expense, net
Other expense, net, for the three months ended September 30, 2024 was $0.9 million compared to $0.4 million, in the prior year quarter. The $0.5 million increase in other expense, net was mainly associated with changes in foreign currency gain and loss accounts the three months ended September 30, 2024 as compared to the prior year quarter.
Income Taxes
The income tax benefit of $0.9 million in the third quarter of 2024 represents a decrease in income tax provision of $1.0 million when compared to the third quarter of 2023. Our effective tax rate was 85.9% for the second quarter of 2024, an increase of 10.4% when compared to the third quarter of 2023. The effective tax rate differs from the federal statutory rate of 21.0%, primarily due to the U.S. state income taxes and income earned in foreign jurisdictions.
Nine months ended September 30, 2024 vs. Nine months ended September 30, 2023
Revenues
Revenue decreased $3.9 million, or 2.7%, to $138.1 million, in the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023 due to decreased revenue in three of our operating segments. The reduction in revenues in the nine month period relates to the conclusion of programs, and the ordinary turnover of customers at a higher rate than initiation of new programs and revenues from new customer. Our sales and marketing organization is amidst a transformation that includes an expansion of staff, a new centralized reporting structure, partnership channel development, and expanded international sales focus. Assuming a supportive economy, we expect improved revenues in the fourth quarter of 2024.
Operating Expenses
Operating expenses were $134.5 million in the nine months ended September 30, 2024, a decrease of $1.9 million, or 1.4%, compared to $136.4 million in the nine months ended September 30, 2023. Cost controls to match revenues and Project Elevate led to the decline in operating expense. The company expects further cost reductions in excess of new costs attributable to revenue growth.
Labor expense decreased $3.7 million, or 5.0%, primarily due to lower labor cost and bonus expense associated with lower revenue.
Production and Distribution expenses decreased $1.3 million, or 3.0%, primarily due to lower fuel charges and software costs as compared to the prior year.
Advertising, Selling, General and Administrative expenses increased $1.0 million, or 6.1%, primarily due to higher sales and marketing expenses.
The largest components of our operating expenses are labor, transportation expenses and outsourced costs. Each of these costs is, at least in part, variable and tends to fluctuate in line with revenues and the demand for our services. There has been significant variability in transportation rates in recent years due to demand and supply fluctuations within the transportation industry. Future changes in transportation expenses will continue to impact our total production costs and total operating expenses, and revenues. Postage costs for mailings are borne by our clients and are not directly reflected in our revenues or expenses.
Other expense, net, for the nine months ended September 30, 2024 was $39.7 million compared to $3.6 million, in the prior year period. The $36.1 million increase in other expense, net was mainly due to the pension termination charge incurred in the nine months ended September 30, 2024.
Income Taxes
The income tax benefit of $8.2 million in the nine months ended September 30, 2024 represents an increase in income tax benefit of $9.8 million when compared to the same period of 2023. Our effective tax rate was 22.8% for the nine months ended September 30, 2024, as compared to the effective tax rate of 79.9% for the same period of 2023. The effective tax rate differs from the federal statutory rate of 21.0%, primarily due to the U.S. state income taxes and income earned in foreign jurisdictions.
Segment Results
The following is a discussion and analysis of the results of our reportable segments for the three and nine months ended September 30, 2024 and 2023. There are two principal financial measures reported to our CEO (the chief operating decision maker) for use in assessing segment performance and allocating resources. Those measures are revenue and operating income. For additional information, see Note N, Segment Reporting, in the Notes to Condensed Consolidated Financial Statements.
Marketing Services:
Three months ended September 30,
Nine months ended September 30,
In thousands
2024
% Change
2023
2024
% Change
2023
Revenue
$
9,050
(14.6)
%
$
10,591
$
25,709
(21.5)
%
$
32,751
Operating income
1,933
33.9
%
1,444
3,391
(12.1)
%
3,859
Three months ended September 30, 2024 vs. Three months ended September 30, 2023
Marketing Services segment revenue decreased $1.5 million, or 14.6%, due to customer turnover, the decline of client spending in excess of new business. Operating income for the three months ended September 30, 2024increased$0.5 million, or 33.9% from the prior year quarter due to the reduced labor cost.
Nine months ended September 30, 2024 vs. Nine months ended September 30, 2023
Marketing Services segment revenue decreased $7.0 million, or 21.5%, due to customer turnover and the additional client spending reductions. This segment is our most economically sensitive segment with regard to changes in client's marketing strategy. Operating income for the nine months ended September 30, 2024decreased $0.5 million, or 12.1% from the prior year quarter primarily due to the reduced labor cost.
Customer Care:
Three months ended September 30,
Nine months ended September 30,
In thousands
2024
% Change
2023
2024
% Change
2023
Revenue
$
13,068
10.4%
$
11,832
$
37,894
(1.2)%
$
38,372
Operating income
2,462
42.6%
1,727
7,117
27.7%
5,573
Three months ended September 30, 2024 vs. Three months ended September 30, 2023
Customer Care segment revenue increased $1.2 million, or 10.4%, primarily driven by the timing of fluctuations with specific programs. Operating income was $2.5 million for the three months ended September 30, 2024, compared to operating income of $1.7 million for the three months ended September 30, 2023. The $0.7 million increase in operating income was driven by the higher revenue.
Nine months ended September 30, 2024 vs. Nine months ended September 30, 2023
Customer Care segment revenue decreased $0.5 million, or 1.2%, which can be impacted by one-time project-based engagements, temporary surges or declines in call volumes among retained customers due to specific programs and events. We also encounter fluctuations based on the geographic regions customers select for staff support. We are leveraging our Amazon Connect cloud-based platform to test and pilot new AI tools, and are exploring how we can augment growth by providing more technical support as clients migrate to more capable contact center platforms. Operating Income was $7.1 million for the nine months ended September 30, 2024, compared to operating income of $5.6 million for the nine months ended September 30, 2023. The increase of $1.5 million was primarily driven by the lower labor cost.
Sales Services:
Three months ended September 30,
Nine months ended September 30,
In thousands
2024
% Change
2023
2024
% Change
2023
Revenue
$
4,205
94.1%
$
2,166
$
13,281
83.1%
$
7,253
Operating income
500
4445.5%
11
2,214
464.8%
392
Three months ended September 30, 2024 vs. Three months ended September 30, 2023
Sales Services segment revenue increased $2.0 million, or 94.1%, primarily due to increased work from a large fintech customer. Operating Income was $0.5 million for the three months ended September 30, 2024, compared to operating income of $11 thousand for the three months ended September 30, 2023. The $0.5 million increase was driven by the higher revenues.
Nine months ended September 30, 2024 vs. Nine months ended September 30, 2023
Sales Services segment revenue increased $6.0 million, or 83.1%, primarily due to growth in work from a large fintech customer. Operating Income was $2.2 million for the nine months ended September 30, 2024, compared to $0.4 million for the six months ended September 30, 2023. The $1.8 million increase was driven by the increased revenues.
Fulfillment & Logistics Services:
Three months ended September 30,
Nine months ended September 30,
In thousands
2024
% Change
2023
2024
% Change
2023
Revenue
$
21,307
(5.4)%
$
22,530
$
61,229
(3.8)%
$
63,625
Operating income
1,074
(58.8)%
2,606
3,721
(40.5)%
6,251
Three months ended September 30, 2024 vs. Three months ended September 30, 2023
Fulfillment & Logistics Services segment revenue decreased $1.2 million, or 5.4%, primarily due to the lower volume from the existing customers not being offset by growth in new programs and customers. Operating income decreased by $1.5 million primarily due to revenue mix, and higher technology and facility expenses.
Nine months ended September 30, 2024 vs. Nine months ended September 30, 2023
Fulfillment & Logistics Services segment revenue decreased by $2.4 million, or 3.8%, due to lost customers and the lower volume from existing customers. We currently have a robust sales pipeline for fulfillment opportunities, particularly for the fourth quarter. The pipeline transcends an otherwise seasonally stronger fourth quarter juxtaposed to the other quarters. The logistics industry is experiencing much higher cost pressure. This is partially the result of market leaders competing for more dominant position, acquiring smaller logistics providers, achieving scale through lowering pricing, as they focus on consolidating market share. Operating income decreased by $2.5 million, or 40.5% due to the lower revenue and higher facility and technology expenses.
Our cash and cash equivalent balances were $5.9 million and $18.4 million at September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024, we had the ability to borrow an additional $24.0 million under our Credit Facility.
We received a $5.3 million tax refund in March 2023, as a result of the tax NOL carryback provisions in the CARES Act.
Our principal sources of liquidity are cash on hand, cash provided by operating activities, and borrowings available under our Credit Facility. Our cash is primarily used for general corporate purposes, working capital requirements, and capital expenditures.At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations such as finance and operating leases and unfunded pension plan benefit payments and other needs for our operations in the short term and beyond.Although the Company believes that it will be able to meet its cash needs for the short and medium term, if unforeseen circumstances arise the Company may need to seek alternative sources of liquidity.
Operating Activities
Net cash used in the operating activities for the nine months ended September 30, 2024 was $7.0 million, compared to net cash provided by operating activities of $6.1 million for the nine months ended September 30, 2023. The $13.1 million year-over-year decrease in cash provided by operating activities was primarily due to the $7.2 million payment to termination the Qualified Pension Plan I during the nine months ended September 30, 2024. as well as the $6.6 million changes in other assets and current liabilities.
Investing Activities
Net cash used in investing activities was $3.1 million for the nine months ended September 30, 2024, as compared to the $1.5 million used in investing activities during the same period in 2023. The $1.6 million increase in cash used in investing activities was primarily related to purchase of property, plant and equipment activities in the nine months ended September 30, 2024.
Financing Activities
Net cash used in financing activities was $0.3 million for the nine months ended September 30, 2024, as compared to $3.1 million of net cash used in financing activities during the nine months ended September 30, 2023. The $2.8 million decrease in cash used in financing activities was primarily related to the $2.4 million used to repurchase our common stock in the nine months ended September 30, 2023.
Foreign Holdings of Cash
Consolidated foreign holdings of cash as of September 30, 2024 and December 31, 2023 were $1.8 million and $5.4 million, respectively.
Debt
On December 21, 2021, the Company entered into a three-year, $25 million asset-based revolving credit facility (the "Credit Facility") with Texas Capital Bank ("TCB"). The Company’s obligations under the Credit Facility are guaranteed on a joint and several basis by the Company’s material subsidiaries (the “Guarantors”). The Credit Facility is secured by substantially all of the assets of the Company and the Guarantors pursuant to a Pledge and Security Agreement, dated as of December 21, 2021, among the Company, TCB and the other Guarantors party thereto (the "Security Agreement"). On December 29, 2023, the Company extended the maturity date for the Credit Facility by a period of 6 months, to June 30, 2025.The extension was executed with substantially similar terms and conditions as the original Facility.
The Credit Facility provides for loans up to the lesser of (a) $25.0 million, and (b) the amount available under a "borrowing base" calculated primarily by reference to the Company's cash and cash equivalents and accounts receivables. The Credit Facility allows the Company to use up to $3.0 million of its borrowing capacity to issue letters of credit.
The loans under the Credit Facility accrue interest at a variable rate equal to the Secured Overnight Financing Rate (SOFR) plus a margin of 2.25% per annum. The latest rate was 7.27% as of September 30, 2024. The outstanding amounts advanced under the Credit Facility are due and payable in full on June 30, 2025.
The Company may repay and reborrow all or any portion of the loans advanced under the Credit Facility at any time, without premium or penalty. The Credit Facility is subject to mandatory prepayments (i) from the net proceeds of asset dispositions not otherwise permitted under the Credit Facility; (ii) if the unpaid principal balance under the Credit Facility plus the aggregate face amount of all outstanding letters of credit exceeds the borrowing base; (iii) in an amount equal to 50% of the net proceeds of issuances of capital stock (subject to customary exceptions); or (iv) in an amount equal to the net proceeds from any issuance of debt not otherwise permitted under the Credit Facility.
The Credit Facility contains certain covenants restricting the Company's and its subsidiaries' ability to create, incur, assume or become liable for indebtedness; make certain investments; pay dividends or repurchase the Company's stock; create, incur or assume liens; consummate mergers or acquisitions; liquidate, dissolve, suspend or cease operations; or modify accounting or tax reporting methods (other than as required by U.S. GAAP).
As of September 30, 2024 and December 31, 2023, we had no borrowings outstanding under the Credit Facility. At each of September 30, 2024 and December 31, 2023, we had letters of credit outstanding in the amount of $1.0 million and $0.8 million, respectively. No amounts were drawn against these letters of credit at September 30, 2024 and December 31, 2023. These letters of credit exist to support insurance programs relating to workers’ compensation, insurance, and reducing cash security deposits on leased property. We had no other off-balance sheet financing activities at September 30, 2024 and December 31, 2023.
As of September 30, 2024, we had the ability to borrow $24.0 million under the Credit Facility.
Dividends
We did not pay any dividends in the three months ended September 30, 2024 and 2023.
Share Repurchase
On May 2, 2023, the Board of Directors of Harte Hanks approved a share repurchase program to maximize shareholder value with authorization to repurchase $6.5 million of the Company’s Common Stock. During 2023, we repurchased 0.4 million shares of common stock for a total combined purchase price of $2.4 million. During 2024, we repurchased zero shares of stock during the three and nine months ended September 30, 2024. In the three and nine months ended September 30, 2023, we repurchased 0.4 million shares of Common Stock for $2.4 million.
Outlook
We consider such factors as total cash and cash equivalents and restricted cash, current assets, current liabilities, total debt, revenues, operating income, cash flows from operations, investing activities, and financing activities when assessing our liquidity. Our management of cash is designed to optimize returns on cash balances and to ensure that it is readily available to meet our operating, investing, and financing requirements as they arise. We believe that there are no conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern for the twelve months following the issuance of these Condensed Consolidated Financial Statements.
Critical and Recent Accounting Policies
Critical accounting estimates are defined as those that, in our judgment, are most important to the portrayal of our Company’s financial condition and results of operations and which require complex or subjective judgments or estimates. Actual results could differ materially from those estimates under different assumptions and conditions. Refer to the 2023 10-K for a discussion of our critical accounting estimates.
Our Significant Accounting policies are described in Note A, Overview and Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements.
See Recent Accounting Pronouncements under Note B of the Notes to Condensed Consolidated Financial Statements for a discussion of certain accounting standards that have been recently issued.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer ("CEO") and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure.
Our management, including our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of September 30, 2024, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our CEO and CFO concluded that the design and operation of these disclosure controls and procedures were effective, at the “reasonable assurance” level, to ensure information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding legal proceedings is set forth in Note L, Litigation and Contingencies, in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.
Item 1a. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2023 10-K, which could materially affect our business, financial condition, or future results. The risks described in our 2023 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results. There have been no material changes during the nine months ended September 30, 2024 to the risk factors previously disclosed in the 2023 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any unregistered equity securities during the quarter ended September 30, 2024.
The following table provides information with respect to purchases by the Company of shares of our Common Stock during the quarter ended September 30, 2024:
Period
Total Number of Shares (or units) Purchased
Average Price per Share (or unit)
Total number of Shares Purchased as Part of a Publicly Announced Plan or Program
Approximate dollar value of shares that may yet be purchased under the program(1)
in thousands
July 1, 2024 to July 31, 2024
—
$
—
—
$
4,131
August 1, 2024 to August 30, 2024
—
$
—
—
4,131
September 1, 2024 to September 30, 2024
—
$
—
—
4,131
—
—
$
4,131
(1)On May 2, 2023, the Board of Directors of Harte Hanks approved a share repurchase program to maximize shareholder value with authorization to repurchase $6.5 million of the Company’s Common Stock. No repurchases were made during the quarter ended September 30, 2024 . After giving effect to the repurchases made under the plan through September 30, 2024, the Company has remaining authority of $4.1 million to repurchase shares under the program.
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*Filed or furnished herewith, as applicable.
**Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.