HARTE HANKS INC quarterly report, Q1 FY2022

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Harte Hanks, Inc. — Q1 2022 10-Q

Business context and period: The filing covers the three months ended March 31, 2022; financial statements are unaudited. Harte Hanks provides customer-experience services through Marketing Services, Customer Care, and Fulfillment & Logistics Services.

Financial performance

  • Revenue: $49.1 million, up 12.1% from $43.8 million.
  • Profit and margins: Operating income was $3.9 million versus an operating loss of $0.9 million; operating margin was 7.9% versus (2.0%). Net income was $3.3 million versus a $1.8 million net loss. Diluted EPS was $0.39 versus a loss of $0.28.
  • Operating costs: Total operating expenses were $45.2 million, up 1.2%. Production and distribution costs rose 24.2%, primarily from transportation and outsourced costs; labor expense declined 1.5%. No restructuring expense was recorded in Q1 2022, compared with $2.2 million in Q1 2021.
  • Segment results: Marketing Services revenue was $12.9 million, up 0.4%, and operating income was $1.4 million. Customer Care revenue was $17.7 million, up 7.2%, and operating income was $3.3 million. Fulfillment & Logistics revenue was $18.4 million, up 28.4%, and operating income was $2.2 million.
  • Cash flow: Operating activities used $0.8 million, compared with $5.7 million used in Q1 2021. Investing activities used $1.4 million and financing activities used $0.3 million. Cash, cash equivalents, and restricted cash declined $2.9 million to $12.2 million.
  • Liquidity and debt: Cash and cash equivalents were $9.7 million; current assets were $79.9 million and current liabilities $44.6 million. Working capital was approximately $35.3 million. Borrowings under the revolving credit facility were $5.0 million, with approximately $18.9–$19.0 million of additional borrowing availability reported in different parts of the filing. The facility matures December 21, 2024; its stated rate was 2.65% at quarter-end. Lease liabilities totaled $23.5 million. Pension liabilities were $51.3 million across qualified and nonqualified plans.
  • Equity: Stockholders’ deficit was $20.6 million; Series A preferred stock was recorded separately as $9.7 million of temporary equity.

Changes versus the prior period

  • Revenue growth was led by Fulfillment & Logistics and Customer Care. Management attributed segment gains to new customers and higher volumes from existing customers; Customer Care also benefited from COVID-related project work.
  • Operating results improved substantially with higher revenue, lower labor costs, cost reductions, and no repeat of prior-year restructuring charges. Q1 2021 also included a favorable litigation settlement in Fulfillment & Logistics.
  • Operating cash outflow narrowed year over year, primarily reflecting the improvement in net income, although receivables and contract assets absorbed cash.

Outlook, risks, and contingencies

  • Management expected continued positive momentum absent significant economic shocks, but provided no specific revenue or earnings guidance. It said liquidity should be sufficient for short- and medium-term needs and reported no substantial doubt about going concern for the following 12 months.
  • Management forecast 2022 capital expenditures of approximately $4–$5 million, mainly for a new ERP system and expansion of the Kansas City facility. It also expected a further $7.6 million tax refund in 2022 from a 2020 NOL carryback.
  • Risks noted include economic and geopolitical uncertainty, COVID-19 and new variants, discretionary client marketing budgets, competition, and transportation-cost increases that could pressure margins and demand. Management said the pandemic had not materially affected operations, liquidity, or covenant compliance to date, while cautioning that future impacts remained possible.
  • The company was in compliance with credit-facility requirements at March 31, 2022. Legal matters arise in the ordinary course; management believed recorded accruals were adequate and material losses beyond accruals remote. Certain client indemnification exposures are not reasonably estimable.
  • The restructuring program was completed in 2021; management expected no related restructuring expense in 2022. The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.

Most important facts for investors to verify

  1. Confirm the borrowing availability under the asset-based facility: the filing cites both approximately $18.9 million and $19.0 million.
  2. Track whether revenue growth—particularly in Fulfillment & Logistics and Customer Care—continues and translates into operating cash generation.
  3. Assess exposure to transportation and outsourced-service costs, and the effect on margins as volumes change.
  4. Monitor collection of the expected $7.6 million tax refund, capital spending, and cash needs for leases and pension obligations.
  5. Review the credit facility’s borrowing-base and covenant terms, along with the company’s substantial lease and pension liabilities.