Harte Hanks, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Harte Hanks provides customer experience services through Marketing Services, Customer Care, and Fulfillment & Logistics Services.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $47.1 million | $49.1 million |
| Operating income | $1.1 million | $3.9 million |
| Operating margin | 2.2% | 7.9% |
| Net income (loss) | $(0.8) million | $3.3 million |
| Diluted earnings (loss) per share | $(0.11) | $0.39 |
| Operating cash flow | $1.7 million provided | $0.8 million used |
Revenue declined 4.0%, while operating expenses rose 2.0% to $46.1 million. The resulting compression in operating margin and a $2.6 million net other expense—primarily related to foreign-currency gains and losses—contributed to the quarterly net loss. Interest income was $0.2 million, versus $0.1 million of net interest expense in Q1 2022. The income tax benefit was $0.5 million; the reported effective tax rate was 41.8%.
Cash and cash equivalents were $13.1 million at March 31, 2023, up from $10.4 million at year-end. Cash-flow reporting also includes $1.0 million held in escrow, producing a reported period-end total of $14.1 million for cash, cash equivalents and restricted cash/escrow. Current assets were $62.2 million and current liabilities $38.3 million. The company reported no revolver borrowings and $24.2 million of additional borrowing availability; $0.8 million of letters of credit was outstanding. The $25 million asset-based facility matures December 21, 2024, and its stated interest rate was 6.81% at quarter-end. Lease liabilities totaled $22.0 million; pension liabilities totaled $36.8 million.
Operating cash flow improved by $2.5 million year over year, principally reflecting working-capital movements. Investing cash use was $0.6 million, including $0.6 million of capital expenditures; financing cash use was $0.3 million. The company received a $5.3 million tax refund in March 2023. Management expects 2023 capital expenditures of approximately $6–7 million, mainly for a new ERP system and Kansas City facility expansion.
Segments and changes versus prior year
| Segment | Revenue | Year-over-year change | Operating income |
|---|---|---|---|
| Marketing Services | $11.2 million | Down 13.0% | $1.1 million, down from $1.4 million |
| Customer Care | $14.4 million | Down 18.7% | $1.6 million, down from $3.3 million |
| Fulfillment & Logistics Services | $21.5 million | Up 16.7% | $2.0 million, down from $2.2 million |
Marketing Services was affected by lower direct-mail volume from existing clients. Customer Care revenue fell as prior-year pandemic-related and recall projects did not recur; the decline was partly offset by $2.8 million of InsideOut revenue. Fulfillment & Logistics growth came primarily from existing customers, but higher transportation costs weighed on earnings. InsideOut contributed $0.5 million of net earnings in the quarter.
Outlook, risks and notable items
- No specific revenue, earnings or margin guidance is provided. Management expects to meet short- and medium-term liquidity needs through cash, operating cash flow and revolver availability, and said it saw no conditions raising substantial doubt about going concern for the following 12 months.
- Management was monitoring inflation and wage pressures; it said inflation had not materially affected the business to date, while noting potential effects on clients and demand. Marketing budgets are discretionary and may be reduced. Transportation costs, economic and geopolitical uncertainty, and foreign-currency movements are additional risks discussed.
- The company expected to combine Marketing Services and Customer Care into a single Customer Experience segment by the end of 2023.
- On May 2, 2023, after quarter-end, the board authorized a new $6.5 million common-stock repurchase program. The company also reported that it did not pay dividends in Q1 and did not expect cash dividends in the foreseeable future.
- The board approved termination of Qualified Pension Plan I in January 2023; the process is expected to take approximately 18 months and transfer obligations to a third party. The company estimated $1.6 million of qualified-plan contributions for 2023, of which $0.3 million had been made by March 31.
- Management reported disclosure controls were effective at the reasonable-assurance level and no material changes in internal control over financial reporting. It reported no material changes to previously disclosed risk factors. Legal matters are described as ordinary-course matters; management said appropriate accruals were recorded and material loss beyond accruals was considered remote.
Investor verification priorities
- Review the source and potential recurrence of the $2.6 million foreign-currency-related other expense and its effect on reported earnings.
- Track revenue trends in Marketing Services and Customer Care, including whether the lost prior-year projects are replaced and how InsideOut performs.
- Monitor Fulfillment & Logistics margins against transportation costs and revenue mix.
- Verify cash-flow sustainability after the tax refund and working-capital effects; distinguish reported cash and cash equivalents from escrow funds.
- Review borrowing-base availability, facility covenants and maturity, alongside lease and pension obligations and planned capital spending.
- Assess execution of the segment reorganization, pension-plan termination, and the post-quarter share-repurchase authorization.