Harte Hanks, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are with FY2019. Harte Hanks provides customer experience services through Marketing Services, Customer Care, and Fulfillment & Logistics Services. Its common stock trades on OTCQX under HRTH after delisting from the NYSE in July 2020.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $176.9 million | $217.6 million |
| Operating expenses | $187.5 million | $239.2 million |
| Operating loss and margin | $10.6 million; (6.0%) | $21.6 million; (9.9%) |
| Net loss | $1.7 million | $26.3 million |
| Loss per diluted share | $0.34 | $4.26 |
| Cash from (used in) operating activities | $(7.8) million | $12.1 million |
| Cash and cash equivalents at year-end | $29.4 million | $28.1 million |
| Total debt at year-end | $27.1 million | $18.7 million |
Revenue fell 18.7%. Operating expenses fell 21.6%, so the operating loss narrowed by $11.0 million. Net loss improved substantially, aided by a $16.6 million income tax benefit versus $1.8 million of tax expense in 2019; the benefit primarily reflected CARES Act NOL carrybacks. The filing reports no positive consolidated operating margin. It does not provide a consolidated gross-margin figure.
Operating cash flow declined by $19.9 million and turned negative, driven mainly by higher pension payments, lower tax refunds, and the absence of the prior-year $5.0 million 3Q Digital earn-out. Cash, cash equivalents, and restricted cash totaled $33.6 million at year-end, compared with $34.1 million in 2019. Investing activities used $0.8 million; financing activities provided $7.3 million, including the $10.0 million PPP loan.
Segment performance
- Marketing Services: Revenue decreased 13.7% to $57.1 million; operating income increased to $5.0 million, with an 8.7% margin versus 7.1%.
- Customer Care: Revenue increased 21.1% to $58.7 million; operating income improved to $5.8 million from a $4.8 million loss. Management cited new projects and greater demand from existing clients.
- Fulfillment & Logistics Services: Revenue decreased 40.6% to $61.1 million; operating loss widened to $2.7 million from $1.1 million. The decline reflected facility closures, lost clients, and lower client volumes.
Material changes and unusual items
- The company exited its Jacksonville direct-mail facility and sold most production equipment to Summit Direct Mail for $1.5 million; additional Jacksonville asset proceeds were about $0.5 million. A strategic partnership allows Harte Hanks to continue managing client relationships and use Summit for campaigns.
- Restructuring charges were $9.4 million in 2020, versus $11.8 million in 2019. 2020 charges included lease impairment and termination costs, severance, asset-disposal losses, and facility-related expenses. The company expects a further $3.6 million of charges through the end of 2021.
- Fulfillment operations moved from Grand Prairie to a new 300,000-square-foot Kansas City facility in December 2020. The company also reduced its Austin footprint and exited and subleased a Manila office.
- The Texas Capital revolving facility was amended: borrowing capacity was reduced to $19.0 million and maturity extended to April 17, 2022. Year-end borrowings were $17.1 million, leaving $0.1 million of stated additional borrowing capacity; $1.8 million of letters of credit were outstanding.
- The $10.0 million unsecured PPP loan bears 1% interest. Harte Hanks applied for forgiveness in Q1 2021 and anticipated full forgiveness, but disclosed uncertainty about eligibility, approval, and potential repayment.
Liquidity, outlook, and risks
Management stated it believed available cash, operating cash flows, and borrowing capacity would meet liquidity needs for at least the next 12 months and that no conditions in aggregate raised substantial doubt about going concern. However, the filing also warns that continuing losses may require additional funding, asset sales, or other strategic arrangements and that unavailable or unacceptable financing could threaten continued operations.
The company reported an unfunded pension liability of $69.2 million at year-end, down from $71.7 million. It expects 2021 contributions of $4.0 million to its qualified pension plans. The filing gives no revenue or earnings guidance. Management expects restructuring actions and the direct-mail exit to reduce recurring expenses, but cautions that savings may not offset the revenue declines.
- COVID-19 created uncertainty: some clients cut work, sought payment accommodations, or entered bankruptcy; Customer Care benefited from increased demand. Management said the pandemic had not materially affected operations or liquidity to date, but future effects could be material.
- Client concentration is significant: the largest client generated 11.2% of 2020 revenue and the largest 25 generated 62%. Many engagements are cancellable on short notice and lack minimum-volume commitments.
- Other key risks include competitive and pricing pressure, discretionary client marketing budgets, privacy and data-security regulation, cyber incidents, dependence on facilities and third-party providers, debt covenants, and the OTCQX market’s lower liquidity.
- The company paid no dividends and made no repurchases under its public share-repurchase program during 2020.
Important facts for investors to verify
- Whether the PPP loan was forgiven in full and whether any SBA review or repayment obligation arose.
- Current borrowing availability, covenant compliance, and the status or terms of the revolving credit facility approaching its April 2022 maturity.
- Whether operating cash flow improves and restructuring produces durable savings without further material revenue losses.
- Client retention and concentration, especially recovery in Fulfillment & Logistics and continued Customer Care growth.
- Required pension contributions and changes in the funded status and actuarial assumptions.
- Any subsequent developments in liquidity or going-concern risks. The financial statements received an unqualified audit opinion; revenue recognition was identified as a critical audit matter.