Harte Hanks, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Harte Hanks provides customer-experience services through Marketing Services, Customer Care, and Fulfillment & Logistics Services. Unless noted, financial amounts below are in millions of dollars.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $53.9 | $49.6 | $151.5 | $142.6 |
| Operating income | $3.8 | $4.2 | $11.7 | $4.8 |
| Operating margin | 7.0% | 8.5% | 7.7% | 3.3% |
| Net income | $7.2 | $4.4 | $15.0 | $13.2 |
| Diluted EPS | $0.83 | $0.52 | $1.73 | $1.57 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $22.3 | $(5.9) |
Q3 revenue grew 8.6%, but operating income fell 10.7% and margin narrowed, reflecting higher production and distribution costs, including transportation and outsourced costs. Net income benefited from $4.7 million of other income, principally a $2.5 million gain on the sale of unused IP addresses and foreign-currency revaluation. For the nine-month comparison, 2021 results included a $10.0 million PPP loan forgiveness gain; 2022 operating income increased substantially as restructuring expense fell to zero from $4.9 million.
Segments and material changes
- Fulfillment & Logistics: Q3 revenue rose 55.6% to $23.5 million; nine-month revenue rose 36.0% to $61.6 million. Management attributed growth to new customers and increased work from existing customers. Q3 operating income was $2.6 million versus $1.5 million.
- Customer Care: Q3 revenue fell 12.1% to $17.4 million and nine-month revenue fell 9.0% to $50.5 million, primarily due to lower volumes from existing customers. Segment operating income also declined in both comparisons.
- Marketing Services: Q3 revenue fell 11.6% to $13.0 million and nine-month revenue fell 5.8% to $39.4 million, mainly due to lower direct-mail volume from existing customers. Nine-month operating income improved modestly, supported by cost reductions.
Cash, debt, and liquidity
- At September 30, cash and cash equivalents were $6.9 million and restricted cash was $2.3 million, compared with $11.9 million and $3.2 million, respectively, at year-end 2021. The company also held $9.9 million in escrow for the proposed Wipro preferred-stock repurchase; this amount was presented in other current assets, not cash and cash equivalents.
- Current assets were $80.6 million and current liabilities were $45.8 million. Other current assets included the escrow deposit. Total liabilities were $114.2 million; stockholders’ deficit was $12.8 million.
- Operating cash flow for the first nine months was $22.3 million, versus cash used of $5.9 million a year earlier. Investing used $5.7 million, including capital spending; financing used $6.4 million, including a $5.0 million debt repayment. Cash, cash equivalents, and restricted cash totaled $19.2 million including the escrow amount.
- No revolver borrowings were outstanding at quarter-end, with $24.2 million of additional borrowing capacity reported. The $25 million asset-based facility matures December 21, 2024; its stated interest rate was 5.14% at quarter-end. The company reported covenant compliance.
- Lease liabilities totaled $21.1 million. Pension liabilities were $49.6 million across qualified and nonqualified plans.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management expected 2022 capital expenditures of approximately $6–7 million, mainly for a new ERP system and Kansas City facility expansion. It stated it expected to meet short- and medium-term cash needs through cash, operations, and revolver availability, and reported no conditions raising substantial doubt about going concern for the next 12 months.
- The company expected to receive an additional $7.6 million tax refund from a 2020 NOL carryback in 2022. Confirm whether and when it was received.
- On June 30, 2022, Harte Hanks agreed to repurchase all 9,926 Series A preferred shares held by Wipro for $9.926 million cash plus 100,000 common shares. At quarter-end, the cash was in escrow and closing remained subject to conditions; management expected completion by year-end 2022.
- Management cited inflation and wage pressure, rising transportation costs, discretionary client marketing budgets, economic and geopolitical uncertainty, and possible renewed COVID-19 impacts as risks. It said inflation had not materially affected the business to date, but future effects were possible.
- The company reported ordinary-course legal matters and client indemnification obligations whose maximum exposure is not reasonably estimable; management said material loss beyond recorded accruals was remote. The filing stated risk factors had not materially changed from the 2021 Form 10-K.
Key facts for investors to verify
- Whether the Wipro preferred-stock repurchase closed, and its final cash, share-count, and equity impact.
- Whether the expected $7.6 million tax refund was received and how it affected cash and working capital.
- Whether Fulfillment & Logistics growth and profitability were sustained, and whether declines in Marketing Services and Customer Care continued.
- How transportation, outsourced-service costs, labor pressures, and revenue mix affected margins after Q3.
- Current revolver borrowing-base availability, covenant compliance, and liquidity after capital spending and pension payments.