HARTE HANKS INC annual report, FY2022

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Harte Hanks, Inc. — FY2022 Form 10-K

Business context and reporting period. Harte Hanks provides customer experience services through Marketing Services, Customer Care, and Fulfillment & Logistics Services. This filing covers the fiscal year ended December 31, 2022; it does not provide a clear standalone fourth-quarter results summary.

Financial performance

  • Revenue: $206.3 million, up 6.0% from $194.6 million in 2021.
  • Profit and margins: Operating income was $15.1 million, versus $7.6 million; operating margin rose to 7.3% from 3.9%. Net income was $36.8 million, versus $15.0 million. Diluted EPS was $4.75, versus $1.76.
  • Cash flow: Operating activities provided $28.8 million, compared with $1.8 million used in 2021. Investing activities used $11.5 million and financing activities used $15.8 million. Cash and cash equivalents at year-end were $10.4 million.
  • Liquidity and debt: No borrowings were outstanding at year-end; $24.2 million was available under the asset-based revolving facility, subject to covenants and borrowing-base limits. The facility matures December 21, 2024. Current assets were $66.3 million and current liabilities $43.6 million.
  • Other obligations: Pension liabilities totaled $39.6 million, down from $54.3 million. Lease liabilities totaled $22.3 million.

Segment results

  • Marketing Services: Revenue of $53.0 million, down 6.1%; operating income of $7.0 million, down 2.8%. Lower direct-mail volumes from existing customers drove the revenue decline.
  • Customer Care: Revenue of $67.2 million, down 10.0%; operating income of $11.3 million, down 3.7%. Lower volumes were partly offset by improved operating efficiency.
  • Fulfillment & Logistics Services: Revenue of $86.1 million, up 35.6%; operating income of $9.8 million, versus $6.0 million. Growth came from new and existing customers and improved efficiency; 2021 operating income included a favorable $0.8 million litigation settlement.

Material changes and unusual items

  • Revenue growth was led by Fulfillment & Logistics, while the other two segments contracted. Production and distribution expense increased 30.7%, mainly due to transportation and outsourced costs.
  • The 2022 income tax benefit was $17.5 million, primarily reflecting an $18.2 million release of valuation allowance on deferred tax assets. The benefit materially contributed to reported net income; future realization depends on taxable income.
  • Other income included a $2.5 million gain from selling unused IP addresses and foreign-currency revaluation income. Management said it does not expect future IP-address sales, if any, to generate significant income. 2021 results included a $10.0 million PPP loan-forgiveness gain.
  • In December 2022, the company acquired InsideOut Solutions for approximately $7.5 million, including cash, escrowed cash and common stock. The acquisition added $3.6 million of intangible assets and $2.4 million of goodwill; it contributed $1.0 million of revenue and $0.2 million of net earnings after closing.
  • The company completed its preferred-stock repurchase from Wipro for $9.926 million in cash and 100,000 common shares. No common shares were repurchased under the public buyback program, which has since been terminated.

Outlook, commentary and risks

  • Management provided no quantified revenue or earnings guidance. It stated that liquidity should be sufficient for at least 12 months from the report date, using cash, operating cash flow and potential facility borrowings; it reported no substantial doubt about going concern.
  • Management is monitoring inflation and wage pressure. It said inflation had not materially affected the business to date, but noted potential effects on clients and demand. Transportation costs, economic uncertainty, and discretionary client marketing budgets may pressure results.
  • Key risks include client concentration and short-notice contract termination: the largest client contributed 12.2% of 2022 revenue, and the top 25 contributed 72.5%. The filing also cites client insourcing, competition, privacy and data-security regulation, cyberattacks, reliance on third parties and data suppliers, facility disruption, and pension funding and investment assumptions.
  • The board approved termination of Qualified Pension Plan I in January 2023; the process is expected to take approximately 18 months and transfer the plan obligations to a third party. Estimated 2023 contributions to Qualified Pension Plan II were $1.6 million.
  • The independent auditor issued an unqualified opinion on the financial statements. Critical audit matters included revenue recognition and realization of deferred tax assets. Management concluded disclosure controls and internal control over financial reporting were effective.

Important facts for investors to verify

  • Whether Fulfillment & Logistics growth and improved operating efficiency can continue, and whether declines in Marketing Services and Customer Care stabilize.
  • How much of 2022 net income and EPS reflects the noncash tax valuation-allowance release and other unusual income items, rather than recurring operations.
  • Actual borrowing capacity under the facility as receivables and the borrowing base change, and compliance with facility covenants.
  • InsideOut’s subsequent revenue, profitability, earn-out or indemnification payments, and integration performance.
  • Developments in pension-plan termination, contributions, and funded status, alongside customer concentration and cybersecurity or privacy exposures.