Harte Hanks, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Harte Hanks provides customer-experience services through Marketing Services, Customer Care, and Fulfillment & Logistics Services. Unless otherwise stated, amounts below are in U.S. dollars, millions.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $47.8 | $48.6 | $94.9 | $97.6 |
| Operating income | $1.7 | $4.0 | $2.7 | $7.9 |
| Operating margin | 3.5% | 8.3% | 2.9% | 8.1% |
| Net income (loss) | $0.6 | $4.5 | $(0.2) | $7.8 |
| Diluted earnings (loss) per share | $0.08 | $0.52 | $(0.03) | $0.91 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $4.6 | $9.9 |
Q2 revenue declined 1.6% year over year, while operating expenses rose 3.5%, reducing operating income 58.4%. For the first half, revenue fell 2.8% and operating income fell 65.6%. Six-month results included $3.4 million of other expense, versus $1.3 million of other income in 2022, primarily due to foreign-currency gains and losses. Q2 other expense was $0.8 million versus $1.2 million of other income a year earlier.
Segments and material changes
- Marketing Services: Q2 revenue fell 18.8% to $10.9 million; first-half revenue fell 16.0% to $22.2 million. Management attributed the declines chiefly to lower direct-mail volume from existing customers. First-half segment operating income was $2.4 million, down from $3.1 million.
- Customer Care: Q2 revenue rose 11.9% to $17.2 million, supported by project work and InsideOut. First-half revenue fell 4.5% to $31.6 million, as reduced pandemic-related and recall projects more than offset $5.1 million of InsideOut revenue. First-half operating income decreased to $4.2 million from $5.6 million.
- Fulfillment & Logistics Services: Q2 revenue was nearly flat at $19.6 million; operating income fell to $1.7 million from $3.0 million. First-half revenue grew 7.8% to $41.1 million, but operating income declined to $3.6 million from $5.2 million. The company cited revenue mix and higher transportation costs.
- Operating expense increases included higher transportation costs and severance, including costs related to the prior CEO and a Marketing Services reduction in force. Depreciation and amortization also increased, partly reflecting the InsideOut acquisition.
Cash, debt, and liquidity
- At June 30, cash and cash equivalents were $13.4 million, up from $10.4 million at December 31, 2022. The cash-flow statement reports $14.4 million of cash, cash equivalents, and restricted cash, including $1.0 million held in escrow.
- First-half operating cash flow was $4.6 million, down from $9.9 million. Investing activities used $1.3 million, mainly capital expenditures; financing activities used $2.3 million, including $1.9 million for share repurchases.
- No borrowings were outstanding under the asset-based revolving credit facility; $24.2 million was available, net of borrowing-base limits and letters of credit. The facility matures December 21, 2024, bears a variable rate (6.81% at June 30), and is secured by substantially all company and guarantor assets. The company reported compliance with its covenants.
- Current assets were $64.0 million and current liabilities $40.4 million. Total liabilities were $94.1 million. Lease liabilities totaled $20.5 million; qualified and nonqualified pension liabilities totaled $36.7 million.
- Management expects 2023 capital expenditures of approximately $3–$4 million, mainly for a new ERP system and Kansas City facility expansion. It believes available cash, operating cash flow, and revolver capacity will meet short- and medium-term needs, and reported no substantial doubt about going concern for the following 12 months.
Outlook, commentary, and notable items
- The filing provides no specific revenue, earnings, or EPS guidance. Management said it is monitoring inflation and wage pressures; inflation had not materially affected the business to date, but could affect clients and demand.
- Management noted that client marketing budgets are discretionary and vulnerable to economic pressure. Transportation-cost changes may affect margins and demand for supply-chain services; foreign exchange, geopolitical uncertainty, and broader economic conditions are also cited risks.
- Kirk Davis became CEO effective June 19, 2023. The company began combining Marketing Services and Customer Care into a Customer Experience segment, with the revised structure expected to be complete by year-end 2023.
- The board authorized a $6.5 million share repurchase program in May. During Q2, the company repurchased approximately 315,000 shares for $1.9 million; $4.6 million remained authorized at quarter-end.
- The company is terminating Qualified Pension Plan I, a process expected to take approximately 18 months, with obligations to be transferred to a third party. It estimated $1.6 million of 2023 contributions to the combined qualified pension plans; $0.6 million had been contributed in the first half.
- InsideOut was acquired in December 2022 for approximately $7.5 million. The filing reports $1.0 million of acquisition-related cash in escrow and a post-closing working-capital adjustment. Ordinary-course legal and client-indemnification matters are disclosed; management said material losses beyond recorded accruals were remote.
Important facts for investors to verify
- Whether the sharp decline in Marketing Services revenue continues, and whether Customer Care growth and InsideOut contributions can offset it.
- Whether operating margins recover, particularly as transportation costs, labor expenses, severance, and segment reorganization affect results.
- The drivers and cash impact of foreign-currency-related other expense, and the sustainability of operating cash flow.
- Revolver availability under the borrowing base, covenant compliance, and the company’s ability to fund capital spending, lease commitments, and pension obligations.
- Progress and costs associated with the Customer Experience segment transition, CEO change, pension-plan termination, and remaining share-repurchase authorization.