Harte Hanks, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Harte Hanks provides customer-experience services through Marketing Services, Customer Care, and Fulfillment & Logistics Services. Financial figures below are in millions of dollars unless otherwise stated.
Financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $43.8 | $40.5 |
| Operating expenses | $44.6 | $45.6 |
| Operating loss / margin | $(0.9) / (2.0)% | $(5.1) / (12.6)% |
| Net income (loss) | $(1.8) | $5.1 |
| Loss attributable to common stockholders / diluted EPS | $(1.9) / $(0.28) | $4.3 / $0.67 |
| Cash used in operating activities | $(5.7) | $(4.0) |
Revenue increased about 8%, while operating expenses declined about 2%. The operating loss narrowed by $4.2 million. The year-over-year net-income comparison was heavily affected by the $11.3 million income-tax benefit recognized in Q1 2020; Q1 2021 recorded $0.6 million of tax expense.
- Segment performance: Customer Care revenue rose 95.1% to $16.5 million and operating income improved to $2.3 million from a $1.0 million loss. Marketing Services revenue fell 4.6% to $12.9 million, with operating income down to $0.4 million from $0.9 million. Fulfillment & Logistics revenue fell 22.7% to $14.3 million but operating income improved to $1.1 million from a $1.2 million loss.
- Cash and liquidity: Cash and cash equivalents were $24.9 million at March 31, versus $29.4 million at year-end; cash plus restricted cash was $26.5 million, down from $33.6 million. Current assets were $83.9 million and current liabilities $53.1 million. Operating cash use increased year over year, primarily due to working capital.
- Debt and obligations: Total debt was $27.1 million, comprising $17.1 million drawn on the revolving facility and a $10.0 million PPP loan. The company had only $0.1 million of additional availability under the revolver at March 31. Pension liabilities were $66.5 million; lease liabilities totaled $27.7 million. Stockholders’ deficit was $54.4 million.
- Other cash flows: Investing activities used $0.7 million and financing activities used $0.2 million. Capital expenditures were $0.7 million, although $1.9 million of equipment purchases remained in accounts payable.
Material changes and management commentary
- Customer Care’s strong growth, attributed to new project work and higher volumes from existing clients, more than offset declines in Marketing Services and Fulfillment & Logistics. Management cited client losses, lower volumes, COVID-related budget pressure, and the exit from direct-mail facilities as factors behind the declines.
- Cost reductions helped lower production and distribution, SG&A, and depreciation expenses. Labor costs rose 10%, principally from temporary staffing to meet Customer Care demand. Q1 restructuring charges increased to $2.2 million from $1.4 million, including facility-related costs and lease impairment.
- The company continued footprint changes, including migrating Shawnee operations to its Kansas City facility. Management said the pandemic had not materially affected operations or liquidity to date, but warned that further effects—including reduced client demand, customer payment accommodations, and customer bankruptcies—could materially affect results, cash flows, or financial position.
Outlook, risks, and unusual items
- Management stated it expects to meet liquidity needs and fixed obligations for at least the next 12 months and that it saw no conditions raising substantial doubt about its ability to continue as a going concern. It provided no specific revenue or earnings guidance in the supplied filing text.
- On May 5, 2021, after quarter-end, the company amended its revolving credit facility: maturity was extended to April 17, 2023, but borrowing capacity was reduced to $15.0 million. Borrowings were $13.1 million on that date. The facility is secured by substantially all company assets and guaranteed by HHS Guaranty, LLC.
- The company applied in Q1 for forgiveness of the $10.0 million PPP loan and anticipated full forgiveness, but could not estimate the timing or assure forgiveness. Without forgiveness, approximately $8.7 million was due in March 2022.
- The company expected a $7.5 million tax refund related to the 2020 NOL carryback; refunds for 2018 and 2019 had been received. The Q1 tax provision also reflected an estimated effective tax rate of (50.6)%, which management attributed primarily to state taxes and foreign earnings.
- Restructuring estimates are not consistent within the filing: Note O says approximately $2.8 million of additional charges through year-end, while MD&A says approximately $1.9 million. Both cite total restructuring charges of approximately $25.3 million through the end of 2021. The filing also reports a favorable $0.75 million litigation settlement, partially offset by related legal expenses, in Fulfillment & Logistics.
- Other risks include heightened competition, discretionary client marketing budgets, customer credit and bankruptcy exposure, continued pandemic uncertainty, and the company’s substantial pension and lease obligations. Management reported disclosure controls were effective and no material changes to internal control over financial reporting.
Key facts for investors to verify
- Clarify the conflicting $1.9 million versus $2.8 million estimate for remaining 2021 restructuring charges and the related $25.3 million total.
- Track the revolving facility’s reduced capacity, current borrowing headroom, covenant compliance, and the effect of the May 2021 amendment.
- Confirm the PPP forgiveness decision and timing, and receipt of the anticipated $7.5 million tax refund.
- Assess whether Customer Care growth can persist and whether it can offset continuing declines in the other two segments.
- Monitor operating cash use, working-capital trends, pension funding obligations, and the company’s ability to meet debt, lease, and other fixed payments.