Harte Hanks, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Harte Hanks provides customer-experience services through Marketing Services, Customer Care, and Fulfillment & Logistics Services. Unless otherwise noted, financial amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $47.1 | $53.9 | $142.0 | $151.5 |
| Operating income | $2.9 | $3.8 | $5.6 | $11.7 |
| Operating margin | 6.2% | 7.0% | 4.0% | 7.7% |
| Net income | $0.6 | $7.2 | $0.4 | $15.0 |
| Diluted EPS | $0.08 | $0.83 | $0.05 | $1.73 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $6.1 | $22.3 |
Q3 revenue declined 12.6% year over year; nine-month revenue declined 6.3%. Operating expenses fell 11.8% in Q3 and 2.5% year to date, but the reductions did not offset the revenue and margin pressure. Nine-month net income was also affected by a $9.7 million year-over-year swing in other expense/income, primarily related to foreign-currency gains and losses. Q3 other expense was $0.4 million versus $4.7 million of other income a year earlier.
For the nine months, investing activities used $1.5 million, mainly capital expenditures; financing activities used $3.1 million, including $2.4 million for share repurchases. Cash and cash equivalents were $13.3 million at September 30, versus $10.4 million at December 31, 2022. The cash-flow statement reports $14.3 million including $1.0 million held in an acquisition escrow account.
Liquidity, debt, and balance sheet
- No borrowings were outstanding under the $25 million asset-based revolving facility; $24.2 million was available to borrow at September 30. The facility bears a variable rate (7.62% at quarter-end), is secured by substantially all company and guarantor assets, and matures December 21, 2024. The company reported covenant compliance.
- Current assets were $62.2 million and current liabilities were $38.7 million. Total liabilities were $90.3 million and stockholders’ equity was $20.5 million.
- Lease liabilities totaled $19.0 million, including $5.4 million current. Pension liabilities totaled $35.9 million across qualified and nonqualified plans.
- Management said it expects cash on hand, operating cash flow, and available facility borrowings to fund near-term and longer-term needs, and reported no conditions that raise substantial doubt about going concern for the 12 months after issuance.
Material changes and management commentary
- Marketing Services revenue fell 18.6% in Q3 and 16.9% year to date, attributed to lower volume from existing customers, including lower direct-mail activity. Customer Care revenue declined 19.4% in Q3 and 9.7% year to date, reflecting lower project work and the absence of prior-year pandemic-related and recall projects; InsideOut acquisition revenue partly offset the declines.
- Fulfillment & Logistics revenue fell 4.1% in Q3 but rose 3.3% year to date. Nine-month operating income declined, primarily due to revenue mix and higher transportation costs.
- Cost reductions included lower labor from workforce reductions and reduced software licensing fees; nine-month labor savings were partly offset by higher severance. Management noted that transportation costs and rates can affect costs, margins, and demand.
- Effective June 2023, Kirk Davis became CEO; David Garrison became interim CFO in October 2023. The company began combining Marketing Services and Customer Care into a Customer Experience segment, with the revised structure expected by year-end 2023.
- The company repurchased 0.4 million shares for $2.4 million during the first nine months under a $6.5 million authorization; $4.1 million remained available at September 30.
- The Qualified Pension Plan I termination process, approved in January 2023, is expected to take approximately 18 months and transfer obligations to a third party. The company estimated a $1.6 million qualified-plan contribution for 2023 and had contributed $1.2 million through September.
Outlook, risks, and contingencies
The filing provides no quantified revenue or earnings guidance. Management cited economic, geopolitical, inflation, wage, and client-budget uncertainty; marketing expenditures are discretionary and may be reduced by clients. It said inflation had not materially affected the business to date, but a material increase could affect clients and the company. The filing also identifies transportation-cost volatility and foreign-currency results as relevant factors.
The nine-month effective tax rate was 79.9%, versus 13.5% in 2022, primarily due to valuation allowance changes, state taxes, and foreign income; the Q3 rate was 75.6%. Management stated that ordinary-course legal matters were appropriately accrued and that a material loss beyond recorded accruals was remote, while noting outcomes cannot be predicted. No material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether revenue trends in Marketing Services and Customer Care stabilize, and whether the planned segment combination changes reporting or cost allocation.
- Drivers and persistence of foreign-currency gains and losses, and the unusually high effective tax rate and related valuation allowance.
- Operating cash-flow conversion, capital spending needs, and the availability and borrowing-base conditions of the revolving facility as it approaches its December 2024 maturity.
- Execution and costs of the Qualified Pension Plan I termination, required contributions, and ongoing pension obligations.
- Use of the remaining share-repurchase authorization relative to liquidity, operating needs, and credit-facility covenants.
- For comparable periods, note that prior-year operating expense categories were reclassified; the filing identifies a $3.8 million lease-expense reclassification from Production and Distribution to Advertising, Selling, General and Administrative.