Harte Hanks Inc: Form 10-Q for the period ended Sep 30, 2024

Cautionary Note Regarding Forward-Looking Statements

This report, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contains “forward-looking statements” within the meaning of the federal securities laws. All such statements are qualified by this cautionary note, which is provided pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Forward-looking statements will also be included from time to time in our other public filings, press releases, our website, and oral and written presentations by management. Statements other than historical facts are forward-looking and may be identified by words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “seeks,” “could,” “intends,” or words of similar meaning. Examples include statements regarding (1) our strategies and initiatives, including actions designed to respond to market conditions and improve our performance, (2) our financial outlook for revenues, earnings (loss) per share, operating income (loss), expense related to equity-based compensation, capital resources and other financial items, if any, (3) expectations for our businesses and for the industries in which we operate, including the impact of economic conditions of the markets we serve on the marketing expenditures and activities of our clients and prospects, (4) competitive factors, (5) acquisition and development plans, (6) expectations regarding legal proceedings and other contingent liabilities, (7) expectations regarding cost savings due to Project Elevate and (8) other statements regarding future events, conditions, or outcomes.

These forward-looking statements are based on current information, expectations, and estimates and involve risks, uncertainties, assumptions, and other factors that are difficult to predict and that could cause actual results to vary materially from what is expressed in or indicated by the forward-looking statements. In that event, our business, financial condition, results of operations, or liquidity could be materially adversely affected and investors in our securities could lose part or all of their investments. A discussion of some of these risks, uncertainties, assumptions, and other factors can be found in our filings with the SEC, including the factors discussed under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 10-K”), “Part II - Item 1A. Risk Factors” in this Quarterly Report, and in our other reports filed or furnished with the SEC. The forward-looking statements included in this report and those included in our other public filings, press releases, our website, and oral and written presentations by management are made only as of the respective dates thereof, and we undertake no obligation to update publicly any forward-looking statement in this report or in other documents, our website, or oral statements for any reason, even if new information becomes available or other events occur in the future, except as required by law.

Overview

The following MD&A section is intended to help the reader understand the results of operations and financial condition of Harte Hanks, including any material changes in the Company’s financial condition and results of operations since December 31, 2023, and as compared with the three and six months ended September 30, 2023. This section is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes included herein as well as our 2023 10-K. Our 2023 10-K contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates, and contractual obligations. See Note A, Overview and Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements for further information.

Harte Hanks, Inc. is a leading global customer experience company operating in four reportable segments: Marketing Services, Customer Care, Sales services and Fulfillment & Logistics Services. Our mission is to partner with clients to provide them with a robust customer-experience, or CX, strategy, data-driven analytics and actionable insights combined with seamless program execution to better understand, attract, and engage their customers. Our services include strategic planning, data strategy, performance analytics, creative development and execution; technology enablement; marketing automation; B2B and B2C e-commerce; cross-channel customer care; and product, print, and mail fulfillment.

We are affected by the general, national, and international economic and business conditions in the markets where we and our customers operate. Marketing budgets are largely discretionary in nature and, as a consequence, are easier for our clients to reduce in the short-term than other expenses. Our revenues are also affected by the economic fundamentals of each industry that we serve, various market factors, including the demand for services by our clients, the financial condition of and budgets available to our clients, and regulatory factors, among other factors. Due to increases in inflation and interest rates throughout the globe, and other geopolitical uncertainties, including but not limited to the ongoing armed conflicts in multiple regions, there is continued uncertainty and significant volatility and disruption in the global economy and financial markets. We remain committed to making the investments necessary to execute our multichannel strategy while also continuing to adjust our cost structure to appropriately reflect our operations and outlook.

Management is closely monitoring inflation and wage pressure in the market, and the potential impact on our business. While inflation has not had a material impact on our business, it is possible a material increase in inflation could have an impact on our clients, and in turn, on our business.

Recent Developments

Project Elevate

Our management team continuously reviews and adjusts our cost structure and operating footprint to optimize our operations, and invest in improved technology. During the second half of 2023, we engaged a consulting firm to help review and analyze the structure and operations of the Company. This review included greater than 200 meetings with personnel at all levels of the firm and led to the initiation of our transformation program named "Project Elevate". The program involves the optimization and rationalization of our business resources as well as the partial reinvestment of savings into the Company's sales and marketing team, technology, and strategy. A business transformation office was established at the beginning of 2024 to manage and measure these initiatives. We expect to meet our Project Elevate saving target for this year of $6 million and remain confident in our two-year target of exiting 2025 with $16 million in savings.

For the three and nine months ended September 30, 2024, we recorded restructuring charges related to this business transformation effort of $0.8 million and $2.1 million, respectively.

Qualified Pension Plan I termination

In January 2023, the Board of Directors of the Company approved the termination of the Qualified Pension Plan I. The termination process was completed in June 2024 and resulted in the transfer of our obligations pursuant to this pension plan to an insurance company. We made total cash contributions of $7.2 million to terminate the Qualified Pension Plan I. In connection with this termination, we recognized $37.5 million of pension termination charges which were reflected in our Condensed Consolidated Statements of Comprehensive Income (Loss) for nine months ended September 30, 2024.

Changes in Segment Reporting

Starting in the first quarter of 2024, to improve our strategic posture in terms of go-to-market approach and cost structure, we removed the Sales Services business from the Customer Care segment and made the Sales Services business its own segment.

Results of Operations

Operating results were as follows:

In thousands, except per share amounts

Consolidated Results

Three months ended September 30, 2024 vs. Three months ended September 30, 2023

Revenues

Revenue increased $0.5 million, or 1.1%, to $47.6 million in the three months ended September 30, 2024, compared to the three months ended September 30, 2023 driven by increased revenue in our Customer Care and Sales Services segments which were partially offset by the decreased revenue in Fulfillment & Logistics Services and Marketing Services segments. Those decreases were the result of fluctuations in timing of high volume periods associated with ongoing programs, and the conclusion of relationships with some customers.

Operating Expenses

Operating expenses were $45.7 million in the three months ended September 30, 2024, an increase of $1.5 million, or 3.5%, compared to $44.2 million in the three months ended September 30, 2023.

Labor expense increased $1.2 million, or 5.3%, primarily due to higher labor cost associated with higher revenue.

Production and Distribution expenses decreased $1.0 million, or 6.2%, primarily due to lower volumes of brokered freight and lower fuel charges and production supplies cost as compared to the prior year quarter.

Advertising, Selling, General and Administrative expenses increased $0.3 million, or 6.9%, primarily due to higher sales and marketing expense as compared to the prior year quarter.

The largest components of our operating expenses are labor, transportation expenses and outsourced costs. Each of these costs is, at least in part, variable and tends to fluctuate in line with revenues and the demand for our services. Transportation rates have decreased over the last nine months due to dropping demand and supply fluctuations within the transportation industry. Future changes in transportation expenses will continue to impact our total production costs and total operating expenses, and in turn our margins, and may have an impact on future demand for our supply chain management services. Postage costs for mailings are borne by our clients and are not directly reflected in our revenues or expenses.

Other expense, net

Other expense, net, for the three months ended September 30, 2024 was $0.9 million compared to $0.4 million, in the prior year quarter. The $0.5 million increase in other expense, net was mainly associated with changes in foreign currency gain and loss accounts the three months ended September 30, 2024 as compared to the prior year quarter.

Income Taxes

The income tax benefit of $0.9 million in the third quarter of 2024 represents a decrease in income tax provision of $1.0 million when compared to the third quarter of 2023. Our effective tax rate was 85.9% for the second quarter of 2024, an increase of 10.4% when compared to the third quarter of 2023. The effective tax rate differs from the federal statutory rate of 21.0%, primarily due to the U.S. state income taxes and income earned in foreign jurisdictions.

Nine months ended September 30, 2024 vs. Nine months ended September 30, 2023

Revenues

Revenue decreased $3.9 million, or 2.7%, to $138.1 million, in the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023 due to decreased revenue in three of our operating segments. The reduction in revenues in the nine month period relates to the conclusion of programs, and the ordinary turnover of customers at a higher rate than initiation of new programs and revenues from new customer. Our sales and marketing organization is amidst a transformation that includes an expansion of staff, a new centralized reporting structure, partnership channel development, and expanded international sales focus. Assuming a supportive economy, we expect improved revenues in the fourth quarter of 2024.

Operating Expenses

Operating expenses were $134.5 million in the nine months ended September 30, 2024, a decrease of $1.9 million, or 1.4%, compared to $136.4 million in the nine months ended September 30, 2023. Cost controls to match revenues and Project Elevate led to the decline in operating expense. The company expects further cost reductions in excess of new costs attributable to revenue growth.

Labor expense decreased $3.7 million, or 5.0%, primarily due to lower labor cost and bonus expense associated with lower revenue.

Production and Distribution expenses decreased $1.3 million, or 3.0%, primarily due to lower fuel charges and software costs as compared to the prior year.

Advertising, Selling, General and Administrative expenses increased $1.0 million, or 6.1%, primarily due to higher sales and marketing expenses.

The largest components of our operating expenses are labor, transportation expenses and outsourced costs. Each of these costs is, at least in part, variable and tends to fluctuate in line with revenues and the demand for our services. There has been significant variability in transportation rates in recent years due to demand and supply fluctuations within the transportation industry. Future changes in transportation expenses will continue to impact our total production costs and total operating expenses, and revenues. Postage costs for mailings are borne by our clients and are not directly reflected in our revenues or expenses.

Other expense, net

Other expense, net, for the nine months ended September 30, 2024 was $39.7 million compared to $3.6 million, in the prior year period. The $36.1 million increase in other expense, net was mainly due to the pension termination charge incurred in the nine months ended September 30, 2024.

Income Taxes

The income tax benefit of $8.2 million in the nine months ended September 30, 2024 represents an increase in income tax benefit of $9.8 million when compared to the same period of 2023. Our effective tax rate was 22.8% for the nine months ended September 30, 2024, as compared to the effective tax rate of 79.9% for the same period of 2023. The effective tax rate differs from the federal statutory rate of 21.0%, primarily due to the U.S. state income taxes and income earned in foreign jurisdictions.

Segment Results

The following is a discussion and analysis of the results of our reportable segments for the three and nine months ended September 30, 2024 and 2023. There are two principal financial measures reported to our CEO (the chief operating decision maker) for use in assessing segment performance and allocating resources. Those measures are revenue and operating income. For additional information, see Note N, Segment Reporting, in the Notes to Condensed Consolidated Financial Statements.

Marketing Services:

In thousands

Three months ended September 30, 2024 vs. Three months ended September 30, 2023

Marketing Services segment revenue decreased $1.5 million, or 14.6%, due to customer turnover, the decline of client spending in excess of new business. Operating income for the three months ended September 30, 2024 increased $0.5 million, or 33.9% from the prior year quarter due to the reduced labor cost.

Nine months ended September 30, 2024 vs. Nine months ended September 30, 2023

Marketing Services segment revenue decreased $7.0 million, or 21.5%, due to customer turnover and the additional client spending reductions. This segment is our most economically sensitive segment with regard to changes in client's marketing strategy. Operating income for the nine months ended September 30, 2024 decreased $0.5 million , or 12.1% from the prior year quarter primarily due to the reduced labor cost.

Customer Care:

In thousands

Three months ended September 30, 2024 vs. Three months ended September 30, 2023

Customer Care segment revenue increased $1.2 million, or 10.4%, primarily driven by the timing of fluctuations with specific programs. Operating income was $2.5 million for the three months ended September 30, 2024, compared to operating income of $1.7 million for the three months ended September 30, 2023. The $0.7 million increase in operating income was driven by the higher revenue.

Nine months ended September 30, 2024 vs. Nine months ended September 30, 2023

Customer Care segment revenue decreased $0.5 million, or 1.2%, which can be impacted by one-time project-based engagements, temporary surges or declines in call volumes among retained customers due to specific programs and events. We also encounter fluctuations based on the geographic regions customers select for staff support. We are leveraging our Amazon Connect cloud-based platform to test and pilot new AI tools, and are exploring how we can augment growth by providing more technical support as clients migrate to more capable contact center platforms. Operating Income was $7.1 million for the nine months ended September 30, 2024, compared to operating income of $5.6 million for the nine months ended September 30, 2023. The increase of $1.5 million was primarily driven by the lower labor cost.

Sales Services:

In thousands

Three months ended September 30, 2024 vs. Three months ended September 30, 2023

Sales Services segment revenue increased $2.0 million, or 94.1%, primarily due to increased work from a large fintech customer. Operating Income was $0.5 million for the three months ended September 30, 2024, compared to operating income of $11 thousand for the three months ended September 30, 2023. The $0.5 million increase was driven by the higher revenues.

Nine months ended September 30, 2024 vs. Nine months ended September 30, 2023

Sales Services segment revenue increased $6.0 million, or 83.1%, primarily due to growth in work from a large fintech customer. Operating Income was $2.2 million for the nine months ended September 30, 2024, compared to $0.4 million for the six months ended September 30, 2023. The $1.8 million increase was driven by the increased revenues.

Fulfillment & Logistics Services:

In thousands

Three months ended September 30, 2024 vs. Three months ended September 30, 2023

Fulfillment & Logistics Services segment revenue decreased $1.2 million, or 5.4%, primarily due to the lower volume from the existing customers not being offset by growth in new programs and customers. Operating income decreased by $1.5 million primarily due to revenue mix, and higher technology and facility expenses.

Nine months ended September 30, 2024 vs. Nine months ended September 30, 2023

Fulfillment & Logistics Services segment revenue decreased by $2.4 million, or 3.8%, due to lost customers and the lower volume from existing customers. We currently have a robust sales pipeline for fulfillment opportunities, particularly for the fourth quarter. The pipeline transcends an otherwise seasonally stronger fourth quarter juxtaposed to the other quarters. The logistics industry is experiencing much higher cost pressure. This is partially the result of market leaders competing for more dominant position, acquiring smaller logistics providers, achieving scale through lowering pricing, as they focus on consolidating market share. Operating income decreased by $2.5 million, or 40.5% due to the lower revenue and higher facility and technology expenses.

Liquidity and Capital Resources

Sources and Uses of Cash

Our cash and cash equivalent balances were $5.9 million and $18.4 million at September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024, we had the ability to borrow an additional $24.0 million under our Credit Facility.

We received a $5.3 million tax refund in March 2023, as a result of the tax NOL carryback provisions in the CARES Act.

Our principal sources of liquidity are cash on hand, cash provided by operating activities, and borrowings available under our Credit Facility. Our cash is primarily used for general corporate purposes, working capital requirements, and capital expenditures. At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations such as finance and operating leases and unfunded pension plan benefit payments and other needs for our operations in the short term and beyond. Although the Company believes that it will be able to meet its cash needs for the short and medium term, if unforeseen circumstances arise the Company may need to seek alternative sources of liquidity.

Operating Activities

Net cash used in the operating activities for the nine months ended September 30, 2024 was $7.0 million, compared to net cash provided by operating activities of $6.1 million for the nine months ended September 30, 2023. The $13.1 million year-over-year decrease in cash provided by operating activities was primarily due to the $7.2 million payment to termination the Qualified Pension Plan I during the nine months ended September 30, 2024. as well as the $6.6 million changes in other assets and current liabilities.

Investing Activities

Net cash used in investing activities was $3.1 million for the nine months ended September 30, 2024, as compared to the $1.5 million used in investing activities during the same period in 2023. The $1.6 million increase in cash used in investing activities was primarily related to purchase of property, plant and equipment activities in the nine months ended September 30, 2024.

Financing Activities

Net cash used in financing activities was $0.3 million for the nine months ended September 30, 2024, as compared to $3.1 million of net cash used in financing activities during the nine months ended September 30, 2023. The $2.8 million decrease in cash used in financing activities was primarily related to the $2.4 million used to repurchase our common stock in the nine months ended September 30, 2023.

Foreign Holdings of Cash

Consolidated foreign holdings of cash as of September 30, 2024 and December 31, 2023 were $1.8 million and $5.4 million, respectively.

Debt

On December 21, 2021, the Company entered into a three-year, $25 million asset-based revolving credit facility (the "Credit Facility") with Texas Capital Bank ("TCB"). The Company’s obligations under the Credit Facility are guaranteed on a joint and several basis by the Company’s material subsidiaries (the “Guarantors”). The Credit Facility is secured by substantially all of the assets of the Company and the Guarantors pursuant to a Pledge and Security Agreement, dated as of December 21, 2021, among the Company, TCB and the other Guarantors party thereto (the "Security Agreement"). On December 29, 2023, the Company extended the maturity date for the Credit Facility by a period of 6 months, to June 30, 2025. The extension was executed with substantially similar terms and conditions as the original Facility.

The Credit Facility provides for loans up to the lesser of (a) $25.0 million, and (b) the amount available under a "borrowing base" calculated primarily by reference to the Company's cash and cash equivalents and accounts receivables. The Credit Facility allows the Company to use up to $3.0 million of its borrowing capacity to issue letters of credit.

The loans under the Credit Facility accrue interest at a variable rate equal to the Secured Overnight Financing Rate (SOFR) plus a margin of 2.25% per annum. The latest rate was 7.27% as of September 30, 2024. The outstanding amounts advanced under the Credit Facility are due and payable in full on June 30, 2025.

The Company may repay and reborrow all or any portion of the loans advanced under the Credit Facility at any time, without premium or penalty. The Credit Facility is subject to mandatory prepayments (i) from the net proceeds of asset dispositions not otherwise permitted under the Credit Facility; (ii) if the unpaid principal balance under the Credit Facility plus the aggregate face amount of all outstanding letters of credit exceeds the borrowing base; (iii) in an amount equal to 50% of the net proceeds of issuances of capital stock (subject to customary exceptions); or (iv) in an amount equal to the net proceeds from any issuance of debt not otherwise permitted under the Credit Facility.

The Credit Facility contains certain covenants restricting the Company's and its subsidiaries' ability to create, incur, assume or become liable for indebtedness; make certain investments; pay dividends or repurchase the Company's stock; create, incur or assume liens; consummate mergers or acquisitions; liquidate, dissolve, suspend or cease operations; or modify accounting or tax reporting methods (other than as required by U.S. GAAP).

As of September 30, 2024 and December 31, 2023, we had no borrowings outstanding under the Credit Facility. At each of September 30, 2024 and December 31, 2023, we had letters of credit outstanding in the amount of $1.0 million and $0.8 million, respectively. No amounts were drawn against these letters of credit at September 30, 2024 and December 31, 2023. These letters of credit exist to support insurance programs relating to workers’ compensation, insurance, and reducing cash security deposits on leased property. We had no other off-balance sheet financing activities at September 30, 2024 and December 31, 2023.

As of September 30, 2024, we had the ability to borrow $24.0 million under the Credit Facility.

Dividends

We did not pay any dividends in the three months ended September 30, 2024 and 2023.

Share Repurchase

On May 2, 2023, the Board of Directors of Harte Hanks approved a share repurchase program to maximize shareholder value with authorization to repurchase $6.5 million of the Company’s Common Stock. During 2023, we repurchased 0.4 million shares of common stock for a total combined purchase price of $2.4 million. During 2024, we repurchased zero shares of stock during the three and nine months ended September 30, 2024. In the three and nine months ended September 30, 2023, we repurchased 0.4 million shares of Common Stock for $2.4 million.

Outlook

We consider such factors as total cash and cash equivalents and restricted cash, current assets, current liabilities, total debt, revenues, operating income, cash flows from operations, investing activities, and financing activities when assessing our liquidity. Our management of cash is designed to optimize returns on cash balances and to ensure that it is readily available to meet our operating, investing, and financing requirements as they arise. We believe that there are no conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern for the twelve months following the issuance of these Condensed Consolidated Financial Statements.

Critical and Recent Accounting Policies

Critical accounting estimates are defined as those that, in our judgment, are most important to the portrayal of our Company’s financial condition and results of operations and which require complex or subjective judgments or estimates. Actual results could differ materially from those estimates under different assumptions and conditions. Refer to the 2023 10-K for a discussion of our critical accounting estimates.

Our Significant Accounting policies are described in Note A, Overview and Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements.

See Recent Accounting Pronouncements under Note B of the Notes to Condensed Consolidated Financial Statements for a discussion of certain accounting standards that have been recently issued.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer ("CEO") and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure.

Our management, including our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of September 30, 2024, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our CEO and CFO concluded that the design and operation of these disclosure controls and procedures were effective, at the “reasonable assurance” level, to ensure information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2023 10-K, which could materially affect our business, financial condition, or future results. The risks described in our 2023 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results. There have been no material changes during the nine months ended September 30, 2024 to the risk factors previously disclosed in the 2023 10-K.