Cautionary Note About Forward-Looking Statements
This report, including this 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 the cautionary note included under "Forward-Looking
Statements" above, which is provided pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results may vary materially
from what is expressed in or indicated by the forward-looking statements, for
the reasons described in this MD&A, in the Risk Factors in Item 1A above or
elsewhere in this Annual Report on Form 10-K.
Overview
The following MD&A section is intended to help the reader understand the results
of operations and financial condition of Harte Hanks. This section is provided
as a supplement to, and should be read in conjunction with, our Consolidated
Financial Statements and the accompanying notes included herein.
Harte Hanks, Inc. is a leading global customer experience company operating in
three business segments: Marketing Services, Customer Care, 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 the COVID-19 pandemic, recent increases in
inflation and interest rates throughout the globe, and other geopolitical
uncertainties, including but not limited to the ongoing war between Russia and
Ukraine, 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.
19
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Operating results from operations were as follows:
Year Ended December 31,
In thousands, except per share amounts 2022 % Change 2021
Revenues $ 206,278 6.0 % $ 194,596
Operating expenses 191,171 2.3 % 186,957
Operating income $ 15,107 97.8 % $ 7,639
Operating margin 7.3 % 86.6 % 3.9 %
Other income, net (4,206 ) -51.2 % (8,620 )
Income tax expense (benefit) (17,463 ) -1455.8 % 1,288
Net income $ 36,776 145.6 % $ 14,971
Diluted EPS from operations $ 4.75 169.9 % $ 1.76
Year ended December 31, 2022 vs. Year ended December 31, 2021
Consolidated Results
Revenues
Revenues of $206.3 million for the year ended December 31, 2022 increased $11.7
million, or 6.0%, when compared to $194.6 million for the year ended December
31, 2021. Revenue in our Fulfillment & Logistics Services increased
$22.6 million, or 35.6%, to $86.1 million driven by revenue from new clients and
increases in work from the existing clients. Revenue in our Customer Care
segment decreased $7.5 million, or 10.0%, to $67.2 million and revenue in our
Marketing Services declined $3.4 million, or 6.1%, to $53.0 million. For a
discussion of the drivers and reasons for the year-over-year changes in revenue,
see "Segment Results" below.
Among other factors, our revenue performance will depend on general economic
conditions in the markets we serve and how successful we are at maintaining and
growing business with existing clients and acquiring new clients. We believe
that, in the long-term, an increasing portion of overall marketing and
advertising expenditures will be shifted from other advertising media to the
type of targeted media advertising we provide resulting in a benefit to our
business. Targeted media advertising results can be effectively tracked,
enabling measurement of the return on marketing investment. However, growth will
be challenged by both current and new competitors and internally generated
capabilities at current and potential future clients.
Operating Expenses
Operating expenses of $191.2 million for the year ended December 31,
2022 increased $4.2 million, or 2.3%, when compared to $187.0 million for the
year ended December 31, 2021.
Labor costs decreased by $5.2 million, or 4.7%, when compared to the year ended
December 31, 2021, primarily due to lower labor expense in the Customer Care and
Marketing Service segment associated with lower revenue which was partially
offset by higher labor expense in the Fulfillment & Logistics segment driven by
higher revenue and supply chain issues that have led to increased transportation
costs. We have a large amount of part-time employees and are able to dynamically
adjust their schedules to reflect current activities. Production and
Distribution expenses increased $15.4 million, or 30.7%, when compared to the
year ended December 31, 2021, primarily due to higher transportation costs to
support additional logistics revenue as well as higher brokered, or outsourced
costs due to higher brokered revenue. Advertising, Selling and General and
Administrative expenses increased $0.1 million or 0.6%, when compared to the
year ended December 31, 2021. Depreciation expense increased $0.2 million, or
6.6%, when compared to the year ended December 31, 2021, primarily due to the
addition of our new ERP system.
Restructuring expenses were $0 million and $6.4 million for the years ended
December 31, 2022 and 2021, respectively. See Note O, Restructuring Activities,
in the Notes to Consolidated Financial Statements for further discussion
of restructuring activities.
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 increased over the last few 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 in turn our margins, and may have an
impact on future demand for our supply chain management services.
Postage costs of mailings are borne by our clients and are not directly
reflected in our revenues or expenses.
20
--------------------------------------------------------------------------------
Table of Contents
Interest Expense, net
Interest expense, net, for the year ended December 31, 2022, decreased
$0.5 million when compared to the year ended December 31, 2021, due to a lower
debt balance as compared to the year ended December 31, 2021.
Other (Income) Expense, net
Total other income, net was $4.6 million for the year ended December 31, 2022,
when compared to other expense, net of $0.5 million for the year ended December
31, 2021. This $5.1 million increase in other income was primarily attributable
to a $2.4 million increase in foreign currency revaluation income and $2.5
million gain from the sale of unused IP addresses which were no longer useful to
the Company. This increase was partially offset by $0.7 million increase of
pension expense as a result of the lower return on investment from poorer asset
performance as compared to the year ended December 31, 2021. We do not expect
the sale of IP addresses, in the future, if any, to generate a significant
amount of other income.
Income Taxes
Our 2022 income tax benefit was $17.5 million for the year ended December 31,
2022, when compared to tax expense of $1.3 million for the year ended December
31, 2021. The increase in benefit of $18.8 million was primarily related to
the removal of the majority of the U.S. valuation allowance for the year
ended December 31, 2022.
Segment Results
The following is a discussion and analysis of the results of our reporting
segments for the years ended December 31, 2022 and 2021. There are
three principal financial measures reported to our CEO (the chief operating
decision maker) for use in assessing segment performance and allocating
resources. Those measures are revenues, operating income and operating income
plus depreciation and amortization ("EBITDA"). For additional information,
see Note P, Segment Reporting, in the Notes to Consolidated Financial Statements
for further discussion.
Marketing Services:
Year Ended December 31,
In thousands 2022 % Change 2021
Revenues $ 52,975 -6.1 % $ 56,388
EBITDA $ 7,344 -4.8 % $ 7,713
Operating Income 6,982 -2.8 % 7,183
Operating Income % of Revenue 13.2 % 3.5 % 12.7 %
Marketing Services segment revenue declined $3.4 million, or 6.1%, due to
a decrease in direct mail service volume from existing customers. Operating
income for the year ended December 31, 2022 decreased $0.2 million due to the
lower revenue which was partially offset by lower operating expense driven
by improved labor utilization.
21
--------------------------------------------------------------------------------
Table of Contents
Customer Care:
Year Ended December 31,
In thousands 2022 % Change 2021
Revenues $ 67,205 -10.0 % $ 74,691
EBITDA $ 12,167 -3.2 % $ 12,569
Operating Income 11,283 -3.7 % 11,720
Operating Income % of Revenue 16.8 % 7.0 % 15.7 %
Customer Care segment revenue decreased $7.5 million primarily due to a decrease
in volumes with existing customers. Operating Income for the year ended
December 31, 2022 was $11.3 million, a decrease of $0.4 million when compared to
the prior year due to lower revenue which was partially offset by lower
operating expense driven by improved operational efficiency.
Fulfillment & Logistics Services:
Year Ended December 31,
In thousands 2022 % Change 2021
Revenues $ 86,098 35.6 % $ 63,517
EBITDA $ 10,593 -58.2 % $ 6,698
Operating Income 9,769 -63.4 % 5,980
Operating Income % of Revenue 11.3 % -20.5 % 9.4 %
Fulfillment & Logistics Services segment revenue increased $22.6 million, or
35.6%, primarily driven by revenue from new customers and an increase in work
from existing customers. Operating income was $9.8 million for the year ended
December 31, 2022 compared to $6.0 million for the year ended December 31,
2021. The $3.8 million increase was primarily driven by the higher revenue and
lower operating expense from improved operational efficiency. Operating income
for the prior year period included a favorable $0.8 million litigation
settlement.
22
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
Sources and Uses of Cash
Our cash and cash equivalent balances were $10.4 million and $11.9 million as of
December 31, 2022 and 2021, respectively. Our cash and cash equivalent and
restricted cash balances were $10.4 million and $15.1 million as of December 31,
2022 and 2021, respectively. As of December 31, 2022, we had the ability to
borrow an additional $24.2 million under our New Credit Facility. The money
deposited in an escrow account to satisfy our contingent payment obligations for
the acquisition of InsideOut is not included in our cash and cash equivalent or
restricted cash balances as of December 31, 2022.
During 2020, we received an aggregate of $9.6 million in tax refunds related to
our net operating loss ("NOL") and capital loss carryback for the 2013-2018 tax
years. We received $2.5 million in tax refunds in 2022 and has received
an additional tax refund of $5.3 million in March 2023, as a result of the
change to the tax NOL carryback provisions included in the CARES Act.
Our principal sources of liquidity are cash on hand, cash provided by operating
activities, and borrowings available under our New Credit Facility. Our cash is
primarily used for general corporate purposes, working capital requirements,
debt service 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 debt services, finance and
operating leases and unfunded pension plan benefit payments) and other cash
needs for our operations for at least the twelve months from the date of this
Annual Report through a combination of cash on hand, cash flow from operations,
and borrowings under the New Credit Facility. 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 provided by operating activities was $28.8 million for the year ended
December 31, 2022, when compared to cash used in operating activities of
$1.8 million for the year ended December 31, 2021. The $30.6 million
year-over-year increase in cash provided by operating activities was primarily
driven by the $21.8 million higher net income, which excludes the $10 million
non-cash gain in 2021 from extinguishment of PPP loan, $1.1 million increase in
deferred revenue and customer advances, $8.0 million increase in accounts
payable and accrued expenses, other accrued expenses and liabilities due to
increased transportation expenses in the year ended December 31, 2022. The
above increase was partially offset by the decrease of $5.3 million in customer
postage and program deposits. The net income for the year ended December 31,
2022 also included a non-recurring $2.5 million gain from the sale of unused IP
addresses which were no longer useful to the Company.
Investing Activities
Net cash used in investing activities was $11.5 million for the year ended
December 31, 2022, compared to cash used in investing activities of $2.9 million
for the year ended December 31, 2021. The $8.6 million increase was mainly
due to the $5.8 million of cash used to purchase InsideOut and $5.8 million of
cash used to purchase property, plant and equipment (mainly for our new ERP
system) in the year ended December 31, 2022 when compared to the year
ended December 31, 2021.
Financing Activities
Net cash used in financing activities was $15.8 million for the year ended
December 31, 2022, compared to $13.4 million net cash used in financing
activities for the year ended December 31, 2021. The $2.4 million decrease was
primarily due to the $10.0 million cash used for the repurchase of Preferred
Stock for the year ended December 31, 2022 as compared to $5.0 million cash
proceeds from New Credit Facility for the year ended December 31,
2021. This decrease was partially offset by the $5.0 million repayment of the
borrowings under our New Credit Facility in the year ended December 31, 2022 as
compared to the $17.1 million repayment of the Texas Capital Credit
Facility for the year ended December 31, 2021.
Foreign Holdings of Cash
Consolidated foreign holdings of cash as of December 31, 2022 and 2021 were
$3.4 million and $2.6 million, respectively. The Company does not believe it
will need to re-patriate foreign cash holdings to meet domestic obligations.
Long Term Debt
On December 21, 2021, the Company entered a new three-year, $25,000,000
asset-based revolving credit facility (the "New Credit Facility") with Texas
Capital Bank. The Company's obligations under the New Credit Facility are
guaranteed on a joint and several basis by the Company's material subsidiaries
(the "Guarantors"). The New Credit Facility is secured by substantially all the
assets of the Company and the Guarantors pursuant to a Pledge and Security
Agreement, dated as of December 21, 2021, between the Company, TCB and the other
grantors party thereto (the "Security Agreement").
The New Credit Facility provides for loans up to the lesser of (a) $25,000,000,
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 New Credit Facility allows the Company to use up to $3,000,000 of its
borrowing capacity to issue letters of credit.
The loans under the New Credit Facility accrue interest at a varying rate equal
to the Bloomberg Short-Term Bank Yield Index Rate plus a margin of 2.25% per
annum. The outstanding amounts advanced under the New Credit Facility are due
and payable in full on December 21, 2024.
The Company may repay and reborrow all or any portion of the loans advanced
under the New Credit Facility at any time, without premium or penalty. The New
Credit Facility is subject to mandatory prepayments (i) from the net proceeds of
asset dispositions not otherwise permitted under the New Credit Facility; (ii)
if the unpaid principal balance under the New 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 New Credit
Facility.
The New 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).
In connection with entering the New Credit Facility, the Company and Texas
Capital Bank terminated the Old Texas Capital Credit Facility. Prior to
termination of the Old Texas Capital Credit Facility, the Company used cash on
hand to pay down $8.1 million outstanding and the remaining $5 million of loans
outstanding were deemed to be outstanding under the New Credit Facility. Texas
Capital Bank did not require the New Credit Facility to be guaranteed by HHS
Guaranty, LLC, an entity formed to provide credit support for the Company by
certain members of the Shelton family (descendants of one of the Company's
founders) or any other third-party credit support.
As of December 31, 2022 and 2021, we had $0.0 million and $5.0 million of
borrowings outstanding under the New Credit Facility, respectively. At each
of December 31, 2022 and 2021, we had letters of credit in the amount of
$0.8 million outstanding. No amounts were drawn against these letters of credit
at December 31, 2022 and 2021. These letters of credit exist to support
insurance programs relating to workers' compensation, automobile, and general
liability. We had no other off-balance sheet financing arrangements as of
December 31, 2022 and 2021.
As of December 31, 2022, we had the ability to borrow an additional
$24.2 million under the New Credit Facility.
23
--------------------------------------------------------------------------------
Table of Contents
On April 20, 2020, the Company received loan proceeds in the amount of $10.0
million under the Small Business Administration ("SBA") PPP Term Note.
On June 10, 2021, we received notice that the entire amount of our PPP Term
Note was forgiven by the SBA because we used the proceeds from the loan as
contemplated under the CARES Act. We recorded the $10.0 million of debt
extinguishment as "Gain from extinguishment of debt (Paycheck Protection Program
Term Note)" in the Consolidated Statements of Comprehensive Income.
Dividends
We did not pay any dividends in either 2022 or 2021. We currently intend to
retain any future earnings and do not expect to pay cash dividends on our common
stock in the foreseeable future. Any future dividend declaration can be made
only upon, and subject to, approval of our Board, based on its business
judgment.
Share Repurchase
During 2022 and 2021, we did not repurchase any shares of our common stock under
our stock repurchase program that was publicly announced in August 2014. Under
this program we were authorized to spend up to $20.0 million to repurchase
shares of our outstanding common stock. As of December 31, 2022, we had
authorization of $11.4 million remaining under this program. From 1997 through
December 31, 2015, we repurchased 6.8 million shares for an aggregate of $1.2
billion under this program and previously announced programs. We have not made
any repurchases under the program since 2015. This authorization and program
have since been terminated. This program excluded the 2022 Preferred Stock
repurchase described in "Repurchase of the Preferred Stock from Wipro, LLC".
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 the Consolidated Financial Statements.
24
--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared in accordance with accounting
principles generally accepted in the United States of America ("U.S.
GAAP"), which requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue, costs and expenses, and
related disclosures. On an ongoing basis, we evaluate our estimates and
assumptions based on historical experience and on various other assumptions that
we believe are reasonable under the circumstances. Our actual results could
differ from these estimates under different assumptions or conditions. The areas
that we believe involve the most significant management estimates and
assumptions are detailed below. On an ongoing basis, management reviews its
estimates and assumptions based on currently available information.
Critical accounting policies 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. The areas that we believe involve the most significant management
estimates and assumptions are detailed below.
Our Significant Accounting policies are described in Note A, Overview and
Significant Accounting Policies, in the Notes to Consolidated Financial
Statement.
Revenue Recognition
Application of various accounting principles in accordance with U.S.
GAAP related to measurement and recognition of revenue requires us to make
significant judgments and estimates. Specifically, complex arrangements with
non-standard terms and conditions may require significant contract
interpretation to determine appropriate accounting. For revenue generated from
arrangements that involve third parties, there is significant judgment in
evaluating whether we are the principal, and report revenue on a gross basis, or
the agent, and report revenue on a net basis.
Income Taxes
We are subject to income taxes in the United States and numerous other
jurisdictions. Significant judgment is required in determining our provision for
income taxes and income tax assets and liabilities, including evaluating
uncertainties in the application of accounting principles and complex tax laws.
We record a provision for income taxes for the anticipated tax consequences of
the reported results of operations using the asset and liability method. Under
this method, we recognize deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the financial reporting
and tax basis of assets and liabilities, as well as for operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using the
tax rates that are expected to apply to taxable income for the years in which
those tax assets and liabilities are expected to be realized or settled. We
record a valuation allowance to reduce our deferred tax assets to the net amount
that we believe is more likely than not to be realized. For additional
information on the valuation allowance see Note I, Income Taxes, in the Notes to
Consolidated Financial Statements.
We recognize tax benefits from uncertain tax positions only if we believe that
it is more likely than not that the tax position will be sustained on
examination by the taxing authorities based on the technical merits of the
position. Although we believe that we have adequately reserved for our uncertain
tax positions, we can provide no assurance that the final tax outcome of these
matters will not be materially different. We adjust these reserves when facts
and circumstances change, such as the closing of a tax audit or the refinement
of an estimate. To the extent that the final tax outcome of these matters is
different than the amounts recorded, such differences will affect the provision
for income taxes in the period in which such determination is made and could
have a material impact on our financial condition and operating results. The
provision for income taxes includes the effects of any reserves that we believe
are appropriate, as well as the related net interest and penalties.
Recent Accounting Pronouncements
See Note B, Recent Accounting Pronouncements, in the Notes to Consolidated
Financial Statements for a discussion of certain accounting standards that we
have recently adopted and certain accounting standards that we have not yet been
required to adopt and may be applicable to our future financial condition and
results of operations.
25
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source Glimpses