HARTE HANKS, INC. 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 (the
"1933 Act") and Section 21E of the Exchange Act of 1934, as
amended. Forward-looking statements may also be included 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 our ability to reduce costs pursuant to the Restructuring
Activities, (2) adjustments to our cost structure and other actions designed to
respond to market conditions and improve our performance, and the anticipated
effectiveness and expenses associated with these actions, (3) 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, (4) 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, (5) competitive factors, (6) acquisition and development plans,
(7) our stock repurchase program, (8) expectations regarding legal proceedings
and other contingent liabilities, and (9) 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. 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 the
2020 10-K, Part II, 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 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 Condensed
Consolidated Financial Statements and the accompanying notes included herein as
well as our 2020 10-K. Our 2020 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
three business segments: Marketing Services, Customer Care, and Fulfillment &
Logistics Services. Our mission is to partner with clients to provide them with
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.
28--------------------------------------------------------------------------------
Table of Contents
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 all 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, and the financial condition of and budgets available to our clients, among other factors. We remain committed to making the investments necessary to execute our multichannel strategy while also continuing to adjust our cost structure to reduce costs. We continue to face a challenging competitive environment. The decrease in client budgets/investments in customer experience activities due to the global pandemic naturally increased competition. The sale of our direct mail assets and equipment to Summit inApril 2020 , together with our restructuring activities, have and will continue to result in a decrease of recurring expenses. These are all part of our efforts to prioritize our investments and focus on our core business of partnering with our clients to seamlessly manage experiences with their customers. We expect these actions will continue to enhance our liquidity and financial flexibility, but no assurance can be given that we will sufficiently offset the loss of revenue we have suffered over the past number of years. For additional information, see "Liquidity and Capital Resources" section. COVID-19 In the first quarter of 2020, we took a number of precautionary measures designed to help minimize the risk of the spread of the virus among our employees, including suspending all non-essential employee travel worldwide, temporarily closing the majority of our domestic and foreign offices, extensively and frequently disinfecting our offices that remained open, enforcing social distancing to the extent possible and requiring the majority of our employees to work remotely. These measures will remain in effect until we can safely re-open our offices. We continue to closely monitor the impact of the pandemic on all aspects of our business, including the impact on our customers, employees, suppliers, supply-chain, freight costs, vendors and business partners, as well as how it has impacted our liquidity and ability to comply with covenants in our credit agreement. The emergence of variants of the virus has created increased uncertainties surrounding the impact of the virus. In connection with the pandemic, some of our customers have reduced the amount of work we provide to them while other customers have requested accommodations including extensions of payment or restructuring of agreements. In addition, some of our customers have declared bankruptcy and it is possible that additional customers will file for bankruptcy in the coming months. However, due to pandemic-related changes, including an increased need for contact center services, our Customer Care solutions services secured new contracts as well as increased volume for existing customers. While the pandemic has not had a material effect on our business, liquidity or ability to comply with covenants to date, given the dynamic nature of the pandemic, we may experience material impacts in the future. We recommend that you review "Item 1A. Risk Factors" in our 2020 10-K for a further discussion on COVID-19 and the risks the Company currently faces. Recent Developments
On
Restructuring Activities
Our management team continuously reviews and adjusts our cost structure and operating footprint, optimize our operations, and invest in improved technology.
In the three months ended
We expect that in connection with our cost-saving and restructuring initiatives, we will incur total restructuring charges of approximately$27.1 million through the end of 2021. We have recognized$26.1 million of restructuring charges to date, and we expect to incur an additional$1.0 million of restructuring charges through the end of 2021.
Please refer to Note N, Restructuring Activities, in the Notes to Condensed Consolidated Financial Statements for further discussion on restructuring activities.
29
--------------------------------------------------------------------------------
Table of Contents Results of Operations
Operating results were as follows:
Nine Months Ended September
Three Months Ended September 30, 30,
In thousands, except
percentages 2021 2020 % Change 2021 2020 % Change
Revenues $ 49,597 $ 47,702 4.0 % $ 142,610 $ 129,825 9.8 %
Operating expenses 45,371 46,917 (3.3 )% 137,834 140,033 (1.6 )%
Operating income
(loss) $ 4,226 $ 785 438.3 % $ 4,776 $ (10,208 ) 146.8 %
Operating margin 8.5 % 1.6 % 3.3 % (7.9 )%
Income (loss) before
income taxes $ 4,576 $ (1,674 ) 373.3 % $ 14,233 $ (15,601 ) 191.2 %
Diluted earnings
(loss) per common
share from operations $ 0.52 $ (0.27 ) 294.1 % $ 1.57 $ (0.48 ) 428.1 %
Consolidated Results
Revenues
Three months ended
Revenues increased$1.9 million , or 4.0%, in the three months endedSeptember 30, 2021 , compared to the three months endedSeptember 30, 2020 . Revenue in our Customer Care segment increased$1.8 million , or 10.2%, to$19.8 million . Revenue in our Fulfillment & Logistics Services segment increased$0.5 million , or 3.8%, to$15.1 million and revenue in our Marketing Services segment decreased$0.5 million , or 3.2%, to$14.7 million .
Nine months ended
Revenues increased$12.8 million , or 9.8%, in the nine months endedSeptember 30, 2021 , compared to the nine months endedSeptember 30, 2020 . The largest increase was in our Customer Care segment, which increased by$13.9 million , or 33.3%, to$55.5 million . This increase was driven by strong project-based revenue for new clients and increases in demand by existing clients. Our Marketing Services segment revenue increased by$0.1 million , or 0.3%, to$41.8 million . These increases were partially offset by$1.2 million , or 2.6% decrease in Fulfillment and Logistics Services. Among other factors, our revenue performance depends 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 targeted media advertising resulting in a benefit to our business. Targeted media advertising results can be more effectively tracked, enabling measurement of the return on marketing investment. Operating Expenses
Three months ended
Operating expenses were
Production and distribution expenses decreased$1.0 million , or 7.8%, compared to the three months endedSeptember 30, 2020 primarily due to lower print costs as a result of lower print revenue. Restructuring expense decreased$0.5 million , or 34.0%, compared to the three months endedSeptember 30, 2020 primarily due to higher severance cost in 2020 resulting from the closure of mail facilities, and other headcount reduction in Fulfillment and Marketing Services. See Note N, Restructuring Activities, in the Notes to Condensed Consolidated Financial Statements for further discussion of restructuring activities. Labor expense increased$0.1 million and Advertising, Selling, General and Administrative expense was consistent with the prior year period.
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 tend to fluctuate in line with revenues and the demand for our services.
Postage costs for mailings are borne by our clients and are not directly reflected in our revenues or expenses.
Nine months ended
Operating expenses were$137.8 million in the nine months endedSeptember 30, 2021 , a decrease of$2.2 million , or 1.6%, compared to$140.0 million in the nine months endedSeptember 30, 2020 . 30
--------------------------------------------------------------------------------
Table of Contents
Labor costs increased$5.3 million , or 6.9%, compared to the nine months endedSeptember 30, 2020 , primarily due to higher labor expenses in our Customer Care segment driven by the increased volume of work. Advertising, Selling, General and Administrative expense decreased$2.4 million , or 15.1%, compared to the nine months endedSeptember 30, 2020 , primarily due to cost reduction initiatives as well as a favorable$0.8 million litigation settlement recognized in the three months endedMarch 31, 2021 . Production and distribution expense decreased$1.1 million , or 2.9%, compared to the nine months endedSeptember 30, 2020 , primarily due to lower print cost from lower print revenue and our cost reduction efforts. Depreciation expense declined$0.9 million , or 32.3%, compared to the prior year period, primarily due to the disposal of production equipment from our Jacksonville facility which we exited in 2020. The largest components of our operating expenses are labor, mail 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. Mail transportation rates have increased over the last few years due to demand and supply fluctuations within the transportation industry. Future changes in mail transportation expenses will continue to impact our total production costs and total operating expenses 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.
In the nine months ended
Interest Expense, net
Three months ended
Interest expense, net, in the three months endedSeptember 30, 2021 decreased$52 thousand compared to the three months endedSeptember 30, 2020 due to the lower interest expense associated with lower debt balances as compared to the prior year quarter.
Nine months ended
Interest expense, net, in the nine months endedSeptember 30, 2021 decreased$237 thousand compared to the nine months endedSeptember 30, 2020 due to the write off of interest expense related to our PPP loan, as well as the lower interest expense associated with lower debt balances as compared to the same period last year. Other (income) Expense
Three months ended
Other income, net, for the three months ended
Nine months ended
Other income, net, for the nine months ended
31
--------------------------------------------------------------------------------
Table of Contents Income Taxes
Three months ended
The income tax provision of$0.2 million in the third quarter of 2021 represents an increase in income tax provision of$0.2 million when compared to the third quarter of 2020. Our effective tax rate was 3.8% for the third quarter of 2021, an increase of 0.6% when compared to the third quarter of 2020. The effective income tax rate for the three months endedSeptember 30, 2021 differs from the federal statutory rate of 21.0%, primarily due toU.S. state income taxes and income earned in foreign jurisdictions.
Nine months ended
The income tax provision of$1.0 million in the nine months endedSeptember 30, 2021 represents an increase in income tax provision of$13.9 million when compared to the nine months endedSeptember 30, 2020 . This is a result of the benefit recorded in the first quarter of 2020 on the carryback of federal net operating losses to prior periods under the CARES Act. Our effective tax rate was 7.2% for the nine months endedSeptember 30, 2021 , a decrease of 75.2% when compared to the effective tax rate of 82.4% for the nine months endedSeptember 30, 2020 . The effective income tax rate for the nine months endedSeptember 30, 2021 differs from the federal statutory rate of 21.0%, primarily due toU.S. state income taxes and income earned in foreign jurisdictions. Segment Results
The following is a discussion and analysis of the results of our reporting
segments for the three months ended
Marketing Services:
Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2021 % Change 2020 2021 % Change 2020
Revenues $ 14,729 -3.2 % $ 15,217 $ 41,815 0.3 % $ 41,682
EBITDA 2,772 129.3 % 1,209 5,080 46.4 % 3,470
Operating Income 2,655 148.6 % 1,068 4,668 55.2 % 3,007
Operating Income % of
Revenue 18.0 % 7.0 % 11.2 % 7.2 %
32--------------------------------------------------------------------------------
Table of Contents
Three months ended
Marketing Services segment revenue decreased$0.5 million , or 3.2%, due to the lower volume from the existing customers. Operating income for the three months endedSeptember 30, 2021 increased$1.6 million from the prior year quarter due to our cost reduction efforts.
Nine months ended
Marketing Services segment revenue increased$0.1 million , or 0.3%, driven by the$3.0 million of mail and data services revenue that was transferred into Marketing Services segment starting fromJuly 2020 following the sale of the bulk of our direct mail operations and the decline of$2.9 million in other marketing service revenue as a result of the reduction of client budgets due to the COVID-19 pandemic. Operating income in the nine months endedSeptember 30, 2021 increased$1.7 million , or 55.2% driven by our cost reduction efforts. Customer Care: Three Months Ended September 30, Nine Months Ended September 30, In thousands 2021 % Change 2020 2021 % Change 2020 Revenues$ 19,768 10.2 %$ 17,933 $ 55,503 33.3 %$ 41,640 EBITDA 4,014 33.4 % 3,009 9,964 129.5 % 4,342 Operating Income 3,819 42.2 % 2,686 9,312 161.4 % 3,562 Operating Income % of Revenue 19.3 % 15.0 % 16.8 % 8.6 %
Three months ended
Customer Care segment revenue increased$1.8 million , or 10.2%, primarily due to additional project work and an increase in volumes with existing clients. Operating Income was$3.8 million for the three months endedSeptember 30, 2021 , compared to operating income of$2.7 million for the three months endedSeptember 30, 2020 . The$1.1 million improvement was driven by higher revenue from extension of Covid related project work and increased volume from other clients.
Nine months ended
Customer Care segment revenue increased$13.9 million , or 33.3%, primarily due to additional project work and an increase in volumes with existing clients. Operating Income was$9.3 million for the nine months endedSeptember 30, 2021 , compared to operating income of$3.6 million for the nine months endedSeptember 30, 2020 . This$5.7 million improvement was driven by higher revenue from extension of Covid related project work and increased volume from other clients. The contribution margin improved by 8.2% in the nine months endedSeptember 30, 2021 due to the increase in revenue as well as our restructuring efforts.
Fulfillment & Logistics Services:
Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2021 % Change 2020 2021 % Change 2020
Revenues $ 15,100 3.8 % $ 14,552 $ 45,292 -2.6 % $ 46,503
EBITDA 1,693 517.9 % 274 4,565 -421.9 % (1,418 )
Operating Income
(loss) 1,511 1011.0 % 136 4,024 -254.6 % (2,603 )
Operating Income % of
Revenue 10.0 % 0.9 % 8.9 % -5.6 %
Three months ended
Fulfillment & Logistics Services segment revenue increased$0.5 million , or 3.8%, primarily driven by the increase of work from existing customers. We are starting to see volumes for existing customers return to pre-COVID levels. Operating income was$1.5 million for the three months endedSeptember 30, 2021 compared to$0.1 million for the three months endedSeptember 30, 2020 . The$1.4 million improvement in operating income was primarily driven by the higher revenue and our cost reduction efforts.
Nine months ended
Fulfillment & Logistics Services segment revenue decreased$1.2 million , or 2.6%, compared to the prior year period. The elimination of direct mail operations resulted in a$4.7 million revenue decline as outsourced direct mail is now included in our Marketing Services segment. This decline was partially offset by the$3.5 million revenue increase driven by the increased demand from existing customers. Operating income was$4.0 million for the nine months endedSeptember 30, 2021 compared to operating loss of$2.6 million for the nine months endedSeptember 30, 2020 . The$6.6 million improvement in operating income was primarily driven by the higher revenue and our cost reduction efforts. Operating income for the nine months endedSeptember 30, 2021 also included a favorable$0.8 million litigation settlement. 33
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
Sources and Uses of Cash Our cash and cash equivalent balances were$16.0 million and$29.4 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. Our cash and cash equivalent and restricted cash balances were$18.7 million and$33.6 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. During 2020 we received an aggregate of$9.6 million in tax refunds related to our NOL and capital loss carryback for the 2013-2018 tax years. We also expect to receive additional tax refunds of$7.6 million in 2021, as a result of the change to the tax NOL carryback provisions included in the CARES Act. OnApril 20, 2020 , the Company received PPP Term Note proceeds in the amount of$10.0 million . We applied for forgiveness of the entire$10 million PPP Term Note in the first quarter of 2021. OnJune 10, 2021 , we received notice that the entire amount of our PPP Loan was forgiven by the SBA. We recorded the$10.0 million of debt extinguishment as "Gain from extinguishment of debt (Paycheck Protection Program Term Note)" in the Condensed Consolidated Statements of Comprehensive Income (Loss). Our principal sources of liquidity are cash on hand, cash provided by operating activities, and borrowings. 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 debt services, finance and operating leases and unfunded pension plan benefit payments) and other cash needs for our operations for at least the next twelve months through a combination of cash on hand, cash flow from operations, and borrowings under the Texas Capital Credit Facility. Although the Company believes that it will be able to meet its cash needs for the foreseeable future, if unforeseen circumstances arise the company may need to seek alternative sources of liquidity. To date, the COVID-19 pandemic has not had a material impact on the Company's liquidity or on the Company's ability to meet its obligations under the Texas Capital Credit Facility, including its ability to comply with all covenants. We will continue to closely monitor the impact the COVID-19 pandemic has on the Company's liquidity and assess whether any additional cost saving measures, including capital expenditure deferral or human capital decisions, are needed. Operating Activities Net cash used in operating activities for the nine months endedSeptember 30, 2021 was$5.9 million , compared to net cash used in operating activities of$11.4 million for the nine months endedSeptember 30, 2020 . The$5.5 million year-over-year decrease in cash used in operating activities was primarily due to$16.0 million higher net income which was partially offset by$10 million non-cash gain from extinguishment of the PPP loan in the nine months endedSeptember 30, 2021 and$2.4 million lower non-cash restructuring expense in the nine months endedSeptember 30, 2021 as compared to 2020. Investing Activities Net cash used in investing activities was$2.4 million for the nine months endedSeptember 30, 2021 , compared to net cash provided by investing activities of$0.5 million for the nine months endedSeptember 30, 2020 The$2.9 million year-over-year decrease was mainly due to the$1.9 million of proceeds from sale of property received in the nine months endedSeptember 30, 2020 and the$1.1 million increase in capital expenditure in the nine months endedSeptember 30, 2021 as compared to 2020. Financing Activities Net cash used in financing activities was$4.8 million for the nine months endedSeptember 30, 2021 , as compared to$7.5 million in net cash provided by financing activities for the nine months endedSeptember 30, 2020 . The$12.3 million year-over-year decrease was primarily due to the$10 million cash proceeds from the PPP loan we received in the second quarter of 2020, and the$4 million paydown of the Texas Capital Credit Facility in the second quarter of 2021 as compared to the$1.6 million paydown of theTexas Capital Credit Facility in the nine months endedSeptember 30, 2020 .Foreign Holdings of Cash
Consolidated foreign holdings of cash as of
Long Term Debt OnApril 17, 2017 , we entered the Texas Capital Credit Facility that provided us with a$20.0 million revolving credit facility and for letters of credit issued byTexas Capital Bank up to$5.0 million . OnMay 5, 2021 , we entered into a fourth amendment to the Texas Capital Credit Facility which further extended the maturity of the facility by one year toApril 17, 2023 and decreased the borrowing capacity to$15.0 million . 34
--------------------------------------------------------------------------------
Table of Contents
At each ofSeptember 30, 2021 andDecember 31, 2020 , we had letters of credit in the amount of$1.1 million outstanding. No amounts were drawn against these letters of credit atSeptember 30, 2021 andDecember 31, 2020 . 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 activities atSeptember 30, 2021 andDecember 31, 2020 .
As of
OnApril 20, 2020 , the Company received loan proceeds in the amount of$10.0 million under the Small Business Administration PPP Term Note. The PPP Term Note, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. OnJune 10, 2021 , we received notice that the entire amount of our PPP Loan 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 Condensed Consolidated Statements of Comprehensive Income (Loss). Outlook We consider such factors as total cash and cash equivalents and restricted cash, current assets, current liabilities, total debt, revenues, operating income (loss), 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 Condensed Consolidated Financial Statements.
Critical and Recent Accounting Policies
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. Actual results could differ materially from those estimates under different assumptions and conditions. Refer to the 2020 10-K for a discussion of our critical accounting policies.
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.
© Edgar Online, source
