U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
HARTE HANKS, INC.
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification Number) |
(Address of principal executive offices, including zip code)
(
(Registrant’s telephone number including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered |
| | | OTCQX |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| | ☒ | Smaller reporting company | |
|
|
| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
The number of shares outstanding of the issuer’s common stock as of October 15, 2021 was
HARTE HANKS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FORM 10-Q REPORT
For the Quarterly Period Ended September 30, 2021
Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Balance Sheets
(Unaudited)
| September 30, | December 31, | |||||||
| In thousands, except per share and share amounts | 2021 | 2020 | ||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable (less allowance for doubtful accounts of $ at September 30, 2021 and $ at December 31, 2020) | ||||||||
| Contract assets | ||||||||
| Prepaid expenses | ||||||||
| Prepaid income taxes and income tax receivable | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment (less accumulated depreciation of $ at September 30, 2021 and $ at December 31, 2020) | ||||||||
| Right-of-use assets | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | |||||||
| Accrued payroll and related expenses | ||||||||
| Short-term debt | ||||||||
| Deferred revenue and customer advances | ||||||||
| Customer postage and program deposits | ||||||||
| Other current liabilities | ||||||||
| Short-term lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, net of current portion | ||||||||
| Pensions | ||||||||
| Long-term lease liabilities, net of current portion | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Preferred Stock, $ par value, shares authorized; shares of Series A Convertible Preferred Stock, issued and outstanding | ||||||||
| Stockholders’ deficit | ||||||||
| Common stock, $ par value, shares authorized; shares issued, and shares outstanding at September 30, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Less treasury stock, shares at cost at September 30, 2021 and shares at cost at December 31, 2020 | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities, Preferred Stock and stockholders’ deficit | $ | $ | ||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
| Three Months Ended September 30, | ||||||||
| In thousands, except per share amounts | 2021 | 2020 | ||||||
| Revenue | $ | $ | ||||||
| Operating expenses | ||||||||
| Labor | ||||||||
| Production and distribution | ||||||||
| Advertising, selling, general and administrative | ||||||||
| Restructuring expense | ||||||||
| Depreciation expense | ||||||||
| Total operating expenses | ||||||||
| Operating income | ||||||||
| Other (income) expenses | ||||||||
| Interest expense, net | ||||||||
| Other, net | ( | ) | ||||||
| Total other (income) expenses | ( | ) | ||||||
| Income (loss) before income taxes | ( | ) | ||||||
| Income tax expense (benefit) | ( | ) | ||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Less: Preferred Stock dividends | ||||||||
| Less: Earnings attributable to participating securities | ||||||||
| Income (loss) attributable to common stockholders | $ | $ | ( | ) | ||||
| Earnings (loss) per common share | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Diluted | $ | $ | ( | ) | ||||
| Weighted average shares used to compute income (loss) per share attributable to common shares | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| Comprehensive income (loss), net of tax: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustment to pension liability, net | ||||||||
| Foreign currency translation adjustment | ( | ) | ||||||
| Total other comprehensive (loss) income, net of tax | $ | ( | ) | $ | ||||
| Comprehensive income | $ | $ | ||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| In thousands, except per share amounts | 2021 | 2020 | ||||||
| Operating revenues | $ | $ | ||||||
| Operating expenses | ||||||||
| Labor | ||||||||
| Production and distribution | ||||||||
| Advertising, selling, general and administrative | ||||||||
| Restructuring expense | ||||||||
| Depreciation expense | ||||||||
| Total operating expenses | ||||||||
| Operating income (loss) | ( | ) | ||||||
| Other (income) expenses, net | ||||||||
| Interest expense, net | ||||||||
| Gain from extinguishment of debt (Paycheck Protection Program Term Note) | ( | ) | ||||||
| Other, net | ( | ) | ||||||
| Total other (income) expenses, net | ( | ) | ||||||
| Income (loss) before income taxes | ( | ) | ||||||
| Income tax expense (benefit) | ( | ) | ||||||
| Net Income (loss) | ( | ) | ||||||
| Less: Preferred stock dividends | ||||||||
| Less: Earnings attributable to participating securities | ||||||||
| Income (loss) attributable to common stockholders | $ | $ | ( | ) | ||||
| Income (loss) per common share | ||||||||
| Basic | $ | $ | ( | ) | ||||
| Diluted | $ | $ | ( | ) | ||||
| Weighted-average shares used to compute income (loss) per share attributable to common shares | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| Comprehensive income (loss) | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustment to pension liability | ||||||||
| Foreign currency translation adjustment | ( | ) | ||||||
| Total other comprehensive income, net of tax | $ | $ | ||||||
| Comprehensive income | $ | $ | ||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Stockholders' Deficit
(Unaudited)
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||
| Preferred | Common | Paid-in | Retained | Treasury | Comprehensive | Stockholders’ | ||||||||||||||||||||||
| In thousands | Stock | Stock | Capital | Earnings | Stock | Loss | Deficit | |||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||
| Vesting of RSU's | ( | ) | ||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||
| Vesting of RSU's | ( | ) | ||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||
| Vesting of RSU's | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||
| Preferred | Common | Paid-in | Retained | Treasury | Comprehensive | Stockholders’ | ||||||||||||||||||||||
| In thousands | Stock | Stock | Capital | Earnings | Stock | Loss | Deficit | |||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||
| Vesting of RSU's | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Exercise of Stock Options | ( | ) | ||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||
| Vesting of RSU's | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||
| Vesting of RSU's | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net Income | ||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
Harte Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| In thousands | 2021 | 2020 | ||||||
| Cash Flows from Operating Activities | ||||||||
| Net Income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities | ||||||||
| Depreciation expense | ||||||||
| Restructuring | ||||||||
| Stock-based compensation | ||||||||
| Gain from extinguishment of debt (Paycheck Protection Program Term Note) | ( | ) | ||||||
| Net pension (payment) cost | ( | ) | ||||||
| Deferred income taxes | ( | ) | ||||||
| Changes in assets and liabilities: | ||||||||
| Increase in accounts receivable and contract assets | ( | ) | ( | ) | ||||
| Decrease (Increase) in prepaid expenses, income tax receivable and other current assets | ( | ) | ||||||
| Decrease in accounts payable and accrued expenses | ||||||||
| Increase in other accrued expenses and liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of property, plant and equipment | ||||||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||
| Cash Flows from Financing Activities | ||||||||
| Borrowings | ||||||||
| Repayment of borrowings | ( | ) | ( | ) | ||||
| Debt financing costs | ( | ) | ( | ) | ||||
| Payment of finance leases | ( | ) | ( | ) | ||||
| Treasury stock activities | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ) | ||||||
| Net decrease in cash and cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Cash and cash equivalents and restricted cash at beginning of period | ||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | $ | ||||||
| Supplemental disclosures | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes, net | $ | $ | ||||||
| Non-cash investing and financing activities | ||||||||
| Purchases of property, plant and equipment included in accounts payable | $ | $ | ||||||
See Accompanying Notes to Condensed Consolidated Financial Statements
Harte Hanks, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A - Overview and Significant Accounting Policies
Background
Harte Hanks, Inc. together with its subsidiaries (“Harte Hanks,” “Company,” “we,” “our,” or “us”) is a leading global customer experience company. With offices in North America, Asia-Pacific and Europe, Harte Hanks works with some of the world’s most respected brands.
The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business. In connection with the pandemic, some of our customers have reduced their demand for our services 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. Our Customer Care business has experienced increases in volumes and has added new business from existing clients as well as new clients due to the increased demand for these services driven by COVID-19. While the COVID-19 pandemic has not had a material adverse impact on the Company’s business operations, liquidity or ability to comply with covenants to date, the pandemic has caused significant volatility in the global markets and has caused many companies to slow production or find alternative means for employees to perform their work. It is possible that the COVID-19 pandemic, the measures taken by governments around the globe, including in connection with the emergence of variants of the virus and the resulting economic impact may materially and adversely affect the Company’s results of operations, cash flows and financial position as well as the financial stability of its customers. The COVID-19 pandemic may also exacerbate other risks discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form-10K for the fiscal year ended December 31, 2020 filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 24, 2021, and as amended on April 30, 2021 (the “2020 10-K”), which could materially affect our business, financial condition, or future results. 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.
Segment Reporting
The Company operates
Accounting Principles
Our unaudited interim condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in our 2020 10-K.
Consolidation
The accompanying unaudited interim condensed consolidated financial statements include the accounts of Harte Hanks, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. As used in this report, the terms “Harte Hanks,” “the Company,” “we,” “us,” or “our” may refer to Harte Hanks, Inc., one or more of its consolidated subsidiaries, or all of them taken as a whole, as the context may require.
Interim Financial Information
The condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 8-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Certain prior period amounts in the condensed consolidated financial statements and accompanying notes have been reclassified to conform to the current period's presentation.
Use of Estimates
The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results and outcomes could differ from those estimates and assumptions. Such estimates include, but are not limited to, estimates related to lease accounting; pension accounting; fair value for purposes of assessing long-lived assets for impairment; income taxes; stock-based compensation; and contingencies. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances could result in revised estimates and assumptions.
Operating Expense Presentation in Condensed Consolidated Statements of Comprehensive Income (Loss)
The “Labor” line in the Condensed Consolidated Statements of Comprehensive Income (Loss) includes all employee payroll and benefits costs, including stock-based compensation, along with temporary labor costs. The “Production and distribution” and “Advertising, selling, general and administrative” lines do not include any labor, depreciation, or amortization expense.
Revenue Recognition
We recognize revenue upon the transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for such products or services based on the relevant contract. We apply the following five-step revenue recognition model:
| • | Identification of the contract, or contracts, with a customer |
| • | Identification of the performance obligations in the contract |
| • | Determination of the transaction price |
| • | Allocation of the transaction price to the performance obligations in the contract |
| • | Recognition of revenue when (or as) we satisfy the performance obligation |
Certain client programs provide for adjustments to billings based upon whether we achieve certain performance criteria. In these circumstances, revenue is recognized when the performance criteria are met. We record revenue net of any taxes collected from customers and subsequently remitted to governmental authorities. Any payments received in advance of the performance of services or delivery of the product are recorded as deferred revenue until such time as the services are performed or the product is delivered. Costs incurred for search engine marketing solutions payable to the engine host and postage costs of mailings are billed to our clients and are not directly reflected in our revenue.
Revenue from all our segments is recognized when control of the promised goods or services is transferred to the customer. Fees for these services are determined by the terms set forth in each contract. These fees are typically set at a fixed price or rate by transaction occurrence, service provided, time spent, or product delivered.
For arrangements requiring design and build of a database, revenue is not recognized until client acceptance occurs. Up-front fees billed during the setup phase for these arrangements are deferred and direct build costs are capitalized. Pricing for these types of arrangements is typically based on a fixed price determined in the contract. Revenue from other database marketing solutions is recognized ratably over the contractual service period. Pricing for these services is typically based on a fixed price per month or per contract.
Fair Value of Financial Instruments
FASB ASC 820, Fair Value Measurements and Disclosures, (“ASC 820”) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into three levels:
| Level 1 | Quoted prices in active markets for identical assets or liabilities. |
| Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Because of their maturities and/or variable interest rates, certain financial instruments have fair values approximating their carrying values. These instruments include cash and cash equivalents and restricted cash, accounts receivable, trade payables, and long-term debt. The fair value of the assets in our funded pension plan is disclosed in Note H, Employee Benefit Plans.
Leases
We determine if an arrangement is a lease at its inception. Operating and finance leases are included in the lease right-of-use (“ROU”) assets and in the current portion and long-term portion of lease liabilities on our condensed consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of each lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date of each lease to determine the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease, which are included in the lease ROU assets when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain real estate leases, we account for the lease and non-lease components as a single lease component.
Note B - Recent Accounting Pronouncements
Recently adopted accounting pronouncements
Income taxes
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as a tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The standard became effective for us in the fiscal year 2021, although early adoption is permitted. We adopted this accounting standard update (“ASU”) as of January 1st, 2021. The adoption did not have a material impact on our condensed consolidated financial statements.
Defined Pension Plan
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”), which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 was effective for fiscal years ending after December 15, 2020, and early adoption was permitted. We adopted ASU 2018-14 as of December 31, 2020. The adoption did not have a material impact on our consolidated financial statements.
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting Summary”. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. LIBOR and other inter-bank offered rates are widely used benchmarks or reference rates in the United States and globally. With global capital markets expected to move away from LIBOR and other inter-bank offered rates and toward more observable or transaction-based rates that are less susceptible to manipulation, the FASB launched a project in late 2018 to address potential accounting challenges expected to arise from the transition. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This ASU is effective March 12, 2020 through December 31, 2022. We adopted this ASU on March 12, 2020 and it did not have a material impact on our condensed consolidated financial statements.
Note C - Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. Under ASC 606, Revenue from Contracts with Customers, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of the new standard, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. This standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The standard also includes criteria for the capitalization and amortization of certain contract acquisition and fulfillment costs.
Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our contracts with customers state the terms of sale, including the description, quantity, and price of the product or service purchased. Payment terms can vary by contract, but the period between invoicing and when payment is due is not significant. At September 30, 2021 and December 31, 2020, our contracts do not include any significant financing components.
Consistent with legacy GAAP, we present sales taxes assessed on revenue-producing transactions on a net basis.
Disaggregation of Revenue
We disaggregate revenue by three key revenue streams which are aligned with our business segments. The nature of the services offered by each key revenue stream is different. The following table summarizes revenue from contracts with customers for the three and nine months ended September 30, 2021 and 2020 by our three business segments and the pattern of revenue recognition:
| Three Months Ended September 30, 2021 | ||||||||||||
| In thousands | Revenue for performance obligations recognized over time | Revenue for performance obligations recognized at a point in time | Total | |||||||||
| Marketing Services | $ | $ | $ | |||||||||
| Customer Care | ||||||||||||
| Fulfillment and Logistics Services | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| Three Months Ended September 30, 2020 | ||||||||||||
| In thousands | Revenue for performance obligations recognized over time | Revenue for performance obligations recognized at a point in time | Total | |||||||||
| Marketing Services | $ | $ | $ | |||||||||
| Customer Care | ||||||||||||
| Fulfillment and Logistics Services | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||
| In thousands | Revenue for performance obligations recognized over time | Revenue for performance obligations recognized at a point in time | Total | |||||||||
| Marketing Services | $ | $ | $ | |||||||||
| Customer Care | ||||||||||||
| Fulfillment and Logistics Services | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||
| In thousands | Revenue for performance obligations recognized over time | Revenue for performance obligations recognized at a point in time | Total | |||||||||
| Marketing Services | $ | $ | $ | |||||||||
| Customer Care | ||||||||||||
| Fulfillment and Logistics Services | ||||||||||||
| Total Revenues | $ | $ | $ | |||||||||
Our contracts with customers may consist of multiple performance obligations. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”) basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. For most performance obligations, we determine SSP based on the price at which the performance obligation is sold separately. Although uncommon, if the SSP is not observable through past transactions, we estimate the SSP taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Further discussion of other performance obligations in each of our major revenue streams follows:
Marketing Services
Our Marketing Services segment delivers strategic planning, data strategy, performance analytics, creative development and execution, technology enablement, marketing automation, and database management. We create relevancy by leveraging data, insight, and our extensive experience in leading clients as they engage their customers through digital, traditional, and emerging channels. We are known for helping clients build deep customer relationships, create connected customer experiences, and optimize each and every customer touch point in order to deliver desired business outcomes.
Most marketing services performance obligations are satisfied over time and often offered on a project basis. We have concluded that the best approach to measure the progress toward completion of the project-based performance obligations is the input method, which is based on either the costs or labor hours incurred to date depending upon whether costs or labor hours more accurately depict the transfer of value to the customer.
The variable consideration in these contracts primarily relates to time and material-based services and reimbursable out-of-pocket travel costs, both of which are estimated using the expected value method. For time and material-based contracts, we use the “as invoiced” practical expedient.
Our databases solutions are built around centralized marketing databases with services rendered to build custom database, database hosting services, customer or target marketing lists and data processing services.
These performance obligations, including services rendered to build a custom database, database hosting services, customer or target marketing lists and data processing services, may be satisfied over time or at a point in time. We provide SaaS solutions to host data for customers and have concluded that they are stand-ready obligations to be recognized over time on a monthly basis. Our promise to provide certain data related services meets the over-time recognition criteria because our services do not create an asset with an alternative use, and we have an enforceable right to payment. For performance obligations recognized over time, we choose either the input (i.e., labor hour) or output method (i.e., number of customer records) to measure the progress toward completion depending on the nature of the services provided. Some of our other data-related services do not meet the over-time criteria and are therefore, recognized at a point-in-time, typically upon the delivery of a specific deliverable.
Our contracts may include outsourced print production work for our clients. These contracts may include a promise to purchase postage on behalf of our clients. In such cases, we have determined we are an agent, rather than principal and therefore recognize net consideration as revenue.
We charge our customers for certain data-related services at a fixed transaction-based rate, e.g., per thousand customer records processed. Because the quantity of transactions is unknown at the onset of a contract, our transaction price is variable, and we use the expected value method to estimate the transaction price. The uncertainty associated with the variable consideration generally resolves within a short period of time since the duration of these contracts is generally less than two months.
Customer Care
We operate tele-service workstations in the United States, Asia, and Europe to provide advanced contact center solutions such as: speech, voice and video chat, integrated voice response, analytics, social cloud monitoring, and web self-service.
Performance obligations are stand-ready obligations and are satisfied over time. With regard to account management and software as a service (“SaaS”), we use a time-elapsed output method to recognize revenue. For performance obligations where we charge customers a transaction-based fee, we use the output method based on transaction quantities. In most cases, our contracts provide us the right to invoice for services provided, therefore, we generally use the “as invoiced” practical expedient to recognize revenue associated with these performance obligations unless significant discounts are offered in a contract and prices for services do not represent their SSPs.
The variable consideration in our contracts results primarily from the transaction-based fee structure of some performance obligations with their total transaction quantities to be provided unknown at the onset of a contract, which are estimated using the expected value method.
Fulfillment & Logistics Services
Our services, delivered internally and with our partners, include: printing, lettershop, advanced mail optimization (including commingling services), logistics and transportation optimization, monitoring and tracking, to support traditional and specialized mailings. Our print and fulfillment centers in Massachusetts and Kansas provide custom kitting services, print on demand, product recalls, trade marketing fulfillment, ecommerce product fulfillment, sampling programs, and freight optimization, thereby allowing our customers to distribute literature and other marketing materials.
Most performance obligations offered within this revenue stream are satisfied over time and utilize the input or output method, depending on the nature of the service, to measure progress toward satisfying the performance obligation. For performance obligations where we charge customers a transaction-based fee, we utilize the output method based on the quantities fulfilled. Services provided through our fulfillment centers are typically priced at a per transaction basis and our contracts provide us the right to invoice for services provided and reflects the value to the customer of the services transferred to date. In most cases, we use the “as invoiced” practical expedient to recognize revenue associated with these performance obligations unless significant discounts are offered in a contract and prices for services do not represent their standalone selling prices. Prior to the closure of our direct mail production facilities, our direct mail business contracts may have included a promise to purchase postage on behalf of our clients; in such cases, we have determined we are an agent, rather than principal and therefore recognize net consideration as revenue.
The variable consideration in our contracts results primarily from the transaction-based fee structure of some performance obligations with their total transaction quantities to be provided unknown at the onset of a contract, which is estimated using the expected value method.
Upfront Non-Refundable Fees
We may receive non-refundable upfront fees from customers for implementation of our SaaS database solutions products or for providing training in connection with our contact center solutions. These activities are not deemed to transfer a separate promised service and therefore, represent advanced payments. As we do not deem these activities as transferring a separate promised service, the receipt of such fees represents advanced payments. Where customers have an option to renew a contract, the customer is not required to pay similar upfront fees upon renewal. As a result, we have determined that these renewal options provide for the purchase of future services at a reduced rate and therefore, provide a material right. These upfront non-refundable fees are recognized over the period of benefit which is generally consistent with estimated customer life (four to five years for database solutions contracts and six months to one year for contact center contracts). The balance of upfront non-refundable fees collected from customers was immaterial as of September 30, 2021 and December 31, 2020.
Transaction Price Allocated to Future Performance Obligations
We have elected to apply certain optional exemptions that limit the disclosure requirements over remaining performance obligations at period end to exclude: performance obligations that have an original expected duration of one year or less, transactions using the “as invoiced” practical expedient, or when a performance obligation is a series and we have allocated the variable consideration directly to the services performed. As of September 30, 2021, we had
Contract Balances
We record a receivable when revenue is recognized prior to invoicing when we have an unconditional right to consideration (only the passage of time is required before payment of that consideration is due) and a contract asset when the right to payment is conditional upon our future performance such as delivery of an additional good or service (e.g. customer contract requires customer’s final acceptance of custom database solution or delivery of final marketing strategy presentation before customer payment is required). If invoicing occurs prior to revenue recognition, the unearned revenue is presented on our Condensed Consolidated Balance Sheet as a contract liability, referred to as deferred revenue. The following table summarizes our contract balances as of September 30, 2021 and December 31, 2020:
| In thousands | September 30, 2021 | December 31, 2020 | ||||||
| Contract assets | $ | $ | ||||||
| Deferred revenue and customer advances | ||||||||
| Deferred revenue, included in other long-term liabilities | ||||||||
Revenue recognized during the nine months ended September 30, 2021 from amounts included in deferred revenue at December 31, 2020 was approximately $
Costs to Obtain and Fulfill a Contract
We recognize an asset for the direct costs incurred to obtain and fulfill our contracts with customers to the extent that we expect to recover these costs and if the benefit is longer than one year. These costs are amortized to expense over the expected period of the benefit in a manner that is consistent with the transfer of the related goods or services to which the asset relates. We impair the asset when recoverability is not anticipated. We capitalized a portion of commission expense, implementation and other costs that represents the cost to obtain a contract. The remaining unamortized contract costs were $
Note D - Leases
We have operating and finance leases for corporate and business offices, service facilities, call centers and certain equipment. Leases with an initial term of 12 months or less are generally not recorded on the balance sheet, unless the arrangement includes an option to purchase the underlying asset, or an option to renew the arrangement, that we are reasonably certain to exercise (short-term leases). Our leases have remaining lease terms of year to years, some of which include options to extend the leases for up to an additional years, and some of which include options to terminate the leases within year.
We sublease our Fullerton (CA), Jacksonville (FL) and Uxbridge (UK) facilities. The leases and subleases for these three facilities expire at various dates, the latest being fiscal year 2023.
As of September 30, 2021, assets recorded under finance and operating leases were approximately $
During the nine months ended September 30, 2021, we impaired two leases for the facilities we no longer occupied. The resulting impairment charges are included in our restructuring expenses for the three and nine months ended September 30, 2021. Please refer to Note N, Restructuring Charges for further details.
The following table presents supplemental balance sheet information related to our financing and operating leases:
| In thousands | As of September 30, 2021 | |||||||||||
| Operating Leases | Finance Leases | Total | ||||||||||
| Right-of-use Assets | $ | $ | $ | |||||||||
| Liabilities | ||||||||||||
| Short-term lease liabilities | ||||||||||||
| Long-term lease liabilities | ||||||||||||
| Total Lease Liabilities | $ | $ | $ | |||||||||
| In thousands | As of December 31, 2020 | |||||||||||
| Operating Leases | Finance Leases | Total | ||||||||||
| Right-of-use Assets | $ | $ | $ | |||||||||
| Liabilities | ||||||||||||
| Short-term lease liabilities | ||||||||||||
| Long-term lease liabilities | ||||||||||||
| Total Lease Liabilities | $ | $ | $ | |||||||||
For the three and nine months ended September 30, 2021 and 2020, the components of lease expense were as follows:
| In thousands | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | ||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | ||||||||
| Interest on lease liabilities | ||||||||
| Total Finance lease cost | ||||||||
| Variable lease cost | ||||||||
| Sublease income | ( | ) | ( | ) | ||||
| Total lease cost, net | $ | $ | ||||||
| In thousands | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | ||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | ||||||||
| Interest on lease liabilities | ||||||||
| Total Finance lease cost | ||||||||
| Variable lease cost | ||||||||
| Sublease income | ( | ) | ( | ) | ||||
| Total lease cost, net | $ | $ | ||||||
Other information related to leases was as follows:
| In thousands | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | ||||||
| Supplemental Cash Flows Information | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Operating cash flows from finance leases | ||||||||
| Financing cash flows from finance leases | ||||||||
| Weighted Average Remaining Lease term | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted Average Discount Rate | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
The maturities of the Company’s finance and operating lease liabilities as of September 30, 2021 are as follows:
| In thousands | Operating Leases (1) | Finance Leases | ||||||
| Year Ending December 31, | ||||||||
| Remainder of 2021 | $ | $ | ||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Total future minimum lease payments | ||||||||
| Less: imputed interest | ||||||||
| Total lease liabilities | $ | $ | ||||||
(1) Non-cancelable sublease proceeds for the remainder of the fiscal year ending December 31, 2021 and the fiscal years ending December 31, 2022 and 2023 of $
Note E - Convertible Preferred Stock
Our Amended and Restated Certificate of Incorporation authorizes us to issue
Series A Preferred Stock has the following rights and privileges:
Liquidation Rights
In the event of a liquidation, dissolution or winding down of the Company or a Fundamental Transaction (defined in the Certificate of Designation for the Series A Preferred Stock), whether voluntary or involuntary, the holders of the Series A Preferred Stock are entitled to receive, prior to and in preference to the holders of common stock, from the assets of the Company available for distribution, an amount equal to the greater of (i) the original issue price, plus any dividends accrued but unpaid thereon, and (ii) such amount per share as would have been payable to Wipro had all shares of Series A Preferred Stock been converted into common stock immediately before such liquidation.
Upon liquidation, after the payment of all preferential amounts required to be paid to the holders of Series A Preferred Stock, the remaining assets of the Company available for distribution to its stockholders shall be distributed among the holders of Common Stock.
Dividends
Upon liquidation, dissolution or winding down of the Company, or a Fundamental Transaction (collectively, a “Liquidation”), shares of Series A Preferred Stock which have not been otherwise converted to common stock, shall be entitled to receive dividends that accrue at a rate of (i)
Conversion
At the option of the holders of Series A Preferred Stock, shares of Series A Preferred Stock may be converted into common stock at a rate of
Voting and Other Rights
The Series A Preferred Stock does not have voting rights, except as otherwise required by law. Other rights afforded the holders of Series A Preferred Stock, under defined circumstances, include the election and removal of one member of the Board as a separate voting class, the ability to approve certain actions of the Company prior to execution, and preemptive rights to participate in any future issuance of new securities. In addition, under certain circumstances, the holder of the Series A Preferred Stock is entitled to appoint an observer to our Board. The holder of the Series A Preferred Stock has elected to exercise its observer appointment rights but has not exercised its right to appoint the board member.
We determined that the Series A Preferred Stock has contingent redemption provisions allowing redemption by the holder upon certain defined events. As the events that may trigger the redemption of the Series A Preferred Stock are not solely within our control, the Series A Preferred Stock is classified as mezzanine equity (temporary equity) in the Condensed Consolidated Balance Sheet as of September 30, 2021 and December 31, 2020.
Note F — Long-Term Debt
As of September 30, 2021 and December 31, 2020, long-term debt was as follows:
| In thousands | September 30, 2021 | December 31, 2020 | ||||||
| Revolving credit facility | $ | $ | ||||||
| Paycheck Protection Program Term Note | ||||||||
| Total debt | ||||||||
| Less: current portion of long-term debt | ( | ) | ||||||
| Long-term debt | $ | $ | ||||||
Credit Facility
As of September 30, 2021 and December 31, 2020, we had $
As of each of September 30, 2021 and December 31, 2020, we had letters of credit outstanding in the amount of $
On April 17, 2017, we entered into a secured credit facility with Texas Capital Bank, N.A (“Texas Capital Bank”), that provided a $
The Texas Capital Credit Facility is subject to customary covenants requiring insurance, legal compliance, payment of taxes, prohibition of second liens, and secondary indebtedness, as well as the filing of quarterly and annual financial statements. The Company has been in compliance of all the requirements.
Under the Texas Capital Credit Facility, we can elect to accrue interest on outstanding principal balances at either LIBOR plus
Cash payments for interest were $
On April 14, 2020, the Company entered into a promissory note with Texas Capital Bank, for an unsecured loan with a principal amount of $
The proceeds were used to maintain payroll or make certain permitted interest payments, lease payments and utility payments.
We applied for forgiveness of the entire $
Note G — Stock-Based Compensation
We maintain stock incentive plans for the benefit of certain officers, directors, and employees. Our stock incentive plans provide for the ability to issue stock options, cash stock appreciation rights, performance stock units, phantom stock units and cash performance stock units. Our cash stock appreciation rights, phantom stock units and cash performance stock units settle solely in cash and are treated as the current liability, which are adjusted each reporting period based on changes in our stock price.
Compensation expense for stock-based awards is based on the fair values of the awards on the date of grant and is recognized on a straight-line basis over the vesting period of the entire award in the “Labor” line of the Condensed Consolidated Statements of Comprehensive Income (Loss). We recognized $
Note H — Components of Net Periodic Benefit Cost
Prior to January 1, 1999, we provided a defined benefit pension plan for which most of our employees were eligible to participate (the “Qualified Pension Plan”). In conjunction with significant enhancements to our 401(k) plan, we elected to freeze benefits under the Qualified Pension Plan as of December 31, 1998.
In 1994, we adopted a non-qualified, unfunded, supplemental pension plan (the “Restoration Pension Plan”) covering certain employees, which provides for incremental pension payments so that total pension payments equal those amounts that would have been payable from the principal pension plan were it not for limitations imposed by income tax regulation. The benefits under the Restoration Pension Plan were intended to provide benefits equivalent to our Qualified Pension Plan as if such plan had not been frozen. We elected to freeze benefits under the Restoration Pension Plan as of April 1, 2014.
At the end of 2020, the Board of Directors of the Company approved the division of the Qualified Pension Plan into two distinct plans, “Qualified Pension Plan I” and “Qualified Pension Plan II.” The assets and liabilities of the Qualified Pension Plan that were attributable to certain participants in Qualified Pension Plan II were spun off and transferred into Qualified Pension Plan II effective as of the end of December 31, 2020, in accordance with Internal Revenue Code section 414 (I) and ERISA Section 4044.
Net pension cost for both plans included the following components:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| In thousands | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Interest cost | $ | $ | $ | $ | ||||||||||||
| Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Recognized actuarial loss | ||||||||||||||||
| Net periodic benefit cost | $ | $ | $ | $ | ||||||||||||
Based on current estimates, we are required to make a $
We are not required to make, and do not intend to make, any contributions to our Restoration Pension Plan other than to the extent needed to cover benefit payments. We made benefit payments under this supplemental plan of $
Note I - Income Taxes
The income tax provision (benefit) was $
The income tax provision (benefit) was $
Coronavirus Aid, Relief and Economic Security Act
In response to the COVID-19 pandemic, the CARES Act was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). Under the CARES Act, corporate taxpayers may carryback net operating losses (“ NOLs”) realized during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act. In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. As of December 31, 2020, the Company has filed federal net operating loss carryback claims resulting in an income tax refund for $
The Company determines its estimated annual effective tax rate at the end of each interim period based on estimated pre-tax income (loss) and facts known at that time. The estimated annual effective tax rate is applied to the year-to-date pre-tax income (loss) at the end of each interim period with certain adjustments. The tax effects of significant unusual or extraordinary items are reflected as discrete adjustments in the periods in which they occur. The Company’s estimated annual effective tax rate can change based on the mix of jurisdictional pre-tax income (loss) and other factors. However, if the Company is unable to make a reliable estimate of its annual effective tax rate, then the actual effective tax rate for the year-to-date period may be the best estimate. The Company used a discrete effective tax rate method for the nine months ended September 30, 2020 as it was determined that the ordinary income or loss cannot be reasonably estimated, and any small changes would result in significant changes in the estimated annual effective tax rate. For the nine months ended September 30, 2021, the Company determined that its annual effective tax rate approach would provide a reliable estimate and therefore used its historical method to calculate its tax provision.
Harte Hanks, or one of its subsidiaries, files income tax returns in the U.S. federal, U.S. state, and foreign jurisdictions. For U.S. state returns, we are no longer subject to tax examinations for tax years prior to For U.S. federal and foreign returns, we are no longer subject to tax examinations for tax years prior to
We have elected to classify any interest expense and penalties related to income taxes within income tax expense in our Condensed Consolidated Statements of Comprehensive Income (Loss). We did not have a significant amount of interest or penalties accrued at September 30, 2021 or December 31, 2020.
Note J - Earnings Per Share
In periods in which the Company has net income, the Company is required to calculate earnings per share (“EPS”) using the two-class method. The two-class method is required because the Company’s Series A Preferred Stock is considered a participating security with objectively determinable and non-discretionary dividend participation rights. Series A Preferred stockholders have the right to participate in dividends above their
In periods in which the Company has a net loss, basic loss per share is calculated using the treasury stock method. The treasury stock method is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period. The two-class method is not used, because the calculation would be anti-dilutive.
Reconciliations of basic and diluted EPS were as follows:
| Three Months Ended September 30, | ||||||||
| In thousands, except per share amounts | 2021 | 2020 | ||||||
| Numerator: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Less: Preferred stock dividends | ||||||||
| Less: Earnings attributable to participating securities | ||||||||
| Numerator for basic EPS: income (loss) attributable to common stockholders | $ | ( | ) | |||||
| Effect of dilutive securities: | ||||||||
| Add back: Allocation of earnings to participating securities | ||||||||
| Less: Re-allocation of earnings to participating securities considering potentially dilutive securities | ( | ) | ||||||
| Numerator for diluted EPS | ( | ) | ||||||
| Denominator: | ||||||||
| Basic EPS denominator: weighted-average common shares outstanding | ||||||||
| Diluted EPS denominator | ||||||||
| Basic income (loss) per Common Share | $ | $ | ( | ) | ||||
| Diluted income (loss) per Common Share | $ | $ | ( | ) | ||||
For the three months ended September 30, 2021 and 2020, respectively, the following shares have been excluded from the calculation of shares used in the diluted EPS calculation:
| Nine Months Ended September 30, | ||||||||
| In thousands, except per share amounts | 2021 | 2020 | ||||||
| Numerator: | ||||||||
| Net Income (loss) | $ | $ | ( | ) | ||||
| Less: Preferred stock dividend | ||||||||
| Less: Earnings attributable to common stockholders | ||||||||
| Numerator for basic EPS: income (loss) attributable to common stockholders | ( | ) | ||||||
| Effect of dilutive securities: | ||||||||
| Add back: Allocation of earnings to participating securities | ||||||||
| Less: Re-allocation of earnings to participating securities considering potentially dilutive securities | ( | ) | ||||||
| Numerator for diluted EPS | $ | $ | ( | ) | ||||
| Denominator: | ||||||||
| Basic EPS denominator: weighted-average common shares outstanding | ||||||||
| Diluted EPS denominator | ||||||||
| Basic income (loss) per Common Share | $ | $ | ( | ) | ||||
| Diluted income (loss) per Common Share | $ | $ | ( | ) | ||||
For the nine months ended September 30, 2021 and 2020, respectively, the following shares have been excluded from the calculation of shares used in the diluted EPS calculation:
Note K — Comprehensive Income (Loss)
Comprehensive Income (Loss) for a period encompasses net income (loss) and all other changes in equity other than from transactions with our stockholders.
Changes in accumulated other comprehensive income (loss) by component were as follows:
| Defined Benefit | Foreign Currency | |||||||||||
| In thousands | Pension Items | Items | Total | |||||||||
| Balance at December 31, 2020 | $ | ( | ) | $ | $ | ( | ) | |||||
| Other comprehensive income, net of tax, before reclassifications | ( | ) | ( | ) | ||||||||
| Amounts reclassified from accumulated other comprehensive income (loss), net of tax, to other, net, on the condensed consolidated statements of comprehensive loss | ||||||||||||
| Net current period other comprehensive income, net of tax | ( | ) | ||||||||||
| Balance at September 30, 2021 | $ | ( | ) | $ | $ | ( | ) | |||||
| Defined Benefit | Foreign Currency | |||||||||||
| In thousands | Pension Items | Items | Total | |||||||||
| Balance at December 31, 2019 | $ | ( | ) | $ | $ | ( | ) | |||||
| Other comprehensive loss, net of tax, before reclassifications | ||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss), net of tax, to other, net, on the condensed consolidated statements of comprehensive loss | ||||||||||||
| Net current period other comprehensive loss, net of tax | ||||||||||||
| Balance at September 30, 2020 | $ | ( | ) | $ | $ | ( | ) | |||||
Reclassification amounts related to the defined pension plans are included in the computation of net periodic pension benefit cost (see Note H, Components of Net Periodic Benefit Cost).
Note L — Litigation and Contingencies
In the normal course of our business, we are obligated under some agreements to indemnify our clients as a result of claims that we infringe on the proprietary rights of third parties. The terms and duration of these commitments vary and, in some cases, may be indefinite, and certain of these commitments do not limit the maximum amount of future payments we could become obligated to make thereunder; accordingly, our actual aggregate maximum exposure related to these types of commitments is not reasonably estimable. Historically, we have not been obligated to make significant payments for obligations of this nature, and
We are also subject to various claims and legal proceedings in the ordinary course of conducting our businesses and, from time to time, we may become involved in additional claims and lawsuits incidental to our businesses. We routinely assess the likelihood of adverse judgments or outcomes to these matters, as well as ranges of probable losses; to the extent losses are reasonably estimable. Accruals are recorded for these matters to the extent that management concludes a loss is probable and the financial impact, should an adverse outcome occur, is reasonable estimable.
In the opinion of management, appropriate and adequate accruals for legal matters have been made, and management believes that the probability of a material loss beyond the amounts accrued is remote. Nevertheless, we cannot predict the impact of future developments affecting our pending or future claims and lawsuits. We expense legal costs as incurred, and all recorded legal liabilities are adjusted as required as better information becomes available to us. The factors we consider when recording an accrual for contingencies include, among others: (i) the opinions and views of our legal counsel; (ii) our previous experience; and (iii) the decision of our management as to how we intend to respond to the complaints.
Note M — Certain Relationships and Related Party Transactions
As described in Note F, Long-Term Debt, the Company’s Texas Capital Credit Facility is secured 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 our founders). Pursuant to the Amended and Restated Fee, Reimbursement and Indemnity Agreement, dated January 9, 2018, between HHS Guaranty, LLC and the Company, HHS Guaranty, LLC has the right to appoint one representative director to the Board and is paid a fee to provide the guarantee. Currently, David L. Copeland serves as the HHS Guaranty, LLC representative on the Board.
Note N — Restructuring Activities
Our management team continuously reviews and adjusts our cost structure and operating footprint, optimize our operations, and invest in improved technology. During 2020, in an effort to right-size our operating footprint, we terminated leases in Wilkes Barre (PA) and Grand Prairie (TX) and exited our last direct mail facility in Jacksonville (FL). We completed the migration of our fulfillment business from the Grand Prairie operations into a new 300,000 square foot facility in Kansas City in December 2020. In the first quarter of 2021, we completed the migration of our Shawnee operations to Kansas City. The Shawnee facility lease expired on April 30, 2021. The new Kansas City location is now our primary facility in the Midwest. In 2020, we successfully reduced the footprint of our Customer Care business by reducing our Austin office location by approximately 50,000 square feet in addition to exiting one of our two Manila offices since the business is operating effectively in a work-from-home environment.
In the three months ended September 30, 2021 and 2020 we recorded restructuring charges of $
In the nine months ended September 30, 2021 and 2020 we recorded restructuring charges of $
The following table summarizes the restructuring charges which are recorded in “Restructuring Expense” in the Condensed Consolidated Statements of Comprehensive Income (Loss).
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| In thousands | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Adjustment to Contract termination fee | ( | ) | ||||||||||||||
| Severance | $ | $ | $ | $ | ||||||||||||
| Facility, asset impairment and other expense | ||||||||||||||||
| Lease impairment and termination expense | ||||||||||||||||
| Fixed Asset disposal and impairment charges | ( | ) | ( | ) | ||||||||||||
| Facility and other expenses | ||||||||||||||||
| Total facility, asset impairment and other expense | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The following table summarizes the changes in liabilities related to restructuring activities:
| In thousands | Three Months Ended September 30, 2021 | |||||||||||||||
| Contract Termination Fee | Severance | Facility, asset impairment and other expense | Total | |||||||||||||
| Beginning Balance: | $ | $ | $ | $ | ||||||||||||
| Additions | ( | ) | ||||||||||||||
| Payments and adjustments | ( | ) | ( | ) | ||||||||||||
| Ending Balance: | $ | $ | $ | $ | ||||||||||||
| In thousands | Nine Months Ended September 30, 2021 | |||||||||||||||
| Contract Termination Fee | Severance | Facility, asset impairment and other expense | Total | |||||||||||||
| Beginning balance: | $ | $ | $ | $ | ||||||||||||
| Additions | ||||||||||||||||
| Payments and adjustments | ( | ) | ( | ) | ||||||||||||
| Ending balance: | $ | $ | $ | $ | ||||||||||||
| In thousands | Three Months Ended September 30, 2020 | |||||||||||||||
| Contract Termination Fee | Severance | Facility, asset impairment and other expense | Total | |||||||||||||
| Beginning Balance: | $ | $ | $ | $ | ||||||||||||
| Additions | ||||||||||||||||
| Payments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Ending Balance: | $ | $ | $ | $ | ||||||||||||
| For the Nine Months Ended September 30, 2020 | ||||||||||||||||
| Contract Termination Fee | Severance | Facility, asset impairment and other expense | Total | |||||||||||||
| Beginning Balance: | $ | $ | $ | $ | ||||||||||||
| Additions | ||||||||||||||||
| Payments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Ending Balance: | $ | $ | $ | $ | ||||||||||||
We expect that in connection with our cost-saving and restructuring initiatives, we will incur total restructuring charges of approximately $
Note O — Segment Reporting
Harte Hanks is a leading global customer experience company. We have organized our operations into
Our Marketing Services segment leverages data, insight, and experience to support clients as they engage customers through digital, traditional, and emerging channels. We partner with clients to develop strategies and tactics to identify and prioritize customer audiences in B2C and B2B transactions. Our key service offerings include strategic business, brand, marketing and communications planning, data strategy, audience identification and prioritization, predictive modeling, creative development and execution across traditional and digital channels, website and app development, platform architecture, database build and management, marketing automation, and performance measurement, reporting and optimization.
Our Customer Care segment offers intelligently responsive contact center solutions, which use real-time data to effectively interact with each customer. Customer contacts are handled through phone, e-mail, social media, text messaging, chat and digital self-service support. We provide these services utilizing our advanced technology infrastructure, human resource management skills and industry experience.
Our Fulfillment & Logistics Services segment consists of mail and product fulfillment and logistics services. We offer a variety of product fulfillment solutions, including printing on demand, managing product recalls, and distributing literature and promotional products to support B2B trade, drive marketing campaigns, and improve customer experience. We are also a provider of third-party logistics and freight optimization in the United States. Prior to the sale of our direct mail equipment in 2020, this segment also included our direct mail operations. Outsourced direct mail is now included in our Marketing Services segment.
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 revenue, operating income (loss) and operating income (loss) plus depreciation and amortization (“EBITDA”). Operating income (loss) for segment reporting, disclosed below, is revenues less operating costs and allocated corporate expenses. Segment operating expenses include allocations of certain centrally incurred costs such as employee benefits, occupancy, information systems, accounting services, internal legal staff, and human resources administration. These costs are allocated based on actual usage or other appropriate methods. Unallocated corporate expenses are corporate overhead expenses not attributable to the operating groups. Interest income and expense are not allocated to the segments. The Company does not allocate assets to our reportable segments for internal reporting purposes, nor does our CEO evaluate operating segments using discrete asset information.
The following table presents financial information by segment:
| Three Months ended September 30, 2021 | Marketing Services | Customer Care | Fulfillment and Logistics Services | Restructuring | Unallocated Corporate | Total | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Segment Operating Expense | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Restructuring | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Contribution margin | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Overhead Allocation | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| EBITDA | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Depreciation | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Operating income (loss) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Three Months ended September 30, 2020 | Marketing Services | Customer Care | Fulfillment and Logistics Services | Restructuring | Unallocated Corporate | Total | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Segment Operating Expense | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Restructuring | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Contribution margin | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Overhead Allocation | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| EBITDA | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Depreciation | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Operating income (loss) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Nine Months ended September 30, 2021 | Marketing Services | Customer Care | Fulfillment and Logistics Services (1) | Restructuring | Unallocated corporate | Total | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Segment Operating Expense | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Restructuring | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Contribution margin | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Overhead Allocation | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| EBITDA | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Depreciation | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Operating income (loss) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
| Nine Months ended September 30, 2020 | Marketing Services | Customer Care | Fulfillment and Logistics Services | Restructuring | Unallocated corporate | Total | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Segment Operating Expense | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Restructuring | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Contribution margin | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||
| Overhead Allocation | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
| EBITDA | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||
| Depreciation | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Operating income (loss) | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||
(1) Operating expense in this segment includes $
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
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 in April 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 May 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 to April 17, 2023 and decreased the borrowing capacity to $15.0 million.
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 September 30, 2021 and 2020 we recorded restructuring charges of $0.9 million and $1.4 million, respectively. In the nine months ended September 30, 2021 and 2020 we recorded restructuring charges of $4.9 million and $8.0 million, respectively.
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.
Results of Operations
Operating results were as follows:
| Three Months Ended September 30, |
Nine Months Ended September 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 September 30, 2021 vs. Three months ended September 30, 2020
Revenues increased $1.9 million, or 4.0%, in the three months ended September 30, 2021, compared to the three months ended September 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 September 30, 2021 vs. Nine months ended September 30, 2020
Revenues increased $12.8 million, or 9.8%, in the nine months ended September 30, 2021, compared to the nine months ended September 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 September 30, 2021 vs. Three months ended September 30, 2020
Operating expenses were $45.4 million in the three months ended September 30, 2021, a decrease of $1.5 million, or 3.3%, compared to $46.9 million in the three months ended September 30, 2020.
Production and distribution expenses decreased $1.0 million, or 7.8%, compared to the three months ended September 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 ended September 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 September 30, 2021 vs. Nine months ended September 30, 2020
Operating expenses were $137.8 million in the nine months ended September 30, 2021, a decrease of $2.2 million, or 1.6%, compared to $140.0 million in the nine months ended September 30, 2020.
Labor costs increased $5.3 million, or 6.9%, compared to the nine months ended September 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 ended September 30, 2020, primarily due to cost reduction initiatives as well as a favorable $0.8 million litigation settlement recognized in the three months ended March 31, 2021. Production and distribution expense decreased $1.1 million, or 2.9%, compared to the nine months ended September 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 September 30, 2021 and 2020, we recorded restructuring charges of $4.9 million and $8.0 million, respectively. See Note N, Restructuring Activities, in the Notes to Condensed Consolidated Financial Statements for further discussion on restructuring activities.
Interest Expense, net
Three months ended September 30, 2021 vs. Three months ended September 30, 2020
Interest expense, net, in the three months ended September 30, 2021 decreased $52 thousand compared to the three months ended September 30, 2020 due to the lower interest expense associated with lower debt balances as compared to the prior year quarter.
Nine months ended September 30, 2021 vs. Nine months ended September 30, 2020
Interest expense, net, in the nine months ended September 30, 2021 decreased $237 thousand compared to the nine months ended September 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 September 30, 2021 vs. Three months ended September 30, 2020
Other income, net, for the three months ended September 30, 2021 was $0.6 million, compared to $2.2 million net expense for the three months ended September 30, 2020. The $2.8 million increase in other income was mainly due to a $0.6 million decrease in pension expenses and a $2.2 million decrease in foreign currency revaluation expense.
Nine months ended September 30, 2021 vs. Nine months ended September 30, 2020
Other income, net, for the nine months ended September 30, 2021 was $0.1 million, compared to $4.5 million net expense for the nine months ended September 30, 2020. The $4.6 million increase in other income was mainly due to a $1.7 million decrease in pension expense and a $2.7 million decrease in foreign currency revaluation.
Income Taxes
Three months ended September 30, 2021vs. Three months ended September 30, 2020
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 ended September 30, 2021 differs from the federal statutory rate of 21.0%, primarily due to U.S. state income taxes and income earned in foreign jurisdictions.
Nine months ended September 30, 2021vs. Nine months ended September 30, 2020
The income tax provision of $1.0 million in the nine months ended September 30, 2021 represents an increase in income tax provision of $13.9 million when compared to the nine months ended September 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 ended September 30, 2021, a decrease of 75.2% when compared to the effective tax rate of 82.4% for the nine months ended September 30, 2020. The effective income tax rate for the nine months ended September 30, 2021 differs from the federal statutory rate of 21.0%, primarily due to 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 reporting segments for the three months ended September 30, 2021 and 2020. 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 revenue, operating income (loss) and operating income (loss) plus depreciation and amortization (“EBITDA”). For additional information, see Note O, Segment Reporting, in the Notes to Condensed Consolidated Financial Statements.
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 | % | ||||||||||||||||
Three months ended September 30, 2021vs. Three months ended September 30, 2020
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 ended September 30, 2021 increased $1.6 million from the prior year quarter due to our cost reduction efforts.
Nine months ended September 30, 2021vs. Nine months ended September 30, 2020
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 from July 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 ended September 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 September 30, 2021vs. Three months ended September 30, 2020
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 ended September 30, 2021, compared to operating income of $2.7 million for the three months ended September 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 September 30, 2021vs. Nine months ended September 30, 2020
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 ended September 30, 2021, compared to operating income of $3.6 million for the nine months ended September 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 ended September 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 September 30, 2021vs. Three months ended September 30, 2020
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 ended September 30, 2021 compared to $0.1 million for the three months ended September 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 September 30, 2021vs. Nine months ended September 30, 2020
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 ended September 30, 2021 compared to operating loss of $2.6 million for the nine months ended September 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 ended September 30, 2021 also included a favorable $0.8 million litigation settlement.
Liquidity and Capital Resources
Sources and Uses of Cash
Our cash and cash equivalent balances were $16.0 million and $29.4 million at September 30, 2021 and December 31, 2020, respectively. Our cash and cash equivalent and restricted cash balances were $18.7 million and $33.6 million at September 30, 2021 and December 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.
On April 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. On June 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 ended September 30, 2021 was $5.9 million, compared to net cash used in operating activities of $11.4 million for the nine months ended September 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 ended September 30, 2021 and $2.4 million lower non-cash restructuring expense in the nine months ended September 30, 2021 as compared to 2020.
Investing Activities
Net cash used in investing activities was $2.4 million for the nine months ended September 30, 2021, compared to net cash provided by investing activities of $0.5 million for the nine months ended September 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 ended September 30, 2020 and the $1.1 million increase in capital expenditure in the nine months ended September 30, 2021 as compared to 2020.
Financing Activities
Net cash used in financing activities was $4.8 million for the nine months ended September 30, 2021, as compared to $7.5 million in net cash provided by financing activities for the nine months ended September 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 the Texas Capital Credit Facility in the nine months ended September 30, 2020.
Foreign Holdings of Cash
Consolidated foreign holdings of cash as of September 30, 2021 and 2020 were $2.4 million and $3.4 million, respectively.
Long Term Debt
On April 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 by Texas Capital Bank up to $5.0 million. On May 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 to April 17, 2023 and decreased the borrowing capacity to $15.0 million.
At each of September 30, 2021 and December 31, 2020, we had letters of credit in the amount of $1.1 million outstanding. No amounts were drawn against these letters of credit at September 30, 2021 and December 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 at September 30, 2021 and December 31, 2020.
As of September 30, 2021 and December 31, 2020, we had $13.1 million and $17.1 million of borrowings outstanding under the Texas Capital Facility, respectively. As of September 30, 2021, we had the ability to borrow an additional $0.8 million under the facility.
On April 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.
On June 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
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 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, 2021, 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 during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of COVID-19 on our internal controls to minimize the impact on their design and operating effectiveness.
Information regarding legal proceedings is set forth in Note L, Litigation and Contingencies, in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.
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 2020 10-K, which could materially affect our business, financial condition, or future results. The risks described in our 2020 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 three months ended September 30, 2021 to the risk factors previously disclosed in the 2020 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
None.
| Exhibit No. |
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Description of Exhibit |
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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| *101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL Document. | ||
| *101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||
| *101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||
| *101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document | ||
| *101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
| *101.DEF | Inline XBRL Definition Linkbase Document | ||
| *104 | Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) | ||
*Filed or furnished herewith, as applicable.
**Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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HARTE HANKS, INC. |
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| November 12, 2021 |
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/s/ Brian Linscott |
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Brian Linscott |
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Chief Executive Officer |
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| November 12, 2021 |
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/s/ Laurilee Kearnes |
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Laurilee Kearnes |
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Vice President, and Chief Financial Officer |
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