HARTE HANKS, INC. Cautionary Note About Forward-Looking Statements
This report, including this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), contains "forward-looking statements" within the meaning of the federal securities laws. All such statements are qualified by the cautionary note included under "Forward-Looking Statements" above, which is provided pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may vary materially from what is expressed in or indicated by the forward-looking statements, for the reasons described in this MD&A, in the Risk Factors in Item 1A above or elsewhere in this Annual Report on Form 10-K.
Overview
The following MD&A section is intended to help the reader understand the results
of operations and financial condition of
We are affected by the general, national, and international economic and
business conditions in the markets where we and our customers operate. Marketing
budgets are largely discretionary in nature and, as a consequence, are easier
for our clients to reduce in the short-term than other expenses. Our revenues
are also affected by the economic fundamentals of each industry that we serve,
various market factors, including the demand for services by our clients, the
financial condition of and budgets available to our clients, and regulatory
factors, among other factors. Due to the COVID-19 pandemic, recent increases in
inflation and interest rates throughout the globe, and other geopolitical
uncertainties, including but not limited to the ongoing war between
Management is closely monitoring inflation and wage pressure in the market, and the potential impact on our business. While inflation has not had a material impact on our business, it is possible a material increase in inflation could have an impact on our clients, and in turn, on our business.
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Table of Contents Results of Operations
Operating results from operations were as follows:
Year Ended December 31,
In thousands, except per share amounts 2022 % Change 2021
Revenues $ 206,278 6.0 % $ 194,596
Operating expenses 191,171 2.3 % 186,957
Operating income $ 15,107 97.8 % $ 7,639
Operating margin 7.3 % 86.6 % 3.9 %
Other income, net (4,206 ) -51.2 % (8,620 )
Income tax expense (benefit) (17,463 ) -1455.8 % 1,288
Net income $ 36,776 145.6 % $ 14,971
Diluted EPS from operations $ 4.75 169.9 % $ 1.76 Year ended
Consolidated Results Revenues
Revenues of
Among other factors, our revenue performance will depend on general economic conditions in the markets we serve and how successful we are at maintaining and growing business with existing clients and acquiring new clients. We believe that, in the long-term, an increasing portion of overall marketing and advertising expenditures will be shifted from other advertising media to the type of targeted media advertising we provide resulting in a benefit to our business. Targeted media advertising results can be effectively tracked, enabling measurement of the return on marketing investment. However, growth will be challenged by both current and new competitors and internally generated capabilities at current and potential future clients.
Operating Expenses
Operating expenses of
Labor costs decreased by
Restructuring expenses were
The largest components of our operating expenses are labor, transportation expenses and outsourced costs. Each of these costs is, at least in part, variable and tends to fluctuate in line with revenues and the demand for our services. Transportation rates have increased over the last few years due to demand and supply fluctuations within the transportation industry. Future changes in transportation expenses will continue to impact our total production costs and total operating expenses. and in turn our margins, and may have an impact on future demand for our supply chain management services.
Postage costs of mailings are borne by our clients and are not directly reflected in our revenues or expenses.
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Table of Contents Interest Expense, net
Interest expense, net, for the year ended
Other (Income) Expense, net
Total other income, net was
Income Taxes
Our 2022 income tax benefit was
Segment Results
The following is a discussion and analysis of the results of our reporting
segments for the years ended
Marketing Services:
Year Ended December 31,
In thousands 2022 % Change 2021
Revenues $ 52,975 -6.1 % $ 56,388
EBITDA $ 7,344 -4.8 % $ 7,713
Operating Income 6,982 -2.8 % 7,183Operating Income % of Revenue 13.2 % 3.5 % 12.7 %
Marketing Services segment revenue declined
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Customer Care:
Year Ended December 31,
In thousands 2022 % Change 2021
Revenues $ 67,205 -10.0 % $ 74,691
EBITDA $ 12,167 -3.2 % $ 12,569
Operating Income 11,283 -3.7 % 11,720Operating Income % of Revenue 16.8 % 7.0 % 15.7 %
Customer Care segment revenue decreased
Fulfillment & Logistics Services:
Year Ended December 31,
In thousands 2022 % Change 2021
Revenues $ 86,098 35.6 % $ 63,517
EBITDA $ 10,593 -58.2 % $ 6,698
Operating Income 9,769 -63.4 % 5,980
Operating Income % of Revenue 11.3 % -20.5 % 9.4 %
Fulfillment & Logistics Services segment revenue increased
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Liquidity and Capital Resources
Sources and Uses of Cash
Our cash and cash equivalent balances were
During 2020, we received an aggregate of
Our principal sources of liquidity are cash on hand, cash provided by operating activities, and borrowings available under our New Credit Facility. Our cash is primarily used for general corporate purposes, working capital requirements, debt service and capital expenditures.
At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations (such as debt services, finance and operating leases and unfunded pension plan benefit payments) and other cash needs for our operations for at least the twelve months from the date of this Annual Report through a combination of cash on hand, cash flow from operations, and borrowings under the New Credit Facility. Although the Company believes that it will be able to meet its cash needs for the short and medium term, if unforeseen circumstances arise the company may need to seek alternative sources of liquidity.
Operating Activities
Net cash provided by operating activities was
Investing Activities
Net cash used in investing activities was
Financing Activities
Net cash used in financing activities was
Foreign Holdings of Cash
Consolidated foreign holdings of cash as of
Long Term Debt
On
The New Credit Facility provides for loans up to the lesser of (a)
The loans under the New Credit Facility accrue interest at a varying rate equal
to the Bloomberg Short-Term Bank Yield Index Rate plus a margin of 2.25% per
annum. The outstanding amounts advanced under the New Credit Facility are due
and payable in full on
The Company may repay and reborrow all or any portion of the loans advanced under the New Credit Facility at any time, without premium or penalty. The New Credit Facility is subject to mandatory prepayments (i) from the net proceeds of asset dispositions not otherwise permitted under the New Credit Facility; (ii) if the unpaid principal balance under the New Credit Facility plus the aggregate face amount of all outstanding letters of credit exceeds the borrowing base; (iii) in an amount equal to 50% of the net proceeds of issuances of capital stock (subject to customary exceptions); or (iv) in an amount equal to the net proceeds from any issuance of debt not otherwise permitted under the New Credit Facility.
The New Credit Facility contains certain covenants restricting the Company's and
its subsidiaries' ability to create, incur, assume or become liable
for indebtedness; make certain investments; pay dividends or repurchase the
Company's stock; create, incur or assume liens? consummate mergers or
acquisitions? liquidate, dissolve, suspend or cease operations? or modify
accounting or tax reporting methods (other than as required by
In connection with entering the New Credit Facility, the Company and
As of
As of
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On
On
Dividends
We did not pay any dividends in either 2022 or 2021. We currently intend to retain any future earnings and do not expect to pay cash dividends on our common stock in the foreseeable future. Any future dividend declaration can be made only upon, and subject to, approval of our Board, based on its business judgment.
Share Repurchase
During 2022 and 2021, we did not repurchase any shares of our common stock under
our stock repurchase program that was publicly announced in
Outlook
We consider such factors as total cash and cash equivalents and restricted cash, current assets, current liabilities, total debt, revenues, operating income, cash flows from operations, investing activities, and financing activities when assessing our liquidity. Our management of cash is designed to optimize returns on cash balances and to ensure that it is readily available to meet our operating, investing, and financing requirements as they arise. We believe that there are no conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern for the twelve months following the issuance of the Consolidated Financial Statements.
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Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared in accordance with accounting
principles generally accepted in
Critical accounting policies are defined as those that, in our judgment, are most important to the portrayal of our Company's financial condition and results of operations and which require complex or subjective judgments or estimates. The areas that we believe involve the most significant management estimates and assumptions are detailed below.
Our Significant Accounting policies are described in Note A, Overview and Significant Accounting Policies, in the Notes to Consolidated Financial Statement.
Revenue Recognition
Application of various accounting principles in accordance with
Income Taxes
We are subject to income taxes in
We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. For additional information on the valuation allowance see Note I, Income Taxes, in the Notes to Consolidated Financial Statements.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We adjust these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results. The provision for income taxes includes the effects of any reserves that we believe are appropriate, as well as the related net interest and penalties.
Recent Accounting Pronouncements
See Note B, Recent Accounting Pronouncements, in the Notes to Consolidated Financial Statements for a discussion of certain accounting standards that we have recently adopted and certain accounting standards that we have not yet been required to adopt and may be applicable to our future financial condition and results of operations.
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