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HARTE HANKS INC - Quarter Report: 2014 September (Form 10-Q)

Table of Contents

 

 

 

U.S.

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

x  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2014

 

or

 

o  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 001-07120

 

 

HARTE-HANKS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

74-1677284

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

9601 McAllister Freeway, Suite 610, San Antonio, Texas

 

78216

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number including area code — 210/829-9000

 

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.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.  See definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

 

The number of shares outstanding of each of the registrant’s classes of common stock as of October 15, 2014 was 62,068,391 shares of common stock, all of one class.

 

 

 



Table of Contents

 

HARTE-HANKS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

FORM 10-Q REPORT

September 30, 2014

 

 

 

Page

 

 

 

Part I.       Financial Information

 

Item 1.

Interim Condensed Consolidated Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets - September 30, 2014 and December 31, 2013

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Three months ended September 30, 2014 and 2013

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income – Nine months ended September 30, 2014 and 2013

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2014 and 2013

6

 

 

 

 

Condensed Consolidated Statements of Changes in Equity - Nine months ended September 30, 2014 and year ended December 31, 2013

7

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

Part II.      Other Information

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

Item 6.

Exhibits

33

 

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Table of Contents

 

Item 1. Interim Condensed Consolidated Financial Statements

Harte-Hanks, Inc. and Subsidiaries Condensed Consolidated Balance Sheets

 

 

 

September 30,
2014

 

December 31,

 

In thousands, except per share and share amounts

 

(Unaudited)

 

2013

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

67,234

 

$

88,747

 

Accounts receivable (less allowance for doubtful accounts of $1,251 at September 30, 2014 and $1,729 at December 31, 2013)

 

107,867

 

120,122

 

Inventory

 

1,540

 

1,286

 

Prepaid expenses

 

9,192

 

8,528

 

Current deferred income tax asset

 

4,942

 

7,696

 

Prepaid income tax

 

3,062

 

4,755

 

Other current assets

 

7,338

 

8,171

 

Total current assets

 

201,175

 

239,305

 

Property, plant and equipment (less accumulated depreciation of $175,684 at September 30, 2014 and $169,854 at December 31, 2013)

 

36,008

 

40,711

 

Goodwill

 

398,164

 

398,164

 

Other intangible assets (less accumulated amortization of $9,768 at September 30, 2014 and $9,748 at December 31, 2013)

 

2,283

 

2,303

 

Other assets

 

3,565

 

5,053

 

Total assets

 

$

641,195

 

$

685,536

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current maturities of long-term debt

 

$

18,375

 

$

15,313

 

Accounts payable

 

32,965

 

36,756

 

Accrued payroll and related expenses

 

12,121

 

16,255

 

Deferred revenue and customer advances

 

30,502

 

36,257

 

Income taxes payable

 

1,496

 

3,407

 

Customer postage and program deposits

 

16,557

 

23,877

 

Other current liabilities

 

5,931

 

8,978

 

Total current liabilities

 

117,947

 

140,843

 

Long-term debt

 

68,906

 

82,687

 

Other long-term liabilities (including deferred income taxes of $69,928 at September 30, 2014 and $65,788 at December 31, 2013)

 

109,761

 

112,952

 

Total liabilities

 

296,614

 

336,482

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $1 par value, 250,000,000 shares authorized 119,598,385 shares issued at September 30, 2014 and 119,186,705 shares issued at December 31, 2013

 

119,598

 

119,187

 

Additional paid-in capital

 

346,651

 

345,095

 

Retained earnings

 

1,160,949

 

1,163,201

 

Less treasury stock, 57,459,160 shares at cost at September 30, 2014 and 56,600,972 shares at cost at December 31, 2013

 

(1,255,372

)

(1,250,311

)

Accumulated other comprehensive loss

 

(27,245

)

(28,118

)

Total stockholders’ equity

 

344,581

 

349,054

 

Total liabilities and stockholders’ equity

 

$

641,195

 

$

685,536

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

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Table of Contents

 

Harte-Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

Three Months Ended September 30,

 

In thousands, except per share amounts

 

2014

 

2013

 

Operating revenues

 

$

134,121

 

$

134,973

 

Operating expenses

 

 

 

 

 

Labor

 

67,026

 

68,341

 

Production and distribution

 

40,350

 

39,315

 

Advertising, selling, general and administrative

 

12,528

 

12,258

 

Impairment of other intangible assets

 

 

2,750

 

Depreciation, software and intangible asset amortization

 

3,677

 

3,949

 

Total operating expenses

 

123,581

 

126,613

 

Operating income

 

10,540

 

8,360

 

Other (income) expenses

 

 

 

 

 

Interest expense, net

 

641

 

729

 

Other, net

 

(581

)

536

 

Total other (income) expenses

 

60

 

1,265

 

Income from continuing operations before income taxes

 

10,480

 

7,095

 

Income tax expense

 

4,060

 

2,644

 

Income from continuing operations

 

6,420

 

4,451

 

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

 

(12,624

)

 

 

 

 

 

 

Net income (loss)

 

$

6,420

 

$

(8,173

)

 

 

 

 

 

 

Basic earnings (loss) per common share

 

 

 

 

 

Continuing operations

 

$

0.10

 

$

0.07

 

Discontinued operations

 

0.00

 

(0.20

)

Basic earnings (loss) per common share

 

$

0.10

 

$

(0.13

)

 

 

 

 

 

 

Weighted-average common shares outstanding

 

62,398

 

62,538

 

 

 

 

 

 

 

Diluted earnings (loss) per common share

 

 

 

 

 

Continuing operations

 

$

0.10

 

$

0.07

 

Discontinued operations

 

0.00

 

(0.20

)

Diluted earnings (loss) per common share

 

$

0.10

 

$

(0.13

)

 

 

 

 

 

 

Weighted-average common and common equivalent shares outstanding

 

62,585

 

62,994

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

Adjustment to pension liability

 

$

558

 

$

1,003

 

Foreign currency translation adjustments

 

(1,348

)

1,056

 

Total other comprehensive income (loss), net of tax

 

(790

)

2,059

 

Comprehensive income (loss)

 

$

5,630

 

$

(6,114

)

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

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Table of Contents

 

Harte-Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

In thousands, except per share amounts

 

2014

 

2013

 

Operating revenues

 

$

407,158

 

$

407,430

 

Operating expenses

 

 

 

 

 

Labor

 

207,943

 

205,601

 

Production and distribution

 

122,784

 

118,871

 

Advertising, selling, general and administrative

 

39,118

 

38,243

 

Impairment of other intangible assets

 

 

2,750

 

Depreciation, software and intangible asset amortization

 

11,207

 

11,788

 

Total operating expenses

 

381,052

 

377,253

 

Operating income

 

26,106

 

30,177

 

Other (income) expenses

 

 

 

 

 

Interest expense, net

 

1,949

 

2,260

 

Other, net

 

1,228

 

(600

)

Total other (income) expenses

 

3,177

 

1,660

 

Income from continuing operations before income taxes

 

22,929

 

28,517

 

Income tax expense

 

9,027

 

10,810

 

Income from continuing operations

 

13,902

 

17,707

 

 

 

 

 

 

 

Loss from discontinued operations, net of income taxes

 

 

(10,903

)

 

 

 

 

 

 

Net income

 

$

13,902

 

$

6,804

 

 

 

 

 

 

 

Basic earnings per common share

 

 

 

 

 

Continuing operations

 

$

0.22

 

$

0.28

 

Discontinued operations

 

0.00

 

(0.17

)

Basic earnings per common share

 

$

0.22

 

$

0.11

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

62,606

 

62,485

 

 

 

 

 

 

 

Diluted earnings per common share

 

 

 

 

 

Continuing operations

 

$

0.22

 

$

0.28

 

Discontinued operations

 

0.00

 

(0.17

)

Diluted earnings per common share

 

$

0.22

 

$

0.11

 

 

 

 

 

 

 

Weighted-average common and common equivalent shares outstanding

 

62,818

 

62,808

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

Adjustment to pension liability

 

$

1,615

 

$

3,009

 

Foreign currency translation adjustments

 

(742

)

(663

)

Total other comprehensive income, net of tax

 

873

 

2,346

 

Comprehensive income

 

$

14,775

 

$

9,150

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

5


 


Table of Contents

 

Harte-Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

In thousands

 

2014

 

2013

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

13,902

 

$

6,804

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

Impairment of other intangible assets

 

 

2,750

 

(Gain) Loss from discontinued operations

 

 

(1,452

)

Loss on the sale of discontinued operations

 

 

12,355

 

Depreciation and software amortization

 

11,187

 

11,623

 

Intangible asset amortization

 

20

 

165

 

Stock-based compensation

 

3,297

 

4,409

 

Excess tax benefits from stock-based compensation

 

 

(32

)

Net pension cost (payments)

 

(4,346

)

(564

)

Deferred income taxes

 

4,469

 

1,355

 

Other, net

 

(738

)

(851

)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Decrease in accounts receivable, net

 

12,255

 

13,789

 

Increase in inventory

 

(254

)

(466

)

Decrease in prepaid expenses and other current assets

 

1,862

 

732

 

Decrease in accounts payable

 

(4,066

)

(6,090

)

Decrease other accrued expenses and liabilities

 

(23,536

)

(7,132

)

Other, net

 

3,913

 

(2,588

)

Net cash provided by continuing operations

 

17,965

 

34,807

 

Net cash provided by (used in) discontinued operations

 

 

(60

)

Net cash provided by operating activities

 

17,965

 

34,747

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(6,814

)

(12,760

)

Proceeds from the sale of property, plant and equipment

 

604

 

4,686

 

Net cash flows from investing activities within discontinued operations

 

 

22,500

 

Net cash (used in) provided by investing activities

 

(6,210

)

14,426

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Repayment of borrowings

 

(10,719

)

(9,188

)

Debt refinancing costs

 

 

(581

)

Issuance of common stock

 

(291

)

264

 

Excess tax benefits from stock-based compensations

 

 

32

 

Purchase of treasury stock

 

(5,362

)

(1,049

)

Dividends paid

 

(16,154

)

(10,749

)

Net cash used in financing activities

 

(32,526

)

(21,271

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(742

)

(525

)

Net increase (decrease) in cash and cash equivalents

 

(21,513

)

27,377

 

Cash and cash equivalents at beginning of period

 

88,747

 

49,384

 

Cash and cash equivalents at end of period

 

$

67,234

 

$

76,761

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

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Table of Contents

 

Harte-Hanks, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Equity

(2014 Unaudited)

 

In thousands, except per share amounts

 

Common
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Accumulated
other
comprehensive
income (loss)

 

Total
Stockholders’
Equity

 

Balance at December 31, 2012

 

$

118,737

 

$

341,586

 

$

1,165,952

 

$

(1,248,377

)

$

(49,734

)

$

328,164

 

Exercise of stock options and release of unvested shares

 

450

 

469

 

 

(407

)

 

512

 

Net tax effect of stock options exercised and release of unvested shares

 

 

(2,606

)

 

 

 

(2,606

)

Stock-based compensation

 

 

5,744

 

 

 

 

5,744

 

Dividends paid ($0.255 per share)

 

 

 

(16,121

)

 

 

(16,121

)

Treasury stock issued

 

 

(98

)

 

135

 

 

37

 

Purchase of treasury stock

 

 

 

 

(1,662

)

 

(1,662

)

Net income

 

 

 

13,370

 

 

 

13,370

 

Other comprehensive loss

 

 

 

 

 

21,616

 

21,616

 

Balance at December 31, 2013

 

$

119,187

 

$

345,095

 

$

1,163,201

 

$

(1,250,311

)

$

(28,118

)

$

349,054

 

Exercise of stock options and release of unvested shares

 

411

 

48

 

 

(750

)

 

(291

)

Net tax effect of stock options exercised and release of unvested shares

 

 

(1,277

)

 

 

 

(1,277

)

Stock-based compensation

 

 

3,552

 

 

 

 

3,552

 

Dividends paid ($0.255 per share)

 

 

 

(16,154

)

 

 

(16,154

)

Treasury stock issued

 

 

(767

)

 

1,051

 

 

284

 

Purchase of treasury stock

 

 

 

 

(5,362

)

 

(5,362

)

Net income

 

 

 

13,902

 

 

 

13,902

 

Other comprehensive income

 

 

 

 

 

873

 

873

 

Balance at September 30, 2014

 

$

119,598

 

$

346,651

 

$

1,160,949

 

$

(1,255,372

)

$

(27,245

)

$

344,581

 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

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Table of Contents

 

Harte-Hanks, Inc. and Subsidiaries

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note A - Basis of Presentation

 

Consolidation

 

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Harte-Hanks, Inc. and subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. All of its 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.

 

Interim Financial Information

 

The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. 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.  Operating results for the three months and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2013.

 

Discontinued Operations

 

As discussed in Note M, Discontinued Operations, we sold the assets of our Shoppers operations on September 27, 2013.  The operating results of our Shoppers are being reported as discontinued operations in the Condensed Consolidated Financial Statements.  Unless otherwise stated, amounts related to the Shoppers operations are excluded from the Notes to Condensed Consolidated Financial Statements for all periods presented.  Results of the remaining Harte Hanks business are reported as continuing operations.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results and outcomes could differ from those estimates and assumptions.  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 Consolidated Statements of Comprehensive Income

 

“Labor” in the Consolidated Statements of Comprehensive Income includes all employee payroll and benefits, including stock-based compensation, along with temporary labor costs.  “Production and distribution” and “Advertising, selling, general and administrative” do not include labor, depreciation or amortization.

 

Note B - Recent Accounting Pronouncements

 

During the second quarter of 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU changes the requirements for reporting discontinued operations. Under the ASU, discontinued operations are defined as either a:

 

·                  Component of an entity or group of components that

 

·                  has been disposed, meets the criteria to be classified as held-for sale, or has been abandoned/spun-off; and

 

·                  represents a strategic shift that has (or will have a major effect on an entity’s operations and financial results), or a

 

·                  Business or nonprofit activity that, on acquisition, meets the criteria to be classified as held-for sale.

 

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This ASU is effective for interim periods beginning after December 15, 2014, is applied prospectively and early adoption is permitted. This ASU does not have an impact on our year-to-date interim period ending September 30, 2014 and does not impact any of our previously reported and disclosed discontinued operations. The impact of the Company will be dependent on any transaction that is within the scope of the new guidance.

 

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.  The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.  The new standard is effective for the Company on January 1, 2017.

 

Early application is not permitted.  The standard permits the use of either the retrospective or cumulative effect transition method.  The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.  The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

Note C - 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, accounts receivable and trade payables.  The fair value of our outstanding debt is disclosed in Note E, Long-Term Debt.

 

Note D — Goodwill

 

As of September 30, 2014 and December 31, 2013, we had goodwill of $398.2 million.  Under the provisions of FASB ASC 350, Intangibles-Goodwill and Other, goodwill is tested for impairment at least annually, or more frequently if events or circumstances indicate that it is “more likely than not” that goodwill might be impaired.  Such events could include a significant change in business conditions, a significant negative regulatory outcome or other events that could negatively affect our business and financial performance.  We perform our annual goodwill impairment assessment as of November 30th of each year.

 

During the second quarter of 2014, Harte Hanks initiated a new strategy and began implementing changes to optimize our operational structure for that strategy. As a result, we now report two distinct divisions as segments — Customer Interaction and Trillium Software. This is considered a triggering event that requires additional consideration of potential impairment. Harte Hanks performed a Step 0 analysis and determined that there is no indication of impairment based on this occurrence, and that as of September 30, 2014, no other triggers are present at this time.

 

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We continue to monitor potential triggering events, including changes in the business climate in which we operate, attrition of key personnel, the current volatility in the capital markets, the Company’s market capitalization compared to our book value, our recent operating performance, and financial projections. The occurrence of one or more triggering events could require additional impairment testing, which could result in impairment charges in the future.

 

Note E — Long-Term Debt

 

Our long-term debt obligations were as follows:

 

The carrying values and estimated fair values of our outstanding debt were as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

In thousands

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

Total Debt

 

$

87,281

 

$

87,281

 

$

98,000

 

$

98,000

 

 

The estimated fair values were calculated using current rates provided to us by our bankers for debt of the same remaining maturity and characteristics.  These current rates are considered Level 2 inputs under the fair value hierarchy established by ASC 820.

 

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Note F — Stock-Based Compensation

 

We recognized $1.0 million and $1.2 million of stock-based compensation during the three months ended September 30, 2014 and 2013, respectively. We recognized $3.3 million and $4.4 million of stock-based compensation during the nine months ended September 30, 2014 and 2013, respectively.

 

We made our annual grant of stock-based awards in the second quarter of 2014 (April 15, 2014).  Additional grants were made during the third quarter relating to current and recently hired employees.

 

Equity awards granted during the quarter were as follows:

 

 

 

Number of
Shares

 

Weighted-
Average
Grant-Date
Fair Value

 

Stock options

 

116,210

 

$

2.21

 

Unvested shares

 

55,459

 

$

6.92

 

Performance stock units

 

22,666

 

$

6.04

 

 

Note G — Components of Net Periodic Pension Benefit Cost

 

Prior to January 1, 1999, we maintained a defined benefit pension plan for which most of our employees were eligible.  We elected to freeze benefits under this defined benefit pension plan as of December 31, 1998.

 

In 1994, we adopted a non-qualified, unfunded, supplemental 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 our principal pension plan if it were not for limitations imposed by income tax regulations.  The benefits under this supplemental pension plan accrued after December 31, 1998 as if the principal pension plan had not been frozen.

 

We are not required to make and do not intend to make any contributions to our unfunded, supplemental pension plan in 2014 other than to the extent needed to cover benefit payments.  We expect benefit payments under this supplemental pension plan to total $1.6 million in 2014.

 

Effective April 1, 2014, we froze benefits under our unfunded, supplemental pension plan, which was accounted for as a curtailment of the plan in the second quarter of 2014.  The plan freeze results in a reduction of plan expense of $0.4 million over the remainder of 2014 and a reduction in the projected benefit obligation of $1.2 million.  This curtailment gain offsets the unrecognized loss held by the plan.  The remaining portion of the unrecognized loss will then be amortized over the average life expectancy of all participants.

 

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Net pension cost for both plans included the following components:

 

 

 

Three Months Ended September 30,

 

In thousands

 

2014

 

2013

 

Service cost

 

$

 

$

86

 

Interest cost

 

1,916

 

1,809

 

Expected return on plan assets

 

(2,109

)

(1,846

)

Amortization of prior service cost

 

 

 

Recognized actuarial loss

 

892

 

1,672

 

Net periodic benefit cost

 

$

699

 

$

1,721

 

 

 

 

Nine Months Ended September 30,

 

In thousands

 

2014

 

2013

 

Service cost

 

$

100

 

$

257

 

Interest cost

 

5,771

 

5,428

 

Expected return on plan assets

 

(6,327

)

(5,537

)

Amortization of prior service cost

 

 

 

Recognized actuarial loss

 

2,734

 

5,015

 

Net periodic benefit cost

 

$

2,278

 

$

5,163

 

 

We made contributions of $4.4 million to our funded, frozen pension plan in the nine months ended September 30, 2014.  We do not plan to make additional contributions to this pension plan during the remainder of 2014.  These contributions to our funded, frozen pension plan are being made in order to satisfy the Pension Protection Act of 2006 minimum required contribution.

 

Note H - Income Taxes

 

Our third quarter 2014 income tax expense of $4.1 million resulted in an effective income tax rate of 38.7%.  Our first nine months of 2014 income tax expense of $9.0 million resulted in an effective income tax rate of 39.4%.  Our effective income tax rate is derived by estimating pretax income and income tax expense for the year ending December 31, 2014.  The effective income tax rate calculated for the first nine months of 2014 is higher than the federal statutory rate of 35.0%, primarily due to the addition of state income taxes.

 

Our third quarter 2013 income tax expense of $2.6 million resulted in an effective income tax rate of 37.3%. Our first nine months of 2013 income tax expense of $10.8 million resulted in an effective income tax rate of 37.9% which benefited from favorable first quarter discrete items including reductions in tax accruals related to certain foreign subsidiaries, and to additional tax credits made available by the American Taxpayer Relief Act of 2012 enacted in January of 2013.  The effective income tax rate calculated for the first nine months of 2013 is higher than the federal statutory rate of 35.0%, primarily due to the addition of state income taxes.

 

Harte Hanks files income tax returns in the U.S. federal, U.S. state and foreign jurisdictions.  For U.S. state and foreign returns, we are no longer subject to tax examinations for tax years prior to 2010.  For U.S. federal returns, we are no longer subject to tax examinations for tax years prior to 2011.

 

We have elected to classify any interest expense and penalties related to income taxes within income tax expense in our Consolidated Statements of Comprehensive Income.  We did not have a significant amount of interest or penalties accrued at September 30, 2014 or December 31, 2013.

 

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Note I - Earnings Per Share

 

Basic earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method.  Dilutive potential common shares include outstanding stock options and non-vested shares.

 

Reconciliations of basic and diluted earnings per share (EPS) are as follows:

 

 

 

Three Months Ended September 30,

 

In thousands, except per share amounts

 

2014

 

2013

 

Net Income

 

 

 

 

 

Income from continuing operations

 

$

6,420

 

$

4,451

 

Income from discontinued operations

 

 

(12,624

)

Net income

 

$

6,420

 

$

(8,173

)

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

Weighted-average common shares outstanding used in earnings per share computations

 

62,398

 

62,538

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

Continuing operations

 

$

0.10

 

$

0.07

 

Discontinued operations

 

0.00

 

(0.20

)

Net income

 

$

0.10

 

$

(0.13

)

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

Shares used in diluted earnings per share computations

 

62,585

 

62,994

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

Continuing operations

 

$

0.10

 

$

0.07

 

Discontinued operations

 

0.00

 

(0.20

)

Net income

 

$

0.10

 

$

(0.13

)

 

 

 

 

 

 

Computation of Shares Used in Earnings Per Share Computations

 

 

 

 

 

Weighted-average common shares outstanding

 

62,398

 

62,538

 

Weighted-average common equivalent shares-dilutive effect of stock options and awards

 

187

 

456

 

Shares used in diluted earnings per share computations

 

62,585

 

62,994

 

 

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Table of Contents

 

4.2 million and 4.1 million of anti-dilutive market price options have been excluded from the calculation of shares used in the diluted EPS calculation for the three months ended September 30, 2014 and 2013, respectively.  0.5 million anti-dilutive non-vested shares have been excluded from the calculation of shares used in the diluted EPS calculation for the three months ended September 30, 2014.  There were no anti-dilutive unvested shares excluded from the calculation of shares used in the diluted EPS calculation for the three months ended September 30, 2013.

 

 

 

Nine Months Ended September 30,

 

In thousands, except per share amounts

 

2014

 

2013

 

Net Income

 

 

 

 

 

Income from continuing operations

 

$

13,902

 

$

17,707

 

Income from discontinued operations

 

 

(10,903

)

Net income

 

$

13,902

 

$

6,804

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

Weighted-average common shares outstanding used in earnings per share computations

 

62,606

 

62,485

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

Continuing operations

 

$

0.22

 

$

0.28

 

Discontinued operations

 

0.00

 

(0.17

)

Net income

 

$

0.22

 

$

0.11

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

Shares used in diluted earnings per share computations

 

62,818

 

62,808

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

Continuing operations

 

$

0.22

 

$

0.28

 

Discontinued operations

 

0.00

 

(0.17

)

Net income

 

$

0.22

 

$

0.11

 

 

 

 

 

 

 

Computation of Shares Used in Earnings Per Share Computations

 

 

 

 

 

Weighted-average common shares outstanding

 

62,606

 

62,485

 

Weighted-average common equivalent shares-dilutive effect of stock options and awards

 

212

 

323

 

Shares used in diluted earnings per share computations

 

62,818

 

62,808

 

 

4.1 million and 4.3 million anti-dilutive market price options have been excluded from the calculation of shares used in the diluted EPS calculation for the nine months ended September 30, 2014 and 2013, respectively.  An insignificant number of anti-dilutive non-vested shares have been excluded from the calculation of shares used in the diluted EPS calculation for the nine months ended September 30, 2014 and 2013, respectively.

 

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Table of Contents

 

Note J — Comprehensive Income

 

Comprehensive income (loss) for a period encompasses net income (loss) and all other changes in equity other than from transactions with our stockholders.  Our comprehensive income (loss) was as follows:

 

 

 

Three Months Ended September 30,

 

In thousands

 

2014

 

2013

 

Net income (loss)

 

$

6,420

 

$

(8,173

)

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

Adjustment to pension liability

 

930

 

1,672

 

Tax expense

 

(372

)

(669

)

Adjustment to pension liability, net of tax

 

558

 

1,003

 

Foreign currency translation adjustment

 

(1,348

)

1,056

 

Total other comprehensive income (loss)

 

(790

)

2,059

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

5,630

 

$

(6,114

)

 

 

 

Nine Months Ended September 30,

 

In thousands

 

2014

 

2013

 

Net income

 

$

13,902

 

$

6,804

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

Adjustment to pension liability

 

2,691

 

5,015

 

Tax expense

 

(1,076

)

(2,006

)

Adjustment to pension liability, net of tax

 

1,615

 

3,009

 

Foreign currency translation adjustment

 

(742

)

(663

)

Total other comprehensive income (loss)

 

873

 

2,346

 

 

 

 

 

 

 

Total comprehensive income

 

$

14,775

 

$

9,150

 

 

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Table of Contents

 

Changes in accumulated other comprehensive income by component are as follows:

 

In thousands

 

Defined Benefit
Pension Items

 

Foreign
Currency
Items

 

Total

 

Balance at December 31, 2013

 

$

(32,279

)

$

4,161

 

$

(28,118

)

Other comprehensive income, net of tax, before reclassifications

 

 

(742

)

(742

)

Amounts reclassified from accumulated other comprehensive income, net of tax

 

1,615

 

 

1,615

 

Net current period other comprehensive income, net of tax

 

1,615

 

(742

)

873

 

Balance at September 30, 2014

 

$

(30,664

)

$

3,419

 

$

(27,245

)

 

In thousands

 

Defined Benefit
Pension Items

 

Foreign
Currency
Items

 

Total

 

Balance at December 31, 2012

 

$

(54,431

)

$

4,697

 

$

(49,734

)

Other comprehensive (loss), net of tax, before reclassifications

 

 

(663

)

(663

)

Amounts reclassified from accumulated other comprehensive income, net of tax

 

3,009

 

 

3,009

 

Net current period other comprehensive income (loss), net of tax

 

3,009

 

(663

)

2,346

 

Balance at September 30, 2013

 

$

(51,422

)

$

4,034

 

$

(47,388

)

 

Reclassification amounts related to the defined pension plans are included in the computation of net period pension benefit cost (see Note G, Components of Net Periodic Pension Benefit Cost).

 

Note K — Litigation 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 there under; accordingly, our actual aggregate maximum exposure related to these types of commitments cannot be reasonably estimated.  Historically, we have not been obligated to make significant payments for obligations of this nature, and no liabilities have been recorded for these obligations in our financial statements.

 

We are also currently subject to various other legal proceedings in the course of conducting our businesses and, from time to time, we may become involved in additional claims and lawsuits incidental to our businesses.  In the opinion of management, after consultation with counsel, none of these matters is currently considered to be reasonably possible of resulting in a material adverse effect on our consolidated financial position or results of operations.  Nevertheless, we cannot predict the impact of future developments affecting our pending or future claims and lawsuits and any resolution of a claim or lawsuit within a particular fiscal quarter may adversely impact our results of operations for that quarter.  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.

 

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Table of Contents

 

Note L — Business Segments

 

During the second quarter of 2014, Harte Hanks initiated a new strategy to optimize our operational structure by organizing into two distinct operating divisions: Customer Interaction and Trillium Software. In accordance with ASC 280, Segment Reporting, we determined that under this new organizational structure, we will report the two operating divisions as two reportable segments — Customer Interaction and Trillium Software.  Our reportable segments are described below.

 

Customer Interaction

 

Our Customer Interaction services offer a wide variety of integrated, multi-channel, data-driven marketing service solutions for our customers. We derive revenues by offering a full complement of capabilities and resources to provide these services in media from direct mail to email, including:

 

·                  agency and digital services;

 

·                  database marketing solutions and business-to-business lead generation;

 

·                  direct mail; and

 

·                  contact centers.

 

Customer Interaction’s largest cost components are labor, outsourced costs and mail supply chain costs.  2013 results reflect an impairment loss of $2.8 million related to other intangible assets associated with our Aberdeen business recorded in the third quarter of 2013.

 

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Table of Contents

 

Trillium Software

 

Trillium Software is a leading enterprise data quality solutions provider.  Our full complement of technologies and services includes global data profiling, data cleansing, enrichment, and data linking for e-business, customer relationship management, data governance, enterprise resource planning, supply chain management, data warehouse, and other enterprise applications. Revenues from the Trillium Software segment are comprised primarily of software, maintenance and professional services.

 

Trillium Software’s largest cost component is software development, which is comprised primarily of labor. General corporate expense consists primarily of pension and workers compensation expense related to employees from operations we no longer own.

 

Information about the operations of our two business segments is as follows:

 

 

 

Three Months Ended September 30,

 

In thousands

 

2014

 

2013

 

Operating revenues

 

 

 

 

 

Customer Interaction

 

$

121,078

 

$

121,338

 

Trillium Software

 

13,043

 

13,635

 

Total operating revenues

 

$

134,121

 

$

134,973

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

Customer Interaction

 

$

7,601

 

$

5,559

 

Trillium Software

 

3,318

 

3,931

 

Corporate

 

(379

)

(1,130

)

Total operating income

 

$

10,540

 

$

8,360

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

$

10,540

 

8,360

 

Interest expense

 

716

 

$

754

 

Interest income

 

(75

)

(25

)

Other, net

 

(581

)

536

 

Total income from continuing operations before income taxes

 

$

10,480

 

$

7,095

 

 

 

 

Nine Months Ended September 30,

 

In thousands

 

2014

 

2013

 

Operating revenues

 

 

 

 

 

Customer Interaction

 

$

367,133

 

$

367,928

 

Trillium Software

 

40,025

 

39,502

 

Total operating revenues

 

$

407,158

 

$

407,430

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

Customer Interaction

 

$

18,743

 

$

22,600

 

Trillium Software

 

9,662

 

10,969

 

Corporate

 

(2,299

)

(3,392

)

Total operating income

 

$

26,106

 

$

30,177

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

$

26,106

 

$

30,177

 

Interest expense

 

2,153

 

2,336

 

Interest income

 

(204

)

(76

)

Other, net

 

1,228

 

(600

)

Total income from continuing operations before income taxes

 

$

22,929

 

$

28,517

 

 

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Table of Contents

 

Note M — Discontinued Operations

 

We sold the assets of our Shoppers operations to affiliates of OpenGate Capital Management, LLC on September 27, 2013.  Because Shoppers represented a distinct business unit with operations and cash flows that can clearly be distinguished, both operationally and for financial purposes, from the rest of Harte Hanks, the results of the Shoppers operations are reported as discontinued operations for all periods presented.

 

Results of the remaining Harte Hanks marketing services business are reported as continuing operations.

 

Summarized operating results for the Shoppers discontinued operations are as follows:

 

 

 

Three Months Ended September 30,

 

In thousands

 

2014

 

2013

 

Revenues

 

$

 

$

46,703

 

 

 

 

 

 

 

Income from discontinued operations before impairment charges and income taxes

 

 

76

 

Loss on sale before income taxes

 

 

 

(21,402

)

Income tax benefit

 

 

8,702

 

Income from discontinued operations

 

$

 

$

(12,624

)

 

 

 

Nine Months Ended September 30,

 

In thousands

 

2014

 

2013

 

Revenues

 

$

 

$

140,834

 

 

 

 

 

 

 

Income from discontinued operations before impairment charges and income taxes

 

 

2,767

 

Loss on sale before income taxes

 

 

 

(21,402

)

Income tax benefit

 

 

7,732

 

Income from discontinued operations

 

$

 

$

(10,903

)

 

The major components of cash flows for the Shoppers discontinued operations are as follows:

 

 

 

Nine Months Ended September 30,

 

In thousands

 

2014

 

2013

 

Loss from discontinued operations

 

$

 

$

(10,903

)

Loss on the sale of discontinued operations

 

 

12,355

 

Impairment of Intangible Assets

 

 

 

Deferred Income Taxes

 

 

(5,094

)

Depreciation and software amortization

 

 

2,592

 

Intangible asset amortization

 

 

 

Other, net

 

 

990

 

Net cash provided by discontinued operations

 

$

 

$

(60

)

 

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Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Note Regarding 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 this cautionary note, which is provided pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  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 related there to (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 per share, operating income, expense related to equity-based compensation, capital resources and other financial items, (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 Securities and Exchange Commission, including the factors discussed under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 and in the “Cautionary Note Regarding Forward-Looking Statements” in our third quarter 2014 earnings release issued on October 30, 2014.  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.

 

Overview

 

The following MD&A section is intended to help the reader understand the results of operations and financial condition of Harte-Hanks, Inc. (Harte Hanks).  This section is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements contained elsewhere in this report and our MD&A section, financial statements and accompanying notes to financial statements in our 2013 Form 10-K.  Our 2013 Form 10-K contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates, and contractual obligations.

 

Harte Hanks is one of the world’s leading, insight-driven multi-channel marketing organizations, delivering impactful business results for some of the world’s best-known brands. Through strategic agencies and our core marketing services, we develop integrated solutions that connect brands with prospects and customers, moving them beyond awareness to transactions and brand loyalty.

 

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Table of Contents

 

Our Customer Interaction services offer a wide variety of integrated, multi-channel, data-driven solutions for top brands around the globe.  We help our clients gain insight into their customers’ behaviors from their data and use that insight to create innovative multi-channel marketing programs to deliver a return on marketing investment.  We believe our clients’ success is determined not only by how good their tools are, but how well we help them use the tools to gain insight and analyze their consumers.  This results in a strong and enduring relationship between our clients and their customers.  We offer a full complement of capabilities and resources to provide a broad range of marketing services, in media from direct mail to email, including:

 

·                  agency and digital services;

 

·                  database marketing solutions and business-to-business lead generation;

 

·                  direct mail; and

 

·                  contact centers.

 

Revenues from the Customer Interaction segment represented approximately 90% of our total revenues for both the three months and nine months ended September 30, 2014, respectively.

 

Trillium Software is a leading enterprise data quality solutions provider.  Our data quality specialists help organizations achieve increased business from their data management initiatives and existing business-critical processes by providing enterprise data profiling and data cleansing software and services.  We offer industry-specific business solutions that help solve data problems experienced by financial services, banking, compliance, insurance, risk and retail professionals.  Our full complement of technologies and services includes global data profiling, data cleansing, enrichment, and data linking for e-business, customer relationship management, data governance, enterprise resource planning, supply chain management, data warehouse, and other enterprise applications. Revenues from the Trillium Software segment are comprised primarily of software, maintenance and professional services, and represented approximately 10% of our total revenues for both the three months and nine months ended September 30, 2014.

 

We derive revenues by providing Customer Interaction services and Trillium Software sales and services.

 

General corporate expense consists primarily of pension and workers compensation expense related to employees from operations we no longer own.

 

Previously, Harte Hanks also provided shopper advertising opportunities through our Shoppers segment, which operated in certain California markets.  On September 27, 2013 we sold the assets of our Shoppers operations, The Pennysaver, for gross proceeds of $22.5 million.  This transaction resulted in an after-tax loss of $12.4 million.  Because Shoppers represented a distinct business unit with operations and cash flows that can clearly be distinguished, both operationally and for financial purposes, from the rest of Harte Hanks, the results of the Shoppers operations are reported as discontinued operations for all periods presented.  Results of the remaining Harte Hanks business are reported as continuing operations.  After this sale, Harte Hanks no longer has any Shoppers operations or circulation.

 

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 often discretionary in nature, and are easier to reduce in the short-term than other expenses in response to weak economic conditions.  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 specific 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 in the parts of the business that are not growing as fast. We believe these actions will improve our profitability in future periods.

 

Our principal operating expense items are labor, outsourced costs and mail supply chain management.

 

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Results of Continuing Operations

 

As discussed in Note M, Discontinued Operations, we sold the assets of our Shoppers operations on September 27, 2013.  Therefore, the operating results of our Shoppers are being reported as discontinued operations in the Condensed Consolidated Financial Statements, and are excluded from management’s discussion and analysis of financial condition and results of operations below.

 

Operating results from our continuing operations were as follows:

 

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

 

 

In thousands, except per share amounts

 

2014

 

2013

 

% Change

 

2014

 

2013

 

% Change

 

Revenues

 

$

134,121

 

$

134,973

 

-0.6

%

$

407,158

 

$

407,430

 

-0.1

%

Operating expenses

 

123,581

 

126,613

 

-2.4

%

381,052

 

377,253

 

1.0

%

Operating income

 

$

10,540

 

$

8,360

 

26.1

%

$

26,106

 

$

30,177

 

-13.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

6,420

 

$

4,451

 

44.2

%

$

13,902

 

$

17,707

 

-21.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS from continuing operations

 

$

0.10

 

$

0.07

 

45.2

%

$

0.22

 

$

0.28

 

-21.6

%

 

3rd Quarter 2014 vs. 3rd Quarter 2013

 

Revenues

 

Consolidated revenues decreased $0.9 million, or 0.6%,  in the third quarter of 2014 compared to the third quarter of 2013 due to decreased revenues of $0.3 million, or 0.2%, from our Customer Interaction segment and decreased revenues of $0.6 million, or 4.3%, from our Trillium Software segment.

 

These results reflect the impact of our retail markets vertical decreasing $5.0 million, or 13.1%, compared to the third quarter of 2013.  This is primarily due to reduced revenue from department store and specialty group clients in our direct mail business. This was offset by increases in our financial services vertical of $2.2 million, or 11.5%, over the prior year quarter due to increased credit card and retail banking business, and our select markets vertical increase of $0.7 million, or 5.9%, over the prior year quarter due to work with a new contact center customer. Our technology and auto and consumer brands verticals increased 1.9%, and 5.6%, respectively.  The healthcare and pharmaceuticals vertical decreased 4.4%.

 

Operating Expenses

 

Overall operating expenses were $123.6 million in the third quarter of 2014, compared to $126.6 million in the third quarter of 2013.

 

Labor costs decreased $1.3 million, or 1.9%, compared to the third quarter of 2013 primarily due to reduced management labor from headcount reductions. Production and distribution expenses increased $1.0 million, or 2.6% over the prior year quarter primarily due to an increase in outsourced services. General and administrative expense, decreased $2.5 million, or 16.5%, compared to prior year, as a result of third quarter 2013 including the impairment charge for the Aberdeen intangible asset.  Depreciation and intangible asset and software amortization expense decreased $0.3 million, or 2.4%.

 

Our largest cost components are labor, outsourced costs and mail supply chain costs.  Each of these costs is somewhat variable and tends to fluctuate with revenues and the demand for our services.  Mail supply chain rates have increased over the last few years due to demand and supply issues within the transportation industry.  Future changes in mail supply chain rates 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.

 

Postage costs of mailings are borne by our clients and are not directly reflected in our revenues or expenses.

 

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Income/Earnings Per Share from Continuing Operations

 

We recorded income from continuing operations of $6.4 million and diluted earnings per share from continuing operations of $0.10 per share in the third quarter of 2014.  These results compare to income from continuing operations of $4.5 million and diluted earnings per share from continuing operations of $0.07 per share in the third quarter of 2013.  The increase in income from continuing operations is primarily a result of decreased operating expenses.

 

First Nine Months 2014 vs. First Nine Months 2013

 

Revenues

 

Revenues were relatively flat, decreasing $0.3 million, or 0.1%, in the first nine months of 2014 compared to the first nine months of 2013. Customer Interaction revenues decreased $0.8 million, or 0.2%, and Trillium Software revenues increased $0.5 million, or 1.3%.  These results reflect the impact of a decrease in our retail vertical of $13.6 million, or 11.9% over prior year quarter primarily due to reduced revenues from department store and specialty customers. This was offset by our select markets vertical increasing $10.6 million, or 31.6%, compared to the third quarter of 2013, primarily due to non-recurring streaming enrollment services from a large contract with an existing contact center customer. In addition, our automobile and consumer brands vertical increased $4.9 million, or 7.2%, over the prior year, due to additional work with an existing contact center customer, and our healthcare and pharmaceuticals vertical increased $1.6 million, or 4.8%, due to new mail business with an existing customer.  Our technology and financial services verticals decreased 2.0% and 2.9%, respectively.  Revenues from our vertical markets are impacted by, among other things, the economic fundamentals of each industry, various market factors, including the demand for services by our clients, and the financial condition of and budgets available to specific clients.

 

Operating Expenses

 

Overall operating expenses were $381.1 million in the first nine months of 2014, compared to $377.3 million in the first nine months of 2013.

 

Labor costs increased $2.3 million, or 1.1%, compared to the first nine months of 2013, primarily due to an increase in labor related to production and , severance expense. Production and distribution costs increased $3.9 million, or 3.3%, due to increased outsourced services to support additional revenues and software service contracts and repairs and maintenance costs.  General and administrative expense, decreased $1.9 million, or 4.6%, compared to prior year as a result of third quarter 2013 including the impairment charge for the Aberdeen intangible asset.  Depreciation and intangible asset and software amortization expense decreased $0.6 million, or 4.9%, compared to the prior year, primarily related to decreased software depreciation.

 

Our largest cost components are labor, outsourced costs and mail supply chain costs.  Each of these costs is somewhat variable and tends to fluctuate with revenues and the demand for our services.  Mail supply chain rates have increased over the last few years due to demand and supply issues within the transportation industry.  Future changes in mail supply chain rates 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.

 

Income/Earnings Per Share from Continuing Operations

 

We recorded income from continuing operations of $13.9 million and diluted earnings per share from continuing operations of $0.22 per share in the first nine months of 2014.  These results compare to income from continuing operations of $17.7 million and diluted earnings per share from continuing operations of $0.28 per share in the first nine months of 2013.  The decrease in income from continuing operations is primarily a result of decreased revenues of prior year, increased operating expenses, and an increase in loss from foreign currency translation adjustments.  The first nine months of 2013 also included a gain on the sale of our facility in Belgium.

 

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Customer Interaction

 

Customer Interaction operating results were as follows:

 

Customer Interaction

 

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

 

 

In thousands 

 

2014

 

2013

 

% Change

 

2014

 

2013

 

% Change

 

Revenues

 

$

121,078

 

$

121,338

 

-0.2

%

$

367,133

 

$

367,928

 

-0.2

%

Operating expenses

 

113,477

 

115,779

 

-2.0

%

348,390

 

345,328

 

0.9

%

Operating income

 

$

7,601

 

$

5,559

 

36.7

%

$

18,743

 

$

22,600

 

-17.1

%

 

3rd Quarter 2014 vs, 3rd Quarter 2013

 

Revenues

 

Customer Interaction revenues decreased $0.3 million, or 0.2%, in the third quarter of 2014 compared to the third quarter of 2013.

 

These results reflect the impact of our financial services vertical increasing by $1.8 million, or 11.9%, compared to the third quarter of 2013, primarily due to revenue from credit card and retail banking customers.  In addition, our technology, auto and consumer brands, and select market verticals increased by $1.7 million, or 6.4% $1.1 million, or 5.5%, and $0.5 million, or 5.1%, respectively. These increases were offset by a decrease in revenues in our retail vertical of $5.0 million, or 13.5% as the result of reduced business from a department store customer. Revenues from our vertical markets are impacted by, among other things, the economic fundamentals of each industry, various market factors, including the demand for services by our clients, and the financial condition of and budgets available to specific clients.

 

Future revenue performance will depend on, among other factors, the overall strength of the national and international economies and how successful we are at maintaining and growing business with existing clients, acquiring new clients and meeting client demands.  We believe that, in the long-term, an increasing portion of overall marketing and advertising expenditures will be moved from other advertising media to the targeted media space, and that our business will benefit as a result.  Targeted media advertising results can be more effectively tracked, enabling measurement of the return on marketing investment.

 

Operating Expenses

 

Customer Interaction operating expenses decreased $2.3 million, or 2.0%, in the third quarter of 2014 compared to the third quarter of 2013. Labor costs decreased compared to the third quarter of 2013, primarily due to a decrease in salaries and wages.

 

Customer Interaction’s largest cost components are labor, outsourced costs and mail supply chain costs.  Each of these costs is somewhat variable and tends to fluctuate with revenues and the demand for our services.  Mail supply chain rates have increased over the last few years due to demand and supply issues within the transportation industry.  Future changes in mail supply chain rates 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.

 

First Nine Months of 2014 vs. First Nine Months of 2013

 

Revenues

 

Customer Interaction revenues decreased $0.8 million, or 0.2%, in the first nine months of 2014 compared to the first nine months of 2013. These results reflect the impact of a decrease in our retail vertical of $13.7 million, or 12.3%, offset by an increase in our select markets vertical by $10 million, or 34.5%. Our auto and consumer brands, healthcare and pharmaceuticals and technology verticals increased by $3.5 million, or 5.9%, $1.7 million, or 5.5 %, and $0.5 million, or 0.6%, respectively over the first nine months of 2013. Our financial services vertical decreased $2.9 million, or 5.6% compared to the third quarter of 2013.

 

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Revenues from our vertical markets are impacted by, among other things, the economic fundamentals of each industry, various market factors, including the demand for services by our clients, and the financial condition of and budgets available to specific clients.

 

Future revenue performance will depend on, among other factors, the overall strength of the national and international economies and how successful we are at maintaining and growing business with existing clients, acquiring new clients and meeting client demands.  We believe that, in the long-term, an increasing portion of overall marketing and advertising expenditures will be moved from other advertising media to the targeted media space, and that our business will benefit as a result.  Targeted media advertising results can be more effectively tracked, enabling measurement of the return on marketing investment.

 

Operating Expenses

 

Customer Interaction operating expenses increased $3.1 million, or 0.9%, in the first nine months of 2014 compared to the first nine months of 2013. Labor costs increased compared to the first nine months of 2013, primarily due to an increase in salaries and wages related to an investment in key personnel to generate additional revenues, as well as headcount additions.  Production and distribution costs increased due to increased outsourced services to support additional revenues and software service contracts and repairs and maintenance costs.  General and administrative expense compared to prior year, reflecting increased promotion expense related to rebranding and various increased business services expenses.  Depreciation and intangible asset and software amortization expense decreased compared to the prior year, primarily related to decreased software depreciation.

 

Customer Interaction’s largest cost components are labor, outsourced costs and mail supply chain costs.  Each of these costs is somewhat variable and tends to fluctuate with revenues and the demand for our services.  Mail supply chain rates have increased over the last few years due to demand and supply issues within the transportation industry.  Future changes in mail supply chain rates 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.

 

Trillium Software

 

Trillium Software operating results were as follows:

 

Trillium Software

 

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

 

 

In thousands 

 

2014

 

2013

 

% Change

 

2014

 

2013

 

% Change

 

Revenues

 

$

13,043

 

$

13,635

 

-4.3

%

$

40,025

 

$

39,502

 

1.3

%

Operating expenses

 

9,725

 

9,704

 

0.2

%

30,363

 

28,533

 

6.4

%

Operating income

 

$

3,318

 

$

3,931

 

-15.6

%

$

9,662

 

$

10,969

 

-11.9

%

 

3rd Quarter 2014 vs, 3rd Quarter 2013

 

Revenues

 

Trillium Software revenues decreased $0.6 million, or 4.3%, in the third quarter of 2014 compared to the third quarter of 2013. This decrease was primarily related to decreased revenue from sales of software licenses and professional services.

 

Operating Expenses

 

Trillium Software operating expenses were flat in the third quarter of 2014 compared to the third quarter of 2013.  This is primarily due to flat labor and production expense.

 

Trillium Software’s largest cost component is software development, which is comprised primarily of labor.

 

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Table of Contents

 

First Nine Months of 2014 vs. First Nine Months of 2013

 

Revenues

 

Trillium Software revenues increased $0.5 million, or 1.3%, in the first nine months of 2014 compared to the first nine months of 2013. This increase is primarily a result of increased software license revenues related to recently introduced financial market data solutions.  Maintenance and professional service revenues were flat compared to the first nine months of last year.

 

Operating Expenses

 

Trillium Software, operating expenses increased $1.8 million, or 6.4%, in the first nine months of 2014 compared to the first nine months of 2013. This increase was primarily related to an increase in labor resulting from the hiring of key personnel to drive additional revenues and severance related to a reduction in headcount.

 

Trillium Software’s largest cost component is development, which is comprised primarily of labor.

 

General Corporate Expense

 

3rd Quarter 2014 vs 3rd Quarter 2013

 

General corporate expense decreased $0.8 million, or 66.5%, in the third quarter of 2014 compared to the third quarter of 2013.  This is primarily due to reduced workers compensation expenses as a result of the sale of the Shoppers operations.

 

First Nine Months of 2014 vs. First Nine Months of 2013

 

General corporate expense decreased $1.1 million, or 32.3%, in the first nine months of 2014 compared to the first nine months of 2013. This is primarily due to the retirement and hiring of key executives in the prior year, offset by increased consulting fees during 2014 and expenses related to the communication of our new strategy.

 

Interest Expense

 

3rd Quarter 2014 vs. 3rd Quarter 2013

 

Interest expense decreased $0.1 million, or 12.1%, in the third quarter of 2014 compared to the third quarter of 2013.  This was due to a lower average debt balance in the third quarter of 2014.  The lower average debt balance in the third quarter of 2014 is a result of scheduled quarterly principal payments on the 2011 Term Loan Facility.  See discussion of our credit facilities in the Liquidity and Capital Resources section below.

 

First Nine Months of 2014 vs. First Nine Months of 2013

 

Interest expense, net decreased $0.3 million, or 13.8%, in the first nine months of 2014 compared to the first nine months of 2013.  This was due to a lower average debt balance in the first nine months of 2014.  The lower average debt balance in the first nine months of 2014 is a result of scheduled quarterly principal payments on the 2011 Term Loan Facility.  See discussion of our credit facilities in the Liquidity and Capital Resources section below.

 

Other Income and Expense

 

3rd Quarter 2014 vs. 3rd Quarter 2013

 

Other income, net, was $0.6 million in the third quarter of 2014 compared to other expense, net, $0.5 million in the third quarter of 2013.  This $1.2 million variance from the prior year quarter is primarily due to a $0.8 million foreign currency transaction gain in the third quarter of 2014 versus a $0.8 million foreign currency transaction loss during the prior year quarter.

 

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Table of Contents

 

First Nine Months of 2014 vs. First Nine Months of 2013

 

Other expense, net, was $1.2 million in the first nine months of 2014 compared to other income, net of $0.6 million in the first nine months of 2013.  This $1.8 million variance from the prior year quarter is due to a net change, in foreign currency transaction gains and losses and a $0.9 million gain on the sale of our facility in Belgium in the first quarter of 2013.

 

Income Taxes

 

3rd Quarter 2014 vs. 3rd Quarter 2013

 

Income tax expense increased $1.5 million in the third quarter of 2014 compared to the third quarter of 2013.  The increase in expense is primarily the result of the change in operating performance coupled with the $1.0 million tax benefit resulting from an intangible asset impairment loss recorded in the third quarter of 2013.  Our effective tax rate was 38.7% for the third quarter of 2014, increasing from an impairment loss excluded 37.3% effective tax rate for the third quarter of 2013.  The increase in the effective tax rate is primarily due to a slight increase in the state income tax component of our tax expense.

 

First Nine Months of 2014 vs. First Nine Months of 2013

 

Income tax expense was $9.0 million in the first nine months of 2014 compared to $10.8 million in the first nine months of 2013.  The $1.8 million decrease is primarily a result of the change in operating performance offset by the $1.0 million tax benefit resulting from an intangible asset impairment loss recorded in the third quarter of 2013. Our effective tax rate was 39.4% for the first nine months of 2014, increasing from an impairment loss excluded 37.9% effective tax rate for the first nine months of 2013.  The increase in the effective tax rate is primarily due to 2013 reductions in tax accruals related to certain foreign subsidiaries, and to additional tax credits made available by the American Taxpayer Relief Act of 2012 enacted in January of 2013.

 

Income/Earnings Per Share from Continuing Operations

 

3rd Quarter 2014 vs. 3rd Quarter 2013

 

We recorded income from continuing operations of $6.4 million and diluted earnings per share from continuing operations of $0.10.  These results compare to income from continuing operations of $4.5 million and diluted earnings per share from continuing operations of $0.07 per share in the third quarter of 2013.  The increase in income from continuing operations is primarily a result of a comparatively slight decrease in revenues, decreased operating expenses, and the change in other income and expense discussed above.

 

First Nine Months of 2014 vs. First Nine Months of 2013

 

We recorded income from continuing operations of $13.9 million and diluted earnings per share from continuing operations of $0.22.  These results compare to income from continuing operations of $17.7 million and diluted earnings per share from continuing operations of $0.28 in the first nine months of 2013.  The decrease in income from continuing operations is primarily a result of a decrease in revenues, increased operating expenses, and the change in other income and expense discussed above.

 

Economic Climate and Impact on our Financial Statements

 

As discussed above, we sold the assets of the Shoppers operations on September 27, 2013.  The business and economic climate in California had a negative impact on our Shoppers’ operations and cash flows, which is reflected in the discontinued operations results throughout our financial statements. In addition, local, national and international economic and business conditions affect the marketing expenditures of our clients, as they adjust expenditures in reaction to market conditions. These conditions are presently uneven among the markets we serve, with most showing modest but uncertain economic growth.  These conditions also affect our costs and ability to attract and retain qualified employees.

 

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Table of Contents

 

Liquidity and Capital Resources

 

Sources and Uses of Cash

 

As of September 30, 2014, cash and cash equivalents were $67.2 million, decreasing $21.5 million from cash and cash equivalents of $88.7 million at December 31, 2013.  This net decrease was a result of net cash provided by operating activities of $18.0 million, net cash used in investing activities of $6.2 million, net cash used in financing activities of $32.5 million and the negative effect of exchange rate changes of $0.7 million.

 

Operating Activities

 

Net cash provided by operating activities for the nine months ended September 30, 2014 was $18.0 million, compared to $34.7 million for the nine months ended September 30, 2013.  The $16.8 million year-over-year decrease was attributable to a $5.3 million decrease in net income excluding the $12.3 loss on sale of discontinued operations in 2013, as well as a $8.1 million decrease due to changes within working capital assets and liabilities.

 

For the nine months ended September 30, 2014, our principal working capital changes, which directly affected net cash provided by operating activities, were as follows:

 

·

A decrease in accounts receivable attributable to collection of the December 31, 2013 receivables as well as higher revenues in the fourth quarter of 2013 compared to the third quarter of 2014. Days sales outstanding were approximately 73 days at September 30, 2014, which increased from 71 days at December 31, 2013;

 

 

·

A decrease in prepaid expenses and other current assets due to timing of payments, prepaid insurance, rent and annual licenses/agreements;

 

 

·

A decrease in accounts payable attributable to payment of the December 31, 2013 payables; and

 

 

·

A decrease in accrued payroll and related expenses due to the severance accruals at release of incentive accruals and accrual of severance at year-end 2013.

 

Investing Activities

 

Net cash used in investing activities was $6.2 million for the nine months ended September 30, 2014, compared to net cash provided by investing activities of $14.4 million for the nine months ended September 30, 2013.  The $20.6 million variance is the result of reduced capital spending during the first nine months of 2014 compared to the first nine months of 2013, offset by the sale of our Belgium facility in the first quarter of 2013 for net proceeds of $4.6 million and the sale of our Shoppers business for net proceeds of $22.5 million.

 

Financing Activities

 

Net cash used in financing activities was $32.5 million for the nine months ended September 30, 2014 compared to $21.3 million for the nine months ended September 30, 2013.  The $11.2 million increase is due to the $16.2 million in dividends paid in the first nine months of 2014 compared to only $10.7 million in dividends paid in the first nine months of 2013. We accelerated the payment of our regular first quarter 2013 dividend into December of 2012. Additionally, we increased the amount of stock repurchase activity in the first nine months of 2014 compared to the same period in 2013 by $4.3 million.

 

Credit Facilities

 

On August 16, 2011, we entered into a five-year $122.5 million term loan facility (2011 Term Loan Facility) with Bank of America, N.A., as Administrative Agent.  The 2011 Term Loan Facility matures on August 16, 2016.  For each borrowing under the 2011 Term Loan Facility, we can generally choose to have the interest rate for that borrowing calculated based on either (i) the LIBOR rate (as defined in the 2011 Term Loan Facility) for the applicable interest period, plus a spread (ranging from 2.00% to 2.75% per annum) based on our total net funded debt-to-EBITDA ratio (as defined in the 2011 Term Loan Facility) then in effect; or (ii) the highest of (a) the Agent’s prime rate, (b) the BBA daily floating rate LIBOR, as determined by Agent for such date, plus

 

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Table of Contents

 

1.00%, and (c) the Federal Funds Rate plus 0.50%, plus a spread (ranging from 1.00% to 1.75% per annum) based on our total net funded debt-to-EBITDA ratio then in effect.  We may elect to prepay the 2011 Term Loan Facility at any time without incurring any prepayment penalties.  At September 30, 2014, we had $87.3 million outstanding under the 2011 Term Loan Facility.

 

On August 8, 2013, we entered into a three-year $80.0 million revolving credit facility, a $25.0 million letter of credit sub-facility and a $5.0 million swing line loan sub-facility (2013 Revolving Credit Facility) by amending and restating our 2010 Revolving Credit Facility agreements.  The 2013 Revolving Credit Facility permits us to request up to a $15.0 million increase in the total amount of the facility, and matures on August 16, 2016.  The 2013 Revolving Credit Facility replaces our 2010 Revolving Credit Facility, under which Harte Hanks had no borrowings as of August 8, 2013, except for letters of credit totaling approximately $9.5 million.  For each borrowing under the 2013 Revolving Credit Facility, we can generally choose to have the interest rate for that borrowing calculated on either (i) the Eurodollar rate for the applicable interest period plus a spread which is determined based on our total net debt-to-EBITDA ratio then in effect, which ranges from 2.25% to 3.00% per annum; or (ii) the highest of (a) the Agent’s prime rate, (b) the Federal Funds Rate plus 0.50% per annum, (c) Eurodollar rate plus 1.00% per annum, plus a spread which is determined based on our total debt-to-EBITDA ratio then in effect, which spread ranges from 1.25% to 2.00% per annum.  We are also required to pay a quarterly commitment fee under the 2013 Revolving Credit Facility. The rate of which is applied to the amount equal to the difference of the total commitment amount under the 2013 Revolving Credit Facility less the aggregate amount of outstanding obligations under such facility.  The commitment fee rate ranges from 0.50% to 0.55% per annum, depending on our total net debt-to-EBITDA ratio then in effect.  In addition, we pay a letter of credit fee with respect to outstanding letters of credit.  That fee is calculated by applying a rate equal to the spread applicable to Eurodollar based loans plus a fronting fee of 0.125% per annum to the average daily undrawn amount of the outstanding letters of credit.  We may elect to prepay the 2013 Revolving Credit Facility at any time without incurring any prepayment penalties.

 

Under all of our credit facilities we are required to maintain an interest coverage ratio of not less than 2.75 to 1 and a total debt-to-EBITDA ratio of not more than 2.25 to 1.  The credit facilities also contain customary covenants restricting our and our subsidiaries’ ability to:

 

·

authorize distributions, dividends, stock redemptions and repurchases if a payment event of default has occurred and is continuing;

 

 

·

enter into certain merger or liquidation transactions;

 

 

·

grant liens;

 

 

·

enter into certain sale and leaseback transactions;

 

 

·

have foreign subsidiaries account for more than 25% of the consolidated revenue, or 20% of the assets of Harte Hanks and its subsidiaries, in the aggregate;

 

 

·

enter into certain transactions with affiliates; and

 

 

·

allow the total indebtedness of Harte Hanks’ subsidiaries to exceed $20.0 million.

 

The credit facilities each also include customary covenants regarding reporting obligations, delivery of notices regarding certain events, maintaining our corporate existence, payment of obligations, maintenance of our properties and insurance thereon at customary levels with financially sound and reputable insurance companies, maintaining books and records and compliance with applicable laws.  The credit facilities each also provide for customary events of default including nonpayment of principal or interest, breach of representations and warranties, violations of covenants, failure to pay certain other indebtedness, bankruptcy and material judgments and liabilities, certain violations of environmental laws or ERISA or the occurrence of a change of control.  Our material domestic subsidiaries have guaranteed the performance of Harte Hanks under our credit facilities.  As of September 30, 2014, we were in compliance with all of the covenants of our credit facilities.

 

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Table of Contents

 

Outlook

 

We consider such factors as total cash and cash equivalents, current assets, current liabilities, total debt, revenues, operating income, cash flows from operations, investing activities and financing activities when assessing our liquidity.  Our primary sources of liquidity have been cash and cash equivalents on hand and cash generated from operating activities.  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.

 

Capital resources are also available from and provided through our 2013 Revolving Credit Facility, subject to the terms and conditions of that facility.  The amount of cash on hand and borrowings available under our 2013 Revolving Credit Facility are influenced by a number of factors, including fluctuations in our operating results, revenue growth, accounts receivable collections, working capital changes, capital expenditures, tax payments, share repurchases, pension plan contributions, acquisitions and dividends.

 

As of September 30, 2014, we had $72.8 million of unused borrowing capacity under our 2013 Revolving Credit Facility (which matures on August 16, 2016) and a cash balance of $67.2 million.  Based on our current operational plans, we believe that our cash on hand, cash provided by operating activities, and availability under the 2013 Revolving Credit Facility will be sufficient to fund operations, anticipated capital expenditures, payments of principal and interest on our borrowings, dividends on our common stock and pension contributions for the next 12 months.  Nevertheless, we cannot predict the impact on our business performance of the economic climate in the U.S. and other economies in which we operate.  A lasting economic recession in the U.S. and other economies could have a material adverse effect on our business, financial position or operating results.

 

Critical Accounting Policies

 

Our financial statements and accompanying notes are prepared in accordance with U.S. GAAP.  Preparing financial statements requires that management make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses.  These estimates and assumptions are affected by management’s application of accounting policies.  We consider the following to be our critical accounting policies, as described in detail in our 2013 Form 10-K:

 

·                  Revenue recognition;

 

·                  Allowance for doubtful accounts;

 

·                  Reserve for healthcare, workers’ compensation, automobile and general liability insurance;

 

·                  Goodwill and other intangible assets; and

 

·                  Stock-based compensation.

 

There have been no material changes to the critical accounting policies described in our 2013 Form 10-K.

 

As discussed in Note B, Recent Accounting Pronouncements, of the Notes to Unaudited Condensed Consolidated Financial Statements, certain new financial accounting pronouncements have been issued which either have already been reflected in the accompanying consolidated financial statements, or will become effective for our financial statements at various dates in the future.  The adoptions of these new accounting pronouncements have not had a material effect on our consolidated financial statements; however, the Company is currently evaluating the impact of the new guidance and method of adoption.

 

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Market risk includes the risk of loss arising from adverse changes in market rates and prices.  We face market risks related to interest rate variations and to foreign exchange rate variations.  From time to time, we may utilize derivative financial instruments to manage our exposure to such risks.

 

We are exposed to market risk for changes in interest rates related to our credit facilities.  Our earnings are affected by changes in short-term interest rates as a result of our credit facilities, which bear interest at variable rates based on LIBOR rates (effective 30 day LIBOR rate of 0.15% at September 30, 2014).  The five-year 2011 Term Loan Facility has a maturity date of August 16, 2016.  At September 30, 2014, our debt balance related to the 2011 Term Loan Facility was $87.3 million.  The three-year $80.0 million 2013 Revolving Credit Facility has a maturity date of August 16, 2016.  At September 30, 2014, we did not have any debt outstanding under the 2013 Revolving Credit Facility.

 

Assuming the actual level of borrowings throughout the third quarter of 2014, and assuming a one percentage point change in the average interest rates, we estimate that our net income for the third quarter of 2014 would have changed by approximately $0.1 million.  Due to our overall debt level and cash balance at September 30, 2014, anticipated cash flows from operations, and the various financial alternatives available to us should there be an adverse change in interest rates, we do not believe that we currently have significant exposure to market risks associated with changing interest rates.  At this time we are not entered into any interest rate swap or other derivative instruments to hedge the effects of adverse fluctuations in interest rates.

 

Our earnings are also affected by fluctuations in foreign currency exchange rates as a result of our operations in foreign countries.  Our primary exchange rate exposure is to the Euro, British pound, Australian dollar and Philippine peso.  We monitor these risks throughout the normal course of business.  The majority of the transactions of our U.S. and foreign operations are denominated in the respective local currencies.  Changes in exchange rates related to these types of transactions are reflected in the applicable line items making up operating income in our Consolidated Statements of Comprehensive Income (Loss).  Due to the current level of operations conducted in foreign currencies, we do not believe that the impact of fluctuations in foreign currency exchange rates on these types of transactions is significant to our overall annual earnings.  A smaller portion of our transactions are denominated in currencies other than the respective local currencies.  For example, intercompany transactions that are expected to be settled in the near-term are denominated in U.S. dollars.  Since the accounting records of our foreign operations are kept in the respective local currency, any transactions denominated in other currencies are accounted for in the respective local currency at the time of the transaction.  Any foreign currency gain or loss from these transactions, whether realized or unrealized, results in an adjustment to income, which is recorded in “Other, net” in our Consolidated Statements of Comprehensive Income.  Transactions such as these amounted to $0.4 million in pre-tax currency transaction losses in the third quarter of 2014.  At this time we are not entered into any foreign currency forward exchange contracts or other derivative instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.

 

We do not enter into derivative instruments for any purpose other than cash flow hedging. We do not speculate using derivative instruments.

 

Item 4.  Controls and Procedures

 

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act).  It should be noted that, because of inherent limitations, our disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met.  Based upon that evaluation, the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer 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 properly recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

 

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, of our internal control over financial reporting to determine whether any changes occurred during the third quarter of 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Based on that evaluation, there were no changes in our internal control over financial reporting or in other factors that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.  We may make changes in our internal control processes from time to time in the future.  It should also be noted that, because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements, and controls may become inadequate because of changes in conditions or in the degree of compliance with the policies or procedures.

 

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PART II.         OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

Information regarding legal proceedings is set forth in Note K to the Notes to Unaudited Condensed Consolidated Financial Statements, Litigation Contingencies, in Item 1 of Part I of this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.

 

Item 1a.  Risk Factors

 

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 2013 Form 10-K, which could materially affect our business, financial condition or future results.  The risks described in our 2013 Form 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.  In our judgment, there were no material changes in the risk factors as previously disclosed in Part I, “Item 1A. Risk Factors” of our 2013 Form 10-K.   Refer to Part I, Item 2 of this Quarterly Report on Form 10-Q, for a discussion of the economic climate and impact on our financial statements.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table contains information about our purchases of equity securities during the third quarter of 2014:

 

Period

 

Total Number of
Shares
Purchased (2)

 

Average
Price Paid
per Share

 

Total Number of
Shares Purchased
as Part of a Publicly
Announced Plan (1)

 

Maximum
Dollar Amount
that May Yet
Be Spent Under
the Plan

 

July 1 - 31, 2014

 

59,608

 

$

7.01

 

35,000

 

$

1,603,774

 

August 1 - 31, 2014

 

204,391

 

$

6.99

 

204,391

 

$

20,176,052

 

September 1 - 30, 2014

 

239,768

 

$

6.68

 

239,768

 

$

18,574,484

 

Total

 

503,767

 

$

7.00

 

479,159

 

 

 

 

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(1)  During the third quarter of 2014, we purchased 479,159 shares of our common stock.  264,080 shares were purchased through our stock repurchase program that was publicly announced in August 2012.  Under this program, from which shares can be purchased in the open market, our Board of Directors has authorized us to spend up to $10.0 million to repurchase shares of our outstanding common stock.  This authorization was exhausted on September 4, 2014.  As of September 30, 2014, we have repurchased 1,456,801 shares and spent $10.0 million under the 2012 stock repurchase program. Of the shares repurchased in this quarter, 215,079 shares were purchased through our stock repurchase program that was publicly announced on August 27, 2014 stock repurchase program.  Under the 2014 stock repurchase program our Board of Directors has authorized us to spend up to $20.0 million to repurchase shares of our outstanding common stock in the open market.  As of September 30, 2014, we have repurchased 1,852,893 shares and spent $1.4 million under the 2014 stock repurchase program. Through September 30, 2014, we had repurchased a total of 66,596,389 shares at an average price of $18.33 per share under all repurchase programs.

 

(2)  Total number of shares purchased includes shares, if any, (i) purchased as part of our publicly announced stock repurchase programs, and pursuant to our 2005 Omnibus Incentive Plan and 2013 Omnibus Incentive Plan, (ii) withheld to pay withholding taxes and the exercise price in certain cashless exercises of stock options, and (iii) withheld to offset withholding taxes upon the vesting of unvested shares.

 

Item 6.  Exhibits

 

Exhibit

 

 

No.

 

Description of Exhibit

 

 

 

*31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

*31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

*32.1

 

Furnished Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

*32.2

 

Furnished Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

*101

 

XBRL Instance Document

 


*Filed or furnished herewith

 

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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.

 

 

 

 

HARTE-HANKS, INC.

 

 

 

 

 

 

November 3, 2014

 

/s/ Robert A. Philpott

Date

 

Robert A. Philpott

 

 

President and Chief Executive Officer

 

 

 

 

 

 

November 3, 2014

 

/s/ Douglas C. Shepard

Date

 

Douglas C. Shepard

 

 

Executive Vice President and

 

 

Chief Financial Officer

 

 

 

 

 

 

November 3, 2014

 

/s/ Carlos M. Alvarado

Date

 

Carlos M. Alvarado

 

 

Vice President, Finance and

 

 

Corporate Controller

 

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