HARTE HANKS INC - Quarter Report: 2024 September (Form 10-Q)

(1) This amount is comprised of the below balances:

Cash and cash equivalents$ $ Cash held in Escrow account included in other assets Cash and cash equivalents at end of period$ $

See Accompanying Notes to Condensed Consolidated Financial Statements

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Harte Hanks, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note A -

reportable segments: Marketing Services; Customer Care; Sales Services; and Fulfillment & Logistics Services. Our Chief Executive Officer (“CEO”) is considered to be our chief operating decision maker. Our CEO reviews our operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance by using the two financial measures: revenue and operating income.

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Note B -

Note C -

reportable segments and the pattern of revenue recognition:

$ $ Customer Care Sales Services Fulfillment and Logistics Services Total Revenues$ $ $

Three Months Ended September 30, 2023

In thousands

Revenue for performance obligations recognized over time

Revenue for performance obligations recognized at a point in time

Total

Marketing Services

Customer Care

Sales Services

Fulfillment and Logistics Services

Total Revenues

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$ $ Customer Care Sales Services Fulfillment and Logistics Services Total Revenues$ $ $

Nine Months Ended September 30, 2023

In thousands

Revenue for performance obligations recognized over time

Revenue for performance obligations recognized at a point in time

Total

Marketing Services

Customer Care

Sales Services

Fulfillment and Logistics Services

Total Revenues

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As of September 30, 2024, we had transaction prices allocated to unsatisfied or partially satisfied performance obligations.

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Contract assets Deferred revenue and customer advances Deferred revenue, included in other long-term liabilities

Revenue recognized during the nine months ended September 30, 2024 from amounts included in deferred revenue at the beginning of the period was approximately $ million. Revenue recognized during the nine months ended September 30, 2023 from amounts included in deferred revenue at the beginning of the period was approximately $ million.

The remaining unamortized contract costs were $ million and $ million as of September 30, 2024 and December 31, 2023, respectively. They are included in other current assets and other assets on our balance sheet. For the periods presented, impairment was recognized.

Note D -

, some of which may include options to extend the leases for up to an additional .

As of September 30, 2024, assets recorded under finance and operating leases were approximately $ million and $ million, respectively, and accumulated amortization associated with finance leases was $ million. As of December 31, 2023, assets recorded under finance and operating leases were approximately $ million and $ million, respectively, and accumulated amortization associated with finance leases was $ million. Operating lease right of use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The discount rate used to determine the commencement date present value of lease payment is the interest rate implicit in the lease, or when that is not readily determinable, we utilize our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

There was impairment of leases during the three and nine months ended September 30, 2024 and 2023.

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$ $ $ $ $ LiabilitiesCurrent portion of lease liabilities Long-term lease liabilities Total Lease Liabilities$ $ $ $ $ $ $ $ $ Finance lease cost:Amortization of right-of-use assets Interest on lease liabilities Total Finance lease cost Variable lease cost Sublease income()()()()Total lease cost, net$ $ $ $

Other information related to leases was as follows:

In thousands

Nine Months Ended September 30, 2024

Nine Months Ended September 30, 2023

Supplemental Cash Flows Information

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

Operating cash flows from finance leases

Financing cash flows from finance leases

Weighted Average Remaining Lease term

Operating leases

Finance leases

Weighted Average Discount Rate

Operating leases

Finance leases

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$ 2025 2026 2027 2028 2029 and beyond Total future minimum lease payments Less: imputed interest Total lease liabilities$ $

Note E -

million of the Company’s Common Stock. In the three and nine months ended September 30, 2024, we didn't repurchase any shares of common stock. In the three and nine months ended September 30, 2023, we repurchased million and million shares of Common Stock for $ million and $ million, respectively.

Note F —

, $ million asset-based revolving credit facility (the "Credit Facility") with Texas Capital Bank ("TCB"). The Company’s obligations under the Credit Facility are guaranteed on a joint and several basis by the Company’s material subsidiaries (the “Guarantors”). The Credit Facility is secured by substantially all of the assets of the Company and the Guarantors pursuant to a Pledge and Security Agreement, dated as of December 21, 2021, among the Company, TCB and the other Guarantors party thereto (the "Security Agreement"). On December 29, 2023, the Company extended the maturity date for the Credit Facility by a period of to June 30, 2025. The extension was executed with substantially similar terms and conditions as the original Credit Facility.

The Credit Facility provides for loans up to the lesser of (a) $ million, and (b) the amount available under a “borrowing base” calculated primarily by reference to the Company's cash and cash equivalents and accounts receivables. The Credit Facility allows the Company to use up to $ million of its borrowing capacity to issue letters of credit.

The loans under the Credit Facility accrue interest at a variable rate equal to the Secured Overnight Financing Rate (SOFR) plus a margin of % per annum. The interest rate was % as of September 30, 2024. The outstanding amounts advanced under the Credit Facility are due and payable in full on June 30, 2025. As of September 30, 2024 and December 31, 2023, we had letters of credit outstanding in the amount of $ million and $ million, respectively. amounts were drawn against these letters of credit at September 30, 2024. These letters of credit exist to support insurance programs relating to worker’s compensation and general liability. Unused commitment balances accrue fees at a rate of %.

As of September 30, 2024 and December 31, 2023, we had the ability to borrow $ million and $ million, respectively, under the Credit Facility. As of September 30, 2024 and December 31, 2023, we had borrowings outstanding under the Credit Facility

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Note G —

million and $ million of stock-based compensation expense during the three months ended September 30, 2024 and 2023, respectively. We recognized $ million and $ million of stock-based compensation expense during the nine months ended September 30, 2024 and 2023

Note H —

distinct plans, “Qualified Pension Plan I” and “Qualified Pension Plan II.” The assets and liabilities of the Qualified Pension Plan that were attributable to certain participants in Qualified Pension Plan II were spun off and transferred into Qualified Pension Plan II effective as of the end of December 31, 2021, in accordance with Internal Revenue Code section 414(I) and ERISA Section 4044.

In January 2023, the Board of Directors of the Company approved the termination of the Qualified Pension Plan I. The termination process took approximately months and was completed in June 2024, which resulted in the transfer of our obligations pursuant to this pension plan to an insurance company. We made total cash payment of $ million to terminate the Qualified Pension Plan I during the nine months ended September 30, 2024. We made a $ million cash contribution in the three months ended June 30, 2024. This contribution with the liquidation of pension assets was used to purchase annuities from an insurance company, which settled the liabilities for Pension Plan I participants. We paid another $ million during the three months ended September 30, 2024 as the insurance company was onboarding pension participants and final filings were submitted to the Pension Benefit Guaranty Corporation. We recognized $ million of pension termination charges which were reflected in our Condensed Consolidated Statements of Comprehensive Income (Loss) for nine months ended September 30, 2024.

The overfunded or underfunded status of our defined benefit post-retirement plans is recorded as an asset or liability on our condensed consolidated balance sheets. The funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation. Periodic changes in the funded status are recognized through other comprehensive income in the Condensed Consolidated Statements of Comprehensive Income (Loss). We currently measure the funded status of our defined benefit plans as of December 31, the date of our year-end Consolidated Balance Sheets.

$ $ $ Expected return on plan assets()()()()Recognized actuarial loss Net periodic benefit cost$ $ $ $

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million contribution to the combined qualified Pension Plan in 2024. We made $ million of such $ million aggregate contribution in the nine months ended September 30, 2024.

We are not required to make, and do not intend to make, any contributions to our Restoration Pension Plan in 2024 other than to the extent needed to cover benefit payments. We made benefit payments under this supplemental plan of $ million in both the nine months ended September 30, 2024 and 2023.

Note I -

million and $ million for the three months ended September 30, 2024 and 2023, respectively. The provision for income taxes resulted in an effective tax rate of % for the three months ended September 30, 2024 and % for the three months ended September 30, 2023. The effective income tax rate for the three months ended September 30, 2024 and 2023 differs from the federal statutory rate of 21%, primarily due to the U.S. state income taxes and the impact of income earned in foreign jurisdictions.

The income tax benefit was $ million and income tax provision was $ million for the nine months ended September 30, 2024 and 2023, respectively. The provision for income taxes resulted in an effective tax rate of % for the nine months ended September 30, 2024 and % for the nine months ended September 30, 2023. The effective income tax rate for the nine months ended September 30, 2024 and 2023 differs from the federal statutory rate of 21%, primarily due to the U.S. state income taxes and the impact of income earned in foreign jurisdictions.

Harte Hanks, or one of our subsidiaries file income tax returns in the U.S. federal, U.S. state, and foreign jurisdictions. For U.S. state, federal and foreign returns, we are no longer subject to tax examinations for years prior to 2021. The Company has reviewed all of its tax positions in order to determine whether all, a portion, or none of any related tax benefit should be recognized and has not identified or recorded any ASC 740-10 reserve.

We have elected to classify any interest expense and penalties related to income taxes within income tax expense in our Condensed Consolidated Statements of Comprehensive Income (Loss). We did not have a significant amount of interest or penalties accrued at September 30, 2024 or December 31, 2023.

Note J -

$ $()$ Denominator:Basic EPS denominator: weighted-average common shares outstandingDiluted EPS denominatorBasic (loss) income per Common Share$ $ $()$ Diluted (loss) income per Common Share$ $ $()$

For the three months ended September 30, 2024 and 2023, respectively, the following shares have been excluded from the calculation of shares used in the diluted EPS calculation: and shares of anti-dilutive market price options; and of anti-dilutive unvested restricted shares.

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and shares of anti-dilutive market price options; and of anti-dilutive unvested restricted shares.

Note K —

)$()$()Other comprehensive loss, net of tax, before reclassifications ()()Amounts reclassified from accumulated other comprehensive income, net of tax, to other, net, on the condensed consolidated statements of comprehensive income Net current period other comprehensive loss, net of tax () Balance at September 30, 2024$()$()$()

In thousands

Defined Benefit Pension Items

Foreign Currency Items

Total

Balance at December 31, 2022

()

Other comprehensive income, net of tax, before reclassifications

Amounts reclassified from accumulated other comprehensive income, net of tax, to other, net, on the condensed consolidated statements of comprehensive income

Net current period other comprehensive income, net of tax

Balance at September 30, 2023

()

Note L —

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Note M —

meetings with personnel at all levels of the firm and led to the initiation of our transformation program named "Project Elevate". The program involves the optimization and rationalization of our business resources as well as the partial reinvestment of savings into the Company's sales and marketing team, technology, and strategy. A business transformation office was established at the beginning of 2024 to manage and measure these initiatives. Reorganization cost reductions from Project Elevate during 2024 through 2026 are estimated to be $ million. For the year ended December 31, 2023, we recorded restructuring charges of $ million. We expect to incur total restructuring charges of $ million through the end of 2025.

For the three and nine months ended September 30, 2024, we recorded restructuring charges of $ million and $ million, respectively.

$ Severance Facility and other expenses Total$ $ $ $ $ Additions Payments and adjustment()()()()Ending balance:$ $ $ $

Note N —

reportable segments based on the types of products and services we provide: Marketing Services, Customer Care, Sales Services and Fulfillment & Logistics Services. The Sales Service is our new reportable segment for 2024 as it has become strategically more important for our company. It was included in Customer Care segment in 2023. 2023 segment reporting has been restated to reflect this change.

Our Marketing Services segment leverages data, insight, and experience to support clients as they engage customers through digital, traditional, and emerging channels. We partner with clients to develop strategies and tactics to identify and prioritize customer audiences in B2C and B2B transactions. Our key service offerings include strategic business, brand, marketing and communications planning, data strategy, audience identification and prioritization, predictive modeling, creative development and execution across traditional and digital channels, website and app development, platform architecture, database build and management, marketing automation, and performance measurement, reporting and optimization.

Our Customer Care segment offers intelligently responsive contact center solutions, which use real-time data to effectively interact with each customer. Customer contacts are handled through phone, e-mail, social media, text messaging, chat and

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$ $ $ $ $ $ Segment operating expense Contribution margin (loss)$ $ $ $ $()$()$ Overhead allocation () Depreciation and amortization Operating income (loss)$ $ $ $ $()$()$

The following table presents financial information by segment for the three months ended September 30, 2023:

In thousands

Marketing Services

Customer Care

Sales Services

Fulfillment & Logistics

Restructuring

Unallocated Corporate

Total

Revenue

Segment operating expense

Contribution margin (loss)

()

Overhead allocation

()

Depreciation and amortization

Operating income (loss)

()

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$ $ $ $ $ $ Segment operating expense Contribution margin (loss)$ $ $ $ $()$()$ Overhead allocation () Depreciation and amortization Operating income (loss)$ $ $ $ $()$()$

The following table presents financial information by segment for the nine months ended September 30, 2023:

In thousands

Marketing Services

Customer Care

Sales Services

Fulfillment & Logistics

Restructuring Expense

Unallocated Corporate

Total

Revenue

Segment operating expense

Contribution margin (loss)

()

Overhead allocation

()

Depreciation and amortization

Operating income (loss)

()

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

Cautionary Note Regarding Forward-Looking Statements

This report, including the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contains “forward-looking statements” within the meaning of the federal securities laws. All such statements are qualified by this cautionary note, which is provided pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Forward-looking statements will also be included from time to time in our other public filings, press releases, our website, and oral and written presentations by management. Statements other than historical facts are forward-looking and may be identified by words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “seeks,” “could,” “intends,” or words of similar meaning. Examples include statements regarding (1) our strategies and initiatives, including actions designed to respond to market conditions and improve our performance, (2) our financial outlook for revenues, earnings (loss) per share, operating income (loss), expense related to equity-based compensation, capital resources and other financial items, if any, (3) 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, (4) competitive factors, (5) acquisition and development plans, (6) expectations regarding legal proceedings and other contingent liabilities, (7) expectations regarding cost savings due to Project Elevate and (8) 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. A discussion of some of these risks, uncertainties, assumptions, and other factors can be found in our filings with the SEC, including the factors discussed under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 10-K”), “Part II - Item 1A. Risk Factors” in this Quarterly Report, and in our other reports filed or furnished with the SEC. The forward-looking statements included in this report and those included in our other public filings, press releases, our website, and oral and written presentations by

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management are made only as of the respective dates thereof, and we undertake no obligation to update publicly any forward-looking statement in this report or in other documents, our website, or oral statements for any reason, even if new information becomes available or other events occur in the future, except as required by law.

Overview

The following MD&A section is intended to help the reader understand the results of operations and financial condition of Harte Hanks, including any material changes in the Company’s financial condition and results of operations since December 31, 2023, and as compared with the three and six months ended September 30, 2023. This section is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying notes included herein as well as our 2023 10-K. Our 2023 10-K contains a discussion of other matters not included herein, such as disclosures regarding critical accounting policies and estimates, and contractual obligations. See Note A, Overview and Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements for further information.

Harte Hanks, Inc. is a leading global customer experience company operating in four reportable segments: Marketing Services, Customer Care, Sales services and Fulfillment & Logistics Services. Our mission is to partner with clients to provide them with a robust customer-experience, or CX, strategy, data-driven analytics and actionable insights combined with seamless program execution to better understand, attract, and engage their customers. Our services include strategic planning, data strategy, performance analytics, creative development and execution; technology enablement; marketing automation; B2B and B2C e-commerce; cross-channel customer care; and product, print, and mail fulfillment.

We are affected by the general, national, and international economic and business conditions in the markets where we and our customers operate. Marketing budgets are largely discretionary in nature and, as a consequence, are easier for our clients to reduce in the short-term than other expenses. Our revenues are also affected by the economic fundamentals of each industry that we serve, various market factors, including the demand for services by our clients, the financial condition of and budgets available to our clients, and regulatory factors, among other factors. Due to increases in inflation and interest rates throughout the globe, and other geopolitical uncertainties, including but not limited to the ongoing armed conflicts in multiple regions, there is continued uncertainty and significant volatility and disruption in the global economy and financial markets. We remain committed to making the investments necessary to execute our multichannel strategy while also continuing to adjust our cost structure to appropriately reflect our operations and outlook.

Management is closely monitoring inflation and wage pressure in the market, and the potential impact on our business. While inflation has not had a material impact on our business, it is possible a material increase in inflation could have an impact on our clients, and in turn, on our business.

Recent Developments

Project Elevate

Our management team continuously reviews and adjusts our cost structure and operating footprint to optimize our operations, and invest in improved technology. During the second half of 2023, we engaged a consulting firm to help review and analyze the structure and operations of the Company. This review included greater than 200 meetings with personnel at all levels of the firm and led to the initiation of our transformation program named "Project Elevate". The program involves the optimization and rationalization of our business resources as well as the partial reinvestment of savings into the Company's sales and marketing team, technology, and strategy. A business transformation office was established at the beginning of 2024 to manage and measure these initiatives. We expect to meet our Project Elevate saving target for this year of $6 million and remain confident in our two-year target of exiting 2025 with $16 million in savings.

For the three and nine months ended September 30, 2024, we recorded restructuring charges related to this business transformation effort of $0.8 million and $2.1 million, respectively.

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Qualified Pension Plan I termination

In January 2023, the Board of Directors of the Company approved the termination of the Qualified Pension Plan I. The termination process was completed in June 2024 and resulted in the transfer of our obligations pursuant to this pension plan to an insurance company. We made total cash contributions of $7.2 million to terminate the Qualified Pension Plan I. In connection with this termination, we recognized $37.5 million of pension termination charges which were reflected in our Condensed Consolidated Statements of Comprehensive Income (Loss) for nine months ended September 30, 2024.

Changes in Segment Reporting

Starting in the first quarter of 2024, to improve our strategic posture in terms of go-to-market approach and cost structure, we removed the Sales Services business from the Customer Care segment and made the Sales Services business its own segment.

Results of Operations

Operating results were as follows:


	Three months ended September 30,					Nine months ended September 30,
In thousands, except per share amounts	2024		% Change	2023		2024		% Change	2023
Revenue	$	47,630	1.1%	$	47,119	$	138,113	-2.7%	$	142,001
Operating expenses	45,732		3.5%	44,205		134,467		-1.4%	136,364
Operating income	$	1,898	-34.9%	$	2,914	$	3,646	-35.3%	$	5,637
Operating margin	4.0%		-35.6%	6.2%		2.6%		-33.5%	4.0%
Other expense, net	888			384		39,716			3,610
Income tax (benefit) provision	868			1,912		(8,207)			1,620
Net (loss) income	$	142		$	618	$	(27,863)		$	407
Basic and diluted EPS from operations	$	0.02		$	0.09	$	(3.83)		$	0.05

Consolidated Results

Three months ended September 30, 2024 vs. Three months ended September 30, 2023

Revenues

Revenue increased $0.5 million, or 1.1%, to $47.6 million in the three months ended September 30, 2024, compared to the three months ended September 30, 2023 driven by increased revenue in our Customer Care and Sales Services segments which were partially offset by the decreased revenue in Fulfillment & Logistics Services and Marketing Services segments. Those decreases were the result of fluctuations in timing of high volume periods associated with ongoing programs, and the conclusion of relationships with some customers.

Operating Expenses

Operating expenses were $45.7 million in the three months ended September 30, 2024, an increase of $1.5 million, or 3.5%, compared to $44.2 million in the three months ended September 30, 2023.

Labor expense increased $1.2 million, or 5.3%, primarily due to higher labor cost associated with higher revenue.

Production and Distribution expenses decreased $1.0 million, or 6.2%, primarily due to lower volumes of brokered freight and lower fuel charges and production supplies cost as compared to the prior year quarter.

Advertising, Selling, General and Administrative expenses increased $0.3 million, or 6.9%, primarily due to higher sales and marketing expense as compared to the prior year quarter.

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The largest components of our operating expenses are labor, transportation expenses and outsourced costs. Each of these costs is, at least in part, variable and tends to fluctuate in line with revenues and the demand for our services. Transportation rates have decreased over the last nine months due to dropping demand and supply fluctuations within the transportation industry. Future changes in transportation expenses will continue to impact our total production costs and total operating expenses, and in turn our margins, and may have an impact on future demand for our supply chain management services. Postage costs for mailings are borne by our clients and are not directly reflected in our revenues or expenses.

Other expense, net

Other expense, net, for the three months ended September 30, 2024 was $0.9 million compared to $0.4 million, in the prior year quarter. The $0.5 million increase in other expense, net was mainly associated with changes in foreign currency gain and loss accounts the three months ended September 30, 2024 as compared to the prior year quarter.

Income Taxes

The income tax benefit of $0.9 million in the third quarter of 2024 represents a decrease in income tax provision of $1.0 million when compared to the third quarter of 2023. Our effective tax rate was 85.9% for the second quarter of 2024, an increase of 10.4% when compared to the third quarter of 2023. The effective tax rate differs from the federal statutory rate of 21.0%, primarily due to the U.S. state income taxes and income earned in foreign jurisdictions.

Nine months ended September 30, 2024 vs. Nine months ended September 30, 2023

Revenues

Revenue decreased $3.9 million, or 2.7%, to $138.1 million, in the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023 due to decreased revenue in three of our operating segments. The reduction in revenues in the nine month period relates to the conclusion of programs, and the ordinary turnover of customers at a higher rate than initiation of new programs and revenues from new customer. Our sales and marketing organization is amidst a transformation that includes an expansion of staff, a new centralized reporting structure, partnership channel development, and expanded international sales focus. Assuming a supportive economy, we expect improved revenues in the fourth quarter of 2024.

Operating Expenses

Operating expenses were $134.5 million in the nine months ended September 30, 2024, a decrease of $1.9 million, or 1.4%, compared to $136.4 million in the nine months ended September 30, 2023. Cost controls to match revenues and Project Elevate led to the decline in operating expense. The company expects further cost reductions in excess of new costs attributable to revenue growth.

Labor expense decreased $3.7 million, or 5.0%, primarily due to lower labor cost and bonus expense associated with lower revenue.

Production and Distribution expenses decreased $1.3 million, or 3.0%, primarily due to lower fuel charges and software costs as compared to the prior year.

Advertising, Selling, General and Administrative expenses increased $1.0 million, or 6.1%, primarily due to higher sales and marketing expenses.

The largest components of our operating expenses are labor, transportation expenses and outsourced costs. Each of these costs is, at least in part, variable and tends to fluctuate in line with revenues and the demand for our services. There has been significant variability in transportation rates in recent years due to demand and supply fluctuations within the transportation industry. Future changes in transportation expenses will continue to impact our total production costs and total operating expenses, and revenues. Postage costs for mailings are borne by our clients and are not directly reflected in our revenues or expenses.

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Other expense, net

Other expense, net, for the nine months ended September 30, 2024 was $39.7 million compared to $3.6 million, in the prior year period. The $36.1 million increase in other expense, net was mainly due to the pension termination charge incurred in the nine months ended September 30, 2024.

Income Taxes

The income tax benefit of $8.2 million in the nine months ended September 30, 2024 represents an increase in income tax benefit of $9.8 million when compared to the same period of 2023. Our effective tax rate was 22.8% for the nine months ended September 30, 2024, as compared to the effective tax rate of 79.9% for the same period of 2023. The effective tax rate differs from the federal statutory rate of 21.0%, primarily due to the U.S. state income taxes and income earned in foreign jurisdictions.

Segment Results

The following is a discussion and analysis of the results of our reportable segments for the three and nine months ended September 30, 2024 and 2023. There are two principal financial measures reported to our CEO (the chief operating decision maker) for use in assessing segment performance and allocating resources. Those measures are revenue and operating income. For additional information, see Note N, Segment Reporting, in the Notes to Condensed Consolidated Financial Statements.

Marketing Services:


	Three months ended September 30,						Nine months ended September 30,
In thousands	2024		% Change		2023		2024		% Change		2023
Revenue	$	9,050	(14.6)	%	$	10,591	$	25,709	(21.5)	%	$	32,751

Operating income	1,933		33.9	%	1,444		3,391		(12.1)	%	3,859

Three months ended September 30, 2024 vs. Three months ended September 30, 2023

Marketing Services segment revenue decreased $1.5 million, or 14.6%, due to customer turnover, the decline of client spending in excess of new business. Operating income for the three months ended September 30, 2024 increased $0.5 million, or 33.9% from the prior year quarter due to the reduced labor cost.

Nine months ended September 30, 2024 vs. Nine months ended September 30, 2023

Marketing Services segment revenue decreased $7.0 million, or 21.5%, due to customer turnover and the additional client spending reductions. This segment is our most economically sensitive segment with regard to changes in client's marketing strategy. Operating income for the nine months ended September 30, 2024 decreased $0.5 million , or 12.1% from the prior year quarter primarily due to the reduced labor cost.

Customer Care:


	Three months ended September 30,					Nine months ended September 30,
In thousands	2024		% Change	2023		2024		% Change	2023
Revenue	$	13,068	10.4%	$	11,832	$	37,894	(1.2)%	$	38,372

Operating income	2,462		42.6%	1,727		7,117		27.7%	5,573

Three months ended September 30, 2024 vs. Three months ended September 30, 2023

Customer Care segment revenue increased $1.2 million, or 10.4%, primarily driven by the timing of fluctuations with specific programs. Operating income was $2.5 million for the three months ended September 30, 2024, compared to operating income of $1.7 million for the three months ended September 30, 2023. The $0.7 million increase in operating income was driven by the higher revenue.

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Nine months ended September 30, 2024 vs. Nine months ended September 30, 2023

Customer Care segment revenue decreased $0.5 million, or 1.2%, which can be impacted by one-time project-based engagements, temporary surges or declines in call volumes among retained customers due to specific programs and events. We also encounter fluctuations based on the geographic regions customers select for staff support. We are leveraging our Amazon Connect cloud-based platform to test and pilot new AI tools, and are exploring how we can augment growth by providing more technical support as clients migrate to more capable contact center platforms. Operating Income was $7.1 million for the nine months ended September 30, 2024, compared to operating income of $5.6 million for the nine months ended September 30, 2023. The increase of $1.5 million was primarily driven by the lower labor cost.

Sales Services:


	Three months ended September 30,					Nine months ended September 30,
In thousands	2024		% Change	2023		2024		% Change	2023
Revenue	$	4,205	94.1%	$	2,166	$	13,281	83.1%	$	7,253

Operating income	500		4445.5%	11		2,214		464.8%	392

Three months ended September 30, 2024 vs. Three months ended September 30, 2023

Sales Services segment revenue increased $2.0 million, or 94.1%, primarily due to increased work from a large fintech customer. Operating Income was $0.5 million for the three months ended September 30, 2024, compared to operating income of $11 thousand for the three months ended September 30, 2023. The $0.5 million increase was driven by the higher revenues.

Nine months ended September 30, 2024 vs. Nine months ended September 30, 2023

Sales Services segment revenue increased $6.0 million, or 83.1%, primarily due to growth in work from a large fintech customer. Operating Income was $2.2 million for the nine months ended September 30, 2024, compared to $0.4 million for the six months ended September 30, 2023. The $1.8 million increase was driven by the increased revenues.

Fulfillment & Logistics Services:


In thousands	2024		% Change	2023		2024		% Change	2023
Revenue	$	21,307	(5.4)%	$	22,530	$	61,229	(3.8)%	$	63,625

Operating income	1,074		(58.8)%	2,606		3,721		(40.5)%	6,251

Three months ended September 30, 2024 vs. Three months ended September 30, 2023

Fulfillment & Logistics Services segment revenue decreased $1.2 million, or 5.4%, primarily due to the lower volume from the existing customers not being offset by growth in new programs and customers. Operating income decreased by $1.5 million primarily due to revenue mix, and higher technology and facility expenses.

Nine months ended September 30, 2024 vs. Nine months ended September 30, 2023

Fulfillment & Logistics Services segment revenue decreased by $2.4 million, or 3.8%, due to lost customers and the lower volume from existing customers. We currently have a robust sales pipeline for fulfillment opportunities, particularly for the fourth quarter. The pipeline transcends an otherwise seasonally stronger fourth quarter juxtaposed to the other quarters. The logistics industry is experiencing much higher cost pressure. This is partially the result of market leaders competing for more dominant position, acquiring smaller logistics providers, achieving scale through lowering pricing, as they focus on consolidating market share. Operating income decreased by $2.5 million, or 40.5% due to the lower revenue and higher facility and technology expenses.

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Liquidity and Capital Resources

Sources and Uses of Cash

Our cash and cash equivalent balances were $5.9 million and $18.4 million at September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024, we had the ability to borrow an additional $24.0 million under our Credit Facility.

We received a $5.3 million tax refund in March 2023, as a result of the tax NOL carryback provisions in the CARES Act.

Our principal sources of liquidity are cash on hand, cash provided by operating activities, and borrowings available under our Credit Facility. Our cash is primarily used for general corporate purposes, working capital requirements, and capital expenditures. At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations such as finance and operating leases and unfunded pension plan benefit payments and other needs for our operations in the short term and beyond. Although the Company believes that it will be able to meet its cash needs for the short and medium term, if unforeseen circumstances arise the Company may need to seek alternative sources of liquidity.

Operating Activities

Net cash used in the operating activities for the nine months ended September 30, 2024 was $7.0 million, compared to net cash provided by operating activities of $6.1 million for the nine months ended September 30, 2023. The $13.1 million year-over-year decrease in cash provided by operating activities was primarily due to the $7.2 million payment to termination the Qualified Pension Plan I during the nine months ended September 30, 2024. as well as the $6.6 million changes in other assets and current liabilities.

Investing Activities

Net cash used in investing activities was $3.1 million for the nine months ended September 30, 2024, as compared to the $1.5 million used in investing activities during the same period in 2023. The $1.6 million increase in cash used in investing activities was primarily related to purchase of property, plant and equipment activities in the nine months ended September 30, 2024.

Financing Activities

Net cash used in financing activities was $0.3 million for the nine months ended September 30, 2024, as compared to $3.1 million of net cash used in financing activities during the nine months ended September 30, 2023. The $2.8 million decrease in cash used in financing activities was primarily related to the $2.4 million used to repurchase our common stock in the nine months ended September 30, 2023.

Foreign Holdings of Cash

Consolidated foreign holdings of cash as of September 30, 2024 and December 31, 2023 were $1.8 million and $5.4 million, respectively.

Debt

On December 21, 2021, the Company entered into a three-year, $25 million asset-based revolving credit facility (the "Credit Facility") with Texas Capital Bank ("TCB"). The Company’s obligations under the Credit Facility are guaranteed on a joint and several basis by the Company’s material subsidiaries (the “Guarantors”). The Credit Facility is secured by substantially all of the assets of the Company and the Guarantors pursuant to a Pledge and Security Agreement, dated as of December 21, 2021, among the Company, TCB and the other Guarantors party thereto (the "Security Agreement"). On December 29, 2023, the Company extended the maturity date for the Credit Facility by a period of 6 months, to June 30, 2025. The extension was executed with substantially similar terms and conditions as the original Facility.

The Credit Facility provides for loans up to the lesser of (a) $25.0 million, and (b) the amount available under a "borrowing base" calculated primarily by reference to the Company's cash and cash equivalents and accounts receivables. The Credit Facility allows the Company to use up to $3.0 million of its borrowing capacity to issue letters of credit.

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The loans under the Credit Facility accrue interest at a variable rate equal to the Secured Overnight Financing Rate (SOFR) plus a margin of 2.25% per annum. The latest rate was 7.27% as of September 30, 2024. The outstanding amounts advanced under the Credit Facility are due and payable in full on June 30, 2025.

The Company may repay and reborrow all or any portion of the loans advanced under the Credit Facility at any time, without premium or penalty. The Credit Facility is subject to mandatory prepayments (i) from the net proceeds of asset dispositions not otherwise permitted under the Credit Facility; (ii) if the unpaid principal balance under the Credit Facility plus the aggregate face amount of all outstanding letters of credit exceeds the borrowing base; (iii) in an amount equal to 50% of the net proceeds of issuances of capital stock (subject to customary exceptions); or (iv) in an amount equal to the net proceeds from any issuance of debt not otherwise permitted under the Credit Facility.

The Credit Facility contains certain covenants restricting the Company's and its subsidiaries' ability to create, incur, assume or become liable for indebtedness; make certain investments; pay dividends or repurchase the Company's stock; create, incur or assume liens; consummate mergers or acquisitions; liquidate, dissolve, suspend or cease operations; or modify accounting or tax reporting methods (other than as required by U.S. GAAP).

As of September 30, 2024 and December 31, 2023, we had no borrowings outstanding under the Credit Facility. At each of September 30, 2024 and December 31, 2023, we had letters of credit outstanding in the amount of $1.0 million and $0.8 million, respectively. No amounts were drawn against these letters of credit at September 30, 2024 and December 31, 2023. These letters of credit exist to support insurance programs relating to workers’ compensation, insurance, and reducing cash security deposits on leased property. We had no other off-balance sheet financing activities at September 30, 2024 and December 31, 2023.

As of September 30, 2024, we had the ability to borrow $24.0 million under the Credit Facility.

Dividends

We did not pay any dividends in the three months ended September 30, 2024 and 2023.

Share Repurchase

On May 2, 2023, the Board of Directors of Harte Hanks approved a share repurchase program to maximize shareholder value with authorization to repurchase $6.5 million of the Company’s Common Stock. During 2023, we repurchased 0.4 million shares of common stock for a total combined purchase price of $2.4 million. During 2024, we repurchased zero shares of stock during the three and nine months ended September 30, 2024. In the three and nine months ended September 30, 2023, we repurchased 0.4 million shares of Common Stock for $2.4 million.

Outlook

We consider such factors as total cash and cash equivalents and restricted cash, current assets, current liabilities, total debt, revenues, operating income, cash flows from operations, investing activities, and financing activities when assessing our liquidity. Our management of cash is designed to optimize returns on cash balances and to ensure that it is readily available to meet our operating, investing, and financing requirements as they arise. We believe that there are no conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern for the twelve months following the issuance of these Condensed Consolidated Financial Statements.

Critical and Recent Accounting Policies

Critical accounting estimates are defined as those that, in our judgment, are most important to the portrayal of our Company’s financial condition and results of operations and which require complex or subjective judgments or estimates. Actual results could differ materially from those estimates under different assumptions and conditions. Refer to the 2023 10-K for a discussion of our critical accounting estimates.

Our Significant Accounting policies are described in Note A, Overview and Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements.

See Recent Accounting Pronouncements under Note B of the Notes to Condensed Consolidated Financial Statements for a discussion of certain accounting standards that have been recently issued.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer ("CEO") and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure.

Our management, including our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of September 30, 2024, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our CEO and CFO concluded that the design and operation of these disclosure controls and procedures were effective, at the “reasonable assurance” level, to ensure information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

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 2023 10-K, which could materially affect our business, financial condition, or future results. The risks described in our 2023 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and operating results. There have been no material changes during the nine months ended September 30, 2024 to the risk factors previously disclosed in the 2023 10-K.

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

We did not sell any unregistered equity securities during the quarter ended September 30, 2024.

The following table provides information with respect to purchases by the Company of shares of our Common Stock during the quarter ended September 30, 2024:


Period	Total Number of Shares (or units) Purchased	Average Price per Share (or unit)		Total number of Shares Purchased as Part of a Publicly Announced Plan or Program	Approximate dollar value of shares that may yet be purchased under the program(1)
					in thousands
July 1, 2024 to July 31, 2024	—	$	—	—	$	4,131
August 1, 2024 to August 30, 2024	—	$	—	—	4,131
September 1, 2024 to September 30, 2024	—	$	—	—	4,131
	—			—	$	4,131

(1)On May 2, 2023, the Board of Directors of Harte Hanks approved a share repurchase program to maximize shareholder value with authorization to repurchase $6.5 million of the Company’s Common Stock. No repurchases were made during the quarter ended September 30, 2024 . After giving effect to the repurchases made under the plan through September 30, 2024, the Company has remaining authority of $4.1 million to repurchase shares under the program.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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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.INS						Inline XBRL Instance Document - the instance document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL Document.
*101.SCH						Inline XBRL Taxonomy Extension Schema Document
*101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document
*101.LAB						Inline XBRL Taxonomy Extension Labels Linkbase Document
*101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document
*101.DEF						Inline XBRL Definition Linkbase Document
*104						Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

__________________________________

*Filed or furnished herewith, as applicable.

**Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


						HARTE HANKS, INC.

November 14, 2024						/s/ Kirk Davis
Date						Kirk Davis
						Chief Executive Officer


November 14, 2024						/s/ David Garrison
Date						David Garrison
						Chief Financial Officer

HARTE HANKS INC - Quarter Report: 2024 September (Form 10-Q)

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