HARTE HANKS INC

Previous wording

We are affected by the general, national, and international economic and business conditions in the markets where we and our customers operate. Marketing budgets are largely discretionary in nature and, as a consequence, are easier for our clients to reduce in the short-term than other expenses. Our revenues are also affected by the economic fundamentals of each industry that we serve, various market factors, including the demand for services by our clients, the financial condition of and budgets available to our clients, and regulatory factors, among other factors. Due to the recent 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.

Current wording

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.

Previous wording

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 exceed 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.

Current wording

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.

Previous wording

For thethree and six months ended June 30, 2024, we recorded restructuring charges related to this business transformation effort of $0.4 million and$1.3 million, respectively.

Current wording

For thethree 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.

Previous wording

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 expect to make total cash contributions of$7.4 million will be required for the termination the Qualified Pension Plan I. We made a $6.1 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. Approximately $1.3 million will be paid during the third quarter of 2024 as the insurance company is onboarding plan participants and final filings are submitted to the Pension Benefit Guaranty Corporation. In connection with this termination, we recognized $38.2 million of pension termination charges reflected in our Condensed Consolidated Statements of Comprehensive Income (Loss) for three and six months ended June 30, 2024.

Current wording

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.

Previous wording

Revenue decreased $2.7 million, or 5.7%, to $45.0 million in the three months ended June 30, 2024, compared to the three months ended June 30, 2023 due to decreased revenue in two of the Company's operating 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.

Current wording

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.

Previous wording

Production and Distribution expenses increased$0.4 million, or 2.6%, primarily due to higher volumes of brokered freight and materials as compared to the prior year quarter.

Current wording

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.

Previous wording

Advertising, Selling, General and Administrative expenses increased$0.8 million, or 15.5%, primarily due to continued investment in sales and marketing, and technology services expenses.

Current wording

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.

Previous wording

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 six 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.

Current wording

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.

Previous wording

Other expense, net, for the three months ended June 30, 2024 was$38.2 million compared to$0.9 million, in the prior year quarter. The$37.4 million increase in other expense, net was mainly due to the pension termination charge of$38.2 millionin the three months ended June 30, 2024.

Current wording

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.

Previous wording

The income tax benefit of$9.0 million in the second quarter of 2024 represents an increase in income tax benefit of$9.2 million when compared to the second quarter of 2023. Our effective tax rate was 24.4% for the second quarter of 2024, a decrease of 4.8% from the effective tax rate of 29.3% for the second 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.

Current wording

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.

Previous wording

Revenue decreased $4.4 million, or 4.6%, to $90.5 million, in the six months ended June 30, 2024, compared to the six months ended June 30, 2023 due to decreased revenue in three of our operating segments. The reduction in revenues in the six 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 second half of 2024.

Current wording

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.

Previous wording

Operating expenses were $88.7 million in the six months ended June 30, 2024, a decrease of $3.4 million, or 3.7%, compared to $92.2 million in the six months ended June 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.

Current wording

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.

Previous wording

Labor expense decreased $4.0 million, or 14.9%, primarily due to lower labor cost and bonus expense associated with lower revenue.

Current wording

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

Previous wording

Production and Distribution expenses decreased$0.4 million, or 1.3%, primarily due to lower software costs as compared to the prior year.

Current wording

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.

Previous wording

Advertising, Selling, General and Administrative expenses increased$0.6 million, or 5.8%, primarily due to higher sales and marketing expenses.

Current wording

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

Previous wording

Other expense, net, for the six months ended June 30, 2024 was$38.8 million compared to$3.2 million, in the prior year period. The$35.6 million increase in other expense, net was mainly due to the pension termination charge incurred in the six months ended June 30, 2024.

Current wording

Other expense, net, for thenine 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 thenine months ended September 30, 2024.

Previous wording

The income tax benefit of$9.1 million in the six months ended June 30, 2024 represents an increase in income tax benefit of$8.8 million when compared to the same period of 2023. Our effective tax rate was 24.5% for the six months ended June 30, 2024, a decrease of 33.6% from the effective tax rate of 58.1% 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.

Current wording

The income tax benefit of$8.2 million in thenine 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 thenine 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.

Previous wording

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

Current wording

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.

Previous wording

Marketing Services segment revenue decreased $3.2 million, or 29.1%, due to customer turnover, the decline of client spending in excess of new business starting in the quarter. Operating income for thethree months ended June 30, 2024 decreased $0.6 million, or 47.4%from the prior year quarter due to the reduced revenue.

Current wording

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 thethree months ended September 30, 2024 increased $0.5 million, or 33.9%from the prior year quarter due to the reduced labor cost.

Previous wording

Marketing Services segment revenue decreased $5.5 million, or 18.3%, due to several factors including higher customer turnover at the during the first half of 2023, coupled with additional client spending reductions. This segment is our most economically sensitive segment with regard to changes in client's marketing strategy. We anticipate naming new leadership in this segment in the fourth quarter with an expanded focus on new business development supporting the change. Operating income for thesix months ended June 30, 2024 decreased $1.0 million , or 38.1% from the prior year quarter due to the reduced revenue.

Current wording

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 thenine months ended September 30, 2024 decreased $0.5 million , or 12.1% from the prior year quarter primarily due to the reduced labor cost.

Previous wording

Customer Care segment revenue decreased $2.5 million, or 17.0%, primarily dueto the timing of fluctuations with specific programs. Operating Income was $2.3 million for the three months ended June 30, 2024, compared to operating income of $2.5 million for the three months ended June 30, 2023. The $0.3 million decrease in operating income was due to the lower revenue.

Current wording

Customer Care segment revenue increased $1.2 million, or 10.4%, primarily driven bythe 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.

Previous wording

Customer Care segment revenue decreased $1.7 million, or 6.5%, 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 $4.7 million for the six months ended June 30, 2024, compared to operating income of $3.8 million for the six months ended June 30, 2023. The increase of $0.8 million was primarily driven by the lower labor cost.

Current wording

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.

Previous wording

Sales Services segment revenue increased $2.1 million, or 92.2%, primarily dueto increased work from a large fintech customer. Operating Income was $0.8 million for the three months ended June 30, 2024, compared to operating income of $48 thousand for the three months ended June 30, 2023. The $0.7 million increase was driven by the increased contribution margin related to higher revenues.

Current wording

Sales Services segment revenue increased $2.0 million, or 94.1%, primarily dueto 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.

Previous wording

Sales Services segment revenue increased $4.0 million, or 78.4%, primarily dueto growth in work from a large fintech customer. Operating Income was $1.7 million for the six months ended June 30, 2024, compared to $0.4 million for the six months ended June 30, 2023. The $1.3 million increase was driven by the increased contribution margin related to higher revenues.

Current wording

Sales Services segment revenue increased $6.0 million, or 83.1%, primarily dueto 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.

Previous wording

Fulfillment & Logistics Services segment revenue increased $0.9 million, or 4.4%, primarily due to the higher volumes and new programs from the existing customers. Operating income decreased by $0.4 million primarily due to revenue mix, and higher facility and technology expenses.

Current wording

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.

Previous wording

Fulfillment & Logistics Services segment revenue decreased by $1.2 million, or 2.9%, due to the lower volume from existing customers not being offset by growth in new programs and 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 $1.0 million, or 27.4% due to the lower revenue and higher facility and technology expenses.

Current wording

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.

Previous wording

Our cash and cash equivalent balances were $11.0 million and $18.4 million at June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024, we had the ability to borrow an additional $24.0 million under our Credit Facility.

Current wording

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.

Previous wording

Net cash used in the operating activities for thesix months ended June 30, 2024 was $4.1 million, compared to net cash provided by operating activities of $4.6 million for thesix months ended June 30, 2023. The $8.7 million year-over-year decrease in cash provided by operating activities was primarily driven by the net of $27.8 million decrease in net income and net pension cost of $31.9 million and deferred tax benefit of$10.2 million, and the $3.0 million changes in current assets and current liabilities.

Current wording

Net cash used in the operating activities for thenine months ended September 30, 2024 was $7.0 million, compared to net cash provided by operating activities of $6.1 million for thenine 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 asthe $6.6 million changes in other assets and current liabilities.

Previous wording

Net cash used in investing activities was $1.2 million for the six months ended June 30, 2024, which is comparable to the $1.3 million used in investing activities during the same period in 2023.

Current wording

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.

Previous wording

Net cash used in financing activities was $0.2 million for the six months ended June 30, 2024, as compared to $2.3 million of net cash used in financing activities during the six months ended June 30, 2023. The $2.1 million decrease was primarily related to the $1.9 million used to repurchase our common stock in the six months ended June 30, 2023.

Current wording

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.

Previous wording

Consolidated foreign holdings of cash as of June 30, 2024 and December 31, 2023 were $1.2 million and $5.4 million, respectively.

Current wording

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

Previous wording

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 7.69% as of June 30, 2024. The outstanding amounts advanced under the Credit Facility are due and payable in full on June 30, 2025.

Current wording

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.

Previous wording

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 repur chased zero shares of stock during thethree and six months ended June 30, 2024. In the three and six months ended June 30, 2023, we repurchased 0.3 million shares of Common Stock for $1.9 million.

Current wording

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 repur chased zero shares of stock during thethree 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.

Previous wording

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

Current wording

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.