Harte Hanks(HHS) - 2019 Q1 - Quarterly Report

Part I. Financial Information This section presents the company's Q1 2019 financial statements, management's discussion, market risk, and controls and procedures Item 1. Financial Statements This section presents Harte Hanks' Q1 2019 unaudited condensed consolidated financial statements and related notes Condensed Consolidated Balance Sheets This section details the company's financial position, including assets, liabilities, and stockholders' deficit Balance Sheet Highlights | Metric (in thousands) | March 31, 2019 | December 31, 2018 | Change | | :-------------------- | :------------- | :---------------- | :----- | | Total Assets | $133,581 | $125,175 | +$8,406 | | Total Liabilities | $155,858 | $134,636 | +$21,222 | | Total Stockholders' Deficit | $(32,000) | $(19,184) | -$12,816 | - The company's total assets increased by $8.4 million, primarily due to the recognition of Right-of-use assets ($23.5 million) from the adoption of new lease accounting standards, partially offset by decreases in accounts receivable, prepaid taxes, and property, plant, and equipment[10][41] - Total liabilities increased by $21.2 million, largely driven by the recognition of short-term ($8.5 million) and long-term ($15.9 million) lease liabilities due to the adoption of ASC 842[10][41] Condensed Consolidated Statements of Comprehensive (Loss) Income This section presents the company's revenues, expenses, and net loss or income for the reported periods Comprehensive Income Statement Highlights | Metric (in thousands, except per share) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change (YoY) | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Operating Revenues | $59,150 | $81,198 | (27.2%) | | Total Operating Expenses | $70,090 | $86,233 | (18.7%) | | Operating Loss | $(10,940) | $(5,035) | 117.3% | | Net (Loss) Income | $(13,527) | $32,629 | (141.4%) | | Basic (Loss) Earnings per common share | $(2.18) | $5.24 | (141.6%) | | Diluted (Loss) Earnings per common share| $(2.18) | $4.67 | (146.7%) | - Operating revenues decreased by 27.2% year-over-year, primarily due to declines across most industry verticals and the sale of 3Q Digital[11][133] - The company reported a net loss of $13.5 million in Q1 2019, a significant decline from a net income of $32.6 million in Q1 2018, largely due to lower revenues and the absence of a gain on sale recognized in the prior year[11][139] Condensed Consolidated Statements of Changes in Equity This section outlines changes in the company's equity, including preferred stock, common stock, and retained earnings Changes in Equity Highlights | Metric (in thousands) | Balance at Dec 31, 2018 | Net Loss (Q1 2019) | Other Comprehensive Income (Q1 2019) | Balance at Mar 31, 2019 | | :-------------------- | :---------------------- | :----------------- | :----------------------------------- | :---------------------- | | Preferred Stock | $9,723 | — | — | $9,723 | | Common Stock | $12,115 | — | — | $12,115 | | Additional Paid-in Capital | $453,868 | — | — | $452,051 | | Retained Earnings | $812,704 | $(13,527) | $11,377 (accounting change) | $810,554 | | Treasury Stock | $(1,251,388) | — | $1,984 (issued) | $(1,249,404) | | Accumulated Other Comprehensive Loss | $(46,483) | — | $(11,355) (accounting change) + $522 | $(57,316) | | Total Stockholders' Deficit | $(19,184) | $(13,527) | $22 (accounting change) + $151 (stock-based comp) + $16 (treasury stock) + $522 (other comp income) | $(32,000) | - Total stockholders' deficit increased from $(19.2) million at December 31, 2018, to $(32.0) million at March 31, 2019, primarily due to the net loss of $13.5 million and a reclassification of $11.4 million from accumulated other comprehensive loss to retained earnings upon adoption of ASU 2018-02[12][37][90] Condensed Consolidated Statements of Cash Flows This section reports cash inflows and outflows from operating, investing, and financing activities for the reported periods Cash Flow Highlights | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change (YoY) | | :-------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Operating Activities | $(2,871) | $2,801 | $(5,672) | | Investing Activities | $(1,101) | $2,311 | $(3,412) | | Financing Activities | $4,060 | $9,493 | $(5,433) | | Net Increase in Cash | $60 | $14,449 | $(14,389) | | Cash at End of Period | $20,942 | $22,846 | $(1,904) | - Net cash used in operating activities was $2.9 million in Q1 2019, a significant decrease from $2.8 million provided by operating activities in Q1 2018, primarily due to the net loss incurred[13][146] - Net cash provided by financing activities decreased by $5.4 million year-over-year, mainly due to the issuance of Series A Preferred Stock in Q1 2018, partially offset by increased borrowings in Q1 2019[13][149] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note A - Overview and Significant Accounting Policies This note describes the company's business, significant accounting policies, and key corporate actions - Harte Hanks provides data-driven, omni-channel marketing and customer relationship solutions and logistics globally, operating as a single reportable segment[15][16] - On January 30, 2018, the company issued 9,926 shares of Series A Convertible Preferred Stock to Wipro, LLC for $9.9 million, making Wipro a related party with conversion rights to 16% of common stock[17][20] - The company executed a 1-for-10 reverse stock split on January 31, 2018, reducing authorized common stock from 250 million to 25 million shares[24] Note B - Recent Accounting Pronouncements This note details the adoption and impact of recent accounting standards, including ASU 2018-02 and ASU 2016-02 - The company adopted ASU 2018-02 (Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income) in Q1 2019, reclassifying $11.4 million of stranded tax effects from AOCI to retained earnings due to the Tax Reform Act[37][90] - ASU 2016-02 (Leases) was adopted effective January 1, 2019, using a modified retrospective approach, resulting in the recognition of $22.8 million in operating lease ROU assets and $23.9 million in operating lease liabilities on the balance sheet[39][40][41][62] - The adoption of ASU 2018-07 (Stock Compensation) on January 1, 2019, which expands ASC 718 to non-employee share-based payments, did not have a material impact on the financial statements[38] Note C - Revenue from Contracts with Customers This note explains the company's revenue recognition policies and disaggregates revenue by market and stream - Revenue is recognized when control of promised goods or services is transferred to the customer, reflecting the expected consideration, following a five-step model[27][42][43] Vertical Market Revenue | Vertical Market (in thousands) | Q1 2019 Revenue | Q1 2018 Revenue | YoY Change | | :----------------------------- | :-------------- | :-------------- | :--------- | | B2B | $12,785 | $18,882 | (32.3%) | | Consumer Brands | $12,163 | $19,556 | (37.8%) | | Financial Services | $12,965 | $14,645 | (11.5%) | | Healthcare | $4,627 | $4,426 | 4.6% | | Retail | $12,311 | $15,673 | (21.5%) | | Transportation | $4,299 | $8,016 | (46.4%) | | Total Revenues | $59,150 | $81,198 | (27.2%)| Revenue Stream Breakdown | Revenue Stream (in thousands) | Recognized Over Time (Q1 2019) | Recognized At Point in Time (Q1 2019) | Total Revenue (Q1 2019) | | :---------------------------- | :----------------------------- | :------------------------------------ | :---------------------- | | Agency & Digital Services | $6,193 | $39 | $6,232 | | Database Marketing Solutions | $6,106 | $786 | $6,892 | | Direct Mail, Logistics, and Fulfillment | $24,739 | $5,549 | $30,288 | | Contact Centers | $15,738 | — | $15,738 | | Total Revenues | $52,776 | $6,374 | $59,150 | Note D - Leases This note provides details on the company's lease accounting, including recognized right-of-use assets and liabilities - Upon adoption of Topic 842 on January 1, 2019, the company recognized $22.8 million in operating lease ROU assets and $23.9 million in operating lease liabilities, with minimal impact to retained earnings[62] Lease Assets and Liabilities | Lease Type (in thousands) | Right-of-use Assets (Mar 31, 2019) | Short-term Liabilities (Mar 31, 2019) | Long-term Liabilities (Mar 31, 2019) | Total Liabilities (Mar 31, 2019) | | :------------------------ | :--------------------------------- | :------------------------------------ | :----------------------------------- | :------------------------------- | | Financing Leases | $1,187 | $421 | $680 | $1,101 | | Operating Leases | $22,284 | $8,030 | $15,242 | $23,272 | Lease Cost Breakdown | Lease Cost (in thousands) | Three Months Ended March 31, 2019 | | :------------------------ | :-------------------------------- | | Operating lease cost | $2,215 | | Finance lease cost | $83 | | Variable lease cost | $537 | | Total lease cost | $2,835 | Note E - Convertible Preferred Stock This note describes the Series A Convertible Preferred Stock, its issuance, conversion rights, and dividend terms - The company issued 9,926 shares of Series A Preferred Stock to Wipro, LLC for $9.9 million on January 30, 2018, which are convertible into 100.90817 shares of Common Stock per preferred share[68][73] - Series A Preferred Stock accrues cumulative dividends at 5% per year (or higher if common stock dividends are greater) payable solely upon liquidation if not converted, totaling $0.1 million as of March 31, 2019[71] - Due to contingent redemption provisions not solely within the company's control, Series A Preferred Stock is classified as mezzanine equity[75] Note F - Long-Term Debt This note details the company's long-term debt, including its revolving credit facility and outstanding borrowings Long-Term Debt Summary | Metric (in thousands) | March 31, 2019 | December 31, 2018 | | :-------------------- | :------------- | :---------------- | | Borrowings Outstanding| $18,700 | $14,200 | - The company has a $22 million revolving credit facility with Texas Capital Bank, N.A., secured by substantially all assets and guaranteed by HHS Guaranty, LLC, with maturity extended to April 17, 2021[77][80][151] - Interest on outstanding principal balances can be accrued at LIBOR plus 1.95% or prime plus 0.75%, with a 0.50% interest on unused credit balances[78] Note G - Stock-Based Compensation This note outlines the company's stock-based compensation expense and recognition policies Stock-Based Compensation Expense | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Stock-based Compensation Expense | $200 | $600 | - Compensation expense for stock-based awards is recognized on a straight-line basis over the vesting period, included in the "Labor" line of the income statement[83] Note H - Components of Net Periodic Benefit Cost This note provides information on the company's pension plans and associated net periodic benefit costs - The company maintains a frozen Qualified Pension Plan (since 1998) and a frozen non-qualified Restoration Pension Plan (since 2014)[84][85] Net Periodic Benefit Cost | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net Periodic Benefit Cost | $1,435 | $850 | - A minimum contribution of $2.2 million is required for the Qualified Pension Plan in 2019, and $0.4 million in benefit payments were made under the Restoration Pension Plan in Q1 2019[86][87] Note I - Income Taxes This note details the company's income tax expense, effective tax rate, and impact of recent tax accounting changes Income Tax Summary | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Income Tax Expense (Benefit) | $790 | $(8,780) | | Effective Income Tax Rate | (6.2%) | 106.2% | - The negative effective tax rate in Q1 2019 (negative 6.2%) is primarily due to valuation allowances on deferred tax assets for current period federal net operating losses[88] - The company adopted ASU 2018-02 on January 1, 2019, reclassifying $11.4 million of stranded tax effects from accumulated other comprehensive income to retained earnings due to the Tax Reform Act[90] Note J - Earnings Per Share This note presents the calculation of basic and diluted earnings per share, considering common and preferred stock Earnings Per Share Details | Metric (in thousands, except per share) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net (Loss) Income attributable to common stockholders | $(13,649) | $32,629 | | Basic (Loss) Income per Common Share | $(2.18) | $5.24 | | Diluted (Loss) Income per Common Share| $(2.18) | $4.67 | | Weighted-average common shares outstanding (Basic) | 6,268 | 6,213 | | Weighted-average shares (Diluted) | 6,268 | 6,990 | - In periods of net loss (like Q1 2019), basic loss per share is calculated using the treasury stock method, excluding anti-dilutive preferred stock and options[94][95] - In periods of net income (like Q1 2018), EPS is calculated using the two-class method due to the participating nature of preferred stock[93] Note K - Comprehensive (Loss) Income This note details the components of comprehensive loss, including net loss and other comprehensive income adjustments Comprehensive Income Summary | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net (Loss) Income | $(13,527) | $32,629 | | Total Other Comprehensive (Loss) Income, net of tax | $(10,833) | $364 | | Total Comprehensive (Loss) Income | $(24,360) | $32,993 | - Total comprehensive loss for Q1 2019 was $(24.4) million, a significant decline from comprehensive income of $33.0 million in Q1 2018, primarily due to the net loss and the adoption of ASU 2018-02[11][96] - The adoption of ASU 2018-02 resulted in an $(11.4) million adjustment to accumulated other comprehensive loss in Q1 2019[96] Note L - Litigation and Contingencies This note discusses the company's legal proceedings, contingent liabilities, and accrual policies - The company is subject to various claims and legal proceedings in the normal course of business and assesses the likelihood of adverse judgments to record accruals for probable and estimable losses[98] - Historically, the company has not made significant payments for indemnification obligations to clients for third-party proprietary rights claims, and no liabilities have been recorded for these[97] - Management believes appropriate and adequate accruals for legal matters have been made, and the probability of a material loss beyond accrued amounts is remote[100] Note M - Disposition This note details the sale of the 3Q Digital subsidiary, including the gain recognized and contingent payments - On February 28, 2018, the company sold its 3Q Digital, Inc. subsidiary, recognizing a pre-tax gain of $31.0 million in Q1 2018[101][102] - The sale included $5.0 million in cash proceeds and relieved the company of a $35.0 million contingent consideration obligation related to the 2015 acquisition of 3Q Digital[101] - On May 7, 2019, the company received a $5 million contingent payment related to the Qualified Sale of 3Q Digital[102][117] Note O - Certain Relationships and Related Party Transactions This note describes transactions and relationships with related parties, including services from Wipro - Wipro became a related party on January 30, 2018, after purchasing $9.9 million in Series A Preferred Stock, convertible into 16% of common stock[104] Related Party Transactions | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Expense for Wipro services | $6,300 | $2,800 | | Capitalized software services from Wipro | $800 | $1,100 | - Q1 2019 expenses for Wipro services included a one-time $2.1 million termination charge due to new agreements, which are expected to result in $3.3 million in annual savings[106][113] Note P - Restructuring Activities This note outlines the company's restructuring efforts, including workforce reductions and contract terminations - In Q4 2018, workforce reductions resulted in a $0.9 million restructuring charge and are anticipated to generate $7.5 million in annualized cost savings[111] - In Q1 2019, the company recognized $0.5 million in severance expense, leading to $5.7 million in annual savings, with plans for further reductions to yield an additional $0.5 million severance expense and $3.4 million in annual savings[112] - The company incurred a $2.1 million one-time termination charge for Wipro contracts and a $2.3 million impairment charge on long-term other assets (customer databases) in Q1 2019, aiming for $3.3 million in annual savings from Wipro contracts[113] Note Q - Subsequent Events This note discloses significant events occurring after the balance sheet date, such as management changes and credit facility extensions - On May 10, 2019, CEO Bant Breen stepped down, with President Andrew Harrison assuming the role of Principal Executive Officer[115][116] - On May 7, 2019, the Texas Capital Credit Facility maturity was extended by one year to April 17, 2021[116] - On May 7, 2019, the company received a $5 million contingent payment from the sale of 3Q Digital[117] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Harte Hanks' Q1 2019 financial condition and results, highlighting revenue decline and restructuring Overview This section provides an overview of Harte Hanks' business, its market influences, and strategic priorities - Harte Hanks delivers data-driven, omni-channel marketing and customer relationship solutions, focusing on customer journey mapping, creative development, analytics, data management, and execution across digital and traditional channels[121][122] - The company's revenue is influenced by general economic conditions, industry fundamentals, client demand, and marketing budgets, which are discretionary and susceptible to short-term reductions[124] - The company is prioritizing investments in core business, optimizing client customer journeys, and adjusting its cost structure through restructuring and the 3Q Digital sale to enhance liquidity and financial flexibility[125] Recent Developments This section details key management changes and significant restructuring activities undertaken by the company Management Changes This section reports recent changes in the company's executive leadership roles - On May 8, 2019, CEO Bant Breen stepped down, and President Andrew Harrison was appointed Principal Executive Officer[126] - Martin Reidy took leadership of the marketing services division on February 1, 2019, bringing extensive experience in direct and digital marketing[127] - Mark Del Priore was appointed Chief Financial Officer on January 16, 2019, succeeding Jon Biro[128] Restructuring Activities This section outlines the company's recent restructuring efforts, including contract terminations and workforce reductions - In Q1 2019, the company terminated several Wipro contracts, incurring a $2.1 million one-time charge but achieving $3.3 million in annual savings[129] - An impairment charge of $2.3 million was recorded on long-term other assets related to capitalized labor for customer databases, as the company decided not to proceed with the platform[129] - Workforce reductions in Q4 2018 resulted in a $0.9 million restructuring charge and are expected to yield $7.5 million in annualized cost savings, with an additional $2.0 million in non-labor discretionary expense reductions planned for 2019[130] Results of Operations This section analyzes the company's financial performance, including revenues, expenses, and operating loss Revenues This section details the company's revenue performance, including year-over-year changes and contributing factors Revenue Performance | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | % Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :------- | | Revenues | $59,150 | $81,198 | (27.2)% | - Revenues declined by $22.0 million (27.2%) in Q1 2019 compared to Q1 2018, primarily due to declines across most industry verticals (Retail, B2B, Financial Services, Consumer, Transportation) and the $6.9 million impact from the sale of 3Q Digital[133] - Healthcare revenue increased slightly by $0.2 million (4.6%) in Q1 2019[133] Operating Expenses This section analyzes the company's operating expenses, including labor, production, and administrative costs Operating Expense Breakdown | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | % Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :------- | | Total Operating Expenses | $70,090 | $86,233 | (18.7)% | | Labor | $33,815 | $50,656 | (33.2)% | | Production and distribution | $23,000 | $24,149 | (4.7)% | | Advertising, selling, general and administrative | $7,475 | $9,277 | (19.4)% | | Impairment of assets and contract termination | $4,358 | — | N/A | | Depreciation, software and intangible asset amortization | $1,442 | $2,151 | (28.3)% | - Operating expenses decreased by $16.1 million (18.7%) in Q1 2019, partly due to the 3Q Digital sale ($5.8 million reduction) and expense reduction efforts, but partially offset by higher severance expense[135] - Labor costs declined by $16.8 million (33.2%), and depreciation/amortization decreased by $0.7 million (28.5%) due to lower capital expenditure and the elimination of 3Q Digital intangible assets[135] Operating Loss This section discusses the company's operating loss and the factors contributing to its change Operating Loss Summary | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | % Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :------- | | Operating Loss | $(10,940) | $(5,035) | 117.3% | - Operating loss increased by $5.9 million to $(10.9) million in Q1 2019, reflecting a $22.0 million decline in revenues partially offset by a $16.1 million reduction in operating expenses[139] - The sale of 3Q Digital reduced operating income by $1.1 million compared to Q1 2018[139] Interest Expense This section details the company's net interest expense and its year-over-year change Interest Expense Analysis | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | | Interest expense, net | $220 | $929 | $(709) | - Net interest expense declined by $0.7 million in Q1 2019, primarily due to the elimination of interest accretion expense related to the 3Q Digital contingent consideration liability as of February 2018[140] Other Income and Expense This section reports other non-operating income and expenses for the reported periods Other Income and Expense Summary | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | | Other, net | $1,577 | $1,141 | $436 | - Other expense, net, increased by $0.4 million in Q1 2019 compared to Q1 2018[141] Income Taxes This section analyzes the company's income tax expense or benefit and its effective tax rate Income Tax Details | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | | Income tax expense (benefit) | $790 | $(8,780) | $9,570 | | Effective income tax rate | (6.2%) | 106.2% | | - The income tax expense of $0.8 million in Q1 2019 represents a $9.6 million increase in expense compared to the $8.8 million benefit in Q1 2018[142] - The negative effective tax rate in Q1 2019 (6.2%) is primarily due to valuation allowances on deferred tax assets for current period federal net operating losses[142] Liquidity and Capital Resources This section discusses the company's cash position, sources of liquidity, and capital allocation strategies Sources and Uses of Cash This section outlines the company's primary sources and uses of cash, including its liquidity outlook Cash and Cash Equivalents | Metric (in thousands) | March 31, 2019 | December 31, 2018 | | :-------------------- | :------------- | :---------------- | | Cash and cash equivalents | $20,942 | $20,882 | - Principal liquidity sources include cash on hand, cash from operating activities, and borrowings, primarily used for general corporate purposes, working capital, and capital expenditures[143] - The company believes it can meet liquidity requirements for the next twelve months through existing cash, operating cash flow, and the Texas Capital Credit Facility[145] Operating Activities This section details the net cash flows generated from or used in the company's core operating activities Operating Cash Flow | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net cash (used in) provided by operating activities | $(2,871) | $2,801 | $(5,672) | - Net cash used in operating activities was $2.9 million in Q1 2019, a $5.7 million decrease year-over-year, primarily due to the net loss incurred in 2019[146] Investing Activities This section reports the net cash flows from the company's investing activities, including asset sales and purchases Investing Cash Flow | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net cash (used in) provided by investing activities | $(1,101) | $2,311 | $(3,412) | - Net cash used in investing activities was $1.1 million in Q1 2019, a change from $2.3 million provided in Q1 2018, mainly due to the sale of 3Q Digital in late February 2018[148] Financing Activities This section details the net cash flows from the company's financing activities, including debt and equity transactions Financing Cash Flow | Metric (in thousands) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net cash provided by financing activities | $4,060 | $9,493 | $(5,433) | - Net cash provided by financing activities decreased by $5.4 million in Q1 2019, primarily due to the issuance of Series A Preferred Stock in Q1 2018, partially offset by $4.5 million in borrowings in Q1 2019[149] Foreign Holdings of Cash This section provides information on the company's consolidated cash holdings in foreign jurisdictions Foreign Cash Holdings | Metric (in thousands) | March 31, 2019 | March 31, 2018 | | :-------------------- | :------------- | :------------- | | Consolidated foreign holdings of cash | $2,300 | $3,600 | Credit Facilities This section details the company's credit facilities, including outstanding borrowings and maturity dates - The Texas Capital Credit Facility's maturity was extended to April 17, 2021, and it remains secured by substantially all company assets and guaranteed by HHS Guaranty, LLC[151] Credit Facility Details | Metric (in thousands) | March 31, 2019 | December 31, 2018 | | :-------------------- | :------------- | :---------------- | | Borrowings outstanding under Texas Capital Facility | $18,700 | $14,200 | | Letters of credit outstanding | $2,800 | N/A | Outlook This section provides management's assessment of the company's ability to continue as a going concern - Management believes there are no conditions or events that raise substantial doubt about the company's ability to continue as a going concern for the next 12 months[153] Critical Accounting Policies This section highlights key accounting policies that require significant judgment and estimation - The adoption of ASC 842, Leases, is a change to critical accounting policies, detailed in Note D[155] - Goodwill and intangible assets are no longer included as critical accounting policies as they are no longer on the condensed consolidated balance sheet[155] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily interest rate and foreign exchange fluctuations - The company faces market risks from interest rate variations and foreign exchange rate fluctuations, but does not currently use derivative financial instruments for hedging[156][161] - With $18.7 million in variable-rate borrowings under the Texas Capital Facility, a one percentage point change in average interest rates is not expected to have a significant impact on earnings or interest expense[157][159] - Primary foreign exchange rate exposure is to the Euro, British Pound, and Philippine Peso, but the impact of fluctuations is not considered significant to overall annual earnings, with Q1 2019 showing $28,000 in pre-tax currency transaction gains[160] Item 4. Controls and Procedures This section addresses the effectiveness of disclosure controls and internal control over financial reporting Evaluation of Disclosure Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses in internal control - Management concluded that disclosure controls and procedures were not effective as of March 31, 2019, solely due to material weaknesses in internal control over financial reporting[163] - Despite the material weaknesses, the condensed consolidated financial statements in this report are believed to be fairly presented in all material respects, in conformity with GAAP[164] Material Weakness in Internal Control over Financial Reporting Material weaknesses were identified in information, communication, control activities, and revenue recognition - Material weaknesses were identified in (i) the effectiveness of information and communication and control activities, and (ii) the effectiveness of internal controls over revenue recognition[165] - Despite these weaknesses, the CEO, CFO, and Corporate Controller concluded that the financial statements fairly present the company's financial position, results of operations, and cash flows[166] Changes in Internal Control over Financial Reporting The company remediated several material weaknesses, with no other material changes in Q1 2019 - The company successfully remediated several previously disclosed material weaknesses related to monitoring, control environment, and risk assessment[167] - Other than the identified material weaknesses and successful remediations, there were no other material changes in internal controls over financial reporting during Q1 2019[167] Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting Management is actively remediating material weaknesses, making progress in documentation and control redesign - Management is actively engaged in remediation efforts for the material weaknesses, including preparing a comprehensive listing of applications and assessing their impact on financial reporting to address information and communication[168] - Significant progress has been made in addressing the revenue recognition weakness through walk-throughs, flow charts, assessment of key controls, and the design and implementation of new controls[169] - The company continues to work with third-party specialists to review, document, and supplement controls, aiming to enhance accuracy, precision, and business management, though full remediation requires additional work[170] Part II. Other Information This section provides additional disclosures on legal proceedings, risk factors, equity sales, and other relevant information Item 1. Legal Proceedings This section refers to Note L for details on the company's legal proceedings, claims, and accrual policies - Information on legal proceedings is incorporated by reference from Note L, Litigation and Contingencies, in the financial statements[173] Item 1A. Risk Factors This section advises reviewing the 2018 10-K risk factors, noting no material changes occurred in Q1 2019 - Readers should carefully consider the risk factors outlined in the 2018 10-K, as they could materially affect the business[174] - No material changes to the previously disclosed risk factors occurred during the three months ended March 31, 2019[174] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company made no equity security repurchases in Q1 2019, with $11.4 million remaining authorized Equity Repurchase Program | Period | Total Number of Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of a Publicly Announced Plan | Maximum Dollar Amount that May Yet Be Spent Under the Plan | | :------------------ | :------------------------------- | :--------------------------- | :---------------------------------------------------- | :--------------------------------------------------------- | | January 1-31, 2019 | — | $— | — | $11,437,538 | | February 1-28, 2019 | — | $— | — | $11,437,538 | | March 1-31, 2019 | — | $— | — | $11,437,538 | | Total | — | $— | — | | - The Board of Directors does not anticipate purchasing shares under the publicly announced stock repurchase program for the foreseeable future, which still has $11.4 million authorized[176] - Through March 31, 2019, the company had repurchased a total of 6.8 million shares at an average price of $18.10 per share under all current and previous repurchase programs[176] Item 3. Defaults Upon Senior Securities This item is marked as "Not applicable," indicating no defaults upon senior securities during the reporting period Item 4. Mine Safety Disclosure This item is marked as "Not applicable," indicating no mine safety disclosures are required for the company Item 5. Other Information This section reports the subsequent event of the Texas Capital Credit Facility's maturity extension - On May 7, 2019, the Texas Capital Credit Facility's maturity was extended by one year to April 17, 2021[180] Item 6. Exhibits This section lists filed exhibits, including CEO and CFO certifications and the XBRL Instance Document - Exhibits include certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[181] - The XBRL Instance Document is also included as an exhibit[181]