Harte Hanks(HHS) - 2023 Q2 - Quarterly Report

Part I. Financial Information Condensed Consolidated Financial Statements The company's unaudited financial statements for H1 2023 show a net loss of $0.2 million, reduced operating cash flow, and a decline in total assets to $114.7 million Condensed Consolidated Balance Sheets As of June 30, 2023, total assets decreased to $114.7 million, total liabilities decreased to $94.1 million, and stockholders' equity increased to $20.6 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | June 30, 2023 (unaudited) | December 31, 2022 (audited) | | :--- | :--- | :--- | | Total current assets | $63,950 | $66,311 | | Total assets | $114,660 | $119,984 | | Total current liabilities | $40,406 | $43,566 | | Total liabilities | $94,110 | $101,176 | | Total stockholders' equity | $20,550 | $18,808 | Condensed Consolidated Statements of Comprehensive Income For Q2 2023, revenue slightly decreased to $47.8 million and net income sharply fell to $0.6 million, while the six-month period saw a net loss of $0.2 million Q2 Financial Performance (in thousands, except per share amounts) | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Revenue | $47,762 | $48,553 | | Operating Income | $1,670 | $4,011 | | Net Income | $580 | $4,461 | | Diluted EPS | $0.08 | $0.52 | Six-Month Financial Performance (in thousands, except per share amounts) | Metric | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Operating Revenues | $94,882 | $97,615 | | Operating Income | $2,723 | $7,906 | | Net (Loss) Income | ($211) | $7,806 | | Diluted (Loss) EPS | ($0.03) | $0.91 | Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased to $20.6 million by June 30, 2023, driven by comprehensive income and stock-based compensation, despite a net loss and stock repurchases - Total stockholders' equity increased by $1.7 million in the first six months of 2023, from $18.8 million to $20.6 million[12] - Key activities affecting equity in H1 2023 include a net loss of $0.2 million, stock repurchases of $1.9 million, and other comprehensive income of $3.1 million[12] Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities decreased to $4.6 million in H1 2023, while investing activities used $1.3 million and financing activities used $2.3 million Six-Month Cash Flow Summary (in thousands) | Cash Flow Activity | H1 2023 | H1 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $4,587 | $9,862 | | Net cash used in investing activities | ($1,255) | ($3,559) | | Net cash (used in) provided by financing activities | ($2,312) | $4,508 | | Net increase in cash | $3,000 | $7,700 | Notes to Condensed Consolidated Financial Statements This section details the company's accounting policies and financial items, including segment performance, lease obligations, share repurchases, and the InsideOut Solutions acquisition - The company operates three business segments: Marketing Services, Customer Care, and Fulfillment & Logistics Services[16] Disaggregated Revenue by Segment - Six Months Ended June 30 (in thousands) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Marketing Services | $22,160 | $26,374 | | Customer Care | $31,627 | $33,123 | | Fulfillment and Logistics Services | $41,095 | $38,118 | | Total Revenues | $94,882 | $97,615 | - On May 2, 2023, the Board approved a $6.5 million share repurchase program[63] - In Q2 2023, the company repurchased 0.3 million shares for $1.9 million[63] - The company acquired Inside Out Solutions, LLC on December 1, 2022, for approximately $7.5 million[91] - This acquisition contributed $5.1 million in revenue for the first six months of 2023[91][98] Segment Operating Income - Six Months Ended June 30 (in thousands) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Marketing Services | $2,415 | $3,084 | | Customer Care | $4,227 | $5,552 | | Fulfillment and Logistics Services | $3,645 | $5,155 | | Unallocated Corporate | ($7,564) | ($5,885) | | Total Operating Income | $2,723 | $7,906 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results for H1 2023, noting a 2.8% revenue decrease and a 65.6% drop in operating income, driven by segment-specific challenges and partially offset by acquisitions Recent Developments Key recent developments include the appointment of a new CEO, a strategic segment combination, and the initiation of a $6.5 million share repurchase program - Kirk Davis was appointed as the new Chief Executive Officer, effective June 19, 2023[115] - The company plans to combine its Marketing Services and Customer Care segments into a new 'Customer Experience' segment by the end of 2023[116] - A share repurchase program for $6.5 million of common stock was approved on May 2, 2023, with $1.9 million used to repurchase shares in Q2 2023[117] Results of Operations Consolidated revenues decreased by 2.8% to $94.9 million in H1 2023, leading to a 65.6% drop in operating income, primarily due to declines in Marketing Services and Customer Care Consolidated Results of Operations - Six Months Ended June 30 (in thousands) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $94,882 | $97,615 | (2.8)% | | Operating income | $2,723 | $7,906 | (65.6)% | | Diluted (loss) per common share | ($0.03) | $0.91 | (103.3)% | - Marketing Services revenue decreased by $4.2 million (16.0%) in H1 2023 due to lower direct mail volume from existing customers[123][142] - Customer Care revenue decreased by $1.5 million (4.5%) in H1 2023, as non-recurring pandemic-related projects from 2022 ended, partially offset by $5.1 million from the InsideOut acquisition[123][145] - Fulfillment & Logistics Services revenue increased by $3.0 million (7.8%) in H1 2023, but operating income decreased by $1.5 million due to changes in revenue mix and higher transportation costs[123][148] Liquidity and Capital Resources The company's liquidity, including $13.4 million cash and a $24.2 million available credit facility, is deemed sufficient to meet obligations and fund expected capital expenditures of $3 million to $4 million - Cash and cash equivalents stood at $13.4 million as of June 30, 2023[149] - The company has the ability to borrow an additional $24.2 million under its New Credit Facility, with no borrowings outstanding as of June 30, 2023[149][164] - Capital expenditures for 2023 are expected to be between $3 million and $4 million, mainly for a new ERP system and facility expansion[150] - The company received a $5.3 million tax refund in March 2023 as a result of NOL carryback provisions in the CARES Act[150] Quantitative and Qualitative Disclosures About Market Risk This section on market risk disclosures is not applicable for the current reporting period - The company has indicated that this item is not applicable[172] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[174] - No material changes were made to internal controls over financial reporting during the second quarter of 2023[176] Part II. Other Information Legal Proceedings The company is subject to various legal proceedings, for which management believes adequate accruals have been made, with no expectation of material loss beyond current provisions - Information regarding legal proceedings is detailed in Note M, Litigation and Contingencies[177] - Management believes adequate accruals for legal matters have been made and the probability of further material loss is remote[101] Risk Factors No material changes to the company's previously disclosed risk factors were reported for the current period - No material changes to risk factors were reported for the three months ended June 30, 2023, compared to those disclosed in the 2022 10-K[178] Unregistered Sales of Equity Securities and Use of Proceeds The company did not sell unregistered equity securities but repurchased 314,558 common shares for $1.9 million in Q2 2023, with $4.6 million remaining for future repurchases Common Stock Repurchases - Q2 2023 | Period | Total Shares Purchased | Average Price per Share | Total Cost (approx.) | | :--- | :--- | :--- | :--- | | May 2023 | 231,922 | $5.86 | $1.36M | | June 2023 | 82,636 | $6.29 | $0.52M | | Total Q2 | 314,558 | - | $1.88M | - As of June 30, 2023, approximately $4.6 million remained available for repurchase under the authorized $6.5 million program[179] Exhibits This section lists exhibits filed with the Form 10-Q, including the CEO's employment agreement and Sarbanes-Oxley Act certifications - Filed exhibits include the employment agreement for CEO Kirk Davis and Sarbanes-Oxley Act certifications[183]