See Accompanying Notes to Consolidated Financial Statements.
See Accompanying Notes to Consolidated Financial Statements.
See Accompanying Notes to Consolidated Financial Statements.
Harte Hanks, Inc. and Subsidiaries Notes to Consolidated Financial Statements
Note A — Overview and Significant Accounting Policies
Background
Harte Hanks, Inc. together with its subsidiaries (“Harte Hanks,” “Company,” “we,” “our,” or “us”) is a leading global customer experience company. With offices in North America, Asia-Pacific and Europe, Harte Hanks works with some of the world’s most respected brands.
Segment Reporting
The Company operates three business segments: Marketing Services; Customer Care; 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 three financial measures: revenue, operating income and operating income plus depreciation and amortization (EBITDA).
Geographic Concentrations
Depending on the needs of our clients, our services are provided through an integrated approach through twelve facilities worldwide, of which four are located outside of the U.S.
The following table provides information about the operations in different geographic area for the periods indicated:
| | | Year Ended December 31, | |
| In thousands | | 2022 | | | 2021 | |
| Revenue (1) | | | | | | | | |
| United States | | $ | 183,470 | | | $ | 175,437 | |
| Other countries | | | 22,808 | | | | 19,159 | |
| Total revenue | | $ | 206,278 | | | $ | 194,596 | |
| | | December 31, | |
| In thousands | | 2022 | | | 2021 | |
| Property, plant and equipment, net (2) | | | | | | | | |
| United States | | $ | 10,219 | | | $ | 7,549 | |
| Other countries | | | 304 | | | | 198 | |
| Total property, plant and equipment | | $ | 10,523 | | | $ | 7,747 | |
| (1) | Geographic revenues are based on the location of the service being performed. |
| (2) | Property, plant and equipment are based on physical location. |
Credit Risk and Concentration
Accounts receivable are typically unsecured and are derived from revenue earned from customers across different industries and countries. We perform ongoing credit evaluation of our customers and generally do not require collateral. We maintain an allowance for estimated credit losses and bad debt expense on these losses was not material during the years ended December 31, 2022 and 2021. In the event that accounts receivable collection cycle deteriorates, our operating results and financial position could be adversely affected.
Our top customer represented 13.0% and 14.6% of total accounts receivable as of December 31, 2022 and 2021, respectively.
Revenue by Top Customers
The table below sets forth the percentage of our total revenue derived from our largest customers for the years ended December 31, 2022 and 2021, respectively:
| | | Year Ended December 31, |
| In thousands | | 2022 | | 2021 |
| Top ten customers | | 50.6% | | 53.0% |
| Top twenty-five customers | | 72.5% | | 72.6% |
Related Party Transactions
From 2016 until October 2020, we conducted business with Wipro, LLC (“Wipro”), whereby Wipro provided us with a variety of technology-related services. We have since terminated all service agreements with Wipro.
Effective January 30, 2018, Wipro became a related party when it purchased 9,926 shares of our Series A Preferred Stock (which are convertible at Wipro’s option into 1,001,614 shares, or 14% of our Common Stock as of December 31, 2021), for aggregate consideration of $9.9 million. On December 2, 2022, we completed the repurchase of all of our outstanding Preferred Stock from Wipro.
Consolidation
The accompanying audited consolidated financial statements include the accounts of Harte Hanks, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. As used in this report, the terms “Harte Hanks,” “the Company,” “we,” “us,” or “our” may refer to Harte Hanks, Inc., one or more of its consolidated subsidiaries, or all of them taken as a whole, as the context may require.
Use of Estimates
Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from those estimates due to uncertainties. Such estimates include, but are not limited to, estimates related to lease accounting; pension accounting; fair value for purposes of assessing long-lived assets for impairment; revenue recognition; income taxes; stock-based compensation and contingencies. On an ongoing basis, management reviews its estimates and assumptions based on currently available information. Changes in facts and circumstances could result in revised estimates and assumptions.
Operating Expense Presentation in the Consolidated Statements of Comprehensive Income
The “Labor” line in the Consolidated Statements of Comprehensive Income includes all employee payroll and benefits costs, including stock-based compensation and temporary labor costs. The “Production and distribution” and “Advertising, selling, general and administrative” lines do not include labor, depreciation, or amortization expense.
Revenue Recognition
We recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those products or services based on the relevant contract. We apply the following five-step revenue recognition model:
| | • | Identification of the contract, or contracts, with a customer |
| | • | Identification of the performance obligations in the contract |
| | • | Determination of the transaction price |
| | • | Allocation of the transaction price to the performance obligations in the contract |
| | • | Recognition of revenue when (or as) we satisfy the performance obligation |
Certain client programs provide for adjustments to billings based upon whether we achieve certain performance criteria. In these circumstances, revenue is recognized when the foregoing conditions are met. We record revenue net of any taxes collected from customers and subsequently remitted to governmental authorities. Any payments received in advance of the performance of services or delivery of the product are recorded as deferred revenue until such time as the services are performed or the product is delivered. Costs incurred for search engine marketing solutions payable to the engine host and postage costs of mailings are billed to our clients and are not directly reflected in our revenue.
Revenue from agency and digital services, direct mail, logistics, fulfillment and contact center is recognized as the work is performed. Fees for these services are determined by the terms set forth in each contract. These fees are typically a set fixed price or rate by transaction occurrence, service provided, time spent, or product delivered.
For arrangements requiring the design and build out of a database, revenue is not recognized until client acceptance occurs. Up-front fees billed during the setup phase for these arrangements are deferred and direct build costs are capitalized. Pricing for these types of arrangements is typically based on a fixed price determined in the contract. Revenue from other database marketing solutions is recognized ratably over the contractual service period. Pricing for these services is typically based on a fixed price per month or per contract.
Fair Value of Financial Instruments
Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 820, Fair Value Measurements and Disclosures, ("ASC 820") defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs used in valuation methodologies into three levels:
| Level 1 | | Quoted prices in active markets for identical assets or liabilities. |
| | | |
| Level 2 | | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| | | |
| Level 3 | | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Because of their maturities and/or variable interest rates, certain financial instruments have fair values approximating their carrying values. These instruments include cash and cash equivalents and restricted cash, accounts receivable, trade payables, and long-term debt. The fair value of the assets in our funded pension plan is disclosed in Note H, Employee Benefit Plans.
Cash Equivalents
All highly liquid investments with an original maturity of 90 days or less at the time of purchase are considered to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.
Restricted Cash
In our normal business operation, we receive cash from our customers for certain customer program service funding. As these programs impose legal restrictions on the commingling of funds, we present this cash as restricted cash.
Accounts Receivable and Allowance for Credit Losses
Accounts receivables are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. We make estimates of expected credit and collectability trends for the allowance for credit losses based upon our assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current and future economic conditions that may affect the Company's expectation of the collectability in determining the allowance for credit losses. Expected credit losses are recorded in the “Advertising, selling, general, and administrative” line of our Consolidated Statements of Comprehensive Income. As of December 31, 2022 and 2021, our accounts receivables, net, was $47.6 million and $49.2 million, respectively. The Company classifies unbilled receivables as Accounts receivable. The changes in the allowance for credit losses accounts consisted of the following:
| | | Year Ended December 31, | |
| In thousands | | 2022 | | | 2021 | |
| Balance at beginning of year | | $ | 266 | | | $ | 241 | |
| Net charges to expense | | | (92 | ) | | | 95 | |
| Amounts recovered against the allowance | | | (11 | ) | | | (70 | ) |
| Balance at end of year | | $ | 163 | | | $ | 266 | |
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The general ranges of estimated useful lives are:
| | | Years | |
| Buildings and improvements | | 3 to 40 | |
| Software | | 2 to 10 | |
| Equipment and furniture | | 3 to 20 | |
Long-lived assets such as property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. We recorded a $0.2 million impairment of long-lived assets in both 2022 and 2021.
Leases
We determine if an arrangement is a lease at its inception. Operating and finance leases are included in the lease right-of-use (“ROU”) assets and in the current portion and long-term portion of lease liabilities on our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of each lease based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at commencement date of each lease to determine the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease, which are included in the lease ROU assets when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain real estate leases, we account for the lease and non-lease components as a single lease component.
Capitalization of Software Development Costs
Capitalized software costs for internally developed software and implementation of third-party software are amortized over a period of three to five years. On an ongoing basis, management reviews the valuation of these software costs to determine if there has been impairment to the carrying value of these assets and adjusts this value accordingly.
Goodwill
Goodwill is the amount by which the cost of the acquired net assets in a business combination exceeds the fair value of the identifiable net assets on the date of purchase. Goodwill is not amortized. Goodwill is reviewed for impairment at least annually during the fourth quarter, or more frequently if events occur indicating the potential for impairment.
The Company has three reporting segments, but goodwill is booked in the Customer Care segment. During its goodwill impairment review, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance of the Company. If, after assessing the totality of these qualitative factors, the Company determines that it is not more likely than not that the fair value of its reporting unit is less than its carrying amount, then no additional assessment is deemed necessary. Otherwise, the Company performs a quantitative goodwill impairment test. The Company may also elect to bypass the qualitative assessment in a period and elect to proceed to perform the quantitative goodwill impairment test.
Intangible Assets
Intangible assets consist of finite-lived intangible assets acquired through the Company’s business combinations. Such amounts are initially recorded at fair value and subsequently amortized over their useful lives using the straight-line method, which reflects the pattern of benefit, and assumes no residual value.
Finite-lived intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require an intangible asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that intangible asset to its carrying amount. If the carrying amount of the intangible asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.
The factors that drive the estimate of useful life are often uncertain and are reviewed on a periodic basis or when events occur that warrant review. Recoverability is measured by comparing the assets’ book value to future net undiscounted cash flows that the assets are expected to generate to determine if a write-down to the recoverable amount is appropriate. If such assets are written down, an impairment will be recognized as the amount by which the book value of the asset group exceeds the recoverable amount.
Income Taxes
Income tax expense includes U.S. and international income taxes accounted for under the asset and liability method. Certain income and expenses are not reported in tax returns and financial statements in the same year. Such temporary differences are reported as deferred tax. Deferred tax assets are reported net of valuation allowances where we have assessed that it is more likely than not that a tax benefit will not be realized.
Earnings Per Share
Basic earnings per common share is based upon the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is based upon the weighted-average number of common shares and dilutive common stock equivalents outstanding during the period. Dilutive common stock equivalents are calculated based on the assumed exercise of stock options and vesting of unvested shares using the treasury stock method.
Stock-Based Compensation
All share-based awards are recognized as operating expense in the “Labor” line of the Consolidated Statements of Comprehensive Income. Calculated expense is based on the fair values of the awards on the date of grant and is recognized over the requisite service period or performance period of the awards.
Reserve for Healthcare, Workers’ Compensation, Automobile and General Liability
We are self-insured for the majority of our healthcare insurance. We pay actual medical claims up to a stop loss limit of $0.3 million. In the fourth quarter of 2016, we moved to a guaranteed cost program for our workers’ compensation programs.
The reserve is estimated using current claims activity, historical experience, and claims incurred but not reported. We use loss development factors that consider both industry norms and company specific information. Our liability is recorded at the estimate of the ultimate cost of claims at the balance sheet date. At December 31, 2022 and 2021, our reserve for healthcare, workers’ compensation, net, automobile, and general liability was $1.2 million for each year. Periodic changes to the reserve for workers’ compensation, automobile and general liability are recorded as increases or decreases to insurance expense, which is included in the “Advertising, selling, general and administrative” line of our Consolidated Statements of Comprehensive Income. Periodic changes to the reserve for healthcare are recorded as increases or decreases to employee benefits expense, which is included in the “Labor” line of our Consolidated Statements of Comprehensive Income.
Foreign Currencies
In most instances the functional currencies of our foreign operations are the local currencies. Assets and liabilities recorded in foreign currencies are translated in U.S. dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during a given month. Adjustments resulting from this translation are charged or credited to other comprehensive income.
Note B - Recent Accounting Pronouncements
Recently adopted accounting pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses. This ASU added a new impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The CECL model applies to most debt instruments, trade receivables, lease receivables, financial guarantee contracts, and other loan commitments. The CECL model does not have a minimum threshold for recognition of impairment losses and entities will need to measure expected credit losses on assets that have a low risk of loss. As a smaller reporting company pursuant to Rule 12b-2 of the Securities Exchange Act of 1934, as amended, these changes became effective for the Company on January 1, 2022. The adoption of this new standard did not have a material impact on our consolidated financial statements.
Recent Accounting Guidance Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Liabilities from Contracts with Customers. This ASU requires an acquiring entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The ASU is effective for fiscal years and interim periods beginning after December 15, 2022, with early adoption permitted. The Company is evaluating the impact of adopting this ASU.
Note C - Revenue from Contracts with Customers
Under Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (“ASC 606”), an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of the new standard, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. This standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This standard also includes criteria for the capitalization and amortization of certain contract acquisition and fulfillment costs.
Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our contracts with customers state the terms of sale, including the description, quantity, and price of the product sold or service provided. Payment terms can vary by contract, but the period between invoicing and when payment is due is not significant. The Company's contracts with its customers generally do not include rights of return or a significant financing component.
Consistent with legacy U.S. GAAP, we present sales taxes assessed on revenue-producing transactions on a net basis.
Disaggregation of Revenue
We disaggregate revenue by three key revenue streams which are aligned with our business segments. The nature of the services offered by each key revenue stream is different. The following tables summarize revenue from contracts with customers for the years ended December 31, 2022 and 2021 from our three business segments and the pattern of revenue recognition:
| | | For the Year Ended December 31, 2022 | |
| | | Revenue for performance | | | Revenue for performance | | | | | |
| | | obligations recognized | | | obligations recognized at a | | | | | |
| In thousands | | over time | | | point in time | | | Total | |
| Marketing Services | | $ | 45,020 | | | $ | 7,955 | | | $ | 52,975 | |
| Customer Care | | | 67,205 | | | | — | | | | 67,205 | |
| Fulfillment & Logistics Services | | | 75,081 | | | | 11,017 | | | | 86,098 | |
| Total Revenue | | $ | 187,306 | | | $ | 18,972 | | | $ | 206,278 | |
| | | For the Year Ended December 31, 2021 | |
| | | Revenue for performance | | | Revenue for performance | | | | | |
| | | obligations recognized | | | obligations recognized at a | | | | | |
| In thousands | | over time | | | point in time | | | Total | |
| Marketing Services | | $ | 48,450 | | | $ | 7,938 | | | $ | 56,388 | |
| Customer Care | | | 74,691 | | | | — | | | | 74,691 | |
| Fulfillment & Logistics Services | | | 55,754 | | | | 7,763 | | | | 63,517 | |
| Total Revenue | | $ | 178,895 | | | $ | 15,701 | | | $ | 194,596 | |
Our contracts with customers may consist of multiple performance obligations. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”) basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. For most performance obligations, we determine SSP based on the price at which the performance obligation is sold separately. Although uncommon, if the SSP is not observable through past transactions, we estimate the SSP taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Further discussion of other performance obligations in each of our major revenue streams follows:
Marketing Services
Our Marketing Services segment delivers strategic planning, data strategy, performance analytics, creative development and execution, technology enablement, marketing automation, and database management. We create relevancy by leveraging data, insight, and our extensive experience in leading clients as they engage their customers through digital, traditional, and emerging channels. We are known for helping clients build deep customer relationships, create connected customer experiences, and optimize each and every customer touch point in order to deliver desired business outcomes.
Most marketing services performance obligations are satisfied over time and often offered on a project basis. We have concluded that the best approach to measure the progress toward completion of the project-based performance obligations is the input method, which is based on either the costs or labor hours incurred to date depending upon whether costs or labor hours more accurately depict the transfer of value to the customer.
The variable consideration in these contracts primarily relates to time and material-based services and reimbursable out-of-pocket travel costs, both of which are estimated using the expected value method. For time and material-based contracts, we use the “as invoiced” practical expedient.
Our database solutions are built around centralized marketing databases with services rendered to build custom databases, database hosting services, customer or target marketing lists and data processing services.
These performance obligations, including services rendered to build a custom database, database hosting services, customer or target marketing lists and data processing services, may be satisfied over time or at a point in time. We provide SaaS solutions to host data for customers and have concluded that they are stand-ready obligations to be recognized over time on a monthly basis. Our promise to provide certain data related services meets the over-time recognition criteria because our services do not create an asset with an alternative use, and we have an enforceable right to payment. For performance obligations recognized over time, we choose either the input (i.e., labor hour) or output method (i.e., number of customer records) to measure the progress toward completion depending on the nature of the services provided. Some of our other data-related services do not meet the over-time criteria and are therefore, recognized at a point-in-time, typically upon the delivery of a specific deliverable.
Our contracts may include outsourced print production work for our clients. These contracts may include a promise to purchase postage on behalf of our clients. In such cases, we have determined we are an agent, rather than principal and therefore recognize net consideration as revenue.
We charge our customers for certain data-related services at a fixed transaction-based rate, e.g., per thousand customer records processed. Because the quantity of transactions is unknown at the onset of a contract, our transaction price is variable, and we use the expected value method to estimate the transaction price. The uncertainty associated with the variable consideration generally resolves within a short period of time since the duration of these contracts is generally less than two months.
Customer Care
We operate tele-service workstations in the United States, Asia, and Europe to provide advanced contact center solutions such as: speech, voice and video chat, integrated voice response, analytics, social cloud monitoring, and web self-service.
Performance obligations are stand-ready obligations and are satisfied over time. With regard to account management and software as a service (“SaaS”), we use a time-elapsed output method to recognize revenue. For performance obligations where we charge customers a transaction-based fee, we use the output method based on transaction quantities. In most cases, our contracts provide us the right to invoice for services provided, therefore, we generally use the “as invoiced” practical expedient to recognize revenue associated with these performance obligations unless significant discounts are offered in a contract and prices for services do not represent their SSPs.
The variable consideration in our contracts results primarily from the transaction-based fee structure of some performance obligations with their total transaction quantities to be provided unknown at the onset of a contract, which are estimated using the expected value method.
Fulfillment & Logistics Services
Our services, delivered internally and with our partners, include: printing, lettershop, advanced mail optimization (including commingling services), logistics and transportation optimization, monitoring and tracking, to support traditional and specialized mailings. Our print and fulfillment centers in Massachusetts and Kansas provide custom kitting services, print on demand, product recalls, trade marketing fulfillment, ecommerce product fulfillment, sampling programs, and freight optimization, thereby allowing our customers to distribute literature and other marketing materials.
Most performance obligations offered within this revenue stream are satisfied over time and utilize the input or output method, depending on the nature of the service, to measure progress toward satisfying the performance obligation. For performance obligations where we charge customers a transaction-based fee, we utilize the output method based on the quantities fulfilled. Services provided through our fulfillment centers are typically priced at a per transaction basis and our contracts provide us the right to invoice for services provided and reflects the value to the customer of the services transferred to date. In most cases, we use the “as invoiced” practical expedient to recognize revenue associated with these performance obligations unless significant discounts are offered in a contract and prices for services do not represent their standalone selling prices. Prior to the closure of our direct mail production facilities, our direct mail business contracts may have included a promise to purchase postage on behalf of our clients; in such cases, we have determined we are an agent, rather than principal and therefore recognize net consideration as revenue.
The variable consideration in our contracts results primarily from the transaction-based fee structure of some performance obligations with their total transaction quantities to be provided unknown at the onset of a contract, which is estimated using the expected value method.
Upfront Non-Refundable Fees
We may receive non-refundable upfront fees from customers for implementation of our SaaS database solutions products or for providing training in connection with our contact center solutions. These activities are not deemed to transfer a separate promised service and therefore, represent advanced payments. As we do not deem these activities as transferring a separate promised service, the receipt of such fees represents advanced payments. Where customers have an option to renew a contract, the customer is not required to pay similar upfront fees upon renewal. As a result, we have determined that these renewal options provide for the purchase of future services at a reduced rate and therefore, provide a material right. These upfront non-refundable fees are recognized over the period of benefit which is generally consistent with estimated customer life (four to five years for database solutions contracts and six months to one year for contact center contracts). The balance of upfront non-refundable fees collected from customers was not material to the Company's consolidated financial statements as of December 31, 2022 and 2021.
Transaction Price Allocated to Future Performance Obligations
We have elected to apply certain optional exemptions that limit the disclosure requirements over remaining performance obligations at period end to exclude performance obligations that have an original expected duration of one year or less, transactions using the “as invoiced” practical expedient, or when a performance obligation is a series and we have allocated the variable consideration directly to the services performed. As of December 31, 2022, we had no transaction prices allocated to unsatisfied or partially satisfied performance obligations.
Contract Balances
We record a receivable when revenue is recognized prior to invoicing when we have an unconditional right to consideration (only the passage of time is required before payment of that consideration is due) and a contract asset when the right to payment is conditional upon our future performance such as delivery of an additional good or service (e.g. customer contract requires customer’s final acceptance of custom database solution or delivery of final marketing strategy delivery presentation before customer payment is required). If invoicing occurs prior to revenue recognition, the unearned revenue is presented on our Consolidated Balance Sheets as a contract liability, referred to as deferred revenue. The following table summarizes our contract balances as of December 31, 2022 and 2021:
| In thousands | | December 31, 2022 | | | December 31, 2021 | |
| Contract assets | | $ | 309 | | | $ | 622 | |
| Deferred revenue and customer advances | | | 4,590 | | | | 3,942 | |
| Deferred revenue included in other long-term liabilities | | | 432 | | | | 756 | |
Revenue recognized during the year ended December 31, 2022 from amounts included in deferred revenue as of December 31, 2021 was approximately $3.7 million. Revenue recognized during the year ended December 31, 2021 from amounts included in deferred revenue as of December 31, 2020 was approximately $4.2 million.
Costs to Obtain and Fulfill a Contract
We recognize an asset for the direct costs incurred to obtain and fulfill our contracts with customers to the extent that we expect to recover these costs and if the benefit is longer than one year. These costs are amortized to expense over the expected period of the benefit in a manner that is consistent with the transfer of the related goods or services to which the asset relates. We impair the asset when recoverability is not anticipated. We capitalized a portion of commission expense, implementation and other costs that represents the cost to obtain a contract. The remaining unamortized contract costs were $1.0 million and $1.5 million as of December 31, 2022 and 2021, respectively. They are included in other current assets and other assets on our balance sheet. For the years presented, no impairment was recognized.
Note D - Leases
We have operating and finance leases for corporate and business offices, service facilities, call centers and certain equipment. Leases with an initial term of 12 months or less are generally not recorded on the balance sheet, unless the arrangement includes an option to purchase the underlying asset, or an option to renew the arrangement, that we are reasonably certain to exercise (short-term leases). Our leases have remaining lease terms of one year to eight years, some of which may include options to extend the leases for up to an additional five years.
We sublease our Fullerton (CA), Jacksonville (FL) and Uxbridge (UK) facilities. The leases and subleases for these three facilities expire at various dates, the latest being in fiscal year 2024.
As of December 31, 2022, assets recorded under finance and operating leases were approximately $0.6 million and $18.6 million respectively, and accumulated amortization associated with finance leases was $1.0 million. As of December 31, 2021 assets recorded under finance and operating leases were approximately $0.8 million and $21.4 million respectively, and accumulated depreciation associated with finance leases was $0.7 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 utilized 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.
During the year ended December 31, 2021, we impaired three leases for the facilities we no longer occupied. The resulting impairment and early termination charges are included in our restructuring expenses for the year ended December 31, 2021. There is no impairment of leases in the year ended December 31, 2022.
The following tables present supplemental balance sheet information related to our financing and operating leases:
| In thousands | | As of December 31, 2022 | | | | | |
| | | Operating Leases | | | Finance Leases | | | Total | |
| Right-of-use Assets | | $ | 18,574 | | | $ | 595 | | | $ | 19,169 | |
| | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | |
| Short-term lease liabilities | | | 5,587 | | | | 160 | | | | 5,747 | |
| Long-term lease liabilities | | | 16,523 | | | | 52 | | | | 16,575 | |
| Total Lease Liabilities | | $ | 22,110 | | | $ | 212 | | | $ | 22,322 | |
| In thousands | | As of December 31, 2021 | | | | | |
| | | Operating Leases | | | Finance Leases | | | Total | |
| Right-of-use Assets | | $ | 21,382 | | | $ | 760 | | | $ | 22,142 | |
| | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | |
| Short-term lease liabilities | | | 6,359 | | | | 194 | | | | 6,553 | |
| Long-term lease liabilities | | | 19,004 | | | | 211 | | | | 19,215 | |
| Total Lease Liabilities | | $ | 25,363 | | | $ | 405 | | | $ | 25,768 | |
For the year ended December 31, 2022 and 2021, the components of lease expense were as follows:
| In thousands | | Year Ended December 31, 2022 | | | Year Ended December 31, 2021 | |
| Operating lease cost | | $ | 5,832 | | | $ | 7,745 | |
| Finance lease cost | | | | | | | | |
| Amortization of right-of-use assets | | | 166 | | | | 195 | |
| Interest on lease liabilities | | | 16 | | | | 27 | |
| Total Finance lease cost | | | 182 | | | | 222 | |
| Variable lease cost | | | 1,899 | | | | 2,604 | |
| Sublease income | | | (828 | ) | | | (1,153 | ) |
| Total lease cost, net | | $ | 7,085 | | | $ | 9,418 | |
Other information related to leases was as follows:
| In thousands | | Year Ended December 31, 2022 | | | Year Ended December 31, 2021 | |
| Supplemental Cash Flows Information | | | | | | | | |
| | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
| Operating cash flows from operating leases | | $ | 12,698 | | | $ | 15,287 | |
| Operating cash flows from finance leases | | | 15 | | | | 25 | |
| Financing cash flows from finance leases | | | 194 | | | | 227 | |
| | | | | | | | | |
| Weighted Average Remaining Lease term | | | | | | | | |
| | | | | | | | | |
| Operating leases | | | 5.92 | | | | 6.16 | |
| Finance leases | | | 1.36 | | | | 2.16 | |
| | | | | | | | | |
| Weighted Average Discount Rate | | | | | | | | |
| Operating leases | | | 3.55 | % | | | 3.45 | % |
| Finance leases | | | 5.70 | % | | | 5.41 | % |
The maturities of the Company’s finance and operating lease liabilities as of December 31, 2022 are as follows:
| In thousands | | Operating Leases (1) | | | Finance Leases | |
| Year Ending December 31, | | | | | | | | |
| 2023 | | $ | 6,226 | | | $ | 166 | |
| 2024 | | | 4,802 | | | | 48 | |
| 2025 | | | 2,391 | | | | 6 | |
| 2026 | | | 2,290 | | | | — | |
| 2027 | | | 2,290 | | | | — | |
| 2028 & Beyond | | | 6,252 | | | | — | |
| Total future minimum lease payments | | | 24,251 | | | | 220 | |
| Less: Imputed interest | | | 2,141 | | | | 8 | |
| Total lease liabilities | | $ | 22,110 | | | $ | 212 | |
(1) Non-cancelable sublease proceeds for the fiscal year ending December 31, 2023, and 2024 of $0.4 million and $0.4 million, respectively, are not included in the table above.
As of December 31, 2022, we have no new operating leases that have not yet commenced.
Note E - Convertible Preferred Stock
Our Amended and Restated Certificate of Incorporation authorizes us to issue 1.0 million shares of preferred stock. On January 30, 2018, we issued 9,926 shares of our Series A Preferred Stock (the "Preferred Shares") to Wipro at an issue price of $1,000 per share, for gross proceeds of $9.9 million pursuant to a Certificate of Designation filed with the State of Delaware on January 29, 2018. We incurred $0.2 million of transaction fees in connection with the issuance of the Series A Preferred Stock which were netted against the gross proceeds of $9.9 million on our Consolidated Financial Statements.
On June 30, 2022, the Company entered into a share repurchase agreement (the “Repurchase Agreement”) with Wipro, pursuant to which the Company agreed to repurchase all 9,926 shares of the Preferred Stock then outstanding in exchange for (i) a cash payment equal to its liquidation value, or total cash payment of $9,926,000 and (ii) 100,000 shares of the Company’s common stock, par value $1.00 per share (the “Common Stock”). The cash portion of the repurchase price was previously paid into escrow at the signing of the Repurchase Agreement on June 30, 2022 and held in escrow by PNC Bank, National Association, pending the reissuance of the Preferred Stock from the State of New Jersey. Other than the release of previously escrowed funds, no additional cash was paid by Harte Hanks at closing.
On December 2, 2022, we completed the closing of our June 30, 2022 definitive agreement with Wipro to repurchase all of our outstanding Preferred Stock from Wipro, the sole holder of the Preferred Stock.
Series A Preferred Stock had the following rights and privileges:
Liquidation Rights
In the event of a liquidation, dissolution or winding down of the Company or a Fundamental Transaction (defined in the Certificate of Designation for the Series A Preferred Stock), whether voluntary or involuntary, the holders of the Series A Preferred Stock are entitled to receive, prior to and in preference to the holders of common stock, from the assets of the Company available for distribution, an amount equal to the greater of (i) the original issue price, plus any dividends accrued but unpaid thereon, and (ii) such amount per share as would have been payable had all shares of Series A Preferred Stock been converted into Common Stock immediately before such liquidation.
Upon liquidation, after the payment of all preferential amounts required to be paid to the holders of Series A Preferred Stock, the remaining assets of the Company available for distribution to its stockholders shall be distributed among the holders of Common Stock.
Dividends
Upon liquidation, dissolution or winding down of the Company, or a Fundamental Transaction (collectively, a “Liquidation”), shares of Series A Preferred Stock which have not been otherwise converted to common stock, shall be entitled to receive dividends that accrue at a rate of (i) 5.0% each year, or (ii) the rate that cash dividends are paid in respect of shares of common stock (with Series A Preferred Stock being paid on an as-converted basis in such case) for such year if such rate is greater than 5.0%. Dividends on the Series A Preferred Stock are cumulative and accrue to the holders thereof whether or not declared by the Board of Directors (the “Board”). Dividends are payable solely upon a Liquidation, and only if prior to such Liquidation such shares of Series A Preferred Stock have not been converted to common stock.
Conversion
At the option of the holders of Series A Preferred Stock, shares of Series A Preferred Stock may be converted into common stock at a rate of 100.91 shares of common stock for one share of Series A Preferred Stock, subject to certain future adjustments.
Voting and Other Rights
The Series A Preferred Stock does not have voting rights, except as otherwise required by law. Other rights afforded the holders of Series A Preferred Stock, under defined circumstances, include the election and removal of one member of the Board of Directors as a separate voting class, the ability to approve certain actions of the Company prior to execution, and preemptive rights to participate in any future issuance of new securities. In addition, under certain circumstances, the holder of the Series A Preferred Stock is entitled to appoint an observer to our Board of Directors. The holder of the Series A Preferred Stock has elected to exercise its observer appointment rights but not exercised its right to appoint the board member.
We determined that the Series A Preferred Stock has contingent redemption provisions allowing redemption by the holder upon certain defined events. As the event that may trigger the redemption of the Series A Preferred Stock is not solely within our control, the Series A Preferred Stock is classified as mezzanine equity (temporary equity) in the Consolidated Balance Sheet as of December 31, 2021.
Note F — Long-Term Debt
Credit Facilities
As of December 31, 2022 and 2021, we had $0.0 and $5.0 million of borrowings outstanding under the New Credit Facility (as defined below). As of December 31, 2022, we had the ability to borrow an additional $24.2 million under the New Credit Facility.
As of December 31, 2022 and 2021, we had letters of credit outstanding in the amount of $0.8 million and $1.1 million, respectively. No amounts were drawn against these letters of credit as of December 31, 2022 . These letters of credit exist to support insurance programs relating to workers‘ compensation, automobile, and general liability.
On April 17, 2017, we entered into a secured credit facility with Texas Capital Bank, N.A (“Texas Capital Bank”), that provided a $20.0 million revolving credit facility (the “Old Texas Capital Credit Facility”) and for letters of credit issued by Texas Capital Bank up to $5.0 million. Over the term of the Old Texas Capital Credit Facility, we entered into a number of amendments to extend the term and reduce the borrowing capacity. The Old Texas Capital Credit Facility was secured by substantially all of the Company’s and its material domestic subsidiaries’ assets. The Old Texas Capital Credit Facility was guaranteed by HHS Guaranty, LLC, an entity formed to provide credit support for Harte Hanks by certain members of the Shelton family (descendants of one of our founders). The Old Texas Capital Credit Facility was secured by substantially all our assets and continues to be guaranteed by HHS Guaranty, LLC ("HHS"). Under the Old Texas Capital Credit Facility, we were permitted to elect to accrue interest on outstanding principal balances at either LIBOR plus 1.95% or prime plus 0.75%. Unused commitment balances accrued interest at 0.50%. We were required to pay a quarterly fee of 0.5% of the value of the collateral HHS pledged to secure the facility as consideration for the guarantee, which for the year ended December 31, 2021 amounted to $0.4 million.
On
December 21, 2021, the Company entered a new
three-year,
$25,000,000 asset-based revolving credit facility (the "New Credit Facility") with Texas Capital Bank. The Company’s obligations under the New Credit Facility are guaranteed on a joint and several basis by the Company’s material subsidiaries (the “Guarantors”). The New Credit Facility is secured by substantially all the assets of the Company and the Guarantors pursuant to a Pledge and Security Agreement, dated as of
December 21, 2021, between the Company, Texas Capital Bank and the other grantors party thereto (the "Security Agreement").
The New Credit Facility is subject to 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). The Company was in compliance with all of the requirements as of December 31, 2022.
The loans under the New Credit Facility accrue interest at a varying rate equal to the Bloomberg Short-Term Bank Yield Index Rate plus a margin of 2.25% per annum. The interest rate was 6.10% as of December 31, 2022. The outstanding amounts advanced under the New Credit Facility are due and payable in full on December 21, 2024. Unused commitment balances accrued fees at a rate of 0.25%.
In connection with entering the New Credit Facility, the Company and Texas Capital Bank terminated the Company's Old Texas Capital Credit Facility. Prior to termination of the Old Texas Capital Credit Facility, the Company used cash on hand to pay down $12.1 million outstanding under the Old Texas Capital Credit Facility and the remaining $5.0 million of loans outstanding under the Old Texas Capital Credit Facility were deemed to be outstanding under the New Credit Facility. Unlike the Old Texas Capital Credit Facility, Texas Capital Bank did not require the New Credit Facility to be guaranteed by HHS.
Cash payments for interest were $0.3 million and $0.5 million for the years ended December 31, 2022 and 2021, respectively.
Paycheck Protection Program Term Note
On April 14, 2020, the Company entered a promissory note with Texas Capital Bank, for an unsecured loan with a principal amount of $10.0 million made to the Company pursuant to the Paycheck Protection Program (“PPP Term Note”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
The proceeds were used to maintain payroll or make certain permitted interest payments, lease payments and utility payments.
We applied for forgiveness of the entire $10.0 million PPP Term Note in the first quarter of 2021 because we used the proceeds from the loan as contemplated under the CARES Act. On June 10, 2021, we received notice that the entire amount of our PPP Loan was forgiven by the SBA. We recorded the $10.0 million of debt extinguishment as "Gain from extinguishment of debt" in the Consolidated Statements of Comprehensive Income (Loss) for the year ended December 31, 2021.
Note G — Stock-Based Compensation
We maintain stock incentive plans for the benefit of certain officers, directors, and employees. Our stock incentive plans provide for the ability to issue stock options, cash stock appreciation rights, performance stock units, phantom stock units and cash performance stock units. Our cash stock appreciation rights, phantom stock units and cash performance stock units settle solely in cash and are treated as the current liability, which are adjusted each reporting period based on changes in our stock price.
Compensation expense for stock-based awards is based on the fair values of the awards on the date of grant and is recognized on a straight-line basis over the vesting period of the entire award in the “Labor” line of the Consolidated Statements of Comprehensive Income. We recognized $2.4 million and $1.5 million of stock-based compensation expense for the years ended December 31, 2022 and 2021, respectively.
In May 2013, our stockholders approved the 2013 Omnibus Incentive Plan (“2013 Plan”), pursuant to which we may issue up to 500,000 shares of stock-based awards to directors, employees, and consultants, as adjusted for the reverse stock split. The 2013 Plan replaced the stockholder-approved 2005 Omnibus Incentive Plan (“2005 Plan”), pursuant to which we issued equity securities to directors, officers, and key employees. No additional stock-based awards will be granted under the 2005 Plan, but awards previously granted under the 2005 Plan will remain outstanding in accordance with their respective terms. In August 2018, we filed a Form S-8 to increase the total registered shares under 2013 Plan to 553,673 shares. As of December 31, 2022 and 2021, there were 188,582 and 188,285 shares available, respectively, for grant under the 2013 Plan.
In 2020, we established our 2020 Equity Incentive Plan ("2020 Plan") which replaced the 2013 Equity Incentive Plan (“2013 Plan”). Any shares of common stock that remained eligible for issuance under the 2013 Plan are now instead eligible for issuance under the 2020 Plan. In August 2020, we filed a Form S-8 to register up to an aggregate of 2,521,244 shares that may be issued under the 2020 Plan. The 2020 Plan provides for the issuance of stock-based awards to directors, employees and consultants. No additional stock-based awards will be granted under the 2013 Plan, but awards previously granted under the 2013 Plan will remain outstanding in accordance with their respective terms. As of December 31, 2022 and 2021, there were 1.3 million and 1.6 million shares available, respectively, for grant under the 2020 Plan.
We granted equity awards to our Chief Executive Officer and Chief Operating Officer in 2021, as a material inducement for acceptance of such positions. These options, restricted stock, and performance unit awards were not issued under the 2020 Plan and were not submitted for stockholder approval.
Stock Options
Options granted under the 2020 Plan, 2013 Plan or as inducement awards have an exercise price equal to the market value of the common stock on the grant date. These options become exercisable in 25% increments on the first four anniversaries of their date of grant and expire on the tenth anniversary of their date of grant. There were no options outstanding under the 2020 plan as of December 31, 2022 and 2021.
Options to purchase 8,268 shares granted under 2013 Plan awards were outstanding as of December 31, 2022, with exercise prices ranging from $76.80 to $115.20 per share. There were no inducement award options outstanding as of December 31, 2022 and 2021.
Options under the 2005 Plan were granted at exercise prices equal to the market value of the common stock on the grant date. All such awards have met their respective vesting dates. Options to purchase 4,400 shares were outstanding under the 2005 Plan as of December 31, 2022, with exercise prices ranging from $76.80 to $115.20 per share. Options to purchase 29,050 shares were outstanding under the 2005 Plan as of December 31, 2021, with exercise prices ranging from $76.80 to $184.65 per share.
Options granted to officers after April 2015 vest in full upon a change in control if such options are not assumed or replaced by a publicly traded successor with an equivalent award (as defined in such officers’ change in control severance agreements).
The following summarizes all stock option activity during the years ended December 31, 2022 and 2021:
| | | | | | | | | | | Weighted- Average | | | | | |
| | | | | | | Weighted- | | | Remaining | | | Aggregate | |
| | | Number of | | | Average | | | Contractual | | | Intrinsic Value | |
| In thousands | | Shares | | | Exercise Price | | | Term (Years) | | | (Thousands) | |
| Options outstanding at December 31, 2020 | | | 87,747 | | | $ | 40.25 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Adjustment and Correction | | | — | | | | — | | | | | | | | | |
| Granted in 2021 | | | — | | | | — | | | | | | | | | |
| Exercised in 2021 | | | (31,906 | ) | | | 2.95 | | | | | | | | — | |
| Unvested options forfeited in 2021 | | | (7,411 | ) | | | 7.40 | | | | | | | | | |
| Vested options expired in 2021 | | | (10,815 | ) | | | 37.87 | | | | | | | | | |
| Options outstanding at December 31, 2021 | | | 37,615 | | | $ | 80.21 | | | | 1.36 | | | | | |
| Adjustment & Correction | | | (20,000 | ) | | | | | | | | | | | | |
| Granted in 2022 | | | — | | | | — | | | | | | | | | |
| Exercised in 2022 | | | — | | | | | | | | | | | | — | |
| Unvested options forfeited in 2022 | | | — | | | | | | | | | | | | | |
| Vested options expired in 2022 | | | (4,947 | ) | | | 95.80 | | | | | | | | | |
| Options outstanding at December 31, 2022 | | | 12,668 | | | $ | 78.88 | | | | 1.16 | | | | — | |
| | | | | | | | | | | | | | | | | |
| Vested and expected to vest at December 31, 2022 | | | 12,668 | | | $ | 78.88 | | | | 1.16 | | | | — | |
| | | | | | | | | | | | | | | | | |
| Exercisable at December 31, 2022 | | | 12,668 | | | $ | 78.88 | | | | 1.16 | | | | — | |
The aggregate intrinsic value at year end in the table above represents the total pre-tax intrinsic value that would have been received by the option holders if all of the in-the-money options were exercised on December 31, 2022. The pre-tax intrinsic value is the difference between the closing price of our common stock on December 31, 2022 and the exercise price for each in-the-money option. This value fluctuates with the changes in the price of our common stock.
The following table summarizes information about stock options outstanding at December 31, 2022:
| Range of | | Number | | | Weighted-Average | | | Weighted-Average Remaining Life | | | Number | | | Weighted-Average | |
| Exercise Prices | | Outstanding | | | Exercise Price | | | (Years) | | | Exercisable | | | Exercise Price | |
| $76.80 - 115.20 | | | 12,668 | | | $ | 78.88 | | | | 1.16 | | | | 12,668 | | | $ | 78.88 | |
No options were granted during 2022 and 2021. As of December 31, 2022, there was no unrecognized compensation cost related to unvested stock options.
Cash Stock Appreciation Rights
In 2016 and 2017, the Board of Directors approved grants of cash settling stock appreciation rights under the 2013 Plan. Cash stock appreciation rights vest in 25% increments on the first four anniversaries of the date of grant and expire after 10 years. Cash stock appreciation rights settle solely in cash and are treated as a liability.
There were no cash stock appreciation rights issued during 2022 and 2021.
The fair value of each cash stock appreciation right is estimated on the date of grant using the Black-Scholes Option-Pricing Model and is revalued at the end of each period. Changes in fair value are recorded to the income statement as changes to expense. As of December 31, 2022, there was no unrecognized compensation cost related to unvested cash stock appreciation right grants.
Restricted Stock Units
Restricted stock units granted as inducement awards or under the 2020 Plan and 2013 Plan vest in three equal increments on the first three anniversaries of their date of grant. Restricted stock units settle in treasury stock or newly issued shares and are treated as equity. Outstanding restricted stock units granted to officers as inducement awards or under the 2013 Plan vest in full (to the extent not previously vested) upon a change in control if such unvested shares are not assumed or replaced by a publicly traded successor with an equivalent award (as such terms are defined in such officers’ change-in-control severance agreements).
The following summarizes all restricted stock units’ activity during 2022 and 2021:
| | | | | | | Weighted- | |
| | | Number of | | | Average Grant | |
| | | Shares | | | Date Fair Value | |
| Unvested shares outstanding at December 31, 2020 | | | 789,709 | | | $ | 2.22 | |
| | | | | | | | | |
| Granted in 2021 | | | 500,890 | | | | 5.72 | |
| Vested in 2021 | | | (396,407 | ) | | | 3.00 | |
| Forfeited in 2021 | | | (247,753 | ) | | | 2.35 | |
| Unvested shares outstanding at December 31, 2021 | | | 646,439 | | | | 4.41 | |
| Adjustment and Correction | | | 40,000 | | | | | |
| Granted in 2022 | | | 208,165 | | | | 8.93 | |
| Vested in 2022 | | | (296,161 | ) | | | 4.85 | |
| Forfeited in 2022 | | | (82,267 | ) | | | 3.29 | |
| Unvested shares outstanding at December 31, 2022 | | | 516,176 | | | | 6.43 | |
The fair value of each restricted stock unit is estimated on the date of grant as the closing market price of our common stock on the date prior to the grant. As of December 31, 2022, there was $2.4 million of total unrecognized compensation cost related to restricted stock units. This cost is expected to be recognized over a weighted average period of approximately 1.89 years.
Phantom Stock Units
In 2016 and 2017, the Board of Directors approved grants of phantom stock units under the 2013 Plan. Phantom stock units vest in 25% increments on the first four anniversaries of the date of grant. Phantom stock units settle solely in cash and are treated as a liability. Grants of phantom stock units made to officers under the 2013 Plan vest in full (to the extent not previously vested) upon a change in control if they are not assumed or replaced by a publicly traded successor with an equivalent award (as such terms are defined in such officers’ change-in-control severance agreements).
The following summarizes all phantom stock unit activity during 2022 and 2021:
| | | | | | | Weighted- | |
| | | Number of | | | Average Grant | |
| | | Units | | | Date Fair Value | |
| Phantom stock units outstanding as of December 31, 2020 | | | 4,346 | | | $ | 9.70 | |
| | | | | | | | | |
| Granted in 2021 | | | — | | | | — | |
| Vested in 2021 | | | (4,146 | ) | | | 9.70 | |
| Forfeited in 2021 | | | (200 | ) | | | 9.70 | |
| Phantom stock units outstanding as of December 31, 2021 | | | — | | | | — | |
The fair value of each phantom stock unit is estimated on the date of grant as the closing market price of our common stock on the date prior to the grant. Changes in our stock price will result in adjustments to compensation expense and the corresponding liability over the applicable service period. As of December 31, 2022, there was no unrecognized compensation cost related to phantom stock units.
Performance Stock Units
Performance stock units are a form of share-based award similar to unvested shares, except that the number of shares ultimately issued is based on our performance against specific performance goals over a roughly three-year period. At the end of the performance period, the number of shares of stock issued will be determined in accordance with the specified performance target(s) in a range between 0% and 100%. Performance stock units vest solely in common stock and are treated as equity. Upon a change in control, performance stock units granted to officers vest on a pro-rated basis (based on time elapsed from the grant) to the extent not previously settled if they are not assumed or replaced by a publicly traded successor with an equivalent award (as such terms are defined in such officers’ change-in-control severance agreements). Performance Stock Units have been issued under the 2013 Plan, and the 2020 Plan as inducement awards.
The following summarizes all performance stock unit activity during 2022 and 2021:
| | | | | | | Weighted- | |
| | | Number of | | | Average Grant- | |
| | | Units | | | Date Fair Value | |
| Performance stock units outstanding as of December 31, 2020 | | | 32,268 | | | $ | 4.14 | |
| | | | | | | | | |
| Granted in 2021 | | | 75,000 | | | | 5.59 | |
| Settled in 2021 | | | (13,158 | ) | | | 3.30 | |
| Forfeited in 2021 | | | — | | | | | |
| Performance stock units outstanding as of December 31, 2021 | | | 94,110 | | | $ | 5.41 | |
| | | | | | | | | |
| Granted in 2022 | | | 117,000 | | | | 7.77 | |
| Settled in 2022 | | | (69,110 | ) | | | 5.44 | |
| Forfeited in 2022 | | | — | | | | | |
| Performance stock units outstanding as of December 31, 2022 | | | 142,000 | | | | 7.34 | |
The fair value of each performance stock unit is estimated on the date of grant as the closing market price of our common stock on the date prior to the grant, minus the present value of anticipated dividend payments. Periodic compensation expense is based on the current estimate of future performance against specific performance goals over a three-year period and is adjusted up or down based on those estimates. As of December 31, 2022, the total unrecognized compensation cost related to performance stock units was approximately $637,040. This cost is expected to be recognized over a weighted average period of approximately 1.17 years.
Cash Performance Stock Units
In 2016 and 2017, the Board of Directors approved grants of cash performance stock units under the 2013 Plan. Cash performance stock units are a form of share-based award similar to phantom stock units, except that the number of units ultimately issued is based on our performance against specific performance goals measured after a three-year period. At the end of the performance period, the number of units vesting will be determined in accordance with specified performance target(s) in a range between 0% and 100%. Cash performance stock units settle solely in cash and are treated as a liability. Upon a change in control, cash performance stock units granted to officers, vest on a pro-rated basis (based on time elapsed from the grant) to the extent not previously settled if they are not assumed or replaced by a publicly traded successor with an equivalent award (as such terms are defined in such officers’ change-in-control severance agreements).
There was no cash performance stock unit issued during 2022 and 2021.
The fair value of each cash performance stock unit is estimated on the date of grant as the closing market price of our common stock on the date prior to the grant, minus the present value of anticipated dividend payments. Periodic compensation expense is based on the current estimate of future performance against specific performance goals over a three-year period and is adjusted up or down based on those estimates. As of December 31, 2022, there was no unrecognized compensation cost related to cash performance stock units.
Note H — Employee Benefit Plans
Prior to January 1, 1999, we provided a defined benefit pension plan for which most of our employees were eligible to participate (the “Qualified Pension Plan”). In conjunction with significant enhancements to our 401(k) plan, we elected to freeze benefits under the Qualified Pension Plan as of December 31, 1998.
In 1994, we adopted a non-qualified, unfunded, supplemental pension plan (the “Restoration Pension Plan”) covering certain employees, which provides for incremental pension payments so that total pension payments equal those amounts that would have been payable from the principal pension plan were it not for limitations imposed by income tax regulation. The benefits under the Restoration Pension Plan were intended to provide benefits equivalent to our Qualified Pension Plan as if such plan had not been frozen. We elected to freeze benefits under the Restoration Pension Plan as of April 1, 2014.
At the end of 2020, the Board of Directors of the Company approved the division of the Qualified Pension Plan into two 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, 2020, 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 will take approximately 18 months to complete and will result in the transfer of our obligations pursuant to this pension plan to a third-party provider.
The overfunded or underfunded status of our defined benefit post-retirement plans is recorded as an asset or liability on our 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 Consolidated Statements of Comprehensive Income. We currently measure the funded status of our defined benefit plans as of December 31, the date of our year-end Consolidated Balance Sheets.
The status of the defined benefit pension plans at year-end was as follows:
| | | Year Ended December 31, | |
| In thousands | | 2022 | | | 2021 | |
| Change in benefit obligation | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 186,041 | | | $ | 198,586 | |
| Interest cost | | | 5,040 | | | | 4,674 | |
| Actuarial gain | | | (37,014 | ) | | | (6,610 | ) |
| Benefits paid | | | (10,546 | ) | | | (10,609 | ) |
| Benefit obligation at end of year | | $ | 143,521 | | | $ | 186,041 | |
| | | | | | | | | |
| Change in plan assets | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 131,741 | | | $ | 129,348 | |
| Actual return on plan assets | | | (20,358 | ) | | | 10,977 | |
| Contributions | | | 3,053 | | | | 2,025 | |
| Benefits paid | | | (10,545 | ) | | | (10,609 | ) |
| Fair value of plan assets at end of year | | $ | 103,891 | | | $ | 131,741 | |
| | | | | | | | | |
| Funded status at end of year | | $ | (39,630 | ) | | $ | (54,300 | ) |
The following amounts have been recognized in the Consolidated Balance Sheets as of December 31:
| In thousands | | 2022 | | | 2021 | |
| Current pension liabilities | | $ | 1,858 | | | $ | 1,801 | |
| Long term pension liabilities - Qualified plans | | | 18,674 | | | | 27,359 | |
| Long term pension liabilities - Nonqualified plan | | | 19,098 | | | | 25,140 | |
| Total pension liabilities | | $ | 39,630 | | | $ | 54,300 | |
The following amounts have been recognized in accumulated other comprehensive loss, net of tax, as of December 31:
| In thousands | | 2022 | | | 2021 | |
| Net loss | | $ | 44,120 | | | $ | 54,394 | |
Based on current estimates, we will be required to make $1.6 million in contributions to our Qualified Pension Plan II, in 2023.
We are not required to make and do not intend to make any contributions to our Restoration Pension Plan in 2023 other than to the extent needed to cover benefit payments. We made benefit payments under this supplemental plan of $1.8 million in 2022.
The following information is presented for pension plans with an accumulated benefit obligation in excess of plan assets:
| In thousands | | 2022 | | | 2021 | |
| Projected benefit obligation | | $ | 143,521 | | | $ | 186,041 | |
| Accumulated benefit obligation | | $ | 143,521 | | | $ | 186,041 | |
| Fair value of plan assets | | $ | 103,891 | | | $ | 131,741 | |
The Restoration Pension Plan had an accumulated benefit obligation of $21.0 million and $26.9 million as of December 31, 2022 and 2021, respectively.
The following table presents the components of net periodic benefit cost and other amounts recognized in other comprehensive income in the Consolidated Statements of Comprehensive Income for both plans:
| | | Year Ended December 31, | |
| In thousands | | 2022 | | | 2021 | |
| Net Periodic Benefit Cost | | | | | | | | |
| Interest cost | | $ | 5,040 | | | $ | 4,674 | |
| Expected return on plan assets | | | (5,872 | ) | | | (6,754 | ) |
| Recognized actuarial loss | | | 2,876 | | | | 3,441 | |
| Net periodic benefit cost | | | 2,044 | | | | 1,361 | |
| | | | | | | | | |
| Amounts Recognized in Other Comprehensive Income | | | | | | | | |
| Adjustment to pension liabilities | | | (10,274 | ) | | | (14,150 | ) |
| | | | | | | | | |
| Net cost recognized in net periodic benefit cost and other comprehensive income | | $ | (8,230 | ) | | $ | (12,789 | ) |
The components of net periodic benefit costs other than the service cost component are included in Other, net in our Consolidated Statement of Comprehensive Income. The estimated net loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2022 is $2.5 million. The period over which the net loss from the Qualified Pension Plan is amortized into net periodic benefit cost was the average future lifetime of all participants (approximately 16.2 years for Qualified Pension Plan I and approximately 25.6 years for Qualified Pension Plan II ). The Qualified Pension Plan is frozen and almost all of the plan’s participants are not active employees.
The weighted-average assumptions used for measurement of the defined pension plans were as follows:
| | | Year Ended December 31, | |
| | | 2022 | | | 2021 | |
| Weighted-average assumptions used to determine net periodic benefit cost | | | | | | | | |
| Discount rate | | | | | | | | |
| Qualified Plan I | | | 2.75 | % | | | 2.37 | % |
| Qualified Plan II | | | 2.92 | % | | | 2.61 | % |
| Restoration Plan | | | 2.73 | % | | | 2.34 | % |
| | | | | | | | | |
| Expected return on plan assets | | | | | | | | |
| Qualified Plan I | | | 4.25 | % | | | 5.50 | % |
| Qualified Plan II | | | 5.75 | % | | | 4.75 | % |
| Restoration Plan | | | n/a | | | | n/a | |
| | | December 31, | |
| | | 2022 | | | 2021 | |
| Weighted-average assumptions used to determine benefit obligations | | | | | | | | |
| Discount rate | | | | | | | | |
| Qualified Plan I | | | 5.13 | % | | | 2.75 | % |
| Qualified Plan II | | | 5.18 | % | | | 2.92 | % |
| Restoration Plan | | | 5.12 | % | | | 2.73 | % |
The discount rate assumptions are based on current yields of investment-grade corporate long-term bonds. The expected long-term return on plan assets is based on the expected future average annual return for each major asset class within the plan’s portfolio (which is principally comprised of equity investments) over a long-term horizon. In determining the expected long-term rate of return on plan assets, we evaluated input from our investment consultants, actuaries, and investment management firms, including their review of asset class return expectations, as well as long-term historical asset class returns. Projected returns by such consultants and economists are based on broad equity and bond indices. Additionally, we considered our historical 15-year compounded returns, which have been in excess of the forward-looking return expectations.
The funded pension plan assets as of December 31, 2022 and 2021, by asset category, were as follows:
| In thousands | | 2022 | | | % | | | 2021 | | | % | |
| Equity securities | | $ | 50,090 | | | | 48 | % | | $ | 66,324 | | | | 50 | % |
| Debt securities | | | 49,846 | | | | 48 | % | | | 61,689 | | | | 47 | % |
| Other | | | 3,955 | | | | 4 | % | | | 3,728 | | | | 3 | % |
| Total plan assets | | $ | 103,891 | | | | 100 | % | | $ | 131,741 | | | | 100 | % |
The fair values presented have been prepared using values and information available as of December 31, 2022 and 2021.
The following tables present the fair value measurements of the assets in our funded pension plan:
| | | December 31, | | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | |
| In thousands | | 2022 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| Equity securities | | $ | 50,090 | | | $ | 50,090 | | | $ | — | | | $ | — | |
| Debt securities | | | 49,846 | | | | 35,575 | | | | 14,271 | | | | — | |
| Total investments, excluding investments valued at NAV | | | 99,936 | | | | 85,665 | | | | 14,271 | | | | — | |
| Investments valued at NAV (1) | | | 3,955 | | | | — | | | | — | | | | — | |
| Total plan assets | | $ | 103,891 | | | $ | 85,665 | | | $ | 14,271 | | | $ | — | |
| | | December 31, | | | Quoted Prices in Active Markets for Identical Assets | | | Significant Other Observable Inputs | | | Significant Unobservable Inputs | |
| In thousands | | 2021 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| Equity securities | | $ | 66,324 | | | $ | 66,324 | | | $ | — | | | $ | — | |
| Debt securities | | $ | 61,689 | | | | 56,838 | | | | 4,851 | | | | — | |
| Total investments, excluding investments valued at NAV | | | 128,013 | | | | 123,162 | | | | 4,851 | | | | — | |
| Investments valued at NAV (1) | | $ | 3,728 | | | | — | | | | — | | | | — | |
| Total plan assets | | $ | 131,741 | | | $ | 123,162 | | | $ | 4,851 | | | $ | — | |
(1) Investment valued at net asset value ("NAV") are comprised of cash, cash equivalents, and short-term investments used to provide liquidity for the payment of benefits and other purposes. The commingled funds are valued at NAV based on the market value of the underlying investments, which are primarily government issued securities.
Management identified an error in the prior year classification of investments. Certain investments were incorrectly disclosed as Level 2 investments when they were, in fact, Level 1 investments. Management has concluded that this error in disclosure is qualitatively immaterial to the consolidated financial statements. The prior year investments in error have been reclassified to Level 1.
The investment policy for the Qualified Pension Plans focuses on the preservation and enhancement of the corpus of the plan’s assets through prudent asset allocation, quarterly monitoring and evaluation of investment results, and periodic meetings with investment managers.
The investment policy’s goals and objectives are to meet or exceed the representative indices over a full market cycle (3-5 years). The policy establishes the following investment mix, which is intended to subject the principal to an acceptable level of volatility while still meeting the desired return objectives:
| Qualified Pension Plan I | | | Target | | | | Acceptable Range | | Benchmark Index |
| Equities | | | 39 | % | | | 24% - 54% | | |
| U.S. Large Cap | | | 14 | % | | | 9% - 19% | | Russell 1000 TR |
| U.S. Mid Cap | | | 9 | % | | | 4% - 14% | | Russell Mid Cap Index TR |
| U.S. Small Cap | | | 5 | % | | | 0% - 10% | | Russell 2000 TR |
| International Equity | | | | | | | | | |
| Developed | | | 8 | % | | | 3% - 13% | | MSCI EAFE Net TR USD Index |
| Emerging Markets | | | 3 | % | | | 0% - 6% | | MSCI Emerging Net Total Return |
| Fixed Income | | | 59 | % | | | 44% - 74% | | |
| Investment Grade | | | 59 | % | | | 44% - 74% | | BBG BARC US Aggregate Bond Index |
| Cash Equivalent | | | 2 | % | | | 0%-40% | | ICE BofA US 3-Month Treasury Bill Index TR |
| Qualified Pension Plan II | | | Target | | | | Acceptable Range | | Benchmark Index |
| Equities | | | 77 | % | | | 62% - 87% | | |
| U.S. Large Cap | | | 28 | % | | | 18% - 38% | | Russell 1000 TR |
| U.S. Mid Cap | | | 18 | % | | | 13% - 23% | | Russell Mid Cap Index TR |
| U.S. Small Cap | | | 9 | % | | | 4% - 14% | | Russell 2000 TR |
| International Equity | | | | | | | | | |
| Developed | | | 16 | % | | | 11% - 21% | | MSCI EAFE Net TR USD Index |
| Emerging Markets | | | 6 | % | | | 0% - 9% | | MSCI Emerging Net Total Return |
| Fixed Income | | | 21 | % | | | 11% - 31% | | |
| Investment Grade | | | 21 | % | | | 11% - 31% | | BBG BARC US Aggregate Bond Index |
| Cash Equivalent | | | 2 | % | | | 0%-40% | | ICE BofA US 3-Month Treasury Bill Index TR |
The funded pension plans provide for investment in various investment types. Investments, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility risk. Due to the level of risk associated with investments, it is reasonably possible that changes in the value of investments will occur in the near term and may impact the funded status of these plans. To address the issue of risk, the investment policy places high priority on the preservation of the value of capital (in real terms) over a market cycle. Investments are made in companies with a minimum five-year operating history and sufficient trading volume to facilitate, under most market conditions, prompt sale without severe market effect. Investments are diversified across numerous market sectors and individual companies. Reasonable concentration in any one issue, issuer, industry, or geographic area is allowed if the potential reward is worth the risk.
Investment managers are evaluated by the performance of the representative indices over a full market cycle for each class of assets. The Pension Plan Committee reviews, on a quarterly basis, the investment portfolio of each manager, which includes rates of return, performance comparisons with the most appropriate indices, and comparisons of each manager’s performance with a universe of other portfolio managers that employ the same investment style.
The expected future benefit payments for both pension plans over the next ten years as of December 31, 2022 are as follows:
| In thousands | | | | | |
| 2023 | | | $ | 11,253 | |
| 2024 | | | | 11,297 | |
| 2025 | | | | 11,343 | |
| 2026 | | | | 11,450 | |
| 2027 | | | | 11,588 | |
| 2028 - 2032 | | | | 56,404 | |
| Total | | | $ | 113,335 | |
The Company also has two pension plans in its foreign jurisdictions, the associated pension liabilities are not material.
We also sponsored a 401(k) - retirement plan in which we matched a portion of employees’ voluntary before-tax contributions prior to 2018. Under this plan, both employee and matching contributions vest immediately. We stopped this 401(k) match program in 2018 and resumed it in 2022. We incurred $1.2 million in 401k match expense in 2022.
Note I — Income Taxes
Coronavirus Aid, Relief and Economic Security Act
In response to the COVID-19 pandemic, the CARES Act was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”). Under the CARES Act, corporate taxpayers may carryback net operating losses (“ NOLs”) realized during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act. In addition, the CARES Act raises the corporate charitable deduction limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. As of December 31, 2020, the Company filed federal net operating loss carryback claims resulting in an income tax refund for $6.4 million and $3.2 million for tax years 2019 and 2018, respectively. As of December 31, 2022, the Company has received the tax refunds for the tax years 2019 and 2018 and $2.5 million of income tax refunds from the carryback of the loss generated in 2020. We have received the remaining tax refund of $5.3 million in March 2023.
The components of income tax (benefit) expense are as follows:
| | | Year Ended December 31, | |
| In thousands | | 2022 | | | 2021 | |
| Current | | | | | | | | |
| Federal | | $ | 60 | | | $ | (372 | ) |
| State and local | | | 774 | | | | 856 | |
| Foreign | | | 1,546 | | | | 804 | |
| Total current | | $ | 2,380 | | | $ | 1,288 | |
| | | | | | | | | |
| Deferred | | | | | | | | |
| Federal | | $ | (11,496 | ) | | $ | — | |
| State and local | | | (8,347 | ) | | | — | |
| Total deferred | | $ | (19,843 | ) | | $ | — | |
| | | | | | | | | |
| Total income (benefit) expense | | $ | (17,463 | ) | | $ | 1,288 | |
The U.S. and foreign components of income before income taxes were as follows:
| | | Year Ended December 31, | |
| In thousands | | 2022 | | | 2021 | |
| United States | | $ | 10,252 | | | $ | 11,725 | |
| Foreign | | | 9,061 | | | | 4,534 | |
| Total income before income taxes | | $ | 19,313 | | | $ | 16,259 | |
The provision (benefit) for income taxes is based on the various rates set by federal, foreign and local authorities and is affected by permanent and temporary differences between financial accounting and tax reporting requirements. The principal reasons for the difference between the statutory rate and the annual effective rate for 2022 were the impact of the release of the majority of the U.S. valuation allowance, federal and foreign income tax credits, and the benefit of excess stock benefits on vested restricted stock, offset by flow-through partnership income from a United Kingdom affiliate. The principal reasons for the difference between the statutory rate and the annual effective rate for 2021 were the impact of the flow-through partnership income from a United Kingdom affiliate offset by gain on PPP Term Note forgiveness and a change in valuation allowance.
The differences between total income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate of 21% to income before income taxes were as follows:
| | | Year Ended December 31, | |
| In thousands | | 2022 | | | 2021 | |
| Computed expected income tax expense (benefit) | | $ | 4,056 | | | $ | 3,413 | |
| | | | | | | | | |
| Permanent Differences | | | 91 | | | | 172 | |
| Net effect of state income taxes | | | 1,074 | | | | 520 | |
| Foreign subsidiary dividend inclusions | | | 639 | | | | 447 | |
| Foreign tax rate differential | | | (349 | ) | | | (224 | ) |
| Change in valuation allowance | | | (18,243 | ) | | | (1,424 | ) |
| CARES Act NOL Carryback | | | — | | | | (343 | ) |
| Stock-based compensation windfalls | | | (365 | ) | | | (244 | ) |
| Return to Provision | | | (141 | ) | | | 247 | |
| Change in Rate | | | (2,172 | ) | | | (373 | ) |
| Credits | | | (1,126 | ) | | | (403 | ) |
| Adjustments to State Attributes | | | (1,330 | ) | | | 1,561 | |
| Gain on PPP Loan Forgiveness | | | — | | | | (2,122 | ) |
| Other Adjustments, net | | | 403 | | | | 61 | |
| Income tax (benefit) expense | | $ | (17,463 | ) | | $ | 1,288 | |
Total income tax (benefit) expense was allocated as follows:
| | | Year Ended December 31, | |
| In thousands | | 2022 | | | 2021 | |
| Income (loss) from operations | | $ | (17,463 | ) | | $ | 1,288 | |
| Stockholders’ equity (deficit) | | | — | | | | — | |
| Total | | $ | (17,463 | ) | | $ | 1,288 | |
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
| | | Year Ended December 31, | |
| In thousands | | 2022 | | | 2021 | |
| Deferred tax assets | | | | | | | | |
| Deferred compensation and retirement plan | | $ | 10,246 | | | $ | 13,135 | |
| Accrued expenses not deductible until paid | | | 33 | | | | 181 | |
| Lease liability | | | 5,591 | | | | 5,873 | |
| Employee stock-based compensation | | | 491 | | | | 385 | |
| Accrued payroll not deductible until paid | | | 103 | | | | 96 | |
| Accounts receivable, net | | | 43 | | | | 59 | |
| Investment in foreign subsidiaries, outside basis difference | | | 1,047 | | | | 1,019 | |
| Goodwill | | | 445 | | | | 473 | |
| Interest Expense limitations | | | 913 | | | | 1,267 | |
| Other, net | | | 585 | | | | 452 | |
| Foreign net operating loss carryforwards | | | 1,623 | | | | 1,631 | |
| State net operating loss carryforwards | | | 5,184 | | | | 3,475 | |
| Foreign tax credit carryforwards | | | 4,212 | | | | 3,841 | |
| General Business Credit Carryovers | | | 546 | | | | 215 | |
| Total gross deferred tax assets | | | 31,062 | | | | 32,102 | |
| Less valuation allowances | | | (7,652 | ) | | | (25,894 | ) |
| Net deferred tax assets | | $ | 23,410 | | | $ | 6,208 | |
| | | | | | | | | |
| Deferred tax liabilities | | | | | | | | |
| Property, plant and equipment | | $ | (2,024 | ) | | $ | (897 | ) |
| Right-of-use asset | | | (4,765 | ) | | | (5,006 | ) |
| Prepaid Expenses | | | (228 | ) | | | (305 | ) |
| Other, net | | | (87 | ) | | | — | |
| Total gross deferred tax liabilities | | | (7,104 | ) | | | (6,208 | ) |
| Net deferred tax assets (liabilities) | | $ | 16,306 | | | $ | — | |
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. After considering the weight of available information, (most notably the Company’s sustained profitability over the past two years), the Company concluded that it is more-likely-than-not that it will realize the majority of its U.S. deferred tax assets. Certain foreign tax credits as well as certain state net operating loss carryovers will continue to have a valuation allowance until there is substantial evidence that enough future taxable income exists at a more likely than not level in order to utilize those deferred tax assets. The valuation allowance for deferred tax assets was $7.7 million and $25.9 million as of December 31, 2022 and 2021, respectively. The change in the valuation allowance is $18.2 million for the year ended December 31, 2022.
We or one of our subsidiaries file income tax returns in the U.S. federal, U.S. state, and foreign jurisdictions. For U.S. state returns, we are no longer subject to tax examinations for years prior to 2017. For U.S. federal and foreign returns, we are no longer subject to tax examinations for years prior to 2017.
There is no balance of unrecognized tax benefits as of December 31, 2022 and 2021. Any adjustments to this liability as a result of the finalization of audits or potential settlements would not be material.
We have elected to classify any interest and penalties related to income taxes within income tax expense in our Consolidated Statements of Comprehensive Income.
For U.S. tax return purposes, net operating losses and tax credits are normally available to be carried forward to future years, subject to limitations as discussed below. As of December 31, 2022, the Company had no federal net operating loss carryforward. The federal foreign tax carryforward credits of $4.2 million will expire on various dates from 2023 to 2032. Federal general business credit carryforwards of $0.5 million will begin to expire on various dates from 2040 to 2042. The Company has state NOL carryforwards of $105.7 million, and foreign NOL carryforwards of $5.4 million.
Deferred income taxes have not been provided on the undistributed earnings of our foreign subsidiaries as these earnings have been, and under current plans will continue to be, permanently reinvested in these subsidiaries. It is not practicable to estimate the amount of additional taxes which may be payable upon the distribution of these earnings. However, because of the provisions in the Tax Reform Act, the tax cost of repatriation is immaterial and limited to foreign withholding taxes, currency translation and state taxes.
Note J — Earnings Per Share
In periods in which the Company has net income, the Company is required to calculate earnings per share (“EPS”) using the two-class method. The two-class method is required because the Company’s Series A Preferred Stock is considered a participating security with objectively determinable and non-discretionary dividend participation rights. Series A Preferred stockholders have the right to participate in dividends above their five percent dividend rate should the Company declare dividends on its common stock at a dividend rate higher than the five percent (on an as-converted basis). Under the two-class method, undistributed and distributed earnings are allocated on a pro-rata basis to the common and the preferred stockholders. The weighted-average number of common and preferred stock outstanding during the period is then used to calculate EPS for each class of shares.
In periods in which the Company has a net loss, basic loss per share is calculated using the treasury stock method. The treasury stock method is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period. The two-class method is not used, because the calculation would be anti-dilutive.
Reconciliations of basic and diluted EPS are as follows:
| | | Year Ended December 31, | |
| In thousands, except per share amounts | | 2022 | | | 2021 | |
| Numerator: | | | | | | | | |
| Net income | | $ | 36,776 | | | $ | 14,971 | |
| Less: Loss from redemption of Preferred stock | | | 1,380 | | | | — | |
| Less: Preferred stock dividend | | | — | | | | 496 | |
| Less: Earnings attributable to participating securities | | | — | | | | 1,858 | |
| Numerator for basic EPS: income attributable to common stockholders | | | 35,396 | | | | 12,617 | |
| | | | | | | | | |
| Effect of dilutive securities: | | | | | | | | |
| Add back: Allocation of earnings to participating securities | | | — | | | | 1,858 | |
| Less: Re-allocation of earnings to participating securities considering potentially dilutive securities | | | — | | | | (1,766 | ) |
| Numerator for diluted EPS | | $ | 35,396 | | | $ | 12,709 | |
| | | | | | | | | |
| Denominator: | | | | | | | | |
| Basic EPS denominator: weighted-average common shares outstanding | | | 7,101 | | | | 6,802 | |
| Diluted EPS denominator | | | 7,457 | | | | 7,209 | |
| | | | | | | | | |
| Basic income per common share | | $ | 4.98 | | | $ | 1.85 | |
| Diluted income per common share | | $ | 4.75 | | | $ | 1.76 | |
For the years ended December 31, 2022 and 2021, respectively, the following shares have been excluded from the calculation of shares used in the diluted EPS calculation: 13,366 and 46,380 shares of anti-dilutive market price options; 24,918 and 29,983 anti-dilutive unvested shares.
Note K — Comprehensive Income
Comprehensive income for a period encompasses net income and all other changes in equity other than from transactions with our stockholders.
Changes in accumulated other comprehensive loss by component were as follows:
| | | Defined Benefit | | | Foreign | | | | | |
| In thousands | | Pension Items | | | Currency Items | | | Total | |
| Balance at December 31, 2020 | | $ | (68,544 | ) | | $ | 2,933 | | | $ | (65,611 | ) |
| Other comprehensive loss, net of tax, before reclassifications | | | — | | | | (1,867 | ) | | | (1,867 | ) |
| Amounts reclassified from accumulated other comprehensive loss, net of tax | | | 14,150 | | | | — | | | | 14,150 | |
| Net current period other comprehensive income (loss), net of tax | | | 14,150 | | | | (1,867 | ) | | | 12,283 | |
| Balance at December 31, 2021 | | $ | (54,394 | ) | | $ | 1,066 | | | $ | (53,328 | ) |
| Other comprehensive income, net of tax, before reclassifications | | | — | | | | (5,248 | ) | | | (5,248 | ) |
| Amounts reclassified from accumulated other comprehensive loss, net of tax | | | 10,274 | | | | | | | | 10,274 | |
| Net current period other comprehensive income, net of tax | | | 10,274 | | | | (5,248 | ) | | | 5,026 | |
| Balance at December 31, 2022 | | $ | (44,120 | ) | | $ | (4,182 | ) | | $ | (48,302 | ) |
Reclassification amounts related to the defined pension plans are included in the computation of net period pension benefit cost (see Note H, Employee Benefit Plans).
Note L — Acquisition of Inside Out Solutions, LLC
On December 1, 2022, we purchased substantially all of the assets (the “Transaction”) of Inside Out Solutions, LLC, a Florida limited liability company (“InsideOut”), for an aggregate purchase price of approximately $7.5 million (the “Purchase Price”) pursuant to an asset purchase agreement, dated as of December 1, 2022 by and between Harte Hanks and InsideOut (the “Asset Purchase Agreement”).
InsideOut is a premium sales enablement agency offering technology and data driven support to technology, media telecommunications, business services, industrial, and financial technology customers in the North American and European markets with its headquarters in St. Petersburg, Florida.
The acquisition of InsideOut further expands our capabilities within its marketing services and customer care segments and strengthens our ability to drive profitable revenue growth within our current sales enablement offerings, including: (i) demand generation which creates qualified marketing leads for our clients, and (ii) inside sales offerings to further promote a client’s internal growth objectives. In addition, the owner and CEO of InsideOut entered into a two-year consulting agreement with the Company, which will ensure consistency in our delivery of these sales enablement offerings, post-closing.
Pursuant to the Asset Purchase Agreement, $5.75 million of the Purchase Price was paid in cash at closing, $1.0 million in cash was placed in escrow to satisfy indemnification obligations, if any, and separately, to satisfy earn-outs related to future revenue performance. Separately, $0.75 million of the Purchase Price was paid at closing in shares of Harte Hanks common stock, par value $1.00 per share (the “Common Stock”). The share amount was based on the volume weighted closing price over the 15 trading days ending on November 28, 2022. $1.0 million cash in escrow account is included in other current assets in our balance sheet as of December 31, 2022.
The Purchase Price is subject to a post-closing net working capital true-up 180-days after the Transaction closes if net working capital is not between $1.3 million and $1.6 million.
The acquisition was accounted for under the acquisition method of accounting with the Company treated as the acquiring entity. Accordingly, the consideration paid by the Company to complete the acquisition has been recorded to the assets acquired and liabilities assumed based upon their estimated fair values as of the date of the acquisition. The carrying values for current assets and liabilities were deemed to approximate their fair values due to the short-term nature of these assets and liabilities. The following table shows the amounts recorded as of their acquisition date.
| in thousands | | Amount |
| Accounts receivable | | $ 1,445 |
| Prepaid expenses | | 148 |
| Property, plant and equipment | | 177 |
| Total assets acquired | | 1,770 |
| Less: Current liabilities assumed | | (761) |
| Net assets acquired | | $ 1,009 |
We recognized $3.6 million of intangible assets and $2.4 million of goodwill associated with this acquisition. The amount of goodwill recorded reflects expected earning potential and synergies with our Customer Care segment. We are amortizing the intangible assets on a straight-line basis over its useful life of five years. A summary of the Company’s intangible asset as of December 31, 2022 is as follows:
| | | Weighted | | | | | | |
| | | Average | | Gross | | Accumulated | | Net Carrying |
| In thousands | | Amortization Period | | Carrying Amount | | Amortizations | | Amount |
| Customer Relationships | | 5 years | | 3,600 | | 60 | | 3,540 |
Estimated future amortization expense related to intangible assets as of December 31, 2022 is as follows:
| In thousands | | | | |
| Year Ending December 31, | | Amount | |
| 2023 | | $ | 720 | |
| 2024 | | | 720 | |
| 2025 | | | 720 | |
| 2026 | | | 720 | |
| 2027 | | | 660 | |
| Total | | $ | 3,540 | |
The Company's result of operations for the year ended December 31, 2022 includes revenue of $1.0 and net earnings of $0.2 million from the InsideOut operation from the date of acquisition through December 31, 2022.
Note M — Litigation and Contingencies
In the normal course of our business, we are obligated under some agreements to indemnify our clients as a result of claims that we infringe on the proprietary rights of third parties. The terms and duration of these commitments vary and, in some cases, may be indefinite, and certain of these commitments do not limit the maximum amount of future payments we could become obligated to make thereunder; accordingly, our actual aggregate maximum exposure related to these types of commitments is not reasonably estimable. Historically, we have not been obligated to make significant payments for obligations of this nature, and no liabilities have been recorded for these obligations in our consolidated financial statements.
We are also subject to various claims and legal proceedings in the ordinary course of conducting our business and, from time to time, we may become involved in additional claims and lawsuits incidental to our business. We routinely assess the likelihood of adverse judgments or outcomes to these matters, as well as ranges of probable losses; to the extent losses are reasonably estimable. Accruals are recorded for these matters to the extent that management concludes a loss is probable and the financial impact, should an adverse outcome occur, is reasonable estimable.
In the opinion of management, appropriate and adequate accruals for legal matters have been made, and management believes that the probability of a material loss beyond the amounts accrued is remote. Nevertheless, we cannot predict the impact of future developments affecting our pending or future claims and lawsuits. We expense legal costs as incurred, and all recorded legal liabilities are adjusted as required as better information becomes available to us. The factors we consider when recording an accrual for contingencies include, among others: (i) the opinions and views of our legal counsel; (ii) our previous experience; and (iii) the decision of our management as to how we intend to respond to the complaints.
Note N — Certain Relationships and Related Party Transactions
As described in Note F, Long-Term Debt, the Company’s Old Texas Capital Credit Facility was secured by HHS Guaranty, LLC, an entity formed to provide credit support for the Company by certain members of the Shelton family (descendants of one of our founders). The arrangement was terminated in connection with the entry into the New Credit Facility because Texas Capital Bank did not require third-party credit support for the borrowings under the New Credit Facility.
Note O — Restructuring Activities
Our management team continuously reviews and adjusts our cost structure and operating footprint, optimize our operations, and invest in improved technology. During 2020, in an effort to right-size our operating footprint, we terminated leases in Wilkes Barre (PA) and Grand Prairie (TX) and exited our last direct mail facility in Jacksonville (FL). We completed the migration of our fulfillment business from the Grand Prairie (TX) operations into a new 400,000 square foot facility in Kansas City (KS) in December 2020. In the first quarter of 2021, we completed the migration of our Shawnee (KS) operations to Kansas City (KS). The new Kansas City location is now our primary facility in the Midwest. In 2020, we also reduced the footprint of our Customer Care business by reducing our Austin (TX) office location by approximately 50,000 square feet in addition to exiting one of our two Manila offices as the business was operating effectively in a work-from-home environment.
In connection with our cost-saving and restructuring initiatives, we incurred total restructuring charges of $27.6 million through the end of 2021. We completed our restructuring in 2021, and did not incur any additional restructuring expenses in 2022.
For the year ended December 31, 2021, we recorded restructuring charges of $6.4 million. The 2021 restructuring charges included $2.5 million of severance charges, $0.9 million in lease impairment expense and $3.0 million of facility related and other expenses.
The following table summarizes the restructuring charges which are recorded in “Restructuring Expense” in the Consolidated Statement of Comprehensive Income.
| In thousands | | Year Ended December 31, 2021 | |
| Severance | | | 2,482 | |
| Facility, asset impairment and other expense | | | | |
| Lease impairment and termination expense | | | 868 | |
| Fixed Asset disposal and impairment charges | | | 33 | |
| Facility and other expenses | | | 2,976 | |
| Total facility, asset impairment and other expense | | | 3,877 | |
| | | | | |
| Total | | $ | 6,359 | |
The following table summarizes the changes in liabilities related to restructuring activities:
| In thousands | | Year Ended December 31, 2022 | |
| | | | | | | Facility, asset impairment and other | | | | | |
| | | Severance | | | expense | | | Total | |
| Beginning balance: | | $ | 738 | | | $ | — | | | $ | 738 | |
| Additions | | | — | | | | — | | | | — | |
| Payments and adjustment | | | (726 | ) | | | — | | | | (726 | ) |
| Ending balance: | | $ | 12 | | | $ | — | | | $ | 12 | |
In connection with our cost-saving and restructuring initiatives, we incurred total restructuring charges of $27.6 million through the end of 2021. For the years ended December 31, 2021, 2020 and 2019, we recognized $6.4 million, $9.4 million and $11.8 million of restructuring expense, respectively. We do not expect to incur additional restructuring charges after 2021.
Note P — Segment Reporting
Harte Hanks is a leading global customer experience company. We have organized our operations into three business segments based on the types of products and services we provide: Marketing Services, Customer Care, Fulfillment & Logistics Services.
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 digital self-service support. We provide these services utilizing our advanced technology infrastructure, human resource management skills and industry experience.
Our Fulfillment & Logistics Services segment consists of mail and product fulfillment and logistics services. We offer a variety of product fulfillment solutions, including printing on demand, managing product recalls, and distributing literature and promotional products to support B2B trade, drive marketing campaigns, and improve customer experience. We are also a provider of third-party logistics and freight optimization in the United States. Prior to the sale of our direct mail equipment in 2020, this segment also included our direct mail operations. Outsourced direct mail is now included in our Marketing Services segment.
There are three 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 and operating income plus depreciation and amortization (“EBITDA”). Operating income for segment reporting, disclosed below, is revenues less operating costs and allocated corporate expenses. Segment operating expenses include allocations of certain centrally incurred costs such as employee benefits, occupancy, information systems, accounting services, internal legal staff, and human resources administration. These costs are allocated based on actual usage or other appropriate methods. Unallocated corporate expenses are corporate overhead expenses not attributable to the operating groups. Interest income and expense are not allocated to the segments. The Company does not allocate assets to our reportable segments for internal reporting purposes, nor does our CEO evaluate operating segments using discrete asset information. The accounting policies of the segments are consistent with those described in the Note A, Overview and Significant Accounting Policies.
The following table presents financial information by segment:
| Year ended December 31, 2022 | | Marketing Services | | | Customer Care | | | Fulfillment & Logistics Services | | | Restructuring | | | Unallocated Corporate | | | Total | |
| | | | | | | | | | | (In thousands) | | | | | | | | | | | | | |
| Revenues | | $ | 52,975 | | | $ | 67,205 | | | $ | 86,098 | | | $ | — | | | $ | — | | | $ | 206,278 | |
| Segment operating expense | | $ | 41,241 | | | $ | 52,173 | | | $ | 72,180 | | | $ | — | | | $ | 22,849 | | | $ | 188,443 | |
| Restructuring | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Contribution margin | | $ | 11,734 | | | $ | 15,032 | | | $ | 13,918 | | | $ | — | | | $ | (22,849 | ) | | $ | 17,835 | |
| Overhead Allocation | | $ | 4,390 | | | $ | 2,865 | | | $ | 3,325 | | | $ | — | | | $ | (10,580 | ) | | $ | — | |
| EBITDA | | $ | 7,344 | | | $ | 12,167 | | | $ | 10,593 | | | $ | — | | | $ | (12,269 | ) | | $ | 17,835 | |
| Depreciation and amortization | | $ | 362 | | | $ | 884 | | | $ | 824 | | | $ | — | | | $ | 658 | | | $ | 2,728 | |
| Operating income (loss) | | $ | 6,982 | | | $ | 11,283 | | | $ | 9,769 | | | $ | — | | | $ | (12,927 | ) | | $ | 15,107 | |
| Year ended December 31, 2021 | | Marketing Services | | | Customer Care | | | Fulfillment & Logistics Services | | | Restructuring | | | Unallocated Corporate | | | Total | |
| | | | | | | | | | | (In thousands) | | | | | | | | | | | | | |
| Revenues | | $ | 56,388 | | | $ | 74,691 | | | $ | 63,517 | | | $ | — | | | $ | — | | | $ | 194,596 | |
| Segment operating expense | | $ | 44,251 | | | $ | 59,200 | | | $ | 53,666 | | | $ | — | | | $ | 20,922 | | | $ | 178,039 | |
| Restructuring | | $ | — | | | $ | — | | | $ | — | | | $ | 6,359 | | | $ | — | | | $ | 6,359 | |
| Contribution margin | | $ | 12,137 | | | $ | 15,491 | | | $ | 9,851 | | | $ | (6,359 | ) | | $ | (20,922 | ) | | $ | 10,198 | |
| Overhead Allocation | | $ | 4,424 | | | $ | 2,922 | | | $ | 3,153 | | | $ | — | | | $ | (10,499 | ) | | $ | — | |
| EBITDA | | $ | 7,713 | | | $ | 12,569 | | | $ | 6,698 | | | $ | (6,359 | ) | | $ | (10,423 | ) | | $ | 10,198 | |
| Depreciation and amortization | | $ | 530 | | | $ | 849 | | | $ | 718 | | | $ | — | | | $ | 462 | | | $ | 2,559 | |
| Operating income (loss) | | $ | 7,183 | | | $ | 11,720 | | | $ | 5,980 | | | $ | (6,359 | ) | | $ | (10,885 | ) | | $ | 7,639 | |