Harte Hanks, Inc. and Subsidiaries Notes to Consolidated Financial Statements
Note A
— Significant Accounting Policies
The consolidated financial statements and accompanying notes are prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP").
Consolidation
The accompanying consolidated financial statements present the financial position and the results of operations and cash flows 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,” “we,” “us,” or “our” may refer to Harte Hanks, Inc., one or more of our consolidated subsidiaries, or all of them taken as a whole.
Discontinued Operations
As discussed in
Note N
,
Discontinued Operations
, we sold our Trillium reporting unit as of December 23, 2016. As such, the results of operations, financial position, and cash flows for Trillium are reported separately as discontinued operations for all periods presented in the Consolidated Financial Statements. Results of the remaining Harte Hanks business are reported as continuing operations.
Debt under the 2016 Secured Credit Facility, as defined within
Note C
,
Long-Term Debt
, was required to be repaid as a result of the Trillium transaction. In accordance with the provisions of ASC 205-20-45-6,
Allocation of Interest to Discontinued Operations
, we have reclassified interest expense for the 2016 Secured Credit Facility to discontinued operations for December 31, 2016 in the Consolidated Financial Statements.
Reverse Stock Split
On January 31, 2018, we executed a 1-for-
10
reverse stock split (the "Reverse Stock Split"). Pursuant to the Reverse Stock Split, every 10 pre-split shares were exchanged for one post-split share of the Company's Common Stock. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who would otherwise have held a fractional share of the Common Stock received a cash payment in lieu thereof. In addition, our authorized Common Stock was reduced from
250 million
to
25 million
shares. The number of authorized shares of preferred stock remains unchanged at
one million
shares. See
Note P
,
Subsequent Events
, for additional information.
The Consolidated Financial Statements and Accompanying Notes to Consolidated Financial Statements give retroactive effect to the Reverse Stock Split for all periods presented, unless otherwise noted. The calculation of basic and diluted earnings (loss) per share have been determined based on a retroactive adjustment of weighted average shares outstanding for all periods presented. The reflect to the reverse stock split on shareholders' equity, an amount equal to the par value of the reduced shares from the common stock par value account was reclassified to additional paid in capital resulting in no net impact to shareholders' equity on the Consolidated Balance Sheets.
Reclassification of Prior Year Amounts
Certain prior year amounts have been reclassified to conform to the current year presentation. This includes amounts related to discontinued operations, which have been reclassified for comparative purposes in all periods presented. This also includes the retrospective adoption of ASU 2017-07,
Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, resulted in the reclassification of pension expense previously recorded in Labor as of December 31, 2016 to Other, net in the Consolidated Statements of Comprehensive Loss.
Use of Estimates
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results and outcomes could differ from those estimates and assumptions. Such estimates include, but are not limited to, estimates related to pension accounting; fair value for purposes of assessing goodwill, long-lived assets, and intangible assets for impairment; income taxes; and contingencies. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances could result in revised estimates and assumptions.
Operating Expense Presentation in Consolidated Statements of Comprehensive Income (Loss)
The “Labor” line in the Consolidated Statements of Comprehensive Income (Loss) includes all employee payroll and benefits, including stock-based compensation, along with temporary labor costs. The “Production and distribution” and “Advertising, selling, general and administrative” lines do not include labor, depreciation, or amortization.
Revenue Recognition
We recognize revenue when all of the following criteria are satisfied: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) the service has been performed or the product has been delivered. In order to recognize revenue, we require either a purchase order, a statement of work signed by the client, a written contract, or some other form of written authorization from the client. Revenue that is not recognized at the time of sale because the foregoing conditions are not met are recognized when those conditions are subsequently met. Revenue is recognized 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.
Revenue from agency and digital services, direct mail, and contact center is recognized as the work is performed. Fees for these services are determined by the terms set forth in the contact with the client. These are typically set at a fixed price or rate by transaction occurrence, service provided, time spent, or product delivered.
For arrangements requiring design and build 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 are 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 are typically based on a fixed price per month or per contract.
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.
Allowance for Doubtful Accounts
We maintain our allowance for doubtful accounts adequate to reduce accounts receivable to the amount of cash expected to be collected. The methodology used to determine the minimum allowance is based on our prior collection experience and is generally related to the accounts receivable balance in various aging categories. The balance is also influenced by specific clients’ financial strength and circumstance. Accounts that are determined to be uncollectible are written off in the period in which they are determined to be uncollectible. Periodic changes to the allowance balance are recorded as increases or decreases to bad debt expense, which is included in the “Advertising, selling, general, and administrative” line of our Consolidated Statements of Comprehensive Income (Loss). The changes in the allowance for doubtful accounts consisted of the following:
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Year Ended December 31,
|
|
In thousands
|
|
2017
|
|
2016
|
|
2015
|
|
Balance at beginning of year
|
|
$
|
1,028
|
|
|
$
|
974
|
|
|
$
|
878
|
|
|
Net charges to expense
|
|
192
|
|
|
711
|
|
|
685
|
|
|
Amounts recovered against the allowance
|
|
(523
|
)
|
|
(657
|
)
|
|
(589
|
)
|
|
Balance at end of year
|
|
$
|
697
|
|
|
$
|
1,028
|
|
|
$
|
974
|
|
Inventory
Inventory, consisting primarily of print materials and operating supplies, is stated at the lower of cost (first-in, first-out method) or market.
Property, Plant and Equipment
Property, plant and equipment are stated on the basis of cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The general ranges of estimated useful lives are:
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|
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|
Buildings and improvements
|
3
|
to
|
40 years
|
|
Software
|
2
|
to
|
10 years
|
|
Equipment and furniture
|
3
|
to
|
20 years
|
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 did not record an impairment of long-lived assets in
2017
,
2016
, or
2015
.
Capital lease assets are included in property, plant and equipment. Capital lease assets at
December 31, 2017
and
2016
consisted of:
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|
|
|
|
|
December 31,
|
|
In thousands
|
|
2017
|
|
2016
|
|
Equipment and furniture
|
|
$
|
1,774
|
|
|
$
|
2,357
|
|
|
Less accumulated depreciation
|
|
(687
|
)
|
|
(903
|
)
|
|
Net book value
|
|
$
|
1,087
|
|
|
$
|
1,454
|
|
Goodwill and Other Intangible Assets
Goodwill is recorded to the extent that the purchase price of an acquisition exceeds the fair value of the identifiable net assets acquired and is tested for impairment on an annual basis. We have established November 30 as the date for our annual test for impairment of goodwill. Interim testing is performed more frequently if events or circumstances indicate that it is “more likely than not” that goodwill might be impaired. Such events could include changes in the business climate in which we operate, attrition of key personnel, the current volatility in the capital markets, the company’s market capitalization compared to our book value, our recent operating performance, and financial projections.
Goodwill is tested for impairment by assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that is more likely than not that the fair value of the reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, or based on management's judgment, we determine it is more likely than not that the fair value is less than its carrying amount, an impairment test is performed using a one-step approach. The fair value of the reporting unit, using the discounted cash flow method, is compared to its carrying amount. If the carrying amount is greater than the fair value, an impairment loss is recognized in an amount equal to the excess.
Our acquired intangible assets are amortized on a straight-line basis over their estimated useful lives, which generally range from
two
to
10
years. Our acquired intangible assets do not have indefinite lives. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the intangible asset may not be recoverable. The carrying amount of an intangible asset 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. If it is determined that an impairment loss has occurred, the loss is measured as the amount by which the carrying amount of the intangible asset exceeds its fair value.
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 are based upon the weighted-average number of common shares outstanding during the period. Diluted earnings per common share are 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 (Loss). 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 and automobile programs. Prior to the change, our deductible for workers’ compensation was
$0.5 million
. Our deductible for general liability is
$0.3 million
.
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, 2017
and
2016
, our reserve for healthcare, workers’ compensation, net, automobile, and general liability was
$3.5 million
and
$4.6 million
, respectively. 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 (Loss). 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 (Loss).
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 loss.
Geographic Concentrations
Depending on the needs of our clients, our services are provided in an integrated approach through
32
facilities worldwide, of which
6
are located outside of the U.S.
Information about the operations in different geographic areas:
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|
|
Year Ended December 31,
|
|
In thousands
|
|
2017
|
|
2016
|
|
2015
|
|
Revenue
(1)
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
330,944
|
|
|
$
|
324,625
|
|
|
$
|
377,717
|
|
|
Other countries
|
|
52,962
|
|
|
79,787
|
|
|
66,449
|
|
|
Total revenue
|
|
$
|
383,906
|
|
|
$
|
404,412
|
|
|
$
|
444,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
In thousands
|
|
2017
|
|
2016
|
|
Property, plant and equipment
(2)
|
|
|
|
|
|
|
|
United States
|
|
$
|
18,789
|
|
|
$
|
19,810
|
|
|
Other countries
|
|
2,998
|
|
|
4,114
|
|
|
Total property, plant and equipment
|
|
$
|
21,787
|
|
|
$
|
23,924
|
|
|
|
|
|
(1)
|
Geographic revenues are based on the location of the service being performed.
|
|
|
|
|
(2)
|
Property, plant and equipment are based on physical location.
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Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
Stock-Based Compensation
In May 2017, the FASB issued ASU 2017-09,
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
, which provides clarified guidance on applying modification accounting to changes in the terms or conditions of a share-base payment award. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. This change is required to be applied prospectively to an award modified on or after the adoption date. We are evaluating the effect that this will have on our consolidated financial statements and related disclosures.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which provides clarified guidance on the classification of certain cash receipts and payments in the statement of cash flows. This ASU is effective for annual periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. This change is required to be applied using a retrospective transition method to each period presented. We are evaluating the effect that this will have on our consolidated financial statements and related disclosures.
Leases
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires all operating leases to be recorded on the balance sheet. The lessee will record a liability for its lease obligations (initially measured at the present value of the future lease payments not yet paid over the lease term, and an asset for its right to use the underlying asset equal to the lease liability, adjusted for lease payments made at or before lease commencement). This ASU is effective for interim and annual periods beginning after December 15, 2018. This change is required to be applied using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. Early adoption is permitted. We are evaluating the effect that this will have on our consolidated financial statements and related disclosures.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, related to revenue recognition. Under the new standard and its related amendments (collectively known as 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 an entity determines 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. The new standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard also includes criteria for the capitalization and amortization of certain contract acquisition and fulfillment costs.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The new standard is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted, but not before the original effective date of annual reporting periods beginning after December 15, 2016.
We will adopt the new standard on January 1, 2018 utilizing the modified retrospective method. As permitted under the transition guidance, we will apply the new standard only to contracts not completed as of January 1, 2018, which represent contracts for which substantially all of the revenues have not been recognized under existing guidance.
We have established an implementation team to assist with the assessment of the impact that the new standard will have on our operations, consolidated financial statements and related disclosures. We have identified our major revenue streams and are in the process of finalizing our assessment and accounting policies, including the quantification of the expected effect. The adoption of ASC 606 may have a material effect on our consolidated financial statements. Based on analysis to date, we have identified the following potential impacts:
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•
|
Under existing guidance, revenue is recognized upon completion of a specified deliverable or the service. However, the new standard introduced an additional criteria which requires certain performance obligations to be recognized over time
|
if the performance obligation does not create an asset with an alternative use and we have an enforceable right to payment for performance completed to date. We are currently evaluating the impact of these changes under the new standard.
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|
•
|
We enter into contracts which allow the customer or either party the ability to terminate the contract for convenience without incurring a substantial termination penalty. Under existing guidance, we consider the stated term as the contract term and account for terminations when they occur. Under the new standard, the contract term is specified as the contractual period in which the parties to the contract have enforceable rights and obligations. We are currently evaluating the impact these provisions may have on the measurement and allocation of the transaction price as well as any revenue recognition timing differences as compared to current guidance.
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•
|
We perform certain services at the onset of a contract and we may receive a nonrefundable up-front fee from the customer for these services. Currently, we recognize these upfront fees when these services are completed. However, under the new standard, if these services do not represent a promise to transfer a good or service they may not be deemed a separate performance obligation, which would require revenue recognition over the term of the contract including any renewal options. We are currently evaluating the impact of these changes under the new standard.
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In addition, we have determined the adoption of this standard will result in several additional disclosures, including but not limited to additional information around our performance obligations, the timing of revenue recognition, remaining performance obligations at period end, contract assets and liabilities and significant judgments made that impact the amount and timing of revenue from our contracts with customers. These additional disclosures will be included in the Company’s first quarter report on Form 10-Q. In addition, under the modified retrospective method of adoption, we will be required to disclose, for the first year subsequent to adoption, any significant revenue recognition differences under the new standard from what would have been recorded by us had historical revenue recognition guidance continued to be in effect for 2018. We will also be required to disclose the amount of each account impacted as a result of the adoption of the new standard and what that amount would have been under historical revenue recognition guidance during 2018.
This discussion of the expected effects of our adoption of ASC 606 represents management’s best estimates of the effects of adopting ASC 606 at the time of the preparation of this Annual Report on Form 10-K. In order to complete this assessment, we are continuing to update and enhance our internal accounting systems and internal controls over financial reporting, which will include new controls around contract inception and contract modifications, as well as periodic reviews of material contracts. In addition, we are continuing to evaluate the impacts of the new guidance, including:
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|
•
|
Our determination as to whether contract options represent material rights
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•
|
Our estimation policies for variable consideration, including usage based fees and fees based on hours incurred.
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•
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Our policies to allocate the transaction price to the performance obligations in our contracts, specifically, the determination of standalone selling prices used in the allocation.
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•
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The determination of the amounts and amortization periods for costs to obtain a contract that are expected to be recognized as assets. In cases where the period under which such capitalized costs would be amortized is less than 12 months, we have elected to utilize the practical expedient method available under the new standard, and expense these contract costs as incurred.
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•
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Quantification of impacts from adopting the new standard, including income tax impacts.
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Recently adopted accounting pronouncements
Employee Benefit Plans
In March 2017, the FASB issued ASU 2017-07,
Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, which requires entities to present the service cost component of net benefit cost with the other current compensation costs. All other components of net benefit cost are to be reported outside of operating income. This ASU is effective for annual periods beginning after December 15, 2017, with early adoption permitted. This change is required to be applied using a retrospective transition method for each period presented. We adopted the update as of the first quarter of 2017. As a result of the adoption of this ASU, we reclassified
$1.9 million
and
$5.3 million
of pension expense recorded in Labor for the years ended December 31, 2016 and 2015, respectively to Other, net in the Consolidated Statements of Comprehensive Loss.
Goodwill and Other Intangible Assets
In January 2017, the FASB issued ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which eliminates step two from the goodwill impairment test. Under the amendments in ASU 2017-04, an entity should
recognize an impairment charge in the amount that the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. We adopted this standard in January 2017, and have applied it as necessary in our consolidated financial statements.
Stock-Based Compensation
In March 2016, the FASB issued ASU 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting
, which requires entities with share-based payment awards to recognize all related excess tax benefits and tax deficiencies as income tax expenses or benefit in the income statement. This ASU is effective for interim and annual periods beginning after December 15, 2016. We have adopted the update as of the first quarter of 2017. As a result of the adoption of this ASU, excess tax benefits or deficiencies are now reflected in the Consolidated Statements of Comprehensive Loss as a component of income taxes, whereas they previously were recognized in equity. Excess tax benefits are recognized in the Consolidated Statement of Cash Flow as an operating activity, with the prior periods adjusted accordingly. We have elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The ASU was adopted on a modified retrospective basis and no prior periods were restated as a result of this change in accounting policy.
Note B
— Fair Value of Financial Instruments
FASB 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:
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Level 1
|
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Quoted prices in active markets for identical assets or liabilities.
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Level 2
|
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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.
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Level 3
|
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Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
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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, accounts receivable, and trade payables. The fair value of the assets in our funded pension plan is disclosed in
Note F
,
Employee Benefit Plans.
The assumptions used to determine the fair value of our reporting units in Step One and Step Two of our goodwill impairment tests and the discounted cash flow model used to calculate the fair value of our 3Q Digital customer relationship, trade name and non-compete agreement intangible assets are disclosed in
Note E
,
Goodwill and Other Intangible Assets.
The summary of our acquisition related contingent consideration accounted for at fair value on a recurring basis is disclosed in
Note M
,
Acquisition and Disposition.
Note C
— Long-Term Debt
As of
December 31, 2017
the Texas Capital Facility was outstanding, but at each of of years ended
December 31, 2017
and
2016
, we had no debt outstanding.
Credit Facilities
On
March 10, 2016
, we entered into a secured credit facility with Wells Fargo Bank, N.A. as Administrative Agent, consisting of a maximum
$65.0 million
revolving credit facility (the "2016 Revolving Credit Facility"), and a
$45.0 million
term loan facility (the "2016 Term Loan", and together with the 2016 Revolving Credit Facility, the "2016 Secured Credit Facility"). The 2016 Secured Credit Facility was secured by substantially all of our assets and material domestic subsidiaries. The 2016 Secured Credit Facility was used for general corporate purposes, and to replace, and repay remaining outstanding balances on our prior debt.
Prepayment of the 2016 Secured Credit Facility was required upon the completion of the sale of Trillium in accordance with its amended terms. The proceeds of the Trillium sale were used to repay in full all outstanding loans, together with interest, and all other amounts due in connection with repayment (including prepayment penalties of approximately
$1.3 million
). The credit and guarantee agreements related to the 2016 Secured Credit Facility were likewise terminated.
On April 17, 2017, we entered into a secured credit facility with
Texas Capital Bank, N.A.
, that provides a
$20 million
revolving credit facility (the "Texas Capital Credit Facility"). The Texas Capital Credit Facility is being used for general corporate purposes and to provide collateral for up to
$5.0 million
of letters of credit issued by Texas Capital Bank. The Texas Capital Credit Facility is
secured by substantially all of the company's assets and is 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).
On January 9, 2018, we entered into an amendment (the "First Amendment") to the Texas Capital Credit Facility. The First Amendment (i) increases the availability under the revolving credit facility from
$20 million
to
$22 million
and (ii) extends the Texas Capital Credit Facility one year to
April 17, 2020
. The Credit Facility remains secured by substantially all of our assets. Our fee for the collateral balance provided by HHS Guaranty, LLC also changed from an annual fee of
$0.5 million
to
0.5%
of collateral actually pledged; we expect that the fees payable to HHS Guaranty will be substantially similar in amount under the new terms.
Pursuant to the First Amendment, the Texas Capital Credit Facility expires on April 17, 2020 at which point all outstanding principal amounts will be due. Harte Hanks can elect to accrue interest on outstanding principal balances at either
LIBOR
plus
1.95%
or
prime
plus
0.75%
. Unused credit balances will accrue interest at
0.50%
.
The Texas Capital Credit Facility is subject to customary covenants requiring insurance, legal compliance, payment of taxes, prohibition of second liens, and secondary indebtedness, as well as the filing of quarterly and annual financial statements. We were in compliance with all of the covenants of our credit facility at
December 31, 2017
.
Cash payments for interest were
$0.3 million
,
$5.7 million
, and
$1.7 million
for the years ended
December 31, 2017
,
2016
, and
2015
, respectively.
Note D
— Income Taxes
The components of income tax expense (benefit) are as follows:
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|
|
Year Ended December 31,
|
|
In thousands
|
|
2017
|
|
2016
|
|
2015
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
348
|
|
|
$
|
(6,360
|
)
|
|
$
|
2,920
|
|
|
State and local
|
|
245
|
|
|
(107
|
)
|
|
744
|
|
|
Foreign
|
|
472
|
|
|
807
|
|
|
545
|
|
|
Total current
|
|
$
|
1,065
|
|
|
$
|
(5,660
|
)
|
|
$
|
4,209
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(9,886
|
)
|
|
$
|
18,619
|
|
|
$
|
(38,048
|
)
|
|
State and local
|
|
(747
|
)
|
|
7,655
|
|
|
(3,523
|
)
|
|
Foreign
|
|
(326
|
)
|
|
16
|
|
|
2
|
|
|
Total deferred
|
|
$
|
(10,959
|
)
|
|
$
|
26,290
|
|
|
$
|
(41,569
|
)
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(9,894
|
)
|
|
$
|
20,630
|
|
|
$
|
(37,360
|
)
|
The U.S. and foreign components of income (loss) from continuing operations before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
In thousands
|
|
2017
|
|
2016
|
|
2015
|
|
United States
|
|
$
|
(49,731
|
)
|
|
$
|
(66,828
|
)
|
|
$
|
(217,920
|
)
|
|
Foreign
|
|
(2,023
|
)
|
|
(2,320
|
)
|
|
(506
|
)
|
|
Total income (loss) from continuing operations before income taxes
|
|
$
|
(51,754
|
)
|
|
$
|
(69,148
|
)
|
|
$
|
(218,426
|
)
|
The differences between total income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate to income (loss) before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
In thousands
|
|
2017
|
|
Rate
|
|
2016
|
|
Rate
|
|
2015
|
|
Rate
|
|
Computed expected income tax expense (benefit)
|
|
$
|
(18,114
|
)
|
|
35.0
|
%
|
|
$
|
(24,202
|
)
|
|
35.0
|
%
|
|
$
|
(76,449
|
)
|
|
35.0
|
%
|
|
Goodwill impairment basis difference
|
|
6,000
|
|
|
-11.6
|
%
|
|
6,275
|
|
|
-9.1
|
%
|
|
36,664
|
|
|
-16.8
|
%
|
|
Sold operations basis difference
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
686
|
|
|
-0.3
|
%
|
|
Net effect of state income taxes
|
|
(559
|
)
|
|
1.1
|
%
|
|
(954
|
)
|
|
1.4
|
%
|
|
178
|
|
|
-0.1
|
%
|
|
Foreign subsidiary dividend inclusions
|
|
440
|
|
|
-0.8
|
%
|
|
843
|
|
|
-1.2
|
%
|
|
557
|
|
|
-0.3
|
%
|
|
Foreign tax rate differential
|
|
187
|
|
|
-0.4
|
%
|
|
722
|
|
|
-1.0
|
%
|
|
291
|
|
|
-0.1
|
%
|
|
Change in valuation allowance
|
|
2,265
|
|
|
-4.4
|
%
|
|
34,478
|
|
|
-49.9
|
%
|
|
(153
|
)
|
|
0.1
|
%
|
|
Non-deductible interest
|
|
1,280
|
|
|
-2.5
|
%
|
|
3,219
|
|
|
-4.7
|
%
|
|
715
|
|
|
-0.3
|
%
|
|
Stock-based compensation shortfalls
|
|
1,373
|
|
|
-2.7
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
Change in valuation allowance due to tax reform
|
|
(13,821
|
)
|
|
26.7
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
Change in U.S. tax rate due to tax reform
|
|
10,391
|
|
|
-20.1
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
Other, net
|
|
664
|
|
|
-1.2
|
%
|
|
249
|
|
|
-0.4
|
%
|
|
151
|
|
|
-0.1
|
%
|
|
Income tax expense (benefit) for the period
|
|
$
|
(9,894
|
)
|
|
19.1
|
%
|
|
$
|
20,630
|
|
|
-29.9
|
%
|
|
$
|
(37,360
|
)
|
|
17.1
|
%
|
Total income tax expense (benefit) was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
In thousands
|
|
2017
|
|
2016
|
|
2015
|
|
Continuing operations
|
|
$
|
(9,894
|
)
|
|
$
|
20,630
|
|
|
$
|
(37,360
|
)
|
|
Discontinued operations
|
|
—
|
|
|
8,994
|
|
|
5,446
|
|
|
Loss on sale of discontinued operations
|
|
—
|
|
|
(4,600
|
)
|
|
—
|
|
|
Stockholders’ equity
|
|
755
|
|
|
(782
|
)
|
|
2,021
|
|
|
Total
|
|
$
|
(9,139
|
)
|
|
$
|
24,242
|
|
|
$
|
(29,893
|
)
|
The U.S. Tax Cuts and Jobs Act (the "Tax Reform Act”) was enacted on December 22, 2017. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries (the “transition tax”). The Tax Reform Act permanently reduces the U.S. corporate income tax rate from a maximum of
35%
to a flat
21%
rate, effective January 1, 2018. The main impact of the Tax Reform Act on our 2017 financial statement is the re-measurement of deferred tax balances to the new corporate tax rate, in which we recorded a deferred tax benefit of
$3.4 million
.
Due to the complexities involved in accounting for the recently enacted Tax Reform Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118 requires that the company include in its financial statements the reasonable estimate of the impact of the Tax Reform Act on earnings to the extent such reasonable estimate has been determined. Accordingly, our U.S. provision for income tax for 2017 is based on the reasonable estimate guidance provided by SAB 118.
Additionally, we have made a provisional estimate for the transition tax. Due to net deficits in our total accumulated post-1986 foreign earnings and profits that were previously deferred from U.S. income tax, we believe that the company will not be subject to the transition tax, and therefore we have not recorded an income tax effect for the transition tax in the current period. We will update this estimate, if necessary, as the accounting for this is complete.
Effective in 2018, the Tax Reform Act also includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries and a base erosion anti-abuse tax (“BEAT”) measure that taxes certain payments between a U.S. corporation and its foreign subsidiaries. We do not expect that the company will be subject to these taxes and therefore we have not included any tax impacts of GILTI and BEAT in our 2017 financial statements.
We do not have all of the necessary information available to determine a reasonable estimate of the tax liability, if any, under the Tax Reform Act for our remaining outside basis difference in our foreign subsidiaries or to evaluate how the Tax Reform Act will affect our existing accounting position to indefinitely reinvest unremitted foreign earnings. We will continue to apply our existing accounting for this matter under ASC 740, Income Taxes, based on the tax law in effect prior to the enactment of the Tax Reform Act.
We re-measured the applicable deferred tax assets and liabilities based on the rates at which they are expected to reverse. However, we are still analyzing certain aspects of the Tax Reform Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
We will continue to assess the impact from the Tax Reform Act throughout the one-year measurement period as provided by SAB 118 and will record adjustments, if necessary, in 2018.
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
|
|
2017
|
|
2016
|
|
Deferred tax assets
|
|
|
|
|
|
Deferred compensation and retirement plan
|
|
$
|
15,017
|
|
|
$
|
24,715
|
|
|
Accrued expenses not deductible until paid
|
|
1,619
|
|
|
3,508
|
|
|
Employee stock-based compensation
|
|
1,757
|
|
|
3,321
|
|
|
Accrued payroll not deductible until paid
|
|
1,111
|
|
|
1,400
|
|
|
Accounts receivable, net
|
|
179
|
|
|
406
|
|
|
Goodwill
|
|
700
|
|
|
—
|
|
|
Other, net
|
|
290
|
|
|
393
|
|
|
Foreign net operating loss carryforwards
|
|
2,887
|
|
|
2,271
|
|
|
State net operating loss carryforwards
|
|
3,978
|
|
|
3,349
|
|
|
Foreign tax credit carryforwards
|
|
3,653
|
|
|
785
|
|
|
Total gross deferred tax assets
|
|
31,191
|
|
|
40,148
|
|
|
Less valuation allowances
|
|
(28,350
|
)
|
|
(40,148
|
)
|
|
Net deferred tax assets
|
|
$
|
2,841
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
(1,941
|
)
|
|
$
|
(3,060
|
)
|
|
Goodwill and other intangibles
|
|
(701
|
)
|
|
(6,800
|
)
|
|
Other, net
|
|
(972
|
)
|
|
(1,184
|
)
|
|
Total gross deferred tax liabilities
|
|
(3,614
|
)
|
|
(11,044
|
)
|
|
Net deferred tax liabilities
|
|
$
|
(773
|
)
|
|
$
|
(11,044
|
)
|
A reconciliation of the beginning and ending balance of deferred tax valuation allowance is as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
Balance at December 31, 2015
|
|
$
|
9,958
|
|
|
Additions:
|
|
|
|
Charged to cost and expenses
|
|
37,798
|
|
|
Deductions
|
|
(7,608
|
)
|
|
Balance at December 31, 2016
|
|
$
|
40,148
|
|
|
Additions:
|
|
|
|
Charged to cost and expenses
|
|
4,111
|
|
|
Deductions
|
|
(15,909
|
)
|
|
Balance at December 31, 2017
|
|
$
|
28,350
|
|
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. The valuation allowance for deferred tax assets was
$28.4 million
and
$40.1 million
at
December 31, 2017
and 2016, respectively. We recorded a
$13.8 million
deferred income tax benefit related to implementation of the applicable provisions of the Tax Reform Act. The amount of the deferred tax asset considered realizable could be adjusted if estimates of future taxable income during the carryforward period are increased, or if objective negative evidence in the form of cumulative losses is no longer present, and additional weight may be given to subjective evidence such as changes in our growth projections.
We or one of our subsidiaries file income tax returns in the U.S. federal, U.S. state, and foreign jurisdictions. For U.S. federal, U.S. state, and foreign returns, we are no longer subject to tax examinations for years prior to
2013
.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
Balance at December 31, 2014
|
|
$
|
—
|
|
|
Additions for prior year tax positions
|
|
761
|
|
|
Balance at December 31, 2015
|
|
$
|
761
|
|
|
Additions for prior year tax positions
|
|
206
|
|
|
Balance at December 31, 2016
|
|
$
|
967
|
|
|
Settlements
|
|
(761
|
)
|
|
Balance at December 31, 2017
|
|
$
|
206
|
|
Included in the balance as of
December 31, 2017
are
$0.2 million
of unrecognized tax benefits that, if recognized, would impact our effective tax rate. 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 (Loss). We did
not
recognize any tax benefits for the reduction of accrued interest and penalties associated with the reduction of the liability for unrecognized tax benefits during the years ended
December 31, 2017
and
2016
. We did
not
have any interest and penalties accrued at
December 31, 2017
or
2016
.
As of
December 31, 2017
, we had net operating loss carryforwards that are available to reduce future taxable income and that will begin to expire in 2030.
Note E
— Goodwill and Other Intangible Assets
As discussed in Note A,
Significant Accounting Policies
, goodwill is not amortized, but is tested for impairment on an annual basis or when circumstances exist that indicate goodwill may be impaired. Prior to the transaction resulting in the sale of Trillium, the company's goodwill was allocated between
two
reporting units; Customer Interaction and Trillium. As of December 31, 2016 we had
one
reporting unit.
During our annual impairment test in
2017
, we performed a Step One analysis using a business enterprise value approach to determine the fair value of the business. The fair value of the reporting unit was estimated for the purpose of deriving an excess or deficit between the fair value and the carrying amount of the business enterprise. The fair value calculated using the discounted cash flow method was a component of the analysis. Estimated future cash flows were discounted at a rate of
14.0%
. The results of the Step One analysis, in accordance with ASU 2017-04, indicated that the carrying value exceeded the fair value and the full carrying value of goodwill should be written-off, resulting in an impairment charge of
$34.5 million
. Our fair value estimates relied on management assumptions including market rates, revenue growth rates, operating margins, and discount rates.
In conjunction with the sale of Trillium on December 23, 2016, the allocated fair value of goodwill of
$149.3 million
was written-off. This write-off is reflected in the Income (loss) from discontinued operations, net of income taxes line of the Consolidated Statements of Comprehensive Income (Loss) in the Consolidated Financial Statements.
During our annual impairment test in
2016
, we performed a Step One analysis. During the first step we used the income-based approach, in which estimated future cash flows were discounted at a rate of
11.5%
. The results were combined with results of the market-based approach to determine fair value of the business. The results indicated that the fair value of the reporting unit was less than its carrying amount and a Step Two analysis was warranted.
Under Step Two, the fair value of the reporting unit was estimated for the purpose of deriving an estimate of the implied fair value of goodwill. The fair value of tangible assets along with the estimated fair value of intangible assets including non-compete agreements, trade names, and customer relationships, were taken into consideration for the analysis. Additional assumptions used in measuring the fair value of the assets and liabilities included customer attrition rates, discount rates, and royalty rates used in valuing the intangible assets, and the consideration of the market environment in valuing tangible assets. The resulting implied fair value of the goodwill was then compared to the recorded goodwill to determine the amount of impairment. The results of Step Two indicated that a goodwill write down of
$38.7 million
was necessary.
During 2015, as a result of a sustained decline in our market capitalization below our book value of equity and recent operating performance, the company determined that a triggering event had occurred. Using the income-based approach and the market-based approach, the fair value of the reporting unit was estimated to be below the carrying value and therefore indicated impairment. The second step of the test indicated that goodwill was impaired by
$209.9 million
. The impairment charge resulted in a corresponding
$36.8 million
tax benefit resulting in a net income impact of
$173.1 million
. Our fair value estimates relied on management assumptions including discount rate, revenue growth rates, operating margins, attrition rates, and royalty rates.
Our accumulated goodwill impairment was
$283.1 million
,
$248.6 million
, and
$209.9 million
for the years ended
December 31, 2017
,
2016
, and
2015
, respectively.
We recorded
$3.5 million
in goodwill in 2016 in connection with the acquisition of the business of Aleutian Consulting, Inc. on March 4, 2016. The residual purchase price methodology used in the calculation relied on management's assumptions, which are considered Level 3 inputs, as they are unobservable. This goodwill will be tax deductible.
On April 14, 2015, we sold our B2B research businesses, Aberdeen Group and Harte Hanks Market Intelligence (the "B2B research business”). As a result, the
$11.1 million
allocated fair value within the net book value of Customer Interaction goodwill was written off. In addition,
$2.3 million
of intangible assets with indefinite useful lives related to the Aberdeen Group trade name was written off. These amounts are reflected in the Loss on sale in the Other expenses section of the Consolidated Statements of Comprehensive Income (Loss).
On March 16, 2015, we acquired 3Q Digital. We performed a valuation to estimate of the total purchase consideration and values for the tangible and identifiable intangible assets. As a result, we recorded
$41.8 million
in goodwill and
$4.8 million
of identified intangible assets with definite lives for client relationships and non-compete agreements. For further discussion on transactions discussed above, see
Note M
,
Acquisition and Disposition.
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
Balance at December 31, 2015
|
|
$
|
69,699
|
|
|
Purchase consideration
|
|
3,480
|
|
|
Impairment
|
|
(38,669
|
)
|
|
Balance at December 31, 2016
|
|
$
|
34,510
|
|
|
Impairment
|
|
(34,510
|
)
|
|
Balance at December 31, 2017
|
|
$
|
—
|
|
Other intangibles with definite useful lives relate to contact databases, client relationships, and non-compete agreements. They are amortized on a straight-line basis over their respective estimated useful lives, typically a period of
2
to
10
years, and reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The changes in the carrying amount of other intangibles with definite lives are as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
Balance at December 31, 2015
|
|
$
|
4,123
|
|
|
Amortization
|
|
(821
|
)
|
|
Balance at December 31, 2016
|
|
$
|
3,302
|
|
|
Amortization
|
|
(713
|
)
|
|
Balance at December 31, 2017
|
|
$
|
2,589
|
|
Amortization expense related to other intangibles with definite useful lives was
$0.7 million
,
$0.8 million
, and
0.7 million
for the years ended
December 31, 2017
,
2016
, and
2015
, respectively. Expected amortization expense for the next five years is as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
2018
|
|
$
|
624
|
|
|
2019
|
|
613
|
|
|
2020
|
|
613
|
|
|
2021
|
|
613
|
|
|
2022
|
|
126
|
|
|
Thereafter
|
|
—
|
|
|
Total
|
|
2,589
|
|
Note F
— Employee Benefit Plans
Prior to January 1, 1999, we provided a defined benefit pension plan in 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.
The overfunded or underfunded status of our defined benefit post-retirement plans is recorded as an asset or liability on our balance sheet. 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. 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
|
|
2017
|
|
2016
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
179,247
|
|
|
$
|
178,715
|
|
|
Interest cost
|
|
7,347
|
|
|
7,802
|
|
|
Actuarial (gain) loss
|
|
10,121
|
|
|
2,127
|
|
|
Benefits paid
|
|
(9,679
|
)
|
|
(9,397
|
)
|
|
Benefit obligation at end of year
|
|
$
|
187,036
|
|
|
$
|
179,247
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
116,725
|
|
|
121,682
|
|
|
Actual return on plan assets
|
|
17,292
|
|
|
2,883
|
|
|
Contributions
|
|
1,675
|
|
|
1,557
|
|
|
Benefits paid
|
|
(9,679
|
)
|
|
(9,397
|
)
|
|
Fair value of plan assets at end of year
|
|
$
|
126,013
|
|
|
$
|
116,725
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(61,023
|
)
|
|
$
|
(62,522
|
)
|
The following amounts have been recognized in the Consolidated Balance Sheets at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2017
|
|
2016
|
|
Other current liabilities
|
|
$
|
1,685
|
|
|
$
|
1,686
|
|
|
Pensions
|
|
59,338
|
|
|
60,836
|
|
|
Total
|
|
$
|
61,023
|
|
|
$
|
62,522
|
|
The following amounts have been recognized in accumulated other comprehensive loss, net of tax, at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2017
|
|
2016
|
|
Net loss
|
|
$
|
45,418
|
|
|
$
|
46,977
|
|
We are not required to make and do not intend to make any contributions to our Qualified Pension Plan in
2018
. Based on current estimates we will not be required to make any contributions to our Qualified Pension Plan until 2019.
We are not required to make and do not intend to make any contributions to our Restoration Pension Plan in
2018
other than to the extent needed to cover benefit payments. We expect benefit payments under this supplemental pension plan to total approximately
$1.7 million
in
2018
.
The following information is presented for pension plans with an accumulated benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2017
|
|
2016
|
|
Projected benefit obligation
|
|
$
|
187,036
|
|
|
$
|
179,247
|
|
|
Accumulated benefit obligation
|
|
$
|
187,036
|
|
|
$
|
179,247
|
|
|
Fair value of plan assets
|
|
$
|
126,013
|
|
|
$
|
116,725
|
|
The Restoration Pension Plan had an accumulated benefit obligation of
$27.6 million
and
$26.6 million
at
December 31, 2017
and
2016
, respectively.
The following table presents the components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss) for both plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
In thousands
|
|
2017
|
|
2016
|
|
2015
|
|
Net Periodic Benefit Cost (Pre-Tax)
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
7,347
|
|
|
7,802
|
|
|
7,724
|
|
|
Expected return on plan assets
|
|
(7,328
|
)
|
|
(8,245
|
)
|
|
(8,637
|
)
|
|
Recognized actuarial loss
|
|
2,754
|
|
|
2,386
|
|
|
6,228
|
|
|
Net periodic benefit cost
|
|
$
|
2,773
|
|
|
$
|
1,943
|
|
|
$
|
5,315
|
|
|
|
|
|
|
|
|
|
|
Amounts Recognized in Other Comprehensive Income (Loss) (Pre-Tax)
|
|
|
|
|
|
|
|
|
|
|
Net (gain) loss
|
|
$
|
(2,597
|
)
|
|
$
|
5,103
|
|
|
$
|
(9,408
|
)
|
|
|
|
|
|
|
|
|
|
Net (benefit) cost recognized in net periodic benefit cost and other comprehensive (income) loss
|
|
$
|
176
|
|
|
$
|
7,046
|
|
|
$
|
(4,093
|
)
|
The estimated net loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in
2018
is
$2.7 million
. The period over which the net loss from the Qualified Pension Plan is amortized into net periodic benefit cost was changed in 2016 from the average future service of active participants (approximately
9
years) to the average future lifetime of all participants (approximately
23
years). This change reflects that the Qualified Pension Plan is frozen and that 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,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Weighted-average assumptions used to determine net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.21
|
%
|
|
4.49
|
%
|
|
4.13
|
%
|
|
Expected return on plan assets
|
|
6.50
|
%
|
|
7.00
|
%
|
|
7.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
Weighted-average assumptions used to determine benefit obligations
|
|
|
|
|
|
|
|
Discount rate
|
|
3.67
|
%
|
|
4.21
|
%
|
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, 2017
and
2016
, by asset category, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
Equity securities
|
|
$
|
80,191
|
|
|
64
|
%
|
|
$
|
61,254
|
|
|
52
|
%
|
|
Debt securities
|
|
20,481
|
|
|
16
|
%
|
|
21,940
|
|
|
19
|
%
|
|
Other
|
|
25,341
|
|
|
20
|
%
|
|
33,531
|
|
|
29
|
%
|
|
Total plan assets
|
|
$
|
126,013
|
|
|
100
|
%
|
|
$
|
116,725
|
|
|
100
|
%
|
The fair values presented have been prepared using values and information available as of
December 31, 2017
and
2016
.
The following tables present the fair value measurements of the assets in our funded pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
December 31,
2017
|
|
Quoted Prices
in Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Equity securities
|
|
$
|
80,191
|
|
|
$
|
80,191
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Debt securities
|
|
20,481
|
|
|
20,481
|
|
|
—
|
|
|
—
|
|
|
Total investments, excluding investments valued at NAV
|
|
100,672
|
|
|
100,672
|
|
|
—
|
|
|
—
|
|
|
Investments valued at NAV
(1)
|
|
25,341
|
|
|
—
|
|
|
|
|
—
|
|
|
Total plan assets
|
|
$
|
126,013
|
|
|
$
|
100,672
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
December 31,
2016
|
|
Quoted Prices
in Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Equity securities
|
|
$
|
61,254
|
|
|
$
|
61,254
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Debt securities
|
|
21,940
|
|
|
21,940
|
|
|
—
|
|
|
—
|
|
|
Total investments, excluding investments valued at NAV
|
|
83,194
|
|
|
83,194
|
|
|
—
|
|
|
—
|
|
|
Investments valued at NAV
(1)
|
|
33,531
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total plan assets
|
|
$
|
116,725
|
|
|
$
|
83,194
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1) Investment valued at 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.
The investment policy for the Qualified Pension Plan 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
Acceptable Range
|
|
Benchmark Index
|
|
Domestic Equities
|
|
50.0
|
%
|
|
35
|
%
|
-
|
75%
|
|
S&P 500
|
|
Large Cap Growth
|
|
22.5
|
%
|
|
15
|
%
|
-
|
30%
|
|
Russell 1000 Growth
|
|
Large Cap Value
|
|
22.5
|
%
|
|
15
|
%
|
-
|
30%
|
|
Russell 1000 Value
|
|
Mid Cap Value
|
|
5.0
|
%
|
|
5
|
%
|
-
|
15%
|
|
Russell Mid Cap Value
|
|
Mid Cap Growth
|
|
0.0
|
%
|
|
0
|
%
|
-
|
10%
|
|
Russell Mid Cap Growth
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Fixed Income
|
|
35.0
|
%
|
|
15
|
%
|
-
|
50%
|
|
LB Aggregate
|
|
International Equities
|
|
15.0
|
%
|
|
10
|
%
|
-
|
25%
|
|
MSC1 EAFE
|
The funded pension plan provides 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 the plan. 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, 2017
are as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
2018
|
|
$
|
9,922
|
|
|
2019
|
|
9,977
|
|
|
2020
|
|
10,221
|
|
|
2021
|
|
10,476
|
|
|
2022
|
|
10,855
|
|
|
2023-2027
|
|
57,001
|
|
|
Total
|
|
$
|
108,452
|
|
We also sponsor a 401(k)-retirement plan in which we matched a portion of employees’ voluntary before-tax contributions. Under this plan, both employee and matching contributions vest immediately. Total 401(k) expense for these matching payments recognized was
$3.0 million
for each of the years ending December 31,
2017
,
2016
, and
2015
Note G
— Stockholders’ Equity
Dividends
We paid a dividend of
$0.85
per share in the first quarter of
2016
and did not pay any dividends in
2017
Share Repurchase
Under the stock repurchase program publicly announced in August of 2014, our Board provided authorization to spend up to
$20.0 million
to repurchase shares of our outstanding common stock. During
2017
,
no
shares of our common stock were purchased. We had
$11.4 million
remaining under the current authorization as of
December 31, 2017
. From 1997 through December
2017
, we have paid more than
$1.2 billion
to repurchase
6.8 million
shares under this program and previously announced programs
.
Awardees of stock-based compensation may elect to have shares of common stock withheld from vested awards to meet tax obligations. These shares are returned to our treasury stock at the time of vesting. During
2017
, we received
9,310
shares of our common stock, with an estimated market value of
$0.1 million
, from such arrangements.
Series A Convertible Preferred Stock
Harte Hanks is authorized to issue
one million
shares of preferred stock with a par value of
$1.00
. Each share of our Series A Convertible Preferred Stock (the "Series A Preferred Stock") is convertible at any time at the option of the holder into the number of shares of common stock at the initial conversion price. Dividends on the Series A Preferred Stock are accrued at a rate of
5.0%
per year or the rate that cash dividends were paid in respect to shares of common stock if such rate is greater than
5.0%
. Holders of Series A Preferred Stock do not have voting rights, subject to certain exceptions.
On January 23, 2018, we issued
9,926
shares of our Series A Preferred Stock to Wipro, LLC for gross proceeds of
$9.9 million
. Shares are convertible into
16.0%
of our outstanding common stock on a pre-closing basis, priced at
$9.91
per share of common stock. For so long as Wipro owns at least a majority of the preferred shares originally purchased, or is the beneficial owner of at least
5%
of the company's common stock, Wipro has the right to appoint one individual as a non-voting observer to the Board and under certain circumstances Wipro may appoint a board member to the board of directors.
Note H
— Stock-Based Compensation
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 (Loss). For the years ended December 31,
2017
,
2016
, and
2015
, we recorded total stock-based compensation expense from continuing operations of
$2.7 million
,
$2.7 million
, and
$5.4 million
, respectively.
We granted equity awards to our Chief Financial Officer in 2017, Chief Operations Officer in 2016, and our Chief Executive Officer and Chief Marketing Officer in 2015 as a material inducement for acceptance of such positions. These option, restricted stock, and performance unit awards were not submitted for stockholder approval, and were separately listed with the NYSE.
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. As of
December 31, 2017
, there were
0.1 million
shares available for grant under the 2013 Plan.
Stock Options
Options granted under the 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
ten
th anniversary of their date of grant. Options to purchase
0.1 million
shares granted as inducement awards were outstanding at
December 31, 2017
, with exercise prices ranging from
$10.00
to
$42.60
per share.
Following the third quarter 2015 resignation of our former CEO, vesting was accelerated on his unvested stock options (pursuant to the terms of his employment agreement and inducement award), for which we recognized
$0.5 million
of accelerated expense in July 2015. These options were not exercised and subsequently expired.
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
0.1 million
shares were outstanding under the 2005 Plan as of
December 31, 2017
, with exercise prices ranging from
$60.40
to
$159.00
per share.
Options issued through March 2015 vest in full (to the extent not previously vested) upon a change in control, as defined in the applicable equity plan. 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). Additionally,
25%
of the inducement options granted to the Chief Executive Officer will vest (if not previously vested) in the event her employment is terminated without cause, or if she terminates her employment for good reason (as such terms are defined in her employment agreement).
The following summarizes all stock option activity during the years ended
December 31, 2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted- Average
Remaining Contractual
Term (Years)
|
|
Aggregate
Intrinsic Value (Thousands)
|
|
Options outstanding at December 31, 2014
|
|
446,365
|
|
|
$
|
114.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted in 2015
|
|
197,318
|
|
|
57.26
|
|
|
|
|
|
|
|
Exercised in 2015
|
|
(3,500
|
)
|
|
60.40
|
|
|
|
|
$
|
67
|
|
|
Unvested options forfeited in 2015
|
|
(65,982
|
)
|
|
79.59
|
|
|
|
|
|
|
|
Vested options expired in 2015
|
|
(113,988
|
)
|
|
148.83
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2015
|
|
460,213
|
|
|
$
|
87.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted in 2016
|
|
15,037
|
|
|
26.15
|
|
|
|
|
|
|
|
Exercised in 2016
|
|
—
|
|
|
—
|
|
|
|
|
$
|
—
|
|
|
Unvested options forfeited in 2016
|
|
(57,014
|
)
|
|
75.74
|
|
|
|
|
|
|
|
Vested options expired in 2016
|
|
(47,689
|
)
|
|
160.61
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2016
|
|
370,547
|
|
|
$
|
77.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted in 2017
|
|
33,855
|
|
|
10.00
|
|
|
|
|
|
|
|
Exercised in 2017
|
|
—
|
|
|
—
|
|
|
|
|
$
|
—
|
|
|
Unvested options forfeited in 2017
|
|
(9,872
|
)
|
|
73.31
|
|
|
|
|
|
|
|
Vested options expired in 2017
|
|
(85,563
|
)
|
|
110.44
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2017
|
|
308,967
|
|
|
$
|
60.80
|
|
|
5.86
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2017
|
|
308,967
|
|
|
$
|
60.80
|
|
|
5.86
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017
|
|
201,594
|
|
|
$
|
75.42
|
|
|
4.66
|
|
$
|
—
|
|
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, 2017
. The pre-tax intrinsic value is the difference between the closing price of our common stock on
December 31, 2017
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, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
Exercise Prices
|
|
Number
Outstanding
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining Life (Years)
|
|
Number
Exercisable
|
|
Weighted-Average
Exercise Price
|
|
$
|
0.00
|
|
-
|
29.99
|
|
48,892
|
|
|
$
|
14.97
|
|
|
9.39
|
|
3,759
|
|
|
$
|
26.15
|
|
|
$
|
30.00
|
|
-
|
54.99
|
|
96,866
|
|
|
38.39
|
|
|
7.73
|
|
48,433
|
|
|
38.39
|
|
|
$
|
55.00
|
|
-
|
79.99
|
|
94,903
|
|
|
70.27
|
|
|
3.96
|
|
85,785
|
|
|
69.57
|
|
|
$
|
80.00
|
|
-
|
104.99
|
|
30,941
|
|
|
88.28
|
|
|
5.34
|
|
26,253
|
|
|
89.35
|
|
|
$
|
105.00
|
|
-
|
129.99
|
|
22,900
|
|
|
119.73
|
|
|
2.23
|
|
22,900
|
|
|
119.73
|
|
|
$
|
130.00
|
|
-
|
159.99
|
|
14,465
|
|
|
151.51
|
|
|
0.70
|
|
14,465
|
|
|
151.51
|
|
|
|
|
|
|
308,967
|
|
|
$
|
60.80
|
|
|
5.86
|
|
201,595
|
|
|
$
|
75.42
|
|
The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option-Pricing Model based on the following weighted-average assumptions used for grants during
2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Expected term (in years)
|
|
6.25
|
|
|
6.25
|
|
|
6.24
|
|
|
Expected stock price volatility
|
|
53.70
|
%
|
|
44.80
|
%
|
|
40.60
|
%
|
|
Risk-free interest rate
|
|
2.16
|
%
|
|
1.48
|
%
|
|
1.58
|
%
|
|
Expected dividend yield
|
|
—
|
%
|
|
—
|
%
|
|
5.69
|
%
|
Expected term is estimated using the simplified method, which takes into account vesting and contractual term. The simplified method is being used to calculate expected term instead of historical experience due to a lack of relevant historical data resulting from changes in option vesting schedules and changes in the pool of employees receiving option grants. Expected stock price volatility is based on the historical volatility from traded shares of our stock over the expected term. The risk-free interest rate is based on the rate of a zero-coupon U.S. Treasury instrument with a remaining term approximately equal to the expected term. Expected dividend yield is based on historical stock price movement and anticipated future annual dividends over the expected term. Future annual dividends over the expected term are estimated to be
nil
.
The weighted-average fair value of options granted during
2017
,
2016
, and
2015
was
$5.32
,
$11.66
, and
$13.60
, respectively. As of
December 31, 2017
, there was
$0.7 million
of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted average period of approximately
2.18 years
.
Cash Stock Appreciation Rights
In 2016 and 2017 the Board 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. Cash stock appreciation rights settle solely in cash and are treated as a liability.
The following summarizes all cash stock appreciation rights during the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual Term
(Years)
|
|
Cash stock appreciation rights outstanding at December 31, 2016
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted in 2017
|
|
86,618
|
|
|
9.70
|
|
|
|
|
Exercised in 2017
|
|
—
|
|
|
—
|
|
|
|
|
Forfeited in 2017
|
|
—
|
|
|
—
|
|
|
|
|
Cash stock appreciation rights outstanding at December 31, 2017
|
|
86,618
|
|
|
$
|
9.70
|
|
|
9.48
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2017
|
|
86,618
|
|
|
$
|
9.70
|
|
|
9.48
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2017
|
|
—
|
|
|
$
|
—
|
|
|
0.00
|
The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option-Pricing Model based on the following weighted-average assumptions used for grants during
2017
:
|
|
|
|
|
|
|
|
|
|
2017
|
|
Expected term (in years)
|
|
6.25
|
|
|
Expected stock price volatility
|
|
54.45
|
%
|
|
Risk-free interest rate
|
|
2.23
|
%
|
|
Expected dividend yield
|
|
—
|
%
|
Expected term is estimated using the simplified method, which takes into account vesting and contractual term. The simplified method is being used to calculate expected term instead of historical experience due to a lack of relevant historical data resulting from changes in cash stock appreciation right vesting schedules and changes in the pool of employees receiving cash stock appreciation right grants. Expected stock price volatility is based on the historical volatility from traded shares of our stock over the expected term. The risk-free interest rate is based on the rate of a zero-coupon U.S. Treasury instrument with a remaining term approximately equal to the expected term. Expected dividend yield is based on historical stock price movement and anticipated future annual dividends over the expected term. Future annual dividends over the expected term are estimated to be
nil
.
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, 2017
, there was
$0.4 million
of total unrecognized compensation cost related to unvested cash stock appreciation right grants. This cost is expected to be recognized over a weighted average period of approximately
3.48 years
. Changes in our
stock price, the volatility of our stock price, and the risk-free rate of interest will result in adjustments to compensation expense and the corresponding liability over the applicable service period
Unvested Shares
Unvested shares granted as inducement awards or under the 2013 Plan vest in three equal increments on the first three anniversaries of their date of grant. Unvested shares settle solely in common stock and are treated as equity. Outstanding unvested shares 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).
Following the third quarter 2015 resignation of our former CEO, vesting was accelerated on his unvested shares (pursuant to the terms of his employment agreement and inducement award), for which we recognized
$1.2 million
of accelerated expense in July 2015.
The following summarizes all unvested share activity during
2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Unvested shares outstanding at December 31, 2014
|
|
79,007
|
|
|
$
|
80.89
|
|
|
|
|
|
|
|
|
Granted in 2015
|
|
83,626
|
|
|
63.80
|
|
|
Vested in 2015
|
|
(50,507
|
)
|
|
82.27
|
|
|
Forfeited in 2015
|
|
(15,911
|
)
|
|
78.39
|
|
|
Unvested shares outstanding at December 31, 2015
|
|
96,215
|
|
|
$
|
65.69
|
|
|
|
|
|
|
|
|
Granted in 2016
|
|
74,192
|
|
|
26.32
|
|
|
Vested in 2016
|
|
(36,492
|
)
|
|
66.96
|
|
|
Forfeited in 2016
|
|
(39,372
|
)
|
|
57.79
|
|
|
Unvested shares outstanding at December 31, 2016
|
|
94,543
|
|
|
$
|
37.59
|
|
|
|
|
|
|
|
|
Granted in 2017
|
|
160,962
|
|
|
9.81
|
|
|
Vested in 2017
|
|
(40,979
|
)
|
|
41.39
|
|
|
Forfeited in 2017
|
|
(13,304
|
)
|
|
27.84
|
|
|
Unvested shares outstanding at December 31, 2017
|
|
201,222
|
|
|
$
|
15.23
|
|
The fair value of each unvested share is estimated on the date of grant as the closing market price of our common stock on the date of grant. As of
December 31, 2017
, there was
$2.1 million
of total unrecognized compensation cost related to unvested shares. This cost is expected to be recognized over a weighted average period of approximately
1.94 years
.
Phantom Stock Units
In 2016 and 2017 the Board 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
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
Weighted-
Average Grant
Date Fair Value
|
|
Phantom stock units outstanding at December 31, 2015
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Granted in 2016
|
|
78,140
|
|
|
26.90
|
|
|
Vested in 2016
|
|
—
|
|
|
—
|
|
|
Forfeited in 2016
|
|
(24,976
|
)
|
|
26.90
|
|
|
Phantom stock units outstanding at December 31, 2016
|
|
53,164
|
|
|
$
|
26.90
|
|
|
|
|
|
|
|
|
Granted in 2017
|
|
56,000
|
|
|
9.70
|
|
|
Vested in 2017
|
|
(12,483
|
)
|
|
26.90
|
|
|
Forfeited in 2017
|
|
(14,644
|
)
|
|
22.63
|
|
|
Phantom stock units outstanding at December 31, 2017
|
|
82,037
|
|
|
$
|
15.92
|
|
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 of 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, 2017
, there was
$0.7 million
of total unrecognized compensation cost related to phantom stock units. This cost is expected to be recognized over a weighted average period of approximately
3.06 years
.
Performance Stock Units
Under the 2013 Plan and grants of inducement awards, 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).
The following summarizes all performance stock unit activity during
2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
Weighted-
Average Grant-Date Fair Value
|
|
Performance stock units outstanding at December 31, 2014
|
|
60,363
|
|
|
$
|
76.07
|
|
|
|
|
|
|
|
|
Granted in 2015
|
|
66,982
|
|
|
43.02
|
|
|
Settled in 2015
|
|
—
|
|
|
—
|
|
|
Forfeited in 2015
|
|
(57,211
|
)
|
|
75.40
|
|
|
Performance stock units outstanding at December 31, 2015
|
|
70,134
|
|
|
$
|
45.05
|
|
|
|
|
|
|
|
|
Granted in 2016
|
|
47,300
|
|
|
19.00
|
|
|
Settled in 2016
|
|
—
|
|
|
—
|
|
|
Forfeited in 2016
|
|
(33,004
|
)
|
|
57.59
|
|
|
Performance stock units outstanding at December 31, 2016
|
|
84,430
|
|
|
$
|
25.56
|
|
|
|
|
|
|
|
|
Granted in 2017
|
|
89,124
|
|
|
9.95
|
|
|
Settled in 2017
|
|
—
|
|
|
—
|
|
|
Forfeited in 2017
|
|
(10,494
|
)
|
|
47.90
|
|
|
Performance stock units outstanding at December 31, 2017
|
|
163,060
|
|
|
$
|
15.59
|
|
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 of 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, 2017
, there was
$1.3 million
of total unrecognized compensation cost related to
performance stock units. This cost is expected to be recognized over a weighted average period of approximately
1.73 years
. Future annual dividends over the expected term are estimated to be
nil
.
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).
The following summarizes all performance stock unit activity during
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average Grant-Date Fair Value
|
|
Cash performance stock units outstanding at December 31, 2015
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Granted in 2016
|
|
51,209
|
|
|
26.90
|
|
|
Settled in 2016
|
|
—
|
|
|
—
|
|
|
Forfeited in 2016
|
|
(6,812
|
)
|
|
26.90
|
|
|
Cash performance stock units outstanding at December 31, 2016
|
|
44,397
|
|
|
$
|
26.90
|
|
|
|
|
|
|
|
|
Granted in 2017
|
|
109,887
|
|
|
10.10
|
|
|
Settled in 2017
|
|
—
|
|
|
—
|
|
|
Forfeited in 2017
|
|
(3,778
|
)
|
|
26.90
|
|
|
Cash performance stock units outstanding at December 31, 2017
|
|
150,506
|
|
|
$
|
14.63
|
|
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 of 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, 2017
, there was
$0.9 million
of total unrecognized compensation cost related to performance stock units. This cost is expected to be recognized over a weighted average period of approximately
2.13 years
. Future annual dividends over the expected term are estimated to be
nil
.
Note I
— Commitments and Contingencies
At
December 31, 2017
, we had letters of credit in the amount of
$2.8 million
backed by cash collateral.
No
amounts were drawn against these letters of credit at
December 31, 2017
. These letters of credit exist to support insurance programs relating to workers’ compensation, automobile, and general liability.
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 there under; accordingly, our actual aggregate maximum exposure related to these types of commitments cannot be reasonably estimated. 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 financial statements.
We are also currently subject to various other legal proceedings in the course of conducting our businesses and, from time to time, we may become involved in additional claims and lawsuits incidental to our businesses. In the opinion of management, after consultation with counsel, none of these matters is currently considered to be reasonably possible of resulting in a material adverse effect on our consolidated financial position or results of operations. Nevertheless, we cannot predict the impact of future developments affecting our pending or future claims and lawsuits and any resolution of a claim or lawsuit within a particular fiscal quarter may adversely impact our results of operations for that quarter. 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 J
— Leases
We lease real estate and certain equipment under numerous lease agreements, most of which contain some renewal options. The total rent expense applicable to operating leases was
$13.1 million
,
$12.4 million
, and
$13.6 million
for the years ended
December 31, 2017
,
2016
, and
2015
, respectively.
Step rent provisions and escalation clauses, normal tenant improvements, rent holidays, and other lease concessions are taken into account in computing minimum lease payments. We recognize the minimum lease payments on a straight-line basis over the minimum lease term.
The future minimum rental commitments for all non-cancelable operating leases with terms in excess of one year as of
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
2018
|
|
$
|
8,753
|
|
|
2019
|
|
8,500
|
|
|
2020
|
|
6,495
|
|
|
2021
|
|
3,889
|
|
|
2022
|
|
2,016
|
|
|
Thereafter
|
|
1,823
|
|
|
Total
|
|
$
|
31,476
|
|
We also lease certain equipment and software under capital leases. Our capital lease obligations at year-end were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2017
|
|
2016
|
|
Current portion of capital leases
|
|
$
|
506
|
|
|
$
|
559
|
|
|
Long-term portion of capital leases
|
|
486
|
|
|
1,018
|
|
|
Total capital lease obligation
|
|
$
|
992
|
|
|
$
|
1,577
|
|
The future minimum lease payments for all capital leases operating as of
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
2018
|
|
$
|
506
|
|
|
2019
|
|
453
|
|
|
2020
|
|
32
|
|
|
2021
|
|
1
|
|
|
2022
|
|
—
|
|
|
Thereafter
|
|
—
|
|
|
Total
|
|
$
|
992
|
|
Note K
— Earnings (Loss) Per Share
In periods in which the company has net income, the company is required to calculate earnings per share using the two-class method. The two-class method is required because the company's unvested shares granted prior to 2017 are considered participating securities. Participating securities have the right to receive dividends should the company declare dividends on its common stock. Under the two-class method, undistributed and distributed earnings are allocated on a pro-rata basis to the common and restricted stockholders. The weighted-average number of common and restricted shares 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 two-class calculation is anti-dilutive.
On January 31, 2018, we affected a 1-for-10 reverse stock split of our common stock. The calculation of basic and diluted earnings (loss) per share, as presented in the consolidated financial statements, have been adjusted to retroactively apply the reverse stock split.
Reconciliations of basic and diluted earnings (loss) per share ("EPS") are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except per share amounts
|
|
2017
|
|
2016
|
|
2015
|
|
Net Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(41,860
|
)
|
|
$
|
(89,778
|
)
|
|
$
|
(181,066
|
)
|
|
Income (loss) from discontinued operations
|
|
—
|
|
|
(41,159
|
)
|
|
10,138
|
|
|
Net income (loss)
|
|
$
|
(41,860
|
)
|
|
$
|
(130,937
|
)
|
|
$
|
(170,928
|
)
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding used in earnings per share computations
|
|
6,192
|
|
|
6,149
|
|
|
6,164
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(6.76
|
)
|
|
$
|
(14.60
|
)
|
|
$
|
(29.37
|
)
|
|
Discontinued operations
|
|
—
|
|
|
(6.69
|
)
|
|
1.64
|
|
|
Basic earnings (loss) per share
|
|
$
|
(6.76
|
)
|
|
$
|
(21.29
|
)
|
|
$
|
(27.73
|
)
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted earnings per share computations
|
|
6,192
|
|
|
6,149
|
|
|
6,164
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(6.76
|
)
|
|
$
|
(14.60
|
)
|
|
$
|
(29.37
|
)
|
|
Discontinued operations
|
|
—
|
|
|
(6.69
|
)
|
|
1.64
|
|
|
Basic earnings (loss) per share
|
|
$
|
(6.76
|
)
|
|
$
|
(21.29
|
)
|
|
$
|
(27.73
|
)
|
|
|
|
|
|
|
|
|
|
Computation of Shares Used in Earnings Per Share Computations
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
6,192
|
|
|
6,149
|
|
|
6,164
|
|
|
Weighted-average common equivalent shares-dilutive effect of stock options and awards
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Shares used in diluted earnings per share computations
|
|
6,192
|
|
|
6,149
|
|
|
6,164
|
|
For the purpose of calculating the shares used in the diluted EPS calculations,
0.3 million
,
0.4 million
, and
0.5 million
anti-dilutive options have been excluded from the EPS calculations for the years ended
December 31, 2017
,
2016
, and
2015
, respectively.
0.1 million
,
0.1 million
, and
0.1 million
anti-dilutive unvested shares were excluded from the calculation of shares used in the diluted EPS calculation for the years ended
December 31, 2017
,
2016
, and
2015
, respectively.
Note L
— Comprehensive Income (Loss)
Comprehensive income (loss) for a period encompasses net income (loss) and all other changes in equity other than from transactions with our stockholders. Our comprehensive income (loss) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
In thousands
|
|
2017
|
|
2016
|
|
2015
|
|
Net income (loss)
|
|
$
|
(41,860
|
)
|
|
$
|
(130,937
|
)
|
|
$
|
(170,928
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Adjustment to pension liability
|
|
2,597
|
|
|
(5,103
|
)
|
|
9,408
|
|
|
Tax (expense) benefit
|
|
(1,038
|
)
|
|
2,041
|
|
|
(3,763
|
)
|
|
Adjustment to pension liability, net of tax
|
|
1,559
|
|
|
(3,062
|
)
|
|
5,645
|
|
|
Foreign currency translation adjustment
|
|
316
|
|
|
444
|
|
|
(1,976
|
)
|
|
Total other comprehensive income (loss)
|
|
$
|
1,875
|
|
|
$
|
(2,618
|
)
|
|
$
|
3,669
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
(39,985
|
)
|
|
$
|
(133,555
|
)
|
|
$
|
(167,259
|
)
|
Changes in accumulated other comprehensive income (loss) by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Defined Benefit
Pension Items
|
|
Foreign
Currency Items
|
|
Total
|
|
Balance at December 31, 2015
|
|
$
|
(43,915
|
)
|
|
$
|
355
|
|
|
$
|
(43,560
|
)
|
|
Other comprehensive loss, net of tax, before reclassifications
|
|
—
|
|
|
444
|
|
|
444
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
|
|
(3,062
|
)
|
|
—
|
|
|
(3,062
|
)
|
|
Net current period other comprehensive income (loss), net of tax
|
|
(3,062
|
)
|
|
444
|
|
|
(2,618
|
)
|
|
Balance at December 31, 2016
|
|
$
|
(46,977
|
)
|
|
$
|
799
|
|
|
$
|
(46,178
|
)
|
|
Other comprehensive loss, net of tax, before reclassifications
|
|
—
|
|
|
316
|
|
|
316
|
|
|
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
|
|
1,559
|
|
|
—
|
|
|
1,559
|
|
|
Net current period other comprehensive income (loss), net of tax
|
|
1,559
|
|
|
316
|
|
|
1,875
|
|
|
Balance at December 31, 2017
|
|
$
|
(45,418
|
)
|
|
$
|
1,115
|
|
|
$
|
(44,303
|
)
|
Reclassification amounts related to the defined pension plans are included in the computation of net period pension benefit cost (see
Note F
,
Employee Benefit Plans
).
Note M
— Acquisition and Disposition
On
March 4, 2016
, we acquired Aleutian Consulting, Inc. for
$3.5 million
in cash. The results of the acquired business, which now operates as Harte Hanks Consulting, have been included in continuing operations beginning the day of acquisition. The residual purchase price methodology was used for determination of fair value of the tangible assets and goodwill allocation. The calculation relied on management's assumptions, which are considered Level 3 inputs, as they are unobservable
On
March 16, 2015
, we acquired 3Q Digital. The results of the acquired entity have been included in continuing operations beginning the day of acquisition. The fair value of the purchase consideration recognized on acquisition was
$48.2 million
including an initial purchase price of
$30.2 million
in cash and a
$17.9 million
liability for the present value of a contingent consideration included in the agreement. The contingent consideration requires us to pay the former owners an additional sum dependent upon achievement of certain goals up to
$35.0 million
in cash. For the year ending
December 31, 2017
, 3Q Digital had achieved the maximum contingent consideration payout. A portion of the fair value of the purchase consideration is allocated to the tangible and intangible assets transferred based on their estimated fair value at the acquisition date. The acquired intangible assets are as follows: customer relationships of
$4.3 million
(amortized over
seven
years), trade names and trademarks of
$0.3 million
(amortized over
two
years), and non-compete agreements of
$0.2 million
(amortized over
three
years).
The following tables summarize the consideration paid and the amounts of estimated fair value of the assets acquired and liabilities assumed at the acquisition date.
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
Cash consideration per purchase agreement
|
|
$
|
30,245
|
|
|
Estimated fair value of contingent consideration
|
|
17,940
|
|
|
Fair value of total consideration
|
|
$
|
48,185
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
Recognized amounts of tangible assets and liabilities:
|
|
|
|
Current assets
|
|
$
|
4,135
|
|
|
Property and equipment
|
|
164
|
|
|
Other assets
|
|
389
|
|
|
Current liabilities
|
|
(822
|
)
|
|
Other liabilities
|
|
—
|
|
|
Total tangible assets and liabilities
|
|
$
|
3,866
|
|
|
Identifiable intangible assets
|
|
4,773
|
|
|
Goodwill (including deferred tax adjustment of $2,299)
|
|
41,845
|
|
|
Total
|
|
$
|
50,484
|
|
A reconciliation of the beginning and ending accrued balances of the contingent consideration using significant unobservable inputs (Level 3) is as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
Accrued contingent consideration liability as of December 31, 2015
|
|
$
|
20,277
|
|
|
Accretion of interest
|
|
2,430
|
|
|
Adjustments to fair value
|
|
7,018
|
|
|
Accrued contingent consideration liability as of December 31, 2016
|
|
29,725
|
|
|
Accretion of interest
|
|
4,162
|
|
|
Accrued contingent consideration liability as of December 31, 2017
|
|
$
|
33,887
|
|
Adjustments to the fair value of the contingent consideration are recorded within the "Other, net" line in the Consolidated Statements of Comprehensive Income (Loss).
On February 28, 2018, we completed the sale of 3Q Digital to an entity owned by certain former owners of the 3Q Digital business. Consideration for the sale included
$5.0 million
in cash proceeds, subject to certain working capital adjustments, and up to
$5.0 million
in additional consideration if the 3Q Digital business is sold again. The contingent consideration that related to Harte Hanks' acquisition of 3Q Digital in 2015 was assigned to the buyer, therefore relieving Harte Hanks of the obligation. See
Note P
,
Subsequent Events
, for further discussion.
On
April 14, 2015
, Harte Hanks sold its B2B research business. The sale resulted in a pre-tax loss of
$9.5 million
in the second quarter of 2015. The related asset group represented less than
5%
of our total 2014 revenue and did not meet the criteria to be classified as a component of the entity. As such, the related loss on sale is included in continuing operations of the Consolidated Financial Statements. The sale resulted in write-offs of both goodwill and intangible assets allocated to the B2B research business (see
Note E
,
Goodwill and Other Intangible Assets
).
Note N
— Discontinued Operations
On December 23, 2016, we completed the sale of our Trillium business to Syncsort. The decision to sell Trillium was largely based on the prioritization of investments in support of optimizing our clients' customer journey across an omni-channel delivery platform, and the determination that the Trillium business is likely to be a better strategic fit and more valuable asset to other parties. The business was sold for gross proceeds of approximately
$112.0 million
in cash and resulted in a loss on the sale of
$39.9 million
, net of
$4.6 million
of income tax benefit. We believe that the sale of Trillium will allow us to better focus on our core Customer Interaction businesses and moving towards growth.
Because the sale of Trillium represents a strategic shift that has a major effect on our operations and financial results, the results of operations, financial position, and cash flows for Trillium are reported separately as discontinued operations for all periods presented. Results of the remaining Harte Hanks business are reported as continuing operations.
Summarized operating results for the Trillium discontinued operations, through the dates of disposal, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
In thousands
|
|
2017
|
|
2016
|
|
2015
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
45,639
|
|
|
$
|
51,135
|
|
|
|
|
|
|
|
|
|
|
Labor
|
|
—
|
|
|
18,687
|
|
|
22,219
|
|
|
Production and distribution
|
|
—
|
|
|
703
|
|
|
1,404
|
|
|
Advertising, selling, general and administrative
|
|
—
|
|
|
10,255
|
|
|
9,951
|
|
|
Depreciation, software and intangible asset amortization
|
|
—
|
|
|
2,304
|
|
|
1,867
|
|
|
Interest expense, net
|
|
—
|
|
|
7,133
|
|
|
(256
|
)
|
|
Loss on sale
|
|
—
|
|
|
44,529
|
|
|
—
|
|
|
Other, net
|
|
—
|
|
|
(1,207
|
)
|
|
366
|
|
|
Income (loss) from discontinued operations before income taxes
|
|
—
|
|
|
(36,765
|
)
|
|
15,584
|
|
|
Income tax expense
|
|
—
|
|
|
4,394
|
|
|
5,446
|
|
|
Net income (loss) from discontinued operations
|
|
$
|
—
|
|
|
$
|
(41,159
|
)
|
|
$
|
10,138
|
|
Note O
— Selected Quarterly Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
In thousands, except per share amounts
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Revenues
|
|
$
|
94,894
|
|
|
$
|
99,563
|
|
|
$
|
94,722
|
|
|
$
|
97,317
|
|
|
$
|
94,424
|
|
|
$
|
97,425
|
|
|
$
|
99,866
|
|
|
$
|
110,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from continuing operations
|
|
(6,342
|
)
|
|
(8,547
|
)
|
|
(1,791
|
)
|
|
(6,689
|
)
|
|
950
|
|
|
(4,086
|
)
|
|
(33,682
|
)
|
|
(34,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
(8,862
|
)
|
|
(9,278
|
)
|
|
(4,852
|
)
|
|
(8,001
|
)
|
|
(2,098
|
)
|
|
(5,386
|
)
|
|
(35,942
|
)
|
|
(46,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
(7,386
|
)
|
|
(6,700
|
)
|
|
(2,653
|
)
|
|
(5,902
|
)
|
|
(2,480
|
)
|
|
(4,285
|
)
|
|
(29,341
|
)
|
|
(72,891
|
)
|
|
Discontinued operations, net of tax
|
|
—
|
|
|
1,097
|
|
|
—
|
|
|
1,639
|
|
|
—
|
|
|
1,244
|
|
|
—
|
|
|
(45,139
|
)
|
|
Net income (loss)
|
|
$
|
(7,386
|
)
|
|
$
|
(5,603
|
)
|
|
$
|
(2,653
|
)
|
|
(4,263
|
)
|
|
$
|
(2,480
|
)
|
|
$
|
(3,041
|
)
|
|
$
|
(29,341
|
)
|
|
$
|
(118,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.20
|
)
|
|
$
|
(1.09
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(1.12
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.70
|
)
|
|
$
|
(4.73
|
)
|
|
$
|
(11.83
|
)
|
|
Discontinued operations
|
|
$
|
—
|
|
|
$
|
0.18
|
|
|
$
|
—
|
|
|
$
|
0.40
|
|
|
$
|
—
|
|
|
$
|
0.20
|
|
|
$
|
—
|
|
|
$
|
(7.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.20
|
)
|
|
$
|
(1.09
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(1.12
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(0.70
|
)
|
|
$
|
(4.73
|
)
|
|
$
|
(11.83
|
)
|
|
Discontinued operations
|
|
$
|
—
|
|
|
$
|
0.18
|
|
|
$
|
—
|
|
|
0.40
|
|
|
$
|
—
|
|
|
$
|
0.20
|
|
|
$
|
—
|
|
|
$
|
(7.33
|
)
|
Earnings per common share amounts are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share amounts may not equal the quarterly earnings per share amounts or the annual earnings per share amounts due to rounding.
Note P
— Subsequent Events
Amendment to Credit Facility
On January 9, 2018, we entered into an amendment to the Texas Capital Credit Facility that increased the borrowing capacity to
$22 million
and extended the maturity by one year to
April 17, 2020
. The Texas Capital Credit Facility remains secured by substantially all of our assets and continues to be guaranteed by HHS Guaranty, an entity formed by certain members of the descendants of one of our founders. For additional information regarding the amendment to the Texas Capital Credit Facility refer to Note C,
Long-Term Debt
.
Securities Purchase Agreement
On January 23, 2018, we entered into a Securities Purchase Agreement with Wipro, LLC. The agreement consisted of a
$9.9 million
investment in exchange for
9,926
shares of Series A Preferred Stock. Dividends on the Series A Preferred Stock are accrued at a rate of
5.0%
per year or the rate that cash dividends were paid in respect to shares of common stock if such rate is greater than
5.0%
. The aggregate shares issued under the Securities Purchase Agreements are convertible into
16%
of our common stock on a pre-closing basis, priced at
$9.91
per share of common stock.
Along with customary protective provisions, Wipro, LLC will be able to designate an observer or director to the Board. We intend to use the proceeds for general corporate purposes including for working capital purposes.
Since 2016, Wipro, LLC has provided a variety of technology-related service to the Company, including database and software development, database support and analytics, IT infrastructure support, and digital campaign management. Transactions with Wipro, LLC will be classified and disclosed in 2018 as related party transactions in accordance with ASC 850,
Related Party Disclosures
, and in accordance with the SEC's Regulation S-X Rule 4-08(k), as applicable.
Reverse Stock Split
On January 31, 2018, we executed a 1-for-10 reverse stock split. Pursuant to the reverse stock split, every 10 pre-split shares were exchanged for one post-split share of Harte Hanks' Common Stock. For additional information regarding the Reverse Stock Split refer to Note A,
Significant Accounting Policies
.
Sale of 3Q Digital
On February 28, 2018, we sold our 3Q Digital, Inc. subsidiary to an entity owned by certain former owners of the 3Q Digital business. Consideration for the sale included
$5.0 million
in cash proceeds, subject to certain working capital adjustments, and up to
$5.0 million
in additional consideration if the 3Q Digital business is sold again. The
$35.0 million
contingent consideration obligation of the company that related to Harte Hanks' acquisition of 3Q Digital in 2015 was assigned to the buyer, therefore relieving Harte Hanks of the obligation.