Harte Hanks, Inc. and Subsidiaries Notes to Consolidated Financial Statements
Note A — Overview and significant Accounting Policies
Background
Harte Hanks, Inc. (“Harte Hanks,” “Company,” “we,” “our,” or “us”) is a purveyor of data-driven, omni-channel marketing and customer relationship solutions and logistics. The Company has robust capabilities that offer clients the strategic guidance they need across the customer data landscape as well as the executional know-how in database build and management, data analytics, digital media, direct mail, customer contact, client fulfillment and marketing and product logistics. Harte Hanks solves marketing, commerce and logistical challenges for some of the world’s leading brands in North America, Asia-Pacific and Europe.
The Company operates as one reportable segment. Our Chief Executive Officer is considered to be our chief operating decision maker. He reviews our operating results on an aggregate basis for purposes of allocating resources and evaluating financial performance.
Securities Purchase Agreement
On January 23, 2018, we entered into a Securities Purchase Agreement with Wipro, pursuant to which on January 30, 2018, we issued 9,926 shares of Series A Convertible Preferred Stock, par value $1 per share (“Series A Preferred Stock”), for aggregate consideration of $9.9 million. Dividends on the Series A Preferred Stock accrue 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 Preferred Stock issued under the Securities Purchase Agreement are convertible into 1,001,614 shares of our Common Stock. Dividends are payable solely upon a Liquidation (as defined in the Certificate of Designation), and only if prior to such Liquidation such shares of Series A Preferred Stock have not been converted to Common Stock.
Along with customary protective provisions, Wipro has designated an observer to the Board of Directors. We used the proceeds from the issuance for general corporate purposes including working capital purposes.
See Note E, Convertible Preferred Stock, for further information.
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.
Geographic Concentrations
Depending on the needs of our clients, our services are provided through an integrated approach through twenty-one facilities worldwide, of which four are located outside of the U.S.
Information about the operations in different geographic areas:
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|
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|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
In thousands
|
|
2019
|
|
2018
|
Revenue (1)
|
|
|
|
|
|
|
United States
|
|
$
|
182,034
|
|
|
$
|
243,298
|
|
Other countries
|
|
35,543
|
|
|
41,330
|
|
Total revenue
|
|
$
|
217,577
|
|
|
$
|
284,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
In thousands
|
|
2019
|
|
2018
|
Property, plant and equipment (2)
|
|
|
|
|
|
|
United States
|
|
$
|
6,836
|
|
|
$
|
11,647
|
|
Other countries
|
|
1,102
|
|
|
1,945
|
|
Total property, plant and equipment
|
|
$
|
8,323
|
|
|
$
|
13,592
|
|
|
|
(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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Related Party Transactions
Since 2016, we have conducted (and we continue to conduct) business with Wipro, whereby Wipro provides us with a variety of technology-related services, including database and software development, database support and analytics, IT infrastructure support, and digital campaign management. Additionally, we provide Wipro with agency and consulting services.
Effective January 30, 2018, Wipro became a related party when it purchased 9,926 shares of our Series A Preferred Stock (which are convertible at Wipro’s option into 1,001,614 shares, or 16% of our Common Stock as of January 30, 2018), for aggregate consideration of $9.9 million. For information pertaining to the Company’s preferred stock, See Note E, Convertible Preferred Stock.
Consolidation
The accompanying audited consolidated financial statements include the accounts of Harte Hanks, Inc. and subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. As used in this report, the terms “Harte Hanks,” “the Company,” “we,” “us,” or “our” may refer to Harte Hanks, Inc., one or more of its consolidated subsidiaries, or all of them taken as a whole, as the context may require.
Use of Estimates
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 lease accounting; pension accounting; fair value for purposes of assessing long-lived assets for impairment; income taxes; stock-based compensation 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 (Loss) Income
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 upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to be entitled to receive in exchange for those products or services. We apply the following five-step revenue recognition model:
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|
•
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Identification of the contract, or contracts, with a customer
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|
|
•
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Identification of the performance obligations in the contract
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|
|
•
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Determination of the transaction price
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|
|
•
|
Allocation of the transaction price to the performance obligations in the contract
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|
•
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Recognition of revenue when (or as) we satisfy the performance obligation
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Certain client programs provide for adjustments to billings based upon whether we achieve certain performance criteria. In these circumstances, revenue is recognized when the foregoing conditions are met. We record revenue net of any taxes collected from customers and subsequently remitted to governmental authorities. Any payments received in advance of the performance of services or delivery of the product are recorded as deferred revenue until such time as the services are performed or the product is delivered.
Costs incurred for search engine marketing solutions and postage costs of mailings are billed to our clients and are not directly reflected in our revenue.
Revenue from agency and digital services, direct mail, logistics, fulfillment and contact center is recognized as the work is performed. Fees for these services are determined by the terms set forth in the contract 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.
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
|
|
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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|
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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 and restricted cash, accounts receivable, and trade payables, and long-term debt. The fair value of the assets in our funded pension plan is disclosed in Note H, Employee Benefit Plans.
Cash Equivalents
All highly liquid investments with an original maturity of 90 days or less at the time of purchase are considered to be cash equivalents. Cash equivalents are carried at cost, which approximates fair value.
Restricted Cash
In our normal business operation, we receive cash from our customers for certain customer program service funding. As these programs impose legal restrictions on the commingling of funds, we present this cash as restricted cash.
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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|
|
|
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Year Ended December 31,
|
In thousands
|
|
2019
|
|
2018
|
Balance at beginning of year
|
|
$
|
430
|
|
|
$
|
697
|
|
Net charges to expense
|
|
351
|
|
|
131
|
|
Amounts recovered against the allowance
|
|
(115
|
)
|
|
(398
|
)
|
Balance at end of year
|
|
$
|
666
|
|
|
$
|
430
|
|
Inventory
Inventory, consisting primarily of print materials and operating supplies, is stated at the lower of cost (first-in, first-out method) or net realizable value.
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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|
|
|
|
Buildings and improvements
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3
|
to
|
40 years
|
Software
|
2
|
to
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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 recorded a $4.7 million and $4.9 million impairment of long-lived assets in 2019 and 2018, respectively. 2019 impairment charges are included in the restructuring expense in our Consolidated Statements of Comprehensive (Loss) income.
For 2018, capital lease assets are included in property, plant and equipment. Capital lease assets consisted of:
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|
|
|
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In thousands
|
|
December 31, 2018
|
Equipment and furniture
|
|
$
|
2,658
|
|
Less accumulated depreciation
|
|
(920
|
)
|
Net book value
|
|
$
|
1,738
|
|
Leases
We determine if an arrangement is a lease at its inception. Operating and finance leases are included in the lease right-of-use (“ROU”) assets and the current portion and long-term portion of lease obligations on our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease, which are included in the lease ROU asset when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain real estate leases, we account for the lease and non-lease components as a single lease component. See Note B, Recent Accounting Pronouncements - Recently adopted accounting pronouncements.
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 (Loss) Per Share
Basic earnings (loss) per common share are based upon the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) 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 (Loss) income. Calculated expense is based on the fair values of the awards on the date of grant and is recognized over the requisite service period or performance period of the awards.
Reserve for Healthcare, Workers’ Compensation, Automobile, and General Liability
We are self-insured for the majority of our healthcare insurance. We pay actual medical claims up to a stop loss limit of $0.3 million. In the fourth quarter of 2016, we moved to a guaranteed cost program for our workers’ compensation and automobile programs. 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, 2019 and 2018, our reserve for healthcare, workers’ compensation, net, automobile, and general liability was $2.1 million and $2.7 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 (Loss) Income. Periodic changes to the reserve for healthcare are recorded as increases or decreases to employee benefits expense, which is included in the “Labor” line of our Consolidated Statements of Comprehensive Income (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.
Note B - Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, which enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as tax basis step-up in goodwill obtained in a transaction that is not a business combination, ownership changes in investments, and interim-period accounting for enacted changes in tax law. The standard will be effective for us in the fiscal year 2021, although early adoption is permitted. We do not expect that the adoption of this ASU will have a significant impact on our consolidated financial statements.
In April 2019, the FASB issued guidance to amend or clarify certain areas within three previously issued standards related to financial instruments which includes clarification for fair value using the measurement alternative, measuring credit losses and accounting for derivatives and hedging. The amendments in this guidance are largely effective for fiscal years beginning after December 15, 2019 with early adoption permitted. We have not elected early adoption and do not anticipate that this guidance will have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14), which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020, and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2018-14 on our consolidated financial statements.
Recently adopted accounting pronouncements
Income taxes
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU allows for reclassification of stranded tax effects on items resulting from the change in the corporate tax rate as a result of H.R. 1, originally known as the Tax Cuts and Jobs Act of 2017, from accumulated other comprehensive income to retained earnings. Tax effects unrelated to H.R. 1 are permitted to be released from accumulated other comprehensive income using either the specific identification approach or the portfolio approach, based on the nature of the underlying item. ASU 2018-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. We adopted ASU 2018-02 in the first quarter of 2019. See Note I, Income Taxes, for a discussion of the impacts of this ASU.
Stock-based Compensation
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to nonemployee share-based payment accounting, which supersedes ASC 505-50, Accounting for Distributions to Shareholders with Components of Stock and Cash, and expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both non-employees and employees. As a result, most of the guidance in ASC 718 associated with employee share-based payments, including most of its requirements related to classification and measurement, applies to non-employee share-based payment arrangements. The ASU is effective for annual periods beginning after December 15, 2018, and
the interim periods within those fiscal years with early adoption permitted after the entity has adopted ASC 606. This standard was adopted as of January 1, 2019 and did not have a material impact on our consolidated financial statements and related disclosures.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendment ASU 2018-11, which requires all operating leases to be recorded on the balance sheet unless the practical expedient is elected for short-term operating leases. 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, with early adoption permitted. This change is required to be applied using a modified retrospective approach for leases that exist or are entered after the beginning of the earliest comparative period in the financial statements. Full retrospective application is prohibited. In July 2018, the FASB approved an optional transition method to initially account for the impact of the adoption with a cumulative-effect adjustment to the January 1, 2019, rather than the January 1, 2017, financial statements. This will eliminate the need to restate amounts presented prior to January 1, 2019.
We adopted the standard effective January 1, 2019, and we elected the optional transition method and the practical expedients permitted under the transition guidance within the standard. Accordingly, we accounted for our existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contracts contain a lease under ASC Topic 842, (b) whether classification of the operating leases would be different in accordance with ASC Topic 842, or (c) whether the unamortized initial direct costs before transition adjustments (as of December 31, 2018) would have met the definition of initial direct costs in ASC Topic 842 at lease commencement.
The standard had a material impact on our consolidated balance sheets, but did not have an impact on our consolidated statements of comprehensive (loss) income or cash flows from operations. The cumulative effect of the changes on our retained earnings was $22 thousand associated with capital gain. The most significant impact was the recognition of right-of-use (ROU) assets and lease liabilities for operating leases. Our accounting for finance leases remained substantially unchanged. See Note D, Leases for further discussion.
Restricted Cash
In the first quarter of 2019. the Company adopted ASU 2016-18, Statement of Cash flows (Topic 230): Restricted Cash, which enhances and clarifies the guidance on the classification and presentation of restricted cash in the statement of cash flows and requires additional disclosures about restricted cash balances.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). We adopted ASC 606 effective on January 1, 2018 using the modified retrospective method. Please see Note C, Revenue from Contracts with Customers, for the required disclosures related to the impact of adopting this standard and a discussion of our updated policies related to revenue recognition and accounting for costs to obtain and fulfill a customer contract.
Note C - Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. Under ASC 606, Revenue from Contracts with Customers, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that are within the scope of the new standard, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. 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.
Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our contracts with customers state the terms of sale, including the description, quantity, and price of the product or service purchased. Payment terms can vary by contract, but the period between invoicing and when payment is due is not significant. At December 31, 2019 and December 31, 2018, our contracts do not include any significant financing components.
Consistent with legacy GAAP, we present taxes assessed on revenue-producing transactions on a net basis.
Disaggregation of Revenue
We disaggregate revenue by vertical market and key revenue stream. The following table summarizes revenue from contracts with customers for the twelve months ended December 31, 2019 and 2018 by our key vertical markets:
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|
|
|
|
|
|
|
|
|
In thousands
|
|
For the Year Ended December 31, 2019
|
|
For the Year Ended December 31, 2018
|
B2B
|
|
$
|
48,029
|
|
|
$
|
64,026
|
|
Consumer Brands
|
|
46,874
|
|
|
58,382
|
|
Financial Services
|
|
45,978
|
|
|
53,919
|
|
Healthcare
|
|
21,862
|
|
|
19,931
|
|
Retail
|
|
41,505
|
|
|
66,545
|
|
Transportation
|
|
13,329
|
|
|
21,825
|
|
Total Revenues
|
|
$
|
217,577
|
|
|
$
|
284,628
|
|
The nature of the services offered by each key revenue stream are different. The following tables summarize revenue from contracts with customers for the years ended December 31, 2019 and 2018 by our four major revenue streams and the pattern of revenue recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
In thousands
|
|
Revenue for performance obligations recognized
over time
|
|
Revenue for performance obligations recognized at a point in time
|
|
Total
|
Agency & Digital Services
|
|
$
|
24,306
|
|
|
$
|
827
|
|
|
$
|
25,133
|
|
Contact Centers
|
|
61,784
|
|
|
—
|
|
|
61,784
|
|
Database Marketing Solutions
|
|
22,414
|
|
|
3,277
|
|
|
25,691
|
|
Direct Mail, Logistics, and Fulfillment
|
|
88,839
|
|
|
16,130
|
|
|
104,969
|
|
Total Revenues
|
|
$197,343
|
|
$20,234
|
|
$217,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
In thousands
|
|
Revenue for performance obligations recognized
over time
|
|
Revenue for performance obligations recognized at a point in time
|
|
Total
|
Agency & Digital Services
|
|
$
|
34,621
|
|
|
$
|
1,138
|
|
|
$
|
35,759
|
|
Contact Centers
|
|
78,298
|
|
|
—
|
|
|
78,298
|
|
Database Marketing Solutions
|
|
31,684
|
|
|
3,526
|
|
|
35,210
|
|
Direct Mail, Logistics, and Fulfillment
|
|
128,372
|
|
|
6,989
|
|
|
135,361
|
|
Total Revenues
|
|
$272,975
|
|
$11,653
|
|
$284,628
|
Our contracts with customers may consist of multiple performance obligations. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”) basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation. For most performance obligations, we determine SSP based on the price at which the performance obligation is sold separately.
Although uncommon, if the SSP is not observable through past transactions, we estimate the SSP taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Further discussion of other performance obligations in each of our major revenue streams follows:
Agency & Digital Services
Our agency services are full-service, customer engagement agencies specializing in direct and digital communications for both consumer and business-to-business markets. Our digital solutions integrate online services within the marketing mix and include search engine management, display, digital analytics, website development and design, digital strategy, social media, email, e-commerce, and interactive relationship management. Our contracts may include a promise to purchase media or acquire search engine marketing solutions on behalf of our clients; in such cases, we have determined we are an agent, rather than principal and therefore recognize the net consideration as revenue.
Agency and digital services performance obligations are satisfied over time and often offered on a project basis. We have concluded that the best approach of measuring the progress toward completion of the project-based performance obligations is the input method based on costs or labor hours incurred to date dependent upon whether costs or labor hours more accurately depict the transfer of value to the customer.
The variable consideration in these contracts primarily relates to time and material-based services and reimbursable out-of-pocket travel costs, both of which are estimated using the expected value method. For time and material-based contracts, we use the “as invoiced” practical expedient.
Contact Centers
We operate tele-service workstations in the U.S., Asia, and Europe to provide advanced contact center solutions such as: speech, voice and video chat, integrated voice response, analytics, social cloud monitoring, and web self-service.
Performance obligations are stand-ready obligations and satisfied over time. With regard to account management and SaaS, we use a time-elapsed output method. For performance obligations where we charge customers a transaction-based fee, we use the output method based on transaction quantities. In most cases, our contracts provide us the right to invoice for services provided, therefore, we generally use the “as invoiced” practical expedient to recognize revenue associated with these performance obligations unless significant discounts are offered in a contract and prices for services do not represent their standalone selling prices.
The variable consideration in our contracts results primarily from the transaction-based fee structure of some performance obligations with their total transaction quantities to be provided unknown at the onset of a contract, which is estimated using the expected value method.
Database Marketing Solutions
Our solutions are built around centralized marketing databases with services rendered to build custom database, database hosting services, customer or target marketing lists and data processing services.
These performance obligations, including services rendered to build a custom database, database hosting services, professional services, customer or target marketing lists and data processing services, may be satisfied over time or at a point in time. We provide software as a service (“SaaS”) solutions to host data for customers and have concluded that they are stand-ready obligations to be recognized over time on a monthly basis. Our promise to provide certain data related services meets the over-time recognition criteria because our services do not create an asset with an alternative use, and we have an enforceable right to payment. For performance obligations recognized over time, we choose either the input (i.e. labor hour) or output method (i.e. number of customer records) to measure the progress toward completion depending on the nature of the services provided. Some of our other data-related services do not meet the over-time criteria and are therefore, recognized at a point-in-time, typically upon the delivery of a specific deliverable.
We charge our customers for certain data-related services at a fixed transaction-based rate, e.g., per thousand customer records processed. Because the quantity of transactions is unknown at the onset of a contract, our transaction price is variable, and we use the expected value method to estimate the transaction price. The uncertainty associated with the variable consideration generally resolves within a short period of time since the duration of these contracts is generally less than two months.
Direct Mail, Logistics, and Fulfillment
Our services include digital printing, print on demand, advanced mail optimization, logistics and transportation optimization, tracking, commingling, shrink wrapping, and specialized mailings. We also maintain fulfillment centers where we provide custom kitting services, print on demand, product recalls, and freight optimization allowing our customers to distribute literature and other marketing materials.
The majority of performance obligations offered within this revenue stream are satisfied over time and utilize the input or output method, depending on the nature of the service, to measure progress toward satisfying the performance obligation. For performance obligations where we charge customers a transaction-based fee, we utilize the output method based on the quantities fulfilled. Services provided through our fulfillment centers are typically priced at a per transaction basis and our contracts provide us the right to invoice for services provided and reflects the value to the customer of the services transferred to date. In most cases, we use the “as invoiced” practical expedient to recognize revenue associated with these performance obligations unless significant discounts are offered in a contract and prices for services do not represent their standalone selling prices. For our direct mail revenue stream, our contracts may include a promise to purchase postage on behalf of our clients; in such cases, we have determined we are an agent, rather than principal and therefore recognize net consideration as revenue.
The variable consideration in our contracts results primarily from the transaction-based fee structure of some performance obligations with their total transaction quantities to be provided unknown at the onset of a contract, which is estimated using the expected value method.
Upfront Non-Refundable Fees
We may receive non-refundable upfront fees from customers for implementation of our SaaS database solutions products or for providing training in connection with our contact center solutions. These activities are not deemed to transfer a separate promised service and therefore, represent advanced payments. Where customers have an option to renew a contract, the customer is not required to pay similar upfront fees upon renewal. As a result, we have determined that these renewal options provide for the purchase of future services at a reduced rate and therefore, provide a material right. These upfront non-refundable fees are recognized over the period of benefit which is generally consistent with estimated customer life (four to five years for database solutions contracts and six months to one year for contact center contracts). The balance of upfront non-refundable fees collected from customers was immaterial as of December 31, 2019 and 2018.
Transaction Price Allocated to Future Performance Obligations
We have elected to apply certain optional exemptions that limit the disclosure requirements over remaining performance obligations at period end to exclude: performance obligations that have an original expected duration of one year or less, transactions using the “as invoiced” practical expedient, or when a performance obligation is a series and we have allocated the variable consideration directly to the services performed. After considering the above exemptions, the transaction prices allocated to unsatisfied or partially satisfied performance obligations as of December 31, 2019 totaled $0.1 million, which is expected to be recognized in 2020.
Contract Balances
We record a receivable when revenue is recognized prior to invoicing when we have an unconditional right to consideration (only the passage of time is required before payment of that consideration is due) and a contract asset when the right to payment is conditional upon our future performance such as delivery of an additional good or service (e.g. customer contract requires customer’s final acceptance of custom database solution or delivery of final marketing strategy delivery presentation before customer payment is required). If invoicing occurs prior to revenue recognition, the unearned revenue is presented on our Consolidated Balance Sheet as a contract liability, referred to as deferred revenue. The following table summarizes our contract balances as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
December 31, 2019
|
|
December 31, 2018
|
Contract assets
|
|
$
|
805
|
|
|
$
|
2,362
|
|
Deferred revenue and customer advances
|
|
4,397
|
|
|
6,034
|
|
Deferred revenue included in other long-term liabilities
|
|
886
|
|
|
578
|
|
Revenue recognized during the year ended December 31, 2019 from amounts included in deferred revenue at the beginning of the period was approximately $4.3 million.
Costs to Obtain and Fulfill a Contract
We recognize an asset for the direct costs incurred to obtain and fulfill our contracts with customers to the extent that we expect to recover these costs and if the benefit is longer than one year. These costs are amortized to expense over the expected period of benefit in a manner that is consistent with the transfer of the related goods or services to which the asset relates. We capitalized a portion of commission expense, implementation and other costs that represents the cost to obtain and fulfill a contract. The remaining unamortized contract costs were $1.9 million and $3.8 million as of December 31, 2019 and 2018. For the years presented, $0.1 million impairment was recognized in Q4 2018.
Note D - Leases
On January 1, 2019, the Company adopted Topic 842 using the modified retrospective approach with optional transition method. The Company recorded operating lease assets (right-of-use assets) of $22.8 million and operating lease liabilities of $23.9 million. There was minimal impact to retained earnings upon adoption of Topic 842.
We have operating and finance leases for corporate and business offices, service facilities, call centers and certain equipment. Leases with an initial term of 12 months or less are generally not recorded on the balance sheet, unless the arrangement includes an option to purchase the underlying asset, or an option to renew the arrangement, that we are reasonably certain to exercise (short-term leases). Our leases have remaining lease terms of 1 year to 6 years, some of which may include options to extend the leases for up to 5 years, and some of which may include options to terminate the leases within 1 year.
As of December 31, 2019, assets recorded under finance and operating leases were approximately $1.1 million and $17.7 million respectively, and accumulated amortization associated with finance leases was $0.4 million. Operating lease right of use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The discount rate used to determine the commencement date present value of lease payment is the interest rate implicit in the lease, or when that is not readily determinable, we utilized our incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.
The following table presents supplemental balance sheet information related to our financing and operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
As of December 31, 2019
|
|
|
|
|
Operating Leases
|
|
|
Finance Leases
|
|
|
Total
|
|
Right-of-use Assets
|
|
$
|
17,679
|
|
|
$
|
1,138
|
|
|
$
|
18,817
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Short-term lease liabilities
|
|
7,226
|
|
|
390
|
|
|
7,616
|
|
Long-term lease liabilities
|
|
12,514
|
|
|
564
|
|
|
13,078
|
|
Total Lease Liabilities
|
|
$
|
19,740
|
|
|
$
|
954
|
|
|
$
|
20,694
|
|
For the year ended December 31, 2019, the components of lease expense were as follows:
|
|
|
|
|
|
In thousands
|
|
Year Ended December 31, 2019
|
Operating lease cost
|
|
$
|
9,251
|
|
|
|
|
Finance lease cost
|
|
|
Amortization of right-of-use assets
|
|
298
|
|
Interest on lease liabilities
|
|
70
|
|
Total Finance lease cost
|
|
368
|
|
Variable lease cost
|
|
2,797
|
|
Total lease cost
|
|
$
|
12,416
|
|
Other information related to leases was as follows:
|
|
|
|
|
|
In thousands
|
|
Year Ended December 31, 2019
|
Supplemental Cash Flows Information
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
|
$
|
17,986
|
|
Operating cash flows from finance leases
|
|
66
|
|
Financing cash flows from finance leases
|
|
461
|
|
|
|
|
Weighted Average Remaining Lease term
|
|
|
|
|
|
Operating leases
|
|
3.29
|
|
Finance leases
|
|
3.15
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
Operating leases
|
|
4.71
|
%
|
Finance leases
|
|
6.81
|
%
|
The maturities of the Company’s finance and operating lease liabilities as of December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Operating Leases
|
|
|
Finance Leases
|
|
Year Ending December 31,
|
|
|
|
|
2020
|
|
$
|
7,934
|
|
|
$
|
431
|
|
2021
|
|
5,838
|
|
|
238
|
|
2022
|
|
3,957
|
|
|
189
|
|
2023
|
|
2,193
|
|
|
151
|
|
2024
|
|
1,274
|
|
|
35
|
|
2025
|
|
123
|
|
|
—
|
|
Total future minimum lease payments
|
|
21,319
|
|
|
1,044
|
|
Less: Imputed interest
|
|
1,579
|
|
|
90
|
|
Total lease liabilities
|
|
$
|
19,740
|
|
|
$
|
954
|
|
As previously disclosed in our 2018 10-K and under the previous lease accounting standard, ASC 840, Leases, the total commitment for non-cancelable operating and finance leases was $35.0 million and $1.4 million as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Operating Leases
|
|
Finance Leases
|
Year Ending December 31,
|
|
|
|
|
2019
|
|
$
|
9,645
|
|
|
$
|
748
|
|
2020
|
|
8,815
|
|
|
307
|
|
2021
|
|
7,425
|
|
|
131
|
|
2022
|
|
5,456
|
|
|
133
|
|
2023
|
|
2,349
|
|
|
104
|
|
Thereafter
|
|
1,328
|
|
|
—
|
|
Total future minimum lease payments
|
|
$
|
35,018
|
|
|
$
|
1,423
|
|
As of December 31, 2019, we have one additional operating lease that has not yet commenced.
Note E - Convertible Preferred Stock
Our Amended and Restated Certificate of Incorporation authorizes us to issue 1.0 million shares of preferred stock (“Preferred Stock”). On January 30, 2018, we issued 9,926 shares of our Series A Preferred Stock to Wipro, LLC (as further described in Note A above under the heading “Securities Purchase Agreement”) at an issue price of $1.00 per share, for gross proceeds of $9.9 million pursuant to a Certificate of Designation filed with the State of Delaware on January 29, 2018. We incurred $0.2 million of transaction fees in connection with the issuance of the Series A Preferred Stock which are netted against the gross proceeds of $9.9 million on our Consolidated Financial Statements.
Series A Preferred Stock has the following rights and privileges:
Liquidation Rights
In the event of a liquidation, dissolution or winding down of the Company or a Fundamental Transaction (defined in the Certificate of Designation for the Series A Preferred Stock), whether voluntary or involuntary, the holders of the Series A Preferred Stock are entitled to receive, prior to and in preference to the holders of common stock, from the assets of the Company available for distribution, an amount equal to the greater of (i) the original issue price, plus any dividends accrued but unpaid thereon, and (ii) such amount per share as would have been payable had all shares of Series A Preferred Stock been converted into Common Stock immediately before such liquidation.
Upon liquidation, after the payment of all preferential amounts required to be paid to the holders of Series A Preferred Stock, the remaining assets of the Company available for distribution to its stockholders shall be distributed among the holders of Common Stock.
Dividends
Upon liquidation, dissolution or winding down of the Company, or a Fundamental Transaction, shares of Series A Preferred Stock which have not been otherwise converted to Common Stock, shall be entitled to receive dividends that accrue at a rate of (i) 5% each year, or (ii) the rate that cash dividends were paid in respect of common stock (with Series A Preferred Stock being paid on an as-converted basis in such case) for such year if such rate is greater than 5.0%. Dividends on the Series A Preferred Stock are cumulative and accrue to the holders thereof whether or not declared by the Board of Directors. Dividends are payable solely upon a Liquidation (as defined in the Certificate of Designation), and only if prior to such Liquidation such shares of Series A Preferred Stock have not been converted to Common Stock. As of December 31, 2019, cumulative dividends payable to the holders of Series A Preferred Stock upon a Liquidation totaled $1.0 million or $96.0 per share of Series A Preferred Stock.
Conversion
At the option of the holders of Series A Preferred Stock, shares of Series A Preferred Stock may be converted into Common Stock at a rate of 100.91 shares of Common Stock for one share of Series A Preferred Stock, subject to certain future adjustments.
Voting and Other Rights
The Series A Preferred Stock does not have voting rights, except as otherwise required by law. Other rights afforded the holders of Series A Preferred Stock, under defined circumstances, include the election and removal of one member of the Board of Directors as a separate voting class, the ability to approve certain actions of the Company prior to execution, and preemptive rights to participate in any future issuances of new securities. In addition, under certain circumstances, the holder of the Series A Preferred Stock is entitled to appoint an observer to our Board of Directors. The holder of the Series A Preferred Stock has elected to exercise its observer appointment rights but not its right to appoint the board member.
We determined that the Series A Preferred Stock has contingent redemption provisions allowing redemption by the holder upon certain defined events. As the event that may trigger the redemption of the Series A Preferred Stock is not solely within our control, the Series A Preferred Stock is classified as mezzanine equity (temporary equity) in the Consolidated Balance Sheet as of December 31, 2019.
Note F — Long-Term Debt
As of December 31, 2019 and 2018, we had $18.7 million and $14.2 million of borrowing outstanding under the Texas Capital Facility (as defined herein). As of December 31, 2019, we had the ability to borrow an additional $1.6 million under the facility,
Credit Facilities
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”) and letters of credit issued by Texas Capital Bank up to $5 million. The Texas Capital Credit Facility is being used for general corporate purposes. The Texas Capital Credit Facility is secured by substantially all of the Company’s assets and its domestic subsidiaries. The Texas Capital Credit Facility 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).
Under the Texas Capital Credit Facility, we can elect to accrue interest on outstanding principal balances at either LIBOR plus 1.95% or prime plus 0.75%. Unused commitment balances accrue interest at 0.50%. We are required to pay a quarterly fee of $0.1 million as consideration for the guarantee provided by HHS Guaranty, LLC.
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. The Company has been in compliance of all the requirements.
The Texas Capital Credit Facility originally had an expiration date of April 17, 2019, at which point all outstanding amounts would have been due. 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. On May 7, 2019, we entered into an amendment
to the Texas Capital Credit Facility which further extended the maturity of the facility by one year to April 17, 2021. The Texas Capital Credit Facility remains secured by substantially all of our assets and continues to be guaranteed by HHS Guaranty, LLC.
At December 31, 2019, we had letters of credit outstanding in the amount of $2.8 million. No amounts were drawn against these letters of credit at December 31, 2019. These letters of credit exist to support insurance programs relating to workers’ compensation, automobile, and general liability.
Cash payments for interest were $0.9 million and $0.2 million for the years ended December 31, 2019 and 2018, respectively.
Note G — 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 (Loss) Income. For the years ended December 31, 2019 and 2018, we recorded total stock-based compensation expense (income) from operations of $1.1 million and $(0.6) million, respectively.
We granted equity awards to our Chief Executive Officer, Chief Financial Officer and Chief Operations Officer in 2019 and 2018, 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. In August 2018, we filed S-8 to increase the total registered shares under 2013 Plan to 553,673 shares. As of December 31, 2019 and 2018, there were 18.1 thousand and 0.2 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 tenth anniversary of their date of grant. Options to purchase 70 thousand shares granted under 2013 Plan awards were outstanding at December 31, 2019, with exercise prices ranging from $1.57 to $119.00 per share. There is no option outstanding to purchase inducement awards at December 31, 2019.
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 56 thousand shares were outstanding under the 2005 Plan as of December 31, 2019, with exercise prices ranging from $9.70 to $123.10 per share.
Options granted to officers after April 2015 vest in full upon a change in control if such options are not assumed or replaced by a publicly traded successor with an equivalent award (as defined in such officers’ change in control severance agreements). Additionally, 25% of the inducement options granted to the former 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). However, following the August 2018 resignation of our former CEO, her unvested stock option was forfeited according to her separation agreement with the Company and resulted in $0.1 million credit to stock compensation expense.
The following summarizes all stock option activity during the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted- Average
Remaining Contractual
Term (Years)
|
|
Aggregate
Intrinsic Value (Thousands)
|
Options outstanding at December 31, 2017
|
|
308,967
|
|
|
$
|
60.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted in 2018
|
|
14,821
|
|
|
7.40
|
|
|
|
|
|
|
Exercised in 2018
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Unvested options forfeited in 2018
|
|
(61,286
|
)
|
|
37.13
|
|
|
|
|
|
|
Vested options expired in 2018
|
|
(91,133
|
)
|
|
68.28
|
|
|
|
|
|
|
Options outstanding at December 31, 2018
|
|
171,369
|
|
|
$
|
60.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted in 2019
|
|
31,906
|
|
|
1.57
|
|
|
|
|
|
|
Exercised in 2019
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Unvested options forfeited in 2019
|
|
(25,392
|
)
|
|
10.00
|
|
|
|
|
|
|
Vested options expired in 2019
|
|
(51,187
|
)
|
|
59.84
|
|
|
|
|
|
|
Options outstanding at December 31, 2019
|
|
126,696
|
|
|
$
|
57.48
|
|
|
5.21
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2019
|
|
126,696
|
|
|
$
|
57.48
|
|
|
5.21
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2019
|
|
83,674
|
|
|
$
|
85.45
|
|
|
3.08
|
|
—
|
|
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, 2019. The pre-tax intrinsic value is the difference between the closing price of our common stock on December 31, 2019 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, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
Exercise Prices
|
|
Number
Outstanding
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining Life (Years)
|
|
Number
Exercisable
|
|
Weighted-Average
Exercise Price
|
$
|
1.57
|
|
-
|
7.40
|
|
46,727
|
|
|
$
|
3.42
|
|
|
9.32
|
|
3,705
|
|
|
$
|
7.40
|
|
$
|
9.70
|
|
-
|
72.50
|
|
4,000
|
|
|
72.50
|
|
|
2.72
|
|
4,000
|
|
|
72.50
|
|
$
|
76.80
|
|
-
|
119.00
|
|
73,569
|
|
|
88.86
|
|
|
2.87
|
|
73,569
|
|
|
88.86
|
|
$
|
123.10
|
|
-
|
123.10
|
|
2,400
|
|
|
123.10
|
|
|
1.10
|
|
2,400
|
|
|
123.10
|
|
|
|
|
|
126,696
|
|
|
$
|
57.48
|
|
|
5.21
|
|
83,674
|
|
|
$
|
85.45
|
|
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 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
Expected term (in years)
|
|
5.50
|
|
|
5.23
|
|
Expected stock price volatility
|
|
40.53
|
%
|
|
55.07
|
%
|
Risk-free interest rate
|
|
1.86
|
%
|
|
2.96
|
%
|
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.
The weighted-average fair value of options granted during 2019 and 2018 was $1.67 and $3.55, respectively. As of December 31, 2019, there was $0.1 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 1.74 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 and expire after 10 years. 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, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
Weighted-
Average
Grant Price
|
|
Weighted-Average
Remaining
Contractual Term
(Years)
|
Cash stock appreciation rights outstanding at December 31, 2017
|
|
86,618
|
|
|
$
|
9.70
|
|
|
9.48
|
|
|
|
|
|
|
|
Granted in 2018
|
|
—
|
|
|
—
|
|
|
|
Exercised in 2018
|
|
—
|
|
|
—
|
|
|
|
Expired in 2018
|
|
(11,090
|
)
|
|
9.70
|
|
|
|
Forfeited in 2018
|
|
(62,852
|
)
|
|
9.70
|
|
|
|
Cash stock appreciation rights outstanding at December 31, 2018
|
|
12,676
|
|
|
$
|
9.70
|
|
|
8.48
|
|
|
|
|
|
|
|
Granted in 2019
|
|
—
|
|
|
—
|
|
|
|
Exercised in 2019
|
|
—
|
|
|
—
|
|
|
|
Expired in 2018
|
|
—
|
|
|
—
|
|
|
|
Forfeited in 2019
|
|
—
|
|
|
—
|
|
|
|
Cash stock appreciation rights outstanding at December 31, 2019
|
|
12,676
|
|
|
$
|
9.70
|
|
|
7.48
|
|
|
|
|
|
|
|
Vested balance at December 31, 2019
|
|
6,338
|
|
|
$
|
9.70
|
|
|
7.48
|
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, 2019, there was no unrecognized compensation cost related to unvested cash stock appreciation right grants.
Restricted Stock Units
Restricted stock units granted as inducement awards or under the 2013 Plan vest in three equal increments on the first three anniversaries of their date of grant. Restricted stock units settle in treasury stock and are treated as equity. Outstanding restricted stock units granted to officers as inducement awards or under the 2013 Plan vest in full (to the extent not previously vested) upon a change in control if such unvested shares are not assumed or replaced by a publicly-traded successor with an equivalent award (as such terms are defined in such officers’ change-in-control severance agreements).
The following summarizes all restricted stock units’ activity during 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
Unvested shares outstanding at December 31, 2017
|
|
201,222
|
|
|
$
|
15.23
|
|
|
|
|
|
|
Granted in 2018
|
|
72,549
|
|
|
9.51
|
|
Vested in 2018
|
|
(56,219
|
)
|
|
19.28
|
|
Forfeited in 2018
|
|
(110,137
|
)
|
|
14.54
|
|
Unvested shares outstanding at December 31, 2018
|
|
107,415
|
|
|
$
|
9.98
|
|
|
|
|
|
|
Granted in 2019
|
|
383,569
|
|
|
3.26
|
|
Vested in 2019
|
|
(39,858
|
)
|
|
9.65
|
|
Forfeited in 2019
|
|
(22,835
|
)
|
|
10.07
|
|
Unvested shares outstanding at December 31, 2019
|
|
428,291
|
|
|
$
|
3.99
|
|
The fair value of each restricted stock unit is estimated on the date of grant as the closing market price of our common stock on the date of grant. As of December 31, 2019, there was $1.1 million of total unrecognized compensation cost related to restricted stock units. This cost is expected to be recognized over a weighted average period of approximately 1.69 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 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
Weighted-
Average Grant
Date Fair Value
|
Phantom stock units outstanding at December 31, 2017
|
|
82,037
|
|
|
$
|
15.92
|
|
|
|
|
|
|
Granted in 2018
|
|
—
|
|
|
—
|
|
Vested in 2018
|
|
(19,992
|
)
|
|
17.85
|
|
Forfeited in 2018
|
|
(29,234
|
)
|
|
16.32
|
|
Phantom stock units outstanding at December 31, 2018
|
|
32,811
|
|
|
$
|
14.39
|
|
|
|
|
|
|
Granted in 2019
|
|
—
|
|
|
—
|
|
Vested in 2019
|
|
(11,449
|
)
|
|
16.01
|
|
Forfeited in 2019
|
|
(6,542
|
)
|
|
13.49
|
|
Phantom stock units outstanding at December 31, 2019
|
|
14,820
|
|
|
$
|
13.55
|
|
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, 2019, there was $48 thousand of total unrecognized compensation cost related to phantom stock units. This cost is expected to be recognized over a weighted average period of approximately 1.30 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 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
Weighted-
Average Grant-Date Fair Value
|
Performance stock units outstanding at December 31, 2017
|
|
163,060
|
|
|
$
|
15.59
|
|
|
|
|
|
|
Granted in 2018
|
|
11,904
|
|
|
8.40
|
|
Settled in 2018
|
|
—
|
|
|
—
|
|
Forfeited in 2018
|
|
(136,435
|
)
|
|
16.40
|
|
Performance stock units outstanding at December 31, 2018
|
|
38,529
|
|
|
$
|
10.50
|
|
|
|
|
|
|
Granted in 2019
|
|
417,035
|
|
|
2.67
|
|
Settled in 2019
|
|
—
|
|
|
—
|
|
Forfeited in 2019
|
|
(247,635
|
)
|
|
3.36
|
|
Performance stock units outstanding at December 31, 2019
|
|
207,929
|
|
|
$
|
3.27
|
|
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, 2019, there was $0.5 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 6.60 years.
Cash Performance Stock Units
In 2016 and 2017, the Board of Directors approved grants of cash performance stock units under the 2013 Plan. Cash performance stock units are a form of share-based award similar to phantom stock units, except that the number of units ultimately issued is based on our performance against specific performance goals measured after a three-year period. At the end of the performance period, the number of units vesting will be determined in accordance with specified performance target(s) in a range between 0% and 100%. Cash performance stock units settle solely in cash and are treated as a liability. Upon a change in control, cash performance stock units granted to officers vest on a pro-rated basis (based on time elapsed from the grant) to the extent not previously settled if they are not assumed or replaced by a publicly-traded successor with an equivalent award (as such terms are defined in such officers’ change-in-control severance agreements).
The following summarizes all performance stock unit activity during 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average Grant-Date Fair Value
|
Cash performance stock units outstanding at December 31, 2017
|
|
150,506
|
|
|
$
|
14.63
|
|
|
|
|
|
|
Granted in 2018
|
|
—
|
|
|
—
|
|
Settled in 2018
|
|
—
|
|
|
—
|
|
Forfeited in 2018
|
|
(146,728
|
)
|
|
14.32
|
|
Cash performance stock units outstanding at December 31, 2018
|
|
3,778
|
|
|
$
|
26.90
|
|
|
|
|
|
|
Granted in 2019
|
|
—
|
|
|
—
|
|
Settled in 2019
|
|
—
|
|
|
—
|
|
Forfeited in 2019
|
|
(3,778
|
)
|
|
26.90
|
|
Cash performance stock units outstanding at December 31, 2019
|
|
—
|
|
|
$
|
—
|
|
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, 2019, there was no unrecognized compensation cost related to cash performance stock units.
Note H — Employee Benefit Plans
Prior to January 1, 1999, we provided a defined benefit pension plan for which most of our employees were eligible to participate (the “Qualified Pension Plan”). In conjunction with significant enhancements to our 401(k) plan, we elected to freeze benefits under the Qualified Pension Plan as of December 31, 1998.
In 1994, we adopted a non-qualified, unfunded, supplemental pension plan (the “Restoration Pension Plan”) covering certain employees, which provides for incremental pension payments so that total pension payments equal those amounts that would have been payable from the principal pension plan were it not for limitations imposed by income tax regulation. The benefits under the Restoration Pension Plan were intended to provide benefits equivalent to our Qualified Pension Plan as if such plan had not been frozen. We elected to freeze benefits under the Restoration Pension Plan as of April 1, 2014.
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
|
|
2019
|
|
2018
|
Change in benefit obligation
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
171,761
|
|
|
$
|
187,036
|
|
Interest cost
|
|
7,254
|
|
|
6,740
|
|
Actuarial (gain) loss
|
|
21,174
|
|
|
(12,021
|
)
|
Benefits paid
|
|
(10,382
|
)
|
|
(9,994
|
)
|
Benefit obligation at end of year
|
|
$
|
189,807
|
|
|
$
|
171,761
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
107,862
|
|
|
126,013
|
|
Actual return on plan assets
|
|
16,742
|
|
|
(9,847
|
)
|
Contributions
|
|
3,870
|
|
|
1,690
|
|
Benefits paid
|
|
(10,382
|
)
|
|
(9,994
|
)
|
Fair value of plan assets at end of year
|
|
$
|
118,092
|
|
|
$
|
107,862
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(71,715
|
)
|
|
$
|
(63,899
|
)
|
The following amounts have been recognized in the Consolidated Balance Sheets at December 31:
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2019
|
|
2018
|
Other current liabilities
|
|
$
|
1,715
|
|
|
$
|
1,685
|
|
Pensions
|
|
70,000
|
|
|
62,214
|
|
Total
|
|
$
|
71,715
|
|
|
$
|
63,899
|
|
The following amounts have been recognized in accumulated other comprehensive loss, net of tax, at December 31:
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2019
|
|
2018
|
Net loss
|
|
$
|
63,887
|
|
|
$
|
46,584
|
|
Based on current estimates, we will be required to make $6.4 million contributions to our Qualified Pension Plan in 2020.
We are not required to make and do not intend to make any contributions to our Restoration Pension Plan in 2020 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 2020.
The following information is presented for pension plans with an accumulated benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2019
|
|
2018
|
Projected benefit obligation
|
|
$
|
189,807
|
|
|
$
|
171,761
|
|
Accumulated benefit obligation
|
|
$
|
189,807
|
|
|
$
|
171,761
|
|
Fair value of plan assets
|
|
$
|
118,092
|
|
|
$
|
107,862
|
|
The Restoration Pension Plan had an accumulated benefit obligation of $27.6 million and $25.3 million at December 31, 2019 and 2018, 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
|
|
2019
|
|
2018
|
Net Periodic Benefit Cost (Pre-Tax)
|
|
|
|
|
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
|
$
|
7,254
|
|
|
$
|
6,740
|
|
Expected return on plan assets
|
|
(4,446
|
)
|
|
(6,094
|
)
|
Recognized actuarial loss
|
|
2,930
|
|
|
2,754
|
|
Net periodic benefit cost
|
|
5,738
|
|
|
3,400
|
|
|
|
|
|
|
Amounts Recognized in Other Comprehensive (Loss) income (Pre-Tax)
|
|
|
|
|
|
|
Net loss
|
|
5,948
|
|
|
1,166
|
|
|
|
|
|
|
Net cost recognized in net periodic benefit cost and other comprehensive (Loss) income
|
|
$
|
11,686
|
|
|
$
|
4,566
|
|
The components of net periodic benefit costs other than the service cost component are included in Other, net in our Consolidated Statement of Comprehensive (Loss) income. 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 2020 is $3.6 million. The period over which the net loss from the Qualified Pension Plan is amortized into net periodic benefit cost was the average future lifetime of all participants (approximately 19.7 years). The Qualified Pension Plan is frozen and almost all of the plan’s participants are not active employees.
The weighted-average assumptions used for measurement of the defined pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2019
|
|
2018
|
Weighted-average assumptions used to determine net periodic benefit cost
|
|
|
|
|
|
|
Discount rate
|
|
4.35
|
%
|
|
3.67
|
%
|
Expected return on plan assets
|
|
4.25
|
%
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Weighted-average assumptions used to determine benefit obligations
|
|
|
|
|
|
|
Discount rate
|
|
3.20
|
%
|
|
4.35
|
%
|
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, 2019 and 2018, by asset category, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
2019
|
|
%
|
|
2018
|
|
%
|
Equity securities
|
|
$
|
68,563
|
|
|
58
|
%
|
|
$
|
71,384
|
|
|
66
|
%
|
Debt securities
|
|
43,622
|
|
|
37
|
%
|
|
22,134
|
|
|
21
|
%
|
Other
|
|
5,907
|
|
|
5
|
%
|
|
14,344
|
|
|
13
|
%
|
Total plan assets
|
|
$
|
118,092
|
|
|
100
|
%
|
|
$
|
107,862
|
|
|
100
|
%
|
The fair values presented have been prepared using values and information available as of December 31, 2019 and 2018.
The following tables present the fair value measurements of the assets in our funded pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
December 31,
2019
|
|
Quoted Prices
in Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Equity securities
|
|
$
|
68,563
|
|
|
$
|
68,563
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Debt securities
|
|
43,622
|
|
|
39,380
|
|
|
4,242
|
|
|
—
|
|
Total investments, excluding investments valued at NAV
|
|
112,185
|
|
|
107,943
|
|
|
4,242
|
|
|
—
|
|
Investments valued at NAV (1)
|
|
5,907
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total plan assets
|
|
$
|
118,092
|
|
|
$
|
107,943
|
|
|
$
|
4,242
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
December 31, 2018
|
|
Quoted Prices
in Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Equity securities
|
|
$
|
71,384
|
|
|
$
|
71,384
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Debt securities
|
|
22,134
|
|
|
22,134
|
|
|
—
|
|
|
—
|
|
Total investments, excluding investments valued at NAV
|
|
93,518
|
|
|
93,518
|
|
|
—
|
|
|
—
|
|
Investments valued at NAV (1)
|
|
14,344
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total plan assets
|
|
$
|
107,862
|
|
|
$
|
93,518
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(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
|
Equities
|
|
65.0
|
%
|
|
50
|
%
|
-
|
70%
|
|
|
U.S. Large Cap
|
|
30.0
|
%
|
|
20
|
%
|
-
|
40%
|
|
S&P 500 TR
|
U.S. Mid Cap
|
|
10.0
|
%
|
|
0
|
%
|
-
|
15%
|
|
Russell Mid Cap Index TR
|
U.S. Small Cap
|
|
5.0
|
%
|
|
0
|
%
|
-
|
10%
|
|
Russell 2000 TR
|
International - Developed
|
|
15.0
|
%
|
|
0
|
%
|
-
|
25%
|
|
MSCI World ex US Net
|
Emerging Markets
|
|
5.0
|
%
|
|
0
|
%
|
|
8%
|
|
MSCI EMF TR Net EmrgMrkts
|
Fixed Income
|
|
35.0
|
%
|
|
1
|
%
|
-
|
40%
|
|
BBG BARC US Aggregate Bond Index
|
Investment Grade
|
|
35.0
|
%
|
|
1
|
%
|
-
|
40%
|
|
|
International Developed Bonds
|
|
0
|
%
|
|
0
|
%
|
|
5%
|
|
|
High Yield
|
|
0
|
%
|
|
0
|
%
|
|
5%
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019 are as follows:
|
|
|
|
|
|
In thousands
|
|
|
2020
|
|
$
|
10,414
|
|
2021
|
|
10,628
|
|
2022
|
|
10,967
|
|
2023
|
|
11,245
|
|
2024
|
|
11,378
|
|
2025-2029
|
|
57,995
|
|
Total
|
|
$
|
112,627
|
|
We also sponsored a 401(k) - retirement plan in which we matched a portion of employees’ voluntary before-tax contributions prior to 2018. Under this plan, both employee and matching contributions vest immediately. We stopped this 401(k) match program in 2018. Total 401(k) expense for these matching payments recognized was $0.0 million and $0.4 million for years ending December 31, 2019 and 2018.
Note I — Income Taxes
The components of income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
In thousands
|
|
2019
|
|
2018
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
216
|
|
|
$
|
(18,194
|
)
|
State and local
|
|
504
|
|
|
314
|
|
Foreign
|
|
37
|
|
|
1,413
|
|
Total current
|
|
$
|
757
|
|
|
$
|
(16,467
|
)
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
Federal
|
|
$
|
623
|
|
|
$
|
(470
|
)
|
State and local
|
|
(96
|
)
|
|
(181
|
)
|
Foreign
|
|
469
|
|
|
(994
|
)
|
Total deferred
|
|
$
|
996
|
|
|
$
|
(1,645
|
)
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
1,753
|
|
|
$
|
(18,112
|
)
|
The U.S. and foreign components of loss before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
In thousands
|
|
2019
|
|
2018
|
United States
|
|
$
|
(29,003
|
)
|
|
$
|
(4,873
|
)
|
Foreign
|
|
4,492
|
|
|
4,311
|
|
Total loss from operations before income taxes
|
|
$
|
(24,511
|
)
|
|
$
|
(562
|
)
|
The differences between total income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate of 21% to (loss) income before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
In thousands
|
|
2019
|
|
2018
|
Computed expected income tax benefit
|
|
$
|
(5,147
|
)
|
|
$
|
(118
|
)
|
Basis difference on sale of 3Q Digital
|
|
—
|
|
|
(11,937
|
)
|
Net effect of state income taxes
|
|
(509
|
)
|
|
(388
|
)
|
Foreign subsidiary dividend inclusions
|
|
1,083
|
|
|
2,781
|
|
Foreign tax rate differential
|
|
(268
|
)
|
|
189
|
|
Change in valuation allowance
|
|
6,085
|
|
|
3,383
|
|
Loss from deemed liquidation of foreign subsidiary
|
|
—
|
|
|
(4,242
|
)
|
Rate Benefit from Carryback of Capital Loss
|
|
—
|
|
|
(6,452
|
)
|
Stock-based compensation shortfalls
|
|
238
|
|
|
437
|
|
Return to Provision
|
|
216
|
|
|
(1,835
|
)
|
Other, net
|
|
55
|
|
|
70
|
|
Income tax expense (benefit) for the period
|
|
$
|
1,753
|
|
|
$
|
(18,112
|
)
|
Total income tax expense (benefit) was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
In thousands
|
|
2019
|
|
2018
|
(Loss) Income from operations
|
|
$
|
1,753
|
|
|
$
|
(18,112
|
)
|
Stockholders’ equity
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
1,753
|
|
|
$
|
(18,112
|
)
|
The U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted on December 22, 2017. The legislation significantly changed U.S. tax law by, among other things, lowering the corporate income tax rate from 35% to 21%, implementing a territorial tax system and imposing a one-time repatriation tax on deemed repatriated earnings of foreign subsidiaries. We applied the guidance in the SAB 118 when accounting for the enactment-date effects of the Tax Reform Act in 2017 and throughout 2018. At December 31, 2018, we completed our accounting for all the enactment-date income tax effects of the Tax Reform Act. We did not record any adjustments to our provisional amounts in the year ended December 31, 2018.
The Tax Reform Act subjects a U.S. shareholder to tax on Global Intangible Low Tax Income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A Topic 740, No. 5 “Accounting for Global Intangible Low-Taxed Income”, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We elected to account for GILTI as a current period expense when incurred.
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
|
|
2019
|
|
2018
|
Deferred tax assets
|
|
|
|
|
Deferred compensation and retirement plan
|
|
$
|
18,067
|
|
|
$
|
16,179
|
|
Accrued expenses not deductible until paid
|
|
2,331
|
|
|
1,584
|
|
Lease liability
|
|
4,217
|
|
|
—
|
|
Employee stock-based compensation
|
|
736
|
|
|
780
|
|
Accrued payroll not deductible until paid
|
|
196
|
|
|
428
|
|
Accounts receivable, net
|
|
156
|
|
|
100
|
|
Investment in foreign subsidiaries, outside basis difference
|
|
1,336
|
|
|
1,322
|
|
Goodwill
|
|
649
|
|
|
710
|
|
Other, net
|
|
156
|
|
|
142
|
|
Foreign net operating loss carryforwards
|
|
2,364
|
|
|
3,042
|
|
State net operating loss carryforwards
|
|
4,387
|
|
|
3,776
|
|
Foreign tax credit carryforwards
|
|
3,653
|
|
|
3,653
|
|
Federal net operating loss carryforwards
|
|
5,394
|
|
|
2,507
|
|
Total gross deferred tax assets
|
|
43,642
|
|
|
34,223
|
|
Less valuation allowances
|
|
(38,379
|
)
|
|
(31,170
|
)
|
Net deferred tax assets
|
|
$
|
5,263
|
|
|
$
|
3,053
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
(1,159
|
)
|
|
$
|
(1,689
|
)
|
Right-of-use asset
|
|
(3,785
|
)
|
|
—
|
|
Prepaid Expenses
|
|
(279
|
)
|
|
(331
|
)
|
Other, net
|
|
(284
|
)
|
|
(281
|
)
|
Total gross deferred tax liabilities
|
|
(5,507
|
)
|
|
(2,301
|
)
|
Net deferred tax (liabilities) assets
|
|
$
|
(244
|
)
|
|
$
|
752
|
|
A reconciliation of the beginning and ending balance of deferred tax valuation allowance is as follows:
|
|
|
|
|
|
In thousands
|
|
|
Balance at December 31, 2017
|
|
$
|
28,350
|
|
Deferred Income Tax Expense
|
|
3,383
|
|
Return to Provision Impact
|
|
(854
|
)
|
Other Comprehensive Income
|
|
291
|
|
Balance at December 31, 2018
|
|
$
|
31,170
|
|
Deferred Income Tax Expense
|
|
6,086
|
|
Return to Provision Impact
|
|
(364
|
)
|
Other Comprehensive Income
|
|
1,487
|
|
Balance at December 31, 2019
|
|
$
|
38,379
|
|
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 $38.4 million and $31.2 million at December 31, 2019 and 2018, respectively. 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. state returns, we are no longer subject to tax examinations for years prior to 2014. For U.S. federal and foreign returns, we are no longer subject to tax examinations for years prior to 2016.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
|
|
|
|
|
|
In thousands
|
|
|
Balance at December 31, 2017
|
|
$
|
206
|
|
Settlements
|
|
(206
|
)
|
Balance at December 31, 2018
|
|
$
|
—
|
|
Settlements
|
|
|
|
Balance at December 31, 2019
|
|
$
|
—
|
|
There is no balance of unrecognized tax benefits as of December 31, 2019. Any adjustments to this liability as a result of the finalization of audits or potential settlements would not be material.
Effective January 1, 2019 we adopted ASU 2018-02 which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the reduction of the U.S. federal statutory income tax rate from 35% to 21% due to the enactment of the Tax Reform Act. As a result of the adoption, we reclassified $11.4 million of stranded tax effects from accumulated other comprehensive income to retained earnings.
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, 2019 and 2018. We did not have any interest and penalties accrued at December 31, 2019 or 2018.
For U.S. tax return purposes, net operating losses and tax credits are normally available to be carried forward to future years, subject to limitations as discussed below. As of December 31, 2019, the Company has federal net operating loss carryforward of $25.7 million, of which the entire amount is not subject to expiration due to the change in carryforward periods as a result of the U.S. Tax Act. Federal Foreign tax carryforward credit of $3.7 million will expire on various dates from 2023 to 2026.
Deferred income taxes have not been provided on the undistributed earnings of our foreign subsidiaries as these earnings have been, and under current plans will continue to be, permanently reinvested in these subsidiaries. It is not practicable to estimate the amount of additional taxes which may be payable upon the distribution of these earnings. However, because of the provisions in the Tax Reform Act, the tax cost of repatriation is immaterial and limited to foreign withholding taxes, currency translation and state taxes.
Note J — (Loss) Earnings Per Share
In periods in which the company has net income, the company is required to calculate earnings (loss) per share (“EPS”)
using the two-class method. The two-class method is required because the company’s preferred stock is considered a participating security with objectively determinable and non-discretionary dividend participation rights. Preferred stockholders have the right to participate in dividends above their five percent dividend rate should the company declare dividends on its Common Stock at a dividend rate higher than the five percent (on an as-converted basis). Under the two-class method, undistributed and distributed earnings are allocated on a pro-rata basis to the common and the preferred stockholders. The weighted-average number of common and preferred stock outstanding during the period is then used to calculate EPS for each class of shares.
In periods in which the company has a net loss, basic loss per share is calculated using the treasury stock method. The treasury stock method is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period. The two-class method is not used, because the two-class calculation is anti-dilutive.
Reconciliations of basic and diluted EPS are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
In thousands, except per share amounts
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
Net (loss) income
|
|
$
|
(26,264
|
)
|
|
$
|
17,550
|
|
Less: Preferred stock dividend
|
|
496
|
|
|
457
|
|
Less: Earnings attributable to participating securities
|
|
—
|
|
|
2,202
|
|
Numerator for basic EPS: (loss) income attributable to common stockholders
|
|
(26,760
|
)
|
|
14,891
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
Add back: Allocation of earnings to participating securities
|
|
—
|
|
|
2,202
|
|
Less: Re-allocation of earnings to participating securities considering potentially dilutive securities
|
|
—
|
|
|
(2,191
|
)
|
Numerator for diluted EPS
|
|
$
|
(26,760
|
)
|
|
$
|
14,902
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Basic EPS denominator: weighted-average common shares outstanding
|
|
6,284
|
|
|
6,237
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
Unvested shares
|
|
—
|
|
|
33
|
|
Diluted EPS denominator
|
|
6,284
|
|
|
6,270
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
(4.26
|
)
|
|
$
|
2.39
|
|
Diluted earnings (loss) per common share
|
|
$
|
(4.26
|
)
|
|
$
|
2.38
|
|
For the purpose of calculating the shares used in the diluted EPS calculations, 0.1 million and 0.2 million anti-dilutive options have been excluded from the EPS calculations for the years ended December 31, 2019 and 2018. 0.2 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, 2019 and 2018, respectively.
Note K — Comprehensive (Loss) Income
Comprehensive (loss) income for a period encompasses net (loss) income and all other changes in equity other than from transactions with our stockholders.
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, 2017
|
|
$
|
(45,418
|
)
|
|
$
|
1,115
|
|
|
$
|
(44,303
|
)
|
Other comprehensive loss, net of tax, before reclassifications
|
|
—
|
|
|
(1,014
|
)
|
|
(1,014
|
)
|
Amounts reclassified from accumulated other comprehensive income, net of tax
|
|
(1,166
|
)
|
|
—
|
|
|
(1,166
|
)
|
Net current period other comprehensive loss, net of tax
|
|
(1,166
|
)
|
|
(1,014
|
)
|
|
(2,180
|
)
|
Balance at December 31, 2018
|
|
$
|
(46,584
|
)
|
|
$
|
101
|
|
|
$
|
(46,483
|
)
|
Other comprehensive income, net of tax, before reclassifications
|
|
—
|
|
|
652
|
|
|
652
|
|
Amounts reclassified from accumulated other comprehensive (loss) income, net of tax
|
|
(5,948
|
)
|
|
—
|
|
|
(5,948
|
)
|
Adoption of ASU 2018-2
|
|
(11,355
|
)
|
|
—
|
|
|
(11,355
|
)
|
Net current period other comprehensive (loss) income, net of tax
|
|
(17,303
|
)
|
|
652
|
|
|
(16,651
|
)
|
Balance at December 31, 2019
|
|
$
|
(63,887
|
)
|
|
$
|
753
|
|
|
$
|
(63,134
|
)
|
Reclassification amounts related to the defined pension plans are included in the computation of net period pension benefit cost (see Note H, Employee Benefit Plans).
Note L — Litigation and Contingencies
In the normal course of our business, we are obligated under some agreements to indemnify our clients as a result of claims that we infringe on the proprietary rights of third parties. The terms and duration of these commitments vary and, in some cases, may be indefinite, and certain of these commitments do not limit the maximum amount of future payments we could become obligated to make thereunder; accordingly, our actual aggregate maximum exposure related to these types of commitments is not reasonably estimable. Historically, we have not been obligated to make significant payments for obligations of this nature, and no liabilities have been recorded for these obligations in our consolidated financial statements.
We are also subject to various claims and legal proceedings in the ordinary course of conducting our businesses and, from time to time, we may become involved in additional claims and lawsuits incidental to our businesses. We routinely assess the likelihood of adverse judgments or outcomes to these matters, as well as ranges of probable losses; to the extent losses are reasonably estimable. Accruals are recorded for these matters to the extent that management concludes a loss is probable and the financial impact, should an adverse outcome occur, is reasonable estimable.
In the opinion of management, appropriate and adequate accruals for legal matters have been made, and management believes that the probability of a material loss beyond the amounts accrued is remote. Nevertheless, we cannot predict the impact of future developments affecting our pending or future claims and lawsuits. We expense legal costs as incurred, and all recorded legal liabilities are adjusted as required as better information becomes available to us. The factors we consider when recording an accrual for contingencies include, among others: (i) the opinions and views of our legal counsel; (ii) our previous experience; and (iii) the decision of our management as to how we intend to respond to the complaints.
Note M — Disposition
On February 28, 2018, we sold our 3Q Digital Inc. subsidiary (“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 (“Contingent Payment”) if the 3Q Digital business is sold again (provided certain value thresholds are met) (“Qualified Sale”). The $35 million contingent consideration obligation of the Company that related to our acquisition of 3Q Digital in 2015 was assigned to the buyer, thereby relieving us of the obligation. In addition, the identified intangible assets with definite lives for client relationships and non-compete agreements were written-off as a component of the gain on sale.
The 3Q Digital business represented less than 10% of our total 2017 revenues. As a result of the sale, the company recognized a pre-tax gain of $31.0 million in the first quarter of 2018. The assets of 3Q Digital included net intangible assets and the liabilities (including contingent consideration) were removed from our balance sheet as a result of the disposition.
A reconciliation of accrued balances of the contingent consideration using significant unobservable inputs (Level 3) is as follows:
|
|
|
|
|
|
(in thousands)
|
|
Fair Value
|
Accrued contingent consideration liability as of December 31, 2017
|
|
$
|
33,887
|
|
Accretion of interest
|
|
742
|
|
Disposition
|
|
(34,629
|
)
|
Accrued earnout liability as of December 31, 2018
|
|
$
|
—
|
|
On May 7, 2019, we received the $5 million Contingent Payment related to the Qualified Sale of 3Q Digital as defined in the Purchase and Sale Agreement dated February 28, 2018.
Note N — Certain Relationships and Related Party Transactions
Since 2016, we have conducted (and we continue to conduct) business with Wipro, LLC (“Wipro”), whereby Wipro provides us with a variety of technology-related services, including database and software development, database support and analytics, IT infrastructure support, leased facilities and digital campaign management. Additionally, we also provide Wipro with agency services and consulting services.
Effective January 30, 2018, Wipro became a related party when it purchased 9,926 shares of our Series A Preferred Stock (which are convertible at Wipro’s option into 1,001,614 shares, or 16% of our Common Stock), for aggregate consideration of $9.9 million. For information pertaining to the Company’s preferred stock, See Note E, Convertible Preferred Stock.
During the years ended December 31, 2019 and 2018, we recorded an immaterial amount of revenue for services we provided to Wipro.
During the years ended December 31, 2019 and 2018, we recorded $11.7 million and $12.3 million of expense, respectively, in technology-related services and lease expense for a facility Wipro provided to us.
During the years ended December 31, 2019 and 2018, we capitalized $1.7 million of costs ($1.4 million of which was included in the asset impairment charge for the year ended December 31, 2019) and $2.3 million ($2.1 million of which was included in the asset impairment charge for the year ended December 31, 2018), respectively, for internally developed software services received from Wipro. These remaining capitalized costs are included in Other Assets on the Consolidated Balance Sheet as of December 31, 2019.
As of December 31, 2019 and 2018, we had a trade payable due to Wipro of $1.5 million and $5.0 million, respectively. As of December 31, 2019 and 2018, we had an immaterial amount in trade receivables due from Wipro.
In the third quarter of 2019, we entered a business relationship with Snap Kitchen, the founder of which is a 7% owner of Harte Hanks. We recorded a nominal amount of revenue with them in the year ended December 31, 2019.
As described in Note F, Long-Term Debt, the Company’s Texas Capital Credit Facility is secured by HHS Guaranty, LLC, an entity formed to provide credit support for the Company by certain members of the Shelton family (descendants of one of our founders). Pursuant to the Amended and Restated Fee, Reimbursement and Indemnity Agreement, dated January 9, 2018, between HHS Guaranty, LLC and the Company, HHS Guaranty, LLC has the right to appoint one representative director to the Board of Directors. Currently, David L. Copeland serves as the HHS Guaranty, LLC representative on the Board of Directors.
Note O — Restructuring Activities
Our management team along with members of the Board have formed a project committee focused on our cost-saving initiatives and other restructuring efforts. This committee has reviewed each of our business lines and other operational areas to identify both one-time and recurring cost-saving opportunities.
In the year ended December 31, 2019, we recorded restructuring charges of $11.8 million. This comprised charges mainly related to customer database build write offs, termination fees related to certain contracts with Wipro, severance agreements, asset impairment and facility related expense. One of the larger initiatives to combine sub-scale production environments received Board approval on August 1, 2019. This resulted in the closing of three production facilities by the end of 2019 and consolidating the work currently performed at these facilities into other production facilities.
The following table summarizes the restructuring charges which are recorded in “Restructuring Expense” in the Consolidated Statement of Comprehensive (Loss) Income.
|
|
|
|
|
|
In thousands
|
|
Year Ended December 31, 2019
|
Customer database build write off
|
|
$
|
4,036
|
|
Contract termination fee
|
|
3,101
|
|
Severance
|
|
2,098
|
|
Facility, asset impairment and other expense
|
|
2,564
|
|
Total
|
|
$
|
11,799
|
|
The following table summarizes the changes in liabilities related to restructuring activities:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Year Ended December 31, 2019
|
|
|
Contract Termination Fee
|
|
Severance
|
|
Facility, asset impairment and other expense
|
|
Total
|
Beginning balance:
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Additions:
|
|
3,101
|
|
|
2,168
|
|
|
786
|
|
|
6,055
|
|
Payments
|
|
(1,610
|
)
|
|
(1,738
|
)
|
|
(786
|
)
|
|
(4,134
|
)
|
Ending balance:
|
|
$
|
1,491
|
|
|
$
|
430
|
|
|
$
|
—
|
|
|
$
|
1,921
|
|
We expect that in connection with our cost-saving and restructuring initiatives, we will incur total restructuring charges of approximately $14.0 million through 2020.