HARTE HANKS, INC. Cautionary Note Regarding Forward-Looking Statements
This report, including the Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A"), contains "forward-looking
statements" within the meaning of the federal securities laws. All such
statements are qualified by this cautionary note, which is provided pursuant to
the safe harbor provisions of Section 27A of the Securities Act of 1933 and
Section 21E of the Exchange Act. Forward-looking statements may also be included
in our other public filings, press releases, our website, and oral and written
presentations by management. Statements other than historical facts are
forward-looking and may be identified by words such as "may," "will," "expects,"
"believes," "anticipates," "plans," "estimates," "seeks," "could," "intends," or
words of similar meaning. Examples include statements regarding (1) our
strategies and initiatives, including our ability to reduce costs and make other
adjustments to our cost structure and other actions designed to respond to
market conditions and improve our performance, (2) our financial outlook for
revenues, earnings (loss) per share, operating income (loss), expense related to
equity-based compensation, capital resources and other financial items, if any,
(3) expectations for our businesses and for the industries in which we operate,
including the impact of economic conditions of the markets we serve on the
marketing expenditures and activities of our clients and prospects,
(4) competitive factors, (5) acquisition and development plans, (6) expectations
regarding legal proceedings and other contingent liabilities, and (7) other
statements regarding future events, conditions, or outcomes.
These forward-looking statements are based on current information, expectations,
and estimates and involve risks, uncertainties, assumptions, and other factors
that are difficult to predict and that could cause actual results to vary
materially from what is expressed in or indicated by the forward-looking
statements. In that event, our business, financial condition, results of
operations, or liquidity could be materially adversely affected and investors in
our securities could lose part or all of their investments. Some of these risks,
uncertainties, assumptions, and other factors can be found in our filings with
the SEC , including the factors discussed under "Item 1A. Risk Factors" in the
2021 10-K, Part II, and in our other reports filed or furnished with the
SEC . The forward-looking statements included in this report and those included
in our other public filings, press releases, our website, and oral and written
presentations by management are made only as of the respective dates thereof,
and we undertake no obligation to update publicly any forward-looking statement
in this report or in other documents, our website, or oral statements for any
reason, even if new information becomes available or other events occur in the
future, except as required by law.
Overview
The following MD&A is intended to help the reader understand the results of
operations and financial condition of Harte Hanks . This section is provided as a
supplement to, and should be read in conjunction with, our Condensed
Consolidated Financial Statements and the accompanying notes included herein as
well as our 2021 10-K. Our 2021 10-K contains a discussion of other matters not
included herein, such as disclosures regarding critical accounting policies and
estimates, and contractual obligations. See Note A, Overview and Significant
Accounting Policies, in the Notes to Condensed Consolidated Financial Statements
for further information.
Harte Hanks, Inc. is a leading global customer experience company operating in
three business segments: Marketing Services, Customer Care, and Fulfillment &
Logistics Services. Our mission is to partner with clients to provide them with
a robust customer-experience, or CX, strategy, data-driven analytics and
actionable insights combined with seamless program execution to better
understand, attract, and engage their customers. Our services include strategic
planning, data strategy, performance analytics, creative development and
execution; technology enablement; marketing automation; B2B and B2C e-commerce;
cross-channel customer care; and product, print, and mail fulfillment.
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We are affected by the general, national, and international economic and business conditions in the markets where we and our customers operate. Marketing budgets are largely discretionary in nature, and as a consequence are easier for our clients to reduce in the short-term than other expenses. Our revenues are also affected by the economic fundamentals of each industry that we serve, various market factors, including the demand for services by our clients, and the financial condition of and budgets available to our clients, among other factors. Due to the COVID-19 pandemic, recent increases in inflation and interest rates throughout the globe, and other geopolitical uncertainties, including but not limited to the ongoing war betweenRussia andUkraine , there is continued uncertainty and significant disruption in the global economy and financial markets. We remain committed to making the investments necessary to execute our multichannel strategy while also continuing to adjust our cost structure to reduce costs. Management is closely monitoring inflation and wage pressure in the market, and the potential impact to our business. While inflation has not had a material impact to our business, it is possible a material increase in inflation could have an impact on our clients, and in turn, in our business. Share Repurchase OnJune 30, 2022 , the Company entered into a share repurchase agreement with Wipro, pursuant to which the Company will repurchase all 9,926 shares of the Company's Series A Preferred Stock currently outstanding in exchange for (i) a cash payment equal to their liquidation value, or total cash payment of$9,926,000 and (ii) 100,000 shares of the Company's common stock, par value$1.00 per share. Closing of the transaction is subject to customary closing conditions, including that the shares are no longer subject to escheatment.
On
June 30, 2022 , the Company deposited$9,926,000 into an Escrow Account pursuant to the Repurchase Agreement to be released to Wipro when all conditions to the repurchase have been satisfied and included this escrow amount in other current assets on our Condensed Consolidated Balance Sheet as ofSeptember 30, 2022 . The transaction is expected to be completed by the fourth quarter of 2022 and at that time all rights of the parties related to the Series A Preferred Stock will be terminated. COVID-19 In connection with the pandemic, some of our customers have reduced the amount of work we provide to them while other customers have requested accommodations including extensions of payment or restructuring of agreements. However, due to pandemic-related changes, including an increased need for contact center services, our Customer Care solutions services secured new contracts as well as increased volume for existing customers. The majority of this work has been completed, however, we continue to benefit from long-term relationships with existing and new customers. While the pandemic has not had a material effect on our business, liquidity or ability to comply with covenants to date, given the dynamic nature of the pandemic, we may experience material impacts in the future. We recommend that you review "Item 1A. Risk Factors" in our 2021 Annual Report on Form 10-K for a further discussion on COVID-19. 26
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Table of Contents Results of Operations
Operating results were as follows:
Nine Months Ended September
Three Months Ended September 30, 30,
In thousands, except
percentages 2022 2021 % Change 2022 2021 % Change
Revenues $ 53,886 $ 49,597 8.6 % $ 151,500 $ 142,610 6.2 %
Operating expenses 50,113 45,371 10.5 % 139,822 137,834 1.4 %
Operating income $ 3,773 $ 4,226 (10.7 )% $ 11,678 $ 4,776 144.5 %
Operating margin 7.0 % 8.5 % 7.7 % 3.3 %
Income before income
taxes $ 8,385 $ 4,576 83.3 % $ 17,316 $ 14,233 21.7 %
Diluted earnings per
common share from
operations $ 0.83 $ 0.52 59.6 % $ 1.73 $ 1.57 10.5 %
Consolidated Results
Revenues
Three months ended
Revenues increased$4.3 million , or 8.6%, in the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . Revenue in our Fulfillment & Logistics Services segment increased$8.4 million , or 55.6%, to$23.5 million . Revenue in our Customer Care segment decreased$2.4 million , or 12.1%, to$17.4 million , and revenue in our Marketing Services segment decreased$1.7 million , or 11.6%, to$13.0 million .
Nine months ended
Revenues increased$8.9 million , or 6.2%, in the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . Revenue in our Fulfillment & Logistics Services segment increased$16.3 million , or 36.0%, to$61.6 million . Revenue in our Customer Care segment decreased$5.0 million , or 9.0%, to$50.5 million , and revenue in our Marketing Services segment decreased$2.4 million , or 5.8%, to$39.4 million .
For a discussion of the drivers of our revenues, see "Segment Results" below.
Operating Expenses
Three months ended
Operating expenses were$50.1 million in the three months endedSeptember 30, 2022 , an increase of$4.7 million , or 10.5%, compared to$45.4 million in the three months endedSeptember 30, 2021 . Production and distribution expenses increased$5.3 million , or 43.6%, compared to the three months endedSeptember 30, 2021 , primarily due to higher transportation costs to support additional logistics revenue as well as revenue mix changes as compared to the prior year quarter and higher brokered, or outsourced costs due to higher brokered revenue. Advertising, Selling, General and Administrative expenses increased$0.2 million , or 4.7%, compared to three months endedSeptember 30, 2021 primarily due to higher professional fees. Labor expense increased$0.2 million , or 0.7%, compared to the three months endedSeptember 30, 2021 primarily due to higher labor expense in the Fulfillment & Logistics Services segment associated with higher revenue.
Restructuring expenses were
The largest components of our operating expenses are labor, transportation expenses and outsourced costs. Each of these costs is, at least in part, variable and tends to fluctuate in line with revenues and the demand for our services. Transportation rates have increased over the last few years due to demand and supply fluctuations within the transportation industry. Future changes in transportation expenses will continue to impact our total production costs and total operating expenses, and in turn our margins, and may have an impact on future demand for our supply chain management services. As noted above, our revenue mix has shifted which led to a decrease to our overall operating margin.
Postage costs for mailings are borne by our clients and are not directly reflected in our revenues or expenses.
Nine months ended
Operating expenses were$139.8 million in the nine months endedSeptember 30, 2022 , an increase of$2.0 million , or 1.4%, compared to$137.8 million in the nine months endedSeptember 30, 2021 . Production and distribution expenses increased$10.3 million , or 28.7%, compared to the nine months endedSeptember 30, 2021 , primarily due to higher transportation costs to support additional logistics revenue as well as revenue mix changes as compared to the prior year period and higher brokered, or outsourced costs due to higher brokered revenue. Labor expense decreased$3.3M , or 4.0%, compared to the nine months endedSeptember 30, 2021 primarily due to lower labor expense in the Marketing Service and Customer Care segments associated with lower revenue which was partially offset by higher labor expense in the Fulfillment & Logistics segment driven by higher revenue. Advertising, Selling, General and Administrative expenses increased$0.1 million , or 0.7%, compared to nine months endedSeptember 30, 2021 primarily due to lower facility expense driven by fewer leased locations in 2022 as compared to 2021.
Restructuring expenses were
The largest components of our operating expenses are labor, transportation expenses and outsourced costs. Each of these costs is, at least in part, variable and tends to fluctuate in line with revenues and the demand for our services. Transportation rates have increased over the last few years due to demand and supply fluctuations within the transportation industry. Future changes in transportation expenses will continue to impact our total production costs and total operating expenses, and in turn our margins, and may have an impact on future demand for our supply chain management services.
Postage costs for mailings are borne by our clients and are not directly reflected in our revenues or expenses.
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Table of Contents Interest Expense, net
Three months ended
Interest expense, net, in the three months endedSeptember 30, 2022 decreased$0.1 million compared to the three months endedSeptember 30, 2021 due to the lower debt balance as compared to the prior year quarter.
Nine months ended
Interest expense, net, in the nine months endedSeptember 30, 2022 decreased$0.3 million compared to the nine months endedSeptember 30, 2021 due to the lower debt balance as compared to the prior year period. Other income, net
Three months ended
Other income, net, for the three months endedSeptember 30, 2022 was$4.7 million income compared to$0.6 million other income, net, in the prior year quarter mainly due to$2.5 million gain from the sale of some IP addresses which were no longer useful to the Company as well as the decrease in foreign currency revaluation. We do not expect the sale of IP addresses, in the future, if any, to generate a significant amount of other income.
Nine months ended
Other income, net, for the nine months endedSeptember 30, 2022 was$6.0 million income compared to$0.1 million other income, net, in prior year period mainly due to$2.5 million gain from the sale of some IP addresses which were no longer useful to the Company as well the decrease in foreign currency revaluation. We do not expect the sale of IP addresses, in the future, if any, to generate a significant amount of other income. Income Taxes
Three months ended
The income tax provision of$1.2 million in the third quarter of 2022 represents an increase in income tax provision of$1.0 million when compared to the third quarter of 2021. Our effective tax rate was 14.5% for the third quarter of 2022, an increase of 10.8% from the third quarter of 2021. The effective tax rate differs from the federal statutory rate of 21.0%, primarily due to the change in valuation allowance,U.S. state income taxes and income earned in foreign jurisdictions.
Nine months ended
The income tax provision of$2.3 million in the nine months endedSeptember 30, 2022 represents an increase in income tax provision of$1.3 million when compared to the nine months endedSeptember 30, 2021 . Our effective tax rate was 13.5% for the nine months endedSeptember 30, 2022 , an increase from 6.3% when compared to the effective tax rate of 7.2% for the nine months endedSeptember 30, 2021 . The effective tax rate differs from the federal statutory rate of 21.0%, primarily due to the change in valuation allowance,U.S. state income taxes and income earned in foreign jurisdictions. Segment Results The following is a discussion and analysis of the results of our reporting segments for the three and six months endedSeptember 30, 2022 and 2021. There are three principal financial measures reported to our CEO (the chief operating decision maker) for use in assessing segment performance and allocating resources. Those measures are revenue, operating income (loss) and operating income (loss) plus depreciation and amortization ("EBITDA"). For additional information, see Note O, Segment Reporting, in the Notes to Condensed Consolidated Financial Statements. See Note O, Segment Results, in the Notes to Condensed Consolidated Financial Statements for further discussion. Marketing Services: Three Months Ended September 30, Nine Months Ended September 30, In thousands 2022 % Change 2021 2022 % Change 2021 Revenues$ 13,016 -11.6 %$ 14,729 $ 39,389 -5.8 %$ 41,815 EBITDA 1,921 -30.7 % 2,772 5,196 2.3 % 5,080 Operating Income 1,823 -31.3 % 2,655 4,908 5.1 % 4,668 Operating Income % of Revenue 14.0 % 18.0 % 12.5 % 11.2 % 28
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Three months ended
Marketing Services segment revenue decreased$1.7 million , or 11.6%, due to a decrease in direct mail service volume from the existing customers. Operating income for the three months endedSeptember 30, 2022 decreased$0.8 million from the prior year quarter due to the reduced revenue.
Nine months ended
Marketing Services segment revenue decreased$2.4 million , or 5.8%, due to a decrease in direct mail service volume from the existing customers. Operating income for the nine months endedSeptember 30, 2022 increased$0.2 million from the prior year quarter due to our cost reduction efforts which was partially offset by the reduced revenue. Customer Care: Three Months Ended September 30, Nine Months Ended September 30, In thousands 2022 % Change 2021 2022 % Change 2021 Revenues$ 17,375 -12.1 %$ 19,768 $ 50,499 -9.0 %$ 55,503 EBITDA 2,971 -26.0 % 4,014 8,926 -10.4 % 9,964 Operating Income 2,765 -27.6 % 3,819 8,317 -10.7 % 9,312 Operating Income % of Revenue 15.9 % 19.3 % 16.5 % 16.8 %
Three months ended
Customer Care segment revenue decreased$2.4 million , or 12.1%, primarily due to a decrease in volumes with existing customers. Operating Income was$2.8 million for the three months endedSeptember 30, 2022 , compared to operating income of$3.8 million for the three months endedSeptember 30, 2021 . The$1.0 million decrease was due to the decrease in volume from existing clients which was partially offset by our cost reduction efforts.
Nine months ended
Customer Care segment revenue decreased$5.0 million , or 9.0%, primarily due to a decrease in volumes with existing customers. Operating Income of$8.3 million for the nine months endedSeptember 30, 2022 , decreased$1.0 million from the prior year quarter due to the decrease in volume from existing clients which was partially offset by our cost reduction efforts.
Fulfillment & Logistics Services:
Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2022 % Change 2021 2022 % Change 2021
Revenues $ 23,495 55.6 % $ 15,100 $ 61,612 36.0 % $ 45,292
EBITDA 2,777 64.0 % 1,693 8,334 82.6 % 4,565
Operating Income 2,601 72.1 % 1,511 7,753 92.7 % 4,024Operating Income % of Revenue 11.1 % 10.0 % 12.6 % 8.9 %
Three months ended
Fulfillment & Logistics Services segment revenue increased
Nine months ended
Fulfillment & Logistics Services segment revenue increased$16.3 million , or 36.0%, primarily driven by revenue from new customers and an increase in work from existing customers. Operating income was$7.8 million for the nine months endedSeptember 30, 2022 compared to$4.0 million for the nine months endedSeptember 30, 2021 . The$3.8 million improvement in operating income was primarily driven by higher revenue and our cost reduction efforts. Operating income for the prior year period included a favorable$0.8 million litigation settlement. 29
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Liquidity and Capital Resources
Sources and Uses of Cash Our cash and cash equivalent balances were$6.9 million and$11.9 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. Our cash and cash equivalent and restricted cash balances were$9.2 million and$15.1 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. The money deposited in an escrow account to satisfy the purchase price for the Wipro share repurchase is not included in our cash and cash equivalent or restricted cash balances. During 2020, we received an aggregate of$9.6 million in tax refunds related to our net operating loss ("NOL") and capital loss carryback for the 2013-2018 tax years. We also expect to receive additional tax refunds of$7.6 million in 2022, as a result of the change to the tax NOL carryback provisions included in the CARES Act. Our principal sources of liquidity are cash on hand, cash provided by operating activities, and borrowings. Our cash is primarily used for general corporate purposes, working capital requirements, and capital expenditures.
We expect to incur approximately
At this time, we believe that we will be able to continue to meet our liquidity requirements and fund our fixed obligations (such as debt services, finance and operating leases and unfunded pension plan benefit payments) and other cash needs for our operations in both the short and medium term through a combination of cash on hand, cash flow from operations, and borrowings under the New Credit Facility. Although the Company believes that it will be able to meet its cash needs for the short and medium term, if unforeseen circumstances arise the company may need to seek alternative sources of liquidity. To date, the COVID-19 pandemic has not had a material impact on the Company's liquidity or on the Company's ability to meet its obligations under the New Credit Facility. Operating Activities Net cash provided by the operating activities for the nine months endedSeptember 30, 2022 was$22.3 million , compared to net cash used in operating activities of$5.9 million for the nine months endedSeptember 30, 2021 . The$28.2 million year-over-year increase in cash provided by operating activities was primarily due to the$1.8 million increase in net income, excluding the$10 million non-cash gain in 2021 from extinguishment of PPP loan,$10.1 million increase in accounts receivable and contract assets, prepaid and other current assets,$2.8 million increase in deferred revenue and customer advances as well as$4.3 million increase in accounts payable and accrued expenses due to increased transportation expenses in the nine months endedSeptember 30, 2022 as compared to the same period in 2021. Investing Activities Net cash used in investing activities was$5.7 million for the nine months endedSeptember 30, 2022 , compared to$2.4 million for the nine months endedSeptember 30, 2021 . The$3.3 million year-over-year increase in cash used in investing activities was primarily due to the$3.3 million additional cash used to purchase property, plant and equipment (mainly for our new ERP system) in the nine months endedSeptember 30, 2022 as compared to 2021. Financing Activities Net cash used in financing activities was$6.4 million for the nine months endedSeptember 30, 2022 , as compared to$4.8 million of net cash used in financing activities for the nine months endedSeptember 30, 2021 . The$1.6 million year-over-year increase in cash used in financing activities was primarily due to the$5 million paydown of the borrowing under our New Credit Facility in the nine months endedSeptember 30, 2022 as compared to a$4.0 million paydown of the Texas Capital Credit Facility in the second quarter of 2021.Foreign Holdings of Cash
Consolidated foreign holdings of cash as of
Long Term Debt OnDecember 21, 2021 , the Company entered into a new three-year,$25.0 million asset-based revolving credit facility (the "New Credit Facility") withTexas Capital Bank . The Company's obligations under the New Credit Facility are guaranteed on a joint and several basis by the Company's material subsidiaries (the "Guarantors"). The New Credit Facility is secured by substantially all of the assets of the Company and the Guarantors pursuant to a Pledge and Security Agreement, dated as ofDecember 21, 2021 , among the Company, TCB and the other grantors party thereto (the "Security Agreement").
The New Credit Facility provides for loans up to the lesser of (a)
The loans under the New Credit Facility accrue interest at a variable rate equal to the Bloomberg Short-Term Bank Yield Index Rate plus a margin of 2.25% per annum. The outstanding amounts advanced under the New Credit Facility are due and payable in full onDecember 21, 2024 . The Company may voluntarily prepay all or any portion of the loans advanced under the New Credit Facility at any time, without premium or penalty. The New Credit Facility is subject to mandatory prepayments (i) from the net proceeds of asset dispositions not otherwise permitted under the New Credit Facility; (ii) if the unpaid principal balance under the New Credit Facility plus the aggregate face amount of all outstanding letters of credit exceeds the borrowing base; (iii) in an amount equal to 50% of the net proceeds of issuances of capital stock (subject to customary exceptions); or (iv) in an amount equal to the net proceeds from any issuance of debt not otherwise permitted under the New Credit Facility.
The New Credit Facility contains certain covenants restricting the Company's and
its subsidiaries' ability to create, incur, assume or become liable
for indebtedness; make certain investments; pay dividends or repurchase the
Company's stock; create, incur or assume liens? consummate mergers or
acquisitions? liquidate, dissolve, suspend or cease operations? or modify
accounting or tax reporting methods (other than as required by
In connection with entering into the New Credit Facility, the Company andTexas Capital Bank terminated the old Texas Capital Credit Facility. Prior to termination of the old Texas Capital Credit Facility, the Company used cash on hand to pay down$8.1 million outstanding and the remaining$5.0 million of loans outstanding were deemed to be outstanding under the New Credit Facility.Texas Capital Bank did not require the New Credit Facility to be guaranteed byHHS Guaranty, LLC , an entity formed to provide credit support for the Company by certain members of the Shelton family (descendants of one of the Company's founders) or any other third-party credit support. 30
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As ofSeptember 30, 2022 andDecember 31, 2021 , we had$0 million and$5.0 million of borrowings outstanding under the New Credit Facility, respectively. At each ofSeptember 30, 2022 andDecember 31, 2021 , we had letters of credit in the amount of$0.8 million outstanding. No amounts were drawn against these letters of credit atSeptember 30, 2022 andDecember 31, 2021 . These letters of credit exist to support insurance programs relating to workers' compensation, automobile, and general liability. We had no other off-balance sheet financing activities atSeptember 30, 2022 andDecember 31, 2021 .
As of
On
OnJune 10, 2021 , we received notice that the entire amount of our PPP Loan was forgiven by the SBA because we used the proceeds from the loan as contemplated under the CARES Act. We recorded the$10.0 million of debt extinguishment as "Gain from extinguishment of debt (Paycheck Protection Program Term Note)" in the Condensed Consolidated Statements of Comprehensive Income (Loss). Dividends We did not pay any dividends in three months endedSeptember 30, 2022 and 2021. We currently intend to retain any future earnings and do not expect to pay cash dividends on our common stock in the foreseeable future. Any future dividend declaration can be made only upon, and subject to, approval of our Board, based on its business judgment. Share Repurchase During the three-month period which endedSeptember 30, 2022 and 2021, respectively, we did not repurchase any shares of our common stock under our stock repurchase program. This program was publicly announced inAugust 2014 . Under this program we were authorized to spend up to$20.0 million to repurchase shares of our outstanding common stock. Currently, up toSeptember 30, 2022 , we had authorization to repurchase up to$11.4 million of shares, but this authorization and program have since been terminated. From 1997 throughDecember 31, 2015 , while the program was active, we repurchased 6.8 million shares for an aggregate of$1.2 billion under this program (and previously announced programs). We have not made any repurchases under the program since 2015. Outlook We consider such factors as total cash and cash equivalents and restricted cash, current assets, current liabilities, total debt, revenues, operating income (loss), cash flows from operations, investing activities, and financing activities when assessing our liquidity. Our management of cash is designed to optimize returns on cash balances and to ensure that it is readily available to meet our operating, investing, and financing requirements as they arise. We believe that there are no conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern for the twelve months following the issuance of the Consolidated Financial Statements.
Critical and Recent Accounting Policies
Critical accounting estimates are defined as those that, in our judgment, are most important to the portrayal of our Company's financial condition and results of operations and which require complex or subjective judgments or estimates. Actual results could differ materially from those estimates under different assumptions and conditions. Refer to the 2021 10-K for a discussion of our critical accounting estimates.
Our Significant Accounting policies are described in Note A, Overview and Significant Accounting Policies, in the Notes to Condensed Consolidated Financial Statements.
See Recent Accounting Pronouncements under Note B of the Notes to Condensed Consolidated Financial Statements for a discussion of certain accounting standards that have been recently issued.
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