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Houghton Mifflin Harcourt Announces First Quarter 2019 Results in Line With Expectations

Strong selling performance in Texas English Language Arts adoption; Reiterates 2019 guidance


BOSTON, May 9, 2019 /PRNewswire/ -- Learning company Houghton Mifflin Harcourt ("HMH" or the "Company") (HMHC) today announced its financial results for the quarter ended March 31, 2019.

Houghton Mifflin Harcourt Logo (PRNewsFoto/Houghton Mifflin Harcourt)

Operating Highlights:

  • HMH capturing a leading win rate with adoption decisions covering over two-thirds of the addressable Texas English Language Arts opportunity
  • Extensions billings grew 2%
  • HMH Books & Media (formerly referred to as Trade Publishing) billings grew 8%

 


Three Months Ended March 31, 

(in millions of dollars)

2019

2018 1 

Change 

Net sales               

$       195

$       200

(2.6) %

Billings  

155

165

(6.2) %

Loss from continuing operations     

(117)

(106)

(10.8) %

Adjusted EBITDA from continuing operations 2          

(27)

(24)

(12.0) %

Pre-publication or content development costs              

(26)

(24)

(6.5) %

Net cash used in operating activities               

(176)

(99)

(77.0) %

Free cash flow 2   

(212)

(135)

(56.9) %

1

All amounts have been adjusted to eliminate the impact of the Riverside Standardized Testing
business which has been removed from continuing operations and classified as discontinued 
operations.

2

Non-GAAP measure, please refer to Use of Non-GAAP measures for an explanation and
reconciliation.

"Our first quarter demonstrates progress against a key focus of our HMH 2020 strategy – enhancing and extending our core – as evidenced by our performance in Texas and growth within our Extensions, including new partnerships that continue to pave the way for our Learning Company journey," said Jack Lynch, Chief Executive Officer of HMH. "We are building great momentum in Texas, where our next-generation K-8 English Language Arts solutions are leading the market and creating a solid foundation for our high school curriculum, Into Literature, which was introduced to state educators this spring."

Joe Abbott, Chief Financial Officer of HMH added, "As expected, residual sales of our Core Solutions slowed in the first quarter as our customers evaluate new core programs for purchase and implementation later this year.  We are encouraged by our selling performance so far and remain confident in the full year financial outlook we provided in February."

First Quarter 2019 Financial Results:

Net Sales: HMH reported net sales of $195 million for the first quarter of 2019, down 3% or $5 million compared to $200 million in the same quarter of 2018. The net sales decrease was driven by a $9 million decrease in our Education segment, partially offset by a $4 million increase in our HMH Books & Media segment. Within our Education segment, the decrease was primarily due to lower net sales from Core Solutions, which declined by $9 million.

Billings: Billings for the first quarter of 2019 decreased $10 million, or 6%, from the same period in 2018. The billings decrease was driven by a $13 million decrease in our Education segment, partially offset by an $3 million increase in our HMH Books & Media segment.  Within our Education segment, the decrease was primarily due to lower Core Solutions billings, which declined by $15 million, driven by lower residual sales and international sales. Partially offsetting the decrease in our Core Solutions billings was a $2 million increase in billings from Extensions driven by continued growth of Heinemann's Fountas & Pinnell Classroom offering. The HMH Books & Media billings increase was driven by licensing income associated with the delivery of season two of the animated series Carmen Sandiego to Netflix.

Cost of Sales: Overall cost of sales slightly increased by $1 million to $137 million in the first quarter of 2019 from $136 million in the same period in 2018, primarily due to an increase in pre-publication amortization expense related to the timing of 2019 major product releases, partially offset by lower variable costs from reduced sales volume.

Selling and Administrative Costs: Selling and administrative costs increased by $7 million in the first quarter of 2019, primarily due to inflationary increases in labor costs, as well has higher samples driven by the larger new adoption opportunity in 2019.

Operating Loss: Operating loss for the first quarter of 2019 was $102 million, a $9 million unfavorable change from the $93 million operating loss recorded in the same period in 2018. The unfavorable change was primarily the result of lower net sales in the first quarter of 2019, coupled with an increase in selling and administrative expenses.

Net Loss: Net loss of $117 million for the first quarter of 2019 was $16 million more than the net loss of $101 million in the same quarter of 2018. Net loss from continuing operations for the first quarter of 2019 was $117 million, a $11 million unfavorable change from the $106 million net loss from continuing operations in the same quarter of 2018, due primarily to the same factors impacting operating loss and an unfavorable change in our tax provision of $3 million.

Adjusted EBITDA from Continuing Operations: Adjusted EBITDA from continuing operations for the first quarter of 2019 was a loss of $27 million, a $3 million unfavorable change from a loss of $24 million in the same quarter of 2018.

Cash Flows: Net cash used in operating activities for the first quarter of 2019 was $176 million compared with $97 million in the same quarter of 2018. Net cash used in operating activities from continuing operations was $176 million in the first quarter of 2019, an increase of $77 million compared to $99 million in the same quarter of 2018. Net cash used in operating activities included $3 million of cash flow from discontinued operations in 2018. HMH's free cash flow from continuing operations, defined as net cash from operating activities minus capital expenditures, in the first quarter of 2019 was a usage of $212 million compared with a usage of $135 million in the same quarter of 2018. The primary driver of the unfavorable change in free cash flow was an increase in net working capital associated with inventory purchases ahead of large new adoption opportunities in 2019 coupled with the timing of collections.

Conference Call:

At 8:30 a.m. ET on Thursday, May 9, 2019, HMH will also host a conference call to discuss the results with its investors. The call will be webcast live at ir.hmhco.com. The following information is provided for investors who would like to participate:

Toll Free: (844) 835-6565  
International: (484) 653-6719  
Passcode: 2019347   
Moderator: Brian Shipman, Senior Vice President, Investor Relations  
Webcast Link: https://edge.media-server.com/m6/p/su2x7gf9 

An archived webcast with the accompanying slides will be available at ir.hmhco.com for one year for those unable to participate in the live event. An audio replay of this conference call will also be available until May 19, 2019 via the following telephone numbers: (855) 859-2056 in the United States and (404) 537-3406 internationally using passcode 2019347.

Use of Non-GAAP Financial Measures:

To supplement our financial statements presented in accordance with Generally Accepted Accounting Principles (GAAP) and to provide additional insights into our performance (for a completed period and/or on a forward-looking basis), we have presented adjusted EBITDA from continuing operations and free cash flow. These measures are not prepared in accordance with GAAP. This information should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. Management believes that the presentation of these non-GAAP measures provides useful information to investors regarding our results of operations and/or our expected results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business.

Management believes that the presentation of adjusted EBITDA from continuing operations provides useful information to our investors and management as an indicator of our performance that is not affected by: fluctuations in interest rates or effective tax rates; levels of depreciation or amortization; non-cash charges; fees, expenses or charges relating to acquisition-related activities, including purchase accounting adjustments, integration costs and transaction costs, as well as to securities offering- and debt refinancing-activities; charges associated with restructuring and cost saving initiatives, including severance, separation and facility closure costs; certain legal settlements and awards; and non-routine costs and gains. Accordingly, management believes that this measure is useful for comparing our performance from period to period and makes decisions based on it. In addition, targets in adjusted EBITDA (further adjusted to include the change in deferred revenue and in certain instances to exclude pre-publication costs) are used as performance measures to determine certain incentive compensation of management. Management also believes that the presentation of free cash flow provides useful information to our investors because management regularly reviews free cash flow as an important indicator of how much cash is generated by general business operations, excluding capital expenditures, and makes decisions based on it.

Other companies may define these non-GAAP measures differently and, as a result, our use of these non-GAAP measures may not be directly comparable to adjusted EBITDA and free cash flow used by other companies. Although we use these non-GAAP measures as financial measures to assess our business, the use of non-GAAP measures is limited as they include and/or do not include certain items not included and/or included in the most directly comparable GAAP measure. Adjusted EBITDA from continuing operations should be considered in addition to, and not as a substitute for, net income or loss prepared in accordance with GAAP as a measure of performance; and free cash flow should be considered in addition to, and not as a substitute for, net cash provided by operating activities prepared in accordance with GAAP. Adjusted EBITDA from continuing operations is not intended to be a measure of liquidity nor is free cash flow intended to be a measure of residual cash flow available for discretionary use. You are cautioned not to place undue reliance on these non-GAAP measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures (to the extent available without unreasonable efforts) and related disclosure is provided in the appendix to this news release.

About Houghton Mifflin Harcourt

Houghton Mifflin Harcourt (HMHC) is a learning company committed to delivering integrated solutions that engage learners, empower educators and improve student outcomes. As a leading provider of K–12 core curriculum, supplemental and intervention solutions and professional learning services, HMH partners with educators and school districts to uncover solutions that unlock students' potential and extend teachers' capabilities. HMH serves more than 50 million students and 3 million educators in 150 countries, while its award-winning children's books, novels, non-fiction, and reference titles are enjoyed by readers throughout the world. For more information, visit www.hmhco.com

Follow HMH on Twitter, Facebook and YouTube.

Contact

Investors  
Brian S. Shipman, CFA  
SVP, Investor Relations  
(212) 592-1177  
brian.shipman@hmhco.com 

Media  
Bianca Olson  
SVP, Corporate Affairs  
(617) 351-3841  
bianca.olson@hmhco.com 

Forward-Looking Statements

The statements contained herein include forward-looking statements, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes," "estimates," "projects," "anticipates," "expects," "could," "intends," "may," "will," "should," "forecast," "intend," "plan," "potential," "project," "target" or, in each case, their negative, or other variations or comparable terminology. Forward-looking statements include all statements that are not statements of historical facts. They include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, including billings and net sales; financial performance, financial condition; liquidity; products and services, including for new adoptions; outlook for full year 2019; prospects; growth; markets and our positions therein; strategies, including with respect to investing in our Core Solutions and Extensions businesses and operational excellence; efficiency and cost savings initiatives, including actions thereunder and expected impact; the industry in which we operate; and potential business decisions. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this report.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results are consistent with the forward-looking statements contained herein, those results or developments may not be indicative of results or developments in subsequent periods.

Important factors that could cause our results to vary from expectations include, but are not limited to: changes in state and local education funding and/or related programs, legislation and procurement processes; changes in state academic standards; state acceptance of submitted programs and participation rates therefor; industry cycles and trends; the rate and state of technological change; state requirements related to digital instruction; changes in product distribution channels and concentration of retailer power; changes in our competitive environment, including free and low cost open educational resources; periods of operating and net losses; our ability to enforce our intellectual property and proprietary rights; risks based on information technology systems and potential breaches of those systems; dependence on a small number of print and paper vendors; third-party software and technology development; possible defects in digital products; our ability to identify, complete, or achieve the expected benefits of, acquisitions; unanticipated consequences of the recently completed disposition of our Riverside clinical and standardized testing business; our ability to execute on our long-term growth strategy; increases in our operating costs; exposure to litigation; major disasters or other external threats; contingent liabilities; risks related to our indebtedness; future impairment charges; changes in school district payment practices; a potential increase in the portion of our sales coming from digital sales; risks related to doing business abroad; changes in tax law or interpretations; management and other personnel changes; timing, higher costs and unintended consequences of our operational efficiency and cost-reduction initiatives; and other factors discussed in the "Risk Factors" section of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other news releases we issue and filings we make with the SEC. In light of these risks, uncertainties and assumptions, the forward-looking events described herein may not occur.

We undertake no obligation, and do not expect, to publicly update or publicly revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained herein.

 

Houghton Mifflin Harcourt Company

Consolidated Balance Sheets


(in thousands of dollars, except share information)

March 31,
2019
(Unaudited)
 

December 31,
2018
 

Assets



Current assets



Cash and cash equivalents           

$         74,185

$      253,365

Short-term investments

9,999

49,833

Accounts receivable, net

183,125

203,574

Inventories   

261,924

184,209

Prepaid expenses and other assets               

20,953

15,297




Total current assets           

550,186

706,278

Property, plant, and equipment, net        

116,095

125,925

Pre-publication costs, net       

321,837

323,641

Royalty advances to authors, net            

47,544

47,993

Goodwill

716,845

716,073

Other intangible assets, net     

511,963

520,892

Operating lease assets

144,695

Deferred income taxes            

3,259

3,259

Deferred commissions           

21,861

22,635

Other assets            

27,180

28,428




Total assets       

$    2,461,465

$   2,495,124




Liabilities and Stockholders' Equity



Current liabilities



Current portion of long-term debt

$           8,000

$          8,000

Accounts payable        

115,762

76,313

Royalties payable         

42,085

66,893

Salaries, wages, and commissions payable  

17,120

50,225

Deferred revenue         

234,014

251,944

Interest payable            

377

136

Severance and other charges        

1,717

6,020

Accrued postretirement benefits  

1,512

1,512

Operating lease liabilities

14,326

Other liabilities            

22,018

26,649




Total current liabilities       

456,931

487,692

Long-term debt, net of discount and issuance costs

754,513

755,649

Operating lease liabilities

142,441

Long-term deferred revenue   

373,749

395,500

Accrued pension benefits       

29,140

29,320

Accrued postretirement benefits             

13,268

14,300

Deferred income taxes            

32,972

27,075

Other liabilities       

5,780

17,118




Total liabilities   

1,808,794

1,726,654




Commitments and contingencies



Stockholders' equity



Preferred stock, $0.01 par value: 20,000,000 shares authorized; no shares issued and outstanding at
   March 31, 2019 and December 31, 2018               

Common stock, $0.01 par value: 380,000,000 shares authorized; 148,687,581 and 148,164,854 shares issued
   at March 31, 2019 and December 31, 2018, respectively; 124,110,547 and 123,587,820 shares
   outstanding at March 31, 2019 and December 31, 2018, respectively   

1,487

1,481

Treasury stock, 24,577,034 shares as of March 31, 2019 and December 31, 2018, respectively, at cost

(518,030)

(518,030)

Capital in excess of par value      

4,895,556

4,893,174

Accumulated deficit     

(3,679,608)

(3,562,971)

Accumulated other comprehensive loss       

(46,734)

(45,184)




Total stockholders' equity 

652,671

768,470




Total liabilities and stockholders' equity           

$    2,461,465

$   2,495,124




 

 

Houghton Mifflin Harcourt Company

Consolidated Statements of Operations (Unaudited)



Three Months Ended
March 31,
 

(in thousands of dollars, except share and per share information)

2019

2018

Net sales               

$       194,635

$       199,759

Costs and expenses



Cost of sales, excluding publishing rights and pre-publication
   amortization  

96,055

99,733

Publishing rights amortization          

7,605

10,090

Pre-publication amortization           

33,082

25,621




Cost of sales             

136,742

135,444

Selling and administrative

151,983

145,527

Other intangible asset amortization

6,524

6,866

Severance and other charges           

1,221

3,943

Loss on sale of assets        

884




Operating loss           

(101,835)

(92,905)




Other income (expense)



Retirement benefits non-service income        

42

320

Interest expense  

(11,582)

(10,936)

Interest income   

1,092

506

Change in fair value of derivative instruments            

(450)

372

Income from transition services agreement

1,826




Loss from continuing operations before taxes   

(110,907)

(102,643)

Income tax expense for continuing operations            

6,455

3,243




Loss from continuing operations          

(117,362)

(105,886)




Income from discontinued operations, net of tax             

4,575




Net loss      

$    (117,362)

$    (101,311)




Net loss per share attributable to common stockholders



Basic and diluted:



Continuing operations  

$           (0.95)

$           (0.86)

Discontinued operations              

0.04




Net loss            

$           (0.95)

$           (0.82)




Weighted average shares outstanding



Basic

123,798,641

123,222,353




Diluted       

123,798,641

123,222,353




 

 

Houghton Mifflin Harcourt Company

Consolidated Statements of Cash Flows (Unaudited)



Three Months Ended
March 31,
 

(in thousands of dollars)

2019

2018

Cash flows from operating activities



Net loss  

$ (117,362)

$ (101,311)

Adjustments to reconcile net loss to net cash used in operating activities



Income from discontinued operations, net of tax         

(4,575)

Loss on sale of assets  

884

Depreciation and amortization expense        

68,402

61,022

Amortization of debt discount and deferred financing costs        

1,046

1,046

Deferred income taxes 

5,897

4,230

Stock-based compensation expense             

3,551

2,893

Change in fair value of derivative instruments             

450

(372)

Changes in operating assets and liabilities, net of acquisitions



Accounts receivable          

20,482

34,679

Inventories        

(77,715)

(51,978)

Other assets      

(2,771)

1,991

Accounts payable and accrued expenses           

787

3,433

Royalties payable and author advances, net      

(24,359)

(18,218)

Deferred revenue              

(39,870)

(34,715)

Interest payable 

241

19

Severance and other charges             

(59)

3

Accrued pension and postretirement benefits    

(1,212)

(1,311)

Other liabilities  

(13,571)

2,791




Net cash used in operating activities – continuing operations 

(176,063)

(99,489)

Net cash provided by operating activities – discontinued operations      

2,803




Net cash used in operating activities       

(176,063)

(96,686)




Cash flows from investing activities



Proceeds from sales and maturities of short-term investments               

40,000

86,539

Additions to pre-publication costs          

(25,898)

(24,317)

Additions to property, plant, and equipment          

(10,375)

(11,483)

Acquisition of business, net of cash acquired        

(5,447)




Net cash (used in) provided by investing activities – continuing operations          

(1,720)

50,739

Net cash used in investing activities – discontinued operations              

(1,976)




Net cash (used in) provided by investing activities

(1,720)

48,763




Cash flows from financing activities



Payments of long-term debt   

(2,000)

(2,000)

Tax withholding payments related to net share settlements of restricted stock units and awards            

(1,756)

(1,073)

Issuance of common stock under employee stock purchase plan           

505

681

Net collections (remittances) under transition services agreement

1,854




Net cash used in financing activities – continuing operations 

(1,397)

(2,392)




Net decrease in cash and cash equivalents              

(179,180)

(50,315)

Cash and cash equivalents at the beginning of the period       

253,365

148,979




Cash and cash equivalents at the end of the period 

$  74,185

$  98,664




 

 

Houghton Mifflin Harcourt Company

Non-GAAP Reconciliations (Unaudited)



Adjusted EBITDA from continuing operations

Consolidated

(in thousands of dollars)



Three Months Ended March 31,


2019

2018 (1)

Net loss from continuing operations

$   (117,362)

$   (105,886)

Interest expense  

11,582

10,936

Interest income   

(1,092)

(506)

Provision for income taxes               

6,455

3,243

Depreciation expense        

16,179

18,445

Amortization expense – film asset  

5,012

Amortization expense       

47,211

42,577

Non-cash charges – stock compensation      

3,551

2,893

Non-cash charges – loss (gain) on derivative
   instrument      

450

(372)

Fees, expenses or charges for equity offerings,
  debt or acquisitions/dispositions

287

182

Severance, separation costs and facility closures

1,221

3,943

Loss on sale of assets

884




Adjusted EBITDA from continuing operations

$     (26,506)

$     (23,661)




 

 

Free Cash Flow

Consolidated

(in thousands of dollars)



Three Months Ended March 31, 


2019

2018 (1) 

Cash flows from operating activities



Net cash used in operating activities               

$    (176,063)

$       (99,489)

Cash flows from investing activities



Additions to pre-publication costs   

(25,898)

(24,317)

Additions to property, plant, and equipment

(10,375)

(11,483)




Free Cash Flow   

$     (212,336)

$     (135,289)




1

All amounts have been adjusted to eliminate the impact of the Riverside Standardized Testing business which has been removed from continuing operations and classified as discontinued operations.

 

 

Houghton Mifflin Harcourt Company

Calculation of Billings (Unaudited)


Billings (in thousands of dollars)

Consolidated 



Three Months Ended
March 31,
 


2019

2018 (1)

Net sales               

$      194,635

$      199,759

Change in deferred revenue             

(39,681)

(34,590)




Billings  

$      154,954

$      165,169





Education 



Three Months Ended
March 31,
 


2019

2018 (1) 

Core Solutions net sales    

$        51,994

$        61,230

Change in deferred revenue             

(30,252)

(24,822)




    Core Solutions Billings            

$        21,742

$        36,408

Extensions net sales           

$      101,850

$      101,793

Change in deferred revenue             

(8,608)

(10,064)




    Extensions Billings   

$        93,242

$        91,729




Education Billings              

$      114,984

$      128,137





HMH Books & Media 



Three Months Ended
March 31,
 


2019

2018

Net sales               

$        40,791

$       36,736

Change in deferred revenue             

(821)

296




HMH Books & Media Billings         

$        39,970

$       37,032




Billings is an operating measure utilized by the Company derived as shown above.


1

All amounts have been adjusted to eliminate the impact of the Riverside Standardized Testing business which has been removed from continuing operations and classified as discontinued operations.

 

 

 

Cision

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