0001564590-21-008418.txt : 20210225 0001564590-21-008418.hdr.sgml : 20210225 20210225070148 ACCESSION NUMBER: 0001564590-21-008418 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 148 CONFORMED PERIOD OF REPORT: 20201231 FILED AS OF DATE: 20210225 DATE AS OF CHANGE: 20210225 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Houghton Mifflin Harcourt Co CENTRAL INDEX KEY: 0001580156 STANDARD INDUSTRIAL CLASSIFICATION: BOOKS: PUBLISHING OR PUBLISHING AND PRINTING [2731] IRS NUMBER: 271566372 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-36166 FILM NUMBER: 21676356 BUSINESS ADDRESS: STREET 1: 125 HIGH STREET CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 617-351-5000 MAIL ADDRESS: STREET 1: 125 HIGH STREET CITY: BOSTON STATE: MA ZIP: 02110 FORMER COMPANY: FORMER CONFORMED NAME: HMH Holdings (Delaware), Inc. DATE OF NAME CHANGE: 20130626 10-K 1 hmhc-10k_20201231.htm 10-K hmhc-10k_20201231.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, or

For the fiscal year ended December 31, 2020

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-36166

 

Houghton Mifflin Harcourt Company

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

27-1566372

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

125 High Street

Boston, MA 02110

(617) 351-5000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

HMHC

The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes      No  

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2020, was approximately $161.3 million.

The number of shares of common stock, par value $0.01 per share, outstanding as of February 1, 2021 was 126,121,144.

Documents incorporated by reference and made a part of this Form 10-K:

The information required by Part III of this Form 10-K, to the extent not set forth herein, is incorporated herein by reference from the Registrant’s Definitive Proxy Statement for its 2020 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2020.

 


 

Table of Contents

 

 

 

Page(s)

 

 

Special Note Regarding Forward-Looking Statements

3

 

 

 

PART I

 

 

Item 1.

Business

4

Item 1A.

Risk Factors

16

Item 1B.

Unresolved Staff Comments

26

Item 2.

Properties

27

Item 3.

Legal Proceedings

27

Item 4.

Mine Safety Disclosures

27

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

28

Item 6.

Selected Financial Data

30

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

55

Item 8.

Financial Statements and Supplementary Data

56

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

116

Item 9A.

Controls and Procedures

116

Item 9B.

Other Information

117

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

117

Item 11.

Executive Compensation

117

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

117

Item 13.

Certain Relationships and Related Transactions, and Director Independence

117

Item 14.

Principal Accounting Fees and Services

117

 

 

 

PART IV

 

 

Item 15.

Exhibits, Financial Statement Schedules

118

Item 16.

Form 10-K Summary

123

 

 

SIGNATURES

124

 


 

SPECIAL NOTE REGARDING 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; financial condition; liquidity; prospects, growth and strategies; the expected impact of the COVID-19 pandemic; our competitive strengths; the industry in which we operate; the impact of new accounting guidance and tax laws; expenses; effective tax rates; future liabilities; the outcome and impact of pending or threatened litigation; decisions of our customers; education expenditures; population growth; state curriculum adoptions and purchasing cycles; the impact of dispositions, acquisitions and other investments; the timing, structure and expected impact of our operational efficiency and cost-reduction initiatives and the estimated savings and amounts expected to be incurred in connection therewith; 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. 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 actual results may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if actual 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 actual results to vary materially from expectations include, but are not limited to, those described in the “Risk Factors” section of this Annual Report on Form 10-K (this “Annual Report”).

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.

3


Item 1. Business

As used in this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “HMH” and the “Company” refer to Houghton Mifflin Harcourt Company, formerly known as HMH Holdings (Delaware), Inc., and its consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires.

Our Company

We are a learning technology company committed to delivering connected solutions that engage learners, empower educators and improve student outcomes. As a leading provider of Elementary and Secondary School (K–12) core curriculum, supplemental and intervention solutions, and professional learning services, we partner with educators and school districts to uncover solutions that unlock students’ potential and extend teachers’ capabilities. We estimate that we serve more than 50 million students and three million educators in 150 countries, while our award-winning children’s books, novels, non-fiction, and reference titles are enjoyed by readers throughout the world.

We are organized along two business segments: Education and HMH Books & Media (formerly referred to as Trade Publishing). Within our Education division, we focus on the kindergarten through 12th grade (“K-12”) market and, in the United States, we are a market leader. We specialize in comprehensive core curriculum, supplemental and intervention solutions, and we provide ongoing support in professional learning and coaching for educators and administrators. Our offerings are rooted in learning science, and we work with research partners, universities and third-party organizations as we design, build, implement and iterate our offerings to maximize their effectiveness. We are purposeful about innovation, leveraging technology to create engaging and immersive experiences designed to deepen learning experiences for students and to extend teachers’ capabilities so that they can focus on making meaningful connections with their students.

Our diverse portfolio enables us to help ensure that every student and teacher has the tools needed for success. We are able to build deep partnerships with school districts and leverage the scope of our offerings to provide holistic solutions at scale with the support of our far-reaching sales force and talented field-based specialists and consultants. We provide print, digital, and blended print/digital solutions that are tailored to a district’s needs, goals and technological readiness.

For nearly two centuries, our HMH Books & Media segment has brought renowned and awarded children’s, fiction, non-fiction, culinary and reference titles to readers throughout the world. Our distinguished author list includes ten Nobel Prize winners, forty-nine Pulitzer Prize winners, and twenty-six National Book Award winners. We are home to popular characters and titles such as Curious George, Carmen Sandiego, The Lord of the Rings, The Whole 30, The Best American Series, the Peterson Field Guides, CliffsNotes, and The Polar Express, and published distinguished authors such as Tim O’Brien, Temple Grandin, Tim Ferriss, Kwame Alexander, Lois Lowry, and Chris Van Allsburg. In November 2020, we announced that we were beginning to explore a potential sale of the HMH Books & Media segment. Such a sale would be intended to build on the Company’s other strategic restructuring efforts and further align its cost structure to its digital-first strategy.

Market Overview

We operate predominantly within the U.S. K-12 education market, which represents over $740 billion of total spending annually. Specifically, we focus on the U.S. market for K-12 instructional materials and services, which we estimate to be approximately $11.0 billion in size.

The U.S. Education market comprises approximately 13,000 K-12 public school districts, 130,000 public and private schools, over 3.7 million teachers and 56.4 million total student enrollment across public, private and charter schools. From Fall 2020 to Fall 2029, total elementary and secondary school enrollment, an important driver of long-term growth in the K-12 Education market, is projected to increase by 0.8% to 56.8 million students, according to the National Center for Education Statistics.

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The primary sources of funding for public schools in the U.S. are state and local tax collections, with Federal funding accounting for approximately 8% of public education spending nationally. Consequently, general or localized economic conditions as well as legislative and political decisions which affect the ability of state and school districts to raise revenue through tax collections can have a significant impact on spending and growth in the K-12 Education market. The COVID-19 pandemic has had an adverse impact on tax revenues and other financial resources in some states, which could adversely affect state and local spending on public schools, although it is expected that federal pandemic relief funding will help to mitigate those impacts. The Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 collectively provide $112.7 billion one-time emergency support for education through an Education Stabilization Fund, including $67.8 billion exclusively designated for public K-12 education. Public K-12 education has been, and remains, a high priority for political leaders, historically accounting for more than one-fifth of all state and local government spending.

 

Education policy and curriculum choices have traditionally been local prerogatives in the U.S., but Federal law and policy also play an important role. The Elementary and Secondary Education Act (“ESEA”), reauthorized in 2015 by the Every Student Succeeds Act (“ESSA”), requires that states, as a condition to receiving Federal education funds, adopt challenging academic content standards, administer annual student tests aligned to those standards, develop systems of accountability tied to specific goals for student achievement, and take measures to identify and support low performing schools. ESSA gives states more flexibility than they had under prior law, but still requires standards-based, largely assessment-driven accountability with a focus on the achievement of students in all demographic subgroups.

 

Title I, the largest program within ESEA, and other ESEA programs provide targeted funding for specific activities, such as early childhood education, school improvement, dropout prevention, and before- and after-school programs. The Individuals with Disabilities Education Act (“IDEA”) governs how states and public agencies provide early intervention, special education and related services to children with disabilities. Generally, school districts are permitted to spend ESEA funds on instructional materials, including core and supplemental materials, computer software, digital media, digital courseware, and online services.

 

Academic content standards, which are grade-level expectations for student learning, are established at the state level. States generally review and revise standards in each of the various subject areas every six to eight years, and the revision or adoption of new standards typically gives rise to the need for new instructional materials and services aligned to the new or revised standards. Content standards in English language arts and reading in many states are modeled to varying degrees after Common Core State Standards (“CCSS”) and in science after the Next Generation Science Standards (“NGSS”). Both the CCSS and NGSS are products of state-led collaborations. The promulgation of these model standards has led to greater consistency among states’ content standards but has not completely eliminated differences or the need for customized state-specific instructional materials.

Internationally, we export and sell K-12 English language education products to premium private schools that utilize the U.S. curriculum, who are located primarily in Asia, the Pacific, the Middle East, Latin America, the Caribbean and Africa. We also participate in the U.S. consumer book publishing market, which is estimated to be approximately $16.0 billion per year according to the Association of American Publishers.

Education net sales and billings are derived from Core Solutions and Extensions. Core Solutions products address the core curriculum market with grade-level, educational standards-aligned materials. Extensions products address the markets for supplemental programs, intervention programs, and professional learning. HMH Books & Media products primarily address the consumer book publishing market.

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Market Segments

Core Curriculum

Our core curriculum offerings cover state-level educational standards within a subject and include a comprehensive offering of teacher and student materials necessary to conduct grade-level instruction throughout the entire school year. Products and services include students’ print and digital resources and a variety of supporting materials such as teacher’s editions, formative assessments, whole group instruction materials, practice aids and ancillary materials.

Core curriculum programs traditionally have been the primary resource for classroom instruction in most K-12 academic subjects, and as a result, enrollment trends are a major driver of industry growth. Although economic cycles may affect short-term buying patterns, school enrollments, a driver of growth in the educational content industry, are highly predictable and are expected to trend upward over the longer term.

Demand for core curriculum programs is also affected by changes in state curriculum standards, which drive instruction, assessment, and accountability in each state. A significant change in state curriculum standards requires that assessments, teacher training programs, and instructional materials be revised or replaced to align to the new standards, which historically has driven demand for new comprehensive curriculum programs.

In the U.S., core curriculum is typically selected and purchased at the school district level and, in some cases, at the individual school level. In 19 states, before districts make their selections, programs are first evaluated at the state level for alignment to state academic standards and other criteria. These states are commonly referred to as “adoption states,” while states that do not have a state level review process are called “open states” or “open territory states.” The National Center for Education Statistics estimated the student population in adoption states represented approximately half of the U.S. public school elementary and secondary school-age population in 2020. In some adoption states, districts are required to select materials from the state-adopted list; in other adoption states, the state list serves as a recommendation, and districts are free to purchase and use any materials they choose, whether or not adopted by the state. Adoption states typically review materials in the various subject areas on a six- to eight-year cycle. School districts in those states tend to follow the state review cycle and replace core programs in the year or years immediately following state adoption. In open territory states, each individual school or school district evaluates and purchases materials independently, typically according to a five- to ten-year cycle. As a result, in individual adoption states, purchases of core instructional materials in a particular subject area tend to be clustered in a window of one to three years, while in individual open territory states they may occur over several years.

Supplemental

Supplemental resources encompass a wide variety of targeted solutions that enrich learning and support student achievement beyond core curriculum. Supplemental resources can be print and/or digital, and can include software, workbooks, test-prep materials, formative assessment, games, and apps. Newer technologies, such as artificial intelligence and machine learning, combined with more sophisticated algorithms are also driving the rise in supplemental computer-adaptive practice solutions that can both support teachers who are often time and bandwidth constrained, as well as improve personalization of learning for students.

Many teachers augment their core curriculum with supplemental resources for additional practice and personalized instruction around particular areas of need, such as Math, Reading, Writing, or Vocabulary. Supplemental materials are purchased by districts, schools, or individual teachers. These purchases are typically not tied to adoption schedules and leverage funding from local, state and federal sources. We estimate this market to be approximately $2.0 billion per year.

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Intervention

Intervention solutions are generally purchased by individual schools or districts. Demand for intervention materials is significant and growing in the United States. We estimate this market to be $1.5 billion per year. In the latest National Assessment of Educational Progress assessments conducted in 2019, more than 60 percent of public school students tested below proficiency in most grade levels in both literacy and mathematics. These students are strong candidates for intervention programs that are focused on improving outcomes and ensuring students perform at grade level. As demand for digital content and personalized learning solutions is growing, traditional distinctions between core, supplemental and intervention materials and assessments are blurring.

Intervention products and services are funded through state and local funding as well as Title I and other federal funding allocations pursuant to the ESEA and IDEA. Title I provides funding to schools and school districts with high concentrations of students from low income families and is often used to purchase intervention products and services.

Professional Learning

The professional learning market includes consulting and support services to assist individual schools and school districts in raising student achievement, implementing new programs and technology effectively, developing effective teachers, principals and leaders, as well as school and school-district turnaround and improvement solutions. We believe all districts and schools contract for some level of professional services. These services may include support for up-front training, in-classroom coaching, institutes, author workshops, professional learning communities, leadership development, technical support and maintenance, and program management.

One important source of funding for professional learning in the K-12 market is Title II, Part A of ESEA, Supporting Effective Instruction. Title II, Part A focuses on the role of the profession in improving student achievement and requires that funds be used to support professional development that is sustained, job-embedded, data-driven, and personalized. There are also significant funding opportunities for professional learning as part of state programs, especially in states that have consolidated program funding and want solutions that are evidence-based.

The professional learning market, which is relatively fragmented in the United States, is expected to grow as the transition to digital learning in classrooms increases the need for technology training and implementation support for educators. We currently estimate the professional learning market to be approximately $2.3 billion per year. We believe that the use of interim data, differentiation, teacher content knowledge (in mathematics) and the use of technology in the classroom are the areas in which teachers and leaders are most seeking support. Also, demand for teacher training and professional development opportunities tied to the implementation of new or revised standards at the state level is expected to continue. In addition, the need for new teacher development over the next several years is expected to grow as we continue to see the “greening” of the teaching force, with approximately 340,000 new teachers hired every year and approximately 44% of teachers leaving within their first five years in the profession, a trend that may accelerate as a result of the COVID-19 pandemic.

Consumer Book Publishing

The consumer book publishing market includes children’s, fiction, non-fiction, culinary and reference titles offered to consumers in print hardcover and softcover, ebook and audio formats, as well as multimedia extensions of the titles, content and intellectual property associated with these titles. Our sales in this market consist of frontlist titles (newly introduced titles, in their first year of publication) and backlist titles (current and updated copyright editions of titles sold after their first year of publication). In addition to new frontlist sales, market growth is driven by extended branding (e.g., movie tie-ins and anniversary releases of backlist titles) and new intellectual property creation (e.g., extension of characters and franchises into additional formats).

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Between 2018 and 2019, the consumer book publishing market grew 0.4% to $16.2 billion, according to the Association of American Publishers (the “AAP”). Since 2015, the same market has increased by 2.6%, or approximately $410 million, according to the AAP.

Print remains the primary format in which consumer books are produced and distributed and accounts for 74.7% of revenue. Hardback units account for 36.0% of total consumer book revenue despite representing only 24.2% of total consumer book units sold in 2019, per the AAP.

Digital formats show mixed results as downloaded audio sales grew 15.9% from 2018 to 2019 and 143.8% from 2015 to 2019; however, ebook revenue fell 4.9% from 2018 to 2019 and declined 30.8% from 2015 to 2019, according to the AAP.  

Our Products and Services

We are organized in two business segments: Education and HMH Books & Media. Our primary segment measures are net sales and Adjusted EBITDA. The Education segment is our largest business, representing approximately 81%, 87% and 85% of our total net sales for the years ended December 31, 2020, 2019 and 2018, respectively.

Education

Our Education segment provides connected solutions that engage learners, empower educators and improve student outcomes. The principal customers for our Education products are K-12 school districts, which purchase core curriculum, supplemental and intervention solutions and professional learning services.

The Education segment net sales and Adjusted EBITDA were $839.6 million and $145.9 million, $1,210.6 million and $196.9 million, and $1,122.7 million and $210.6 million for the years ended December 31, 2020, 2019 and 2018, respectively, with our 2020 financial results being adversely impacted by the COVID-19 pandemic. Our Education offerings consist of the following:

 

Core Solutions: Our core curriculum offerings include education programs in disciplines including Reading, Literature, Math, Science and Social Studies that serve as primary sources of classroom instruction and represented 50% and 54% of our Education segment billings for the years ended December 31, 2020 and 2019, respectively.

 

Our core programs are developed based on extensive hours of research, including educator input. Educators are the centerpiece of the classroom, but count on comprehensive core curriculum to be the backbone of their instruction. Our core solutions are created to provide educators with the resources needed to align with state standards and support students in their mastery of grade-level subject matter.

 

Between 2016-2018, we launched our next generation of core programs for each of the major subject areas: English Language Arts (Reading and Literature), Mathematics, Science and Social Studies. Our Into Reading and Into Literature national programs, our Into Math national offerings for grades 3-5 and 6-8 along with the K-8 Florida version all received top “all green” scores from EdReports.org.  Science Dimensions, which was co-authored by Dr. Cary Sneider, a writer of the Next Generation Science Standards, was approved by the State Board of Education of California in 2018. HMH Social Studies, our next generation social studies program for grades 6-12, incorporates innovative technology like Google Expeditions to offer curriculum-aligned virtual reality field trips.

 

Extensions: Our extensions offerings include supplemental solutions, intervention solutions, professional services, and our Heinemann brand that provides professional resources and educational services for teachers. Our extensions offerings collectively accounted for 50% and 46% of our Education segment billings for the years ended December 31, 2020 and 2019, respectively.

 

The extensions category represents a notable growth opportunity. We estimate this category accounts for about $6 billion in market opportunity.

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Through our Heinemann brand, we provide professional books, supplemental and intervention curricular resources, and professional services for teachers. Heinemann is a leading professional publisher for educators, and features well-known, respected authors and thought leaders such as Irene Fountas, Gay Su Pinnell, Lucy Calkins, and Jennifer Serravallo, who support the practice of teachers through books, videos, workshops, online courses, and curricular resources.

 

Our intervention solutions also include: READ 180 Universal, one of a select number of programs that the independent, government-run What Works Clearing House has awarded its highest effectiveness ratings for improving comprehension and literacy achievement; MATH 180, a math intervention program focusing on deep understanding and mastery of essential skills and concepts enabling access to algebra and advanced mathematics; System 44, a stand-alone program with a holistic, blended learning model that delivers just-in-time intensive intervention for the most challenged readers in grades 3-12; and iRead, an adaptive technology-based solution focused on helping early learners in grades K-2 become more proficient readers using personalized learning. These solutions are called upon to help students with unique needs, such as the growing population of English language learners.

 

Our professional services offerings bring together world-renowned authors and education experts to work directly with K-12 educators and administrators to build instructional excellence, cultivate leadership and provide school districts with the comprehensive support they need to raise student achievement. These offerings include ongoing curriculum support and expertise in professional development, coaching, and strategic consulting from trusted names like the International Center for Leadership in Education, Literacy Solutions, and Math Solutions.

 

Our supplemental solutions include award-winning solutions like Waggle (which won the CODiE award for “Best Learning Capacity-Building Solution”), as well as artificial intelligence and state-of-the-art speech recognition-driven Amira Assessment and writing-enhancing online tool Writable that we offer through strategic partnerships. We also offer HMH Classroom Libraries, which provide individually curated collections of “just-right” books to strengthen literacy development and foster independent reading.

 

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By leveraging our leading position in the U.S. instructional materials market, we aim to engage our customers with solutions addressing the variety of instructional needs across the educational achievement spectrum. We believe that by integrating our solutions on a single platform, which uses a common student dataset, and by developing ongoing connections with the teachers who use our solutions, we will be well positioned to increase and sustain market share and grow our Education segment revenues.

HMH Books & Media

Founded in 1832, HMH Books & Media develops, markets and sells consumer books in print and digital formats and licenses book rights to other publishers and electronic businesses in the United States and abroad. Our principal distribution channels for this segment are retail stores (both physical and online) and wholesalers. Reference materials are also sold to schools, colleges, libraries, office supply distributors and other businesses.

HMH Books & Media offers an extensive library of general interest, young readers and reference works that include well-known characters and brands. Our award-winning general interest titles include literary fiction, culinary, and non-fiction in hardcover, ebook and paperback formats, including the Mariner Books paperback line. Among the general interest properties are the popular J.R.R. Tolkien titles, the prolific The Best American Series and major cookbook brands such as Betty Crocker and Better Homes and Gardens in addition to recent best sellers including the How to Cook Everything series and The Whole30.

In young readers publishing, our list addresses a broad age group and includes recognized characters and titles such as Curious George and Martha Speaks, Five Little Monkeys, Gossie & Friends, Polar Express, Little Blue Truck, and many more. We also publish novels for young adults, a growing genre, including titles from Lois Lowry, author of The Giver, and Kwame Alexander. Our HMH Books & Media business collaborated on the launch of a new animated series Carmen Sandiego on Netflix as part of our strategy to expand our content across media platforms. In February 2019, we also launched HMH Audio with the goal of capitalizing on the growth of downloaded audiobooks; in Fall 2019, we released new audiobook editions of many of our adult and young reader frontlist books, as well as select titles from our substantial backlist.

For the years ended December 31, 2020, 2019 and 2018, HMH Books & Media net sales and Adjusted EBITDA were approximately $191.7 million and $26.6 million, $180.0 million and $14.9 million, and $199.7 million and $21.9 million, respectively.

In November 2020, we announced that we were exploring a potential sale of the HMH Books & Media segment. Such a sale would be intended to build on the Company’s other strategic restructuring efforts and further align its cost structure to its digital-first strategy.

Seasonality

Approximately 81% of our net sales for the year ended December 31, 2020 were derived from our Education segment, which is a markedly seasonal business. Schools conduct the majority of their purchases in the second and third quarters of the calendar year in preparation for the beginning of the school year. Thus, over the latest three completed fiscal years, approximately 66% of our consolidated net sales were realized in the second and third quarters. Sales of K-12 instructional materials are also cyclical, with some years offering more sales opportunities than others based on the state adoptions calendar. The amount of funding available at the state level for educational materials also has a significant effect on year-to-year net sales. Although the loss of a single customer would not have a material adverse effect on our business, schedules of school adoptions and market acceptance of our products can materially affect year-to-year net sales performance.

Competition

We sell our products in highly competitive markets. In these markets, product quality, innovation and customer service are major differentiating factors between companies. Other factors affecting competition include: (i) competitive pricing, sampling and gratis costs; (ii) digitization and innovative delivery; and (iii) educational effectiveness of the program. In addition to national curriculum publishers, we also compete with a variety of specialized or regional publishers that focus on select disciplines and/or geographic regions in the K-12 market. There are also multiple competitors in the HMH Books & Media, supplemental and assessment markets offering

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content that school districts increasingly are using as part of their core classroom instructional materials. In addition, school districts in many states are able to spend educational funds on “instructional materials” that include core and supplemental materials, computer software, digital media, digital courseware, and online services. Our larger competitors in the educational market include Savvas Learning Co. (formerly Pearson Education, Inc.), McGraw Hill Education, Stride Inc. (formerly K-12 Inc.), Cengage Learning, Inc., Scholastic Corporation, John Wiley & Sons, Inc., Curriculum Associates, LLC, Benchmark Education, LLC, Accelerate Learning, Inc., and Amplify Education, Inc. Also competing in our market as a substitute are open educational resources. These resources are free, digital solutions that range from supplemental resources to full Core Solutions programs.

Printing and binding; raw materials

We outsource the printing and binding of our products, with approximately 49% of our printing requirements handled by a small group of suppliers. We have procurement agreements that provide volume and scheduling flexibility and price predictability. We have a longstanding relationship with these parties. Approximately 22% of our printed materials (consisting primarily of teacher’s editions and other ancillary components) are printed outside of the U.S. and approximately 78% of our printed materials (including most student editions) are printed within the U.S. Paper is one of our principal raw materials. We purchase our paper primarily through one paper merchant and also directly through suppliers for limited product types. We maintain various agreements that protect against supply availability and unbound price increases. We manage our paper supply concentration by having primary and secondary sources and staying ahead of dramatic market changes.

Distribution

We operate three distribution facilities from which we coordinate our own distribution process: one each in Indianapolis, Indiana; Geneva, Illinois; and Troy, Missouri. We also utilize select suppliers to assist us with coordinating the distribution process for a limited number of product types. Additionally, some states require us to use in-state textbook depositories for educational materials sold in that particular state. We utilize various delivery firms, such as United Parcel Service Inc., FedEx Freight, etc., to facilitate the principally ground transportation of products.

Human Capital

 

As of December 31, 2020, we had approximately 2,600 full-time, part-time and temporary employees, none of whom were covered by collective bargaining agreements. We consider our relationship with our employees generally to be good.

 

Health and Safety: The health and safety of our employees is one of our highest priorities, and this is consistent with our operating philosophy. Following Occupational Safety and Health Administration best practices in our distribution centers, we measure, document and post incident rates for safety transparency; host local employee safety committees at each distribution center; and hold quarterly distribution center safety committee meetings for cross-location collaboration.  In response to the COVID-19 pandemic, we have implemented and continue to implement additional safety measures in all our offices and facilities including: adding work from home flexibility; adjusting attendance policies to encourage those who are sick to stay home; increasing cleaning protocols across all locations; initiating regular communication regarding impacts of the COVID-19 pandemic, including health and safety protocols and procedures; implementing temperature screening of employees at our distribution facilities and offices; establishing new physical distancing procedures for employees who need to be onsite; providing additional personal protective equipment and cleaning supplies; modifying work spaces with plexiglass dividers and touchless faucets; implementing protocols to address actual and suspected COVID-19 cases and potential exposure; prohibiting all domestic and international non-essential travel for all employees; and requiring masks to be worn in all locations where permitted by local law.

 

Talent and Development: Successful execution of our strategy is dependent on attracting, developing and retaining key employees and members of our management team. The skills, experience and industry knowledge of our employees significantly benefit our operations and performance. We continuously evaluate, modify, and enhance our internal processes and technologies to increase employee engagement, productivity, and efficiency.  In 2020, we provided a company-wide employee engagement survey to all regular employees. We outperformed

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benchmarked peer companies with engagement among our employees in the 86th percentile. Frequent employee pulse surveys were conducted during 2020 in light of the COVID-19 pandemic, allowing us to quickly collect and respond to feedback – including with more activities and initiatives to support our employees. We additionally continue to provide all of our employees with a variety of training and development opportunities. All regular employees have access to Knowledge Network, HMH’s online learning management system offering over 6,000 on demand training courses and programs, live webinars and in-person training opportunities. More than 2,900 employees participated in training programs in 2020, including Unconscious Bias, Cybersecurity, Sales, Product and Compliance Training as well as Leadership and Management Development Workshops, with more than 15,000 corporate training hours logged.

 

Diversity and Inclusion: We embrace the diversity of our employees, customers and stakeholders, including their unique backgrounds, experiences, thoughts and talents. Everyone is valued and appreciated for their distinct contributions to the growth and sustainability of our business. We strive to cultivate a culture and vision that supports and enhances our ability to recruit, develop and retain diverse talent at every level. We take direct actions to attract, hire, and retain more diverse talent, nurture an inclusive workplace, and create opportunities for meaningful conversations about diversity. We aim to increase the diversity of our employee base by growing our diverse talent pipeline, including partnerships with organizations like Resilient Coders, Girls Write Now, Hacker X, and Editors of Color. We have a goal to build a highly engaged team by increasing retention year over year. As of December 31, 2020, our domestic workforce was approximately 67% female and approximately 77% white, approximately 9% Hispanic or Latino, approximately 8% Black or African American, approximately 5% Asian American, and approximately 1% two or more races or other. Additionally, as of December 31, 2020, approximately 38% of executive management roles were held by women and our executive management team was approximately 77% white, approximately 15% Black or African American, and approximately 8% Hispanic or Latino.

 

As a learning technology company, we are committed to ongoing opportunities for education and growth. This includes formal and informal opportunities for meaningful conversations—from roundtable discussions to company-wide unconscious bias training. Learning and unlearning are lifelong practices that we must actively foster—in our schools, communities, and workplaces. Our cross-functional DEI (“Diversity, Equity and Inclusion”) Council’s work centers around four pillars—leadership, talent, culture, and business—and promotes social justice through Employee Resource Groups (“ERGs”), DEI trainings, and discussions on how to build an anti-racist community. We have ERGs to support Black and African American, Latinx and Hispanic, LGBTQ+, Asian, disabled and neurodiverse, and female employees, in addition to ERGs focused on mental health and wellness. The ERGs hosted virtual activities throughout 2020.

 Intellectual property

Our principal intellectual property assets consist of our trademarks and copyrights in our content. Substantially all of our publications are protected by copyright, whether registered or unregistered, either in our name as the author of a work made for hire or the assignee of copyright, or in the name of an author who has licensed us to publish the work. Ownership of such copyrights secures the exclusive right to publish the work in the United States and in many countries abroad for specified periods: in the United States, in most cases, either 95 years from publication or for the author’s life plus 70 years, but in any event a minimum of 28 years for works published prior to 1978 and 35 years for works published thereafter. In most cases, the authors who retain ownership of their copyright have licensed to us exclusive rights for the full term of copyright. Under U.S. copyright law, for licenses granted by an author during or after 1978, such exclusive licenses are subject to termination by the author or certain of the author’s heirs for a five year period beginning at the end of 35 years after the date of publication of the work or 40 years after the date of the license grant, whichever term ends earlier.

We do not own any material patents, franchises or concessions, but we have registered certain trademarks and service marks in connection with our publishing businesses. We believe we have taken, and take in the ordinary course of business, appropriate available legal steps to reasonably protect our intellectual property in all material jurisdictions.

Environmental matters

We generally contract with independent printers and binders for their services, and our operations are generally not otherwise affected by environmental laws and regulations. However, as the owner and lessee of real

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property, we are subject to environmental laws and regulations, including those relating to the discharge of hazardous materials into the environment, the remediation of contaminated sites and the handling and disposal of wastes. It is possible that we could face liability, regardless of fault, and can be held jointly or severally liable, if contamination were to be discovered on the properties that we own or lease or on properties that we have formerly owned or leased. We are currently unaware of any material environmental liabilities or other material environmental issues relating to our properties or operations and anticipate no material expenditures for compliance with environmental laws or regulations.

 

Environmental, Social and Governance (ESG)

As a corporate citizen, we accept and promote a community responsibility to minimize our impact on the environment to ensure that we will be able to serve teachers, students and all readers for years to come. As such, we seek to make environmentally responsible choices in our business practices. We set objectives for continual improvement of our environmental and sustainability management procedures. Looking ahead, we are working to expand our company-wide sustainability efforts, setting additional goals and measuring progress in other areas material to our business.

Responsible Paper Usage

One of our on-going sustainability focus areas is our approach to how we source, use and dispose of paper related to our products. In 2019, we strengthened and updated our Paper Sourcing and Usage Policy that reflects our continuing commitments to our environment and surroundings. Key 2020 progress highlights were: 99% of HMH purchased paper for education products was manufactured with no less than 10% recycled fiber; 87% of paper we procured domestically for HMH Books & Media segment products was Forest Stewardship Council (FSC)-certified; and 86% of the paper we procured internationally for HMH Books & Media segment products was FSC-certified.

Transportation

 

A major aspect of our business involves the transportation of our products, and we work to promote environmentally friendly modes of such transportation. In 2020, HMH estimates that it saved 332,000 pounds of CO2 emissions by managing our carbon footprint by consolidating shipments and shipping directly from vendors to end recipients when possible.

 

HMH participates in the Environmental Protection Agency’s (“EPA”) SmartWay program.  The EPA’s SmartWay program helps companies advance supply chain sustainability by measuring, benchmarking, and improving freight transportation efficiency. Through this program, HMH partners with the EPA to improve our shipping operations to achieve a more sustainable transportation process that directly facilitates a reduction in our carbon footprint. In 2020, HMH estimates that it saved 130,000 pounds of CO2 emissions by participating in the SmartWay program.

 

Waste Management and Recycling

 

Whenever possible, we aim to recycle our excess product and waste generated at our Distribution Centers to avoid sending recyclable products and other waste to landfills.

 

Donation is HMH’s preferred method of disposal for excess books and materials (rather than destruction) and HMH donated more than one million books to 228 organizations during 2020.

96% of the waste generated at HMH’s Distribution Centers is recycled.

 

In our corporate offices, each employee has a recycling and a garbage bin.  We work to increase employee awareness regarding waste management and recycling with bins and signage.

 

Energy Use

 

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We continue to strive to reduce energy consumption at our HMH Warehouses and related offices through:

 

Conversion to high efficiency fluorescent bulbs

Conference rooms with motion sensor lighting

Energy-efficient HVAC and Heating Units

LED light fixtures in parking lots

 

In addition, the building that houses HMH’s Boston Headquarters at 125 High Street has received the LEED® (Leadership in Energy and Environmental Design) Gold Certification for Existing Buildings™, which is the second highest LEED Certification level attainable.  

 

Further, HMH is listed in Forbes’ “Work from Home 2019: The Top 100 Companies for Remote Jobs” due to our remote location positions across the company that contribute to the reduction in facility energy use and employee transportation fuel consumption.

 

Human Rights & Conduct

 

Our values guide every aspect of our work. We believe that respecting and protecting human rights is fundamental to our work as a responsible company. We align with the United Nations Universal Declaration of Human Rights and other international human rights laws and standards and strive to embody these values in our culture. We seek to embed respect for human rights across our business and with vendors and suppliers with whom we do business as set forth in our Supplier Code of Conduct.

 

Diversity, Equity and Inclusion

 

At HMH, we believe in social justice. The critical work to improve diversity, equity and inclusion is an inward and outward process—we are constantly seeking new ways to better our own culture as we strive to better our world. We aim to create and cultivate an employee community, company culture and business strategy that reflects the diverse demographics and perspectives of our customers. Further, we embrace the diversity of our employees, customers and stakeholders, including their unique backgrounds, experiences, thoughts and talents. We strive to cultivate a culture and vision that supports and enhances our ability to recruit, develop and retain diverse talent at every level.  We take direct actions to nurture an inclusive workplace.

 

In 2020, we established a DEI Council made up of a cross-functional, diverse group of employees. The DEI Council supports our company-wide DEI efforts and takes actionable steps toward reaching our DEI goals. The council supports HMH’s Employee Resource Groups, DEI trainings, and discussions on how to build HMH as a model antiracist community. In 2020, we also named a Director of Diversity, Equity and Inclusion to guide our DEI work, engaging critical stakeholders company-wide in our DEI goals and areas of focus. Last year, we provided opportunities for education and growth, including formal and informal opportunities for meaningful conversations — namely, antiracism roundtable discussions and company-wide unconscious bias training for managers.

 

As a learning technology company focused on empowering students and teachers, it is our responsibility to build content and provide services and resources that foster a holistic understanding of our world and honor the diverse communities we serve. As an organization, we too are always learning and growing, and we will continue to be intentional about improvements we make as part of our continuous evolution. To that end, we established a Content Review Panel – a cross-disciplinary internal advisory board that focuses on equity, inclusion, and diversity in our solutions. The panel reviews our content, striving for equitable, nonbiased, and sensitive treatment and representation for all individuals, communities, and experiences across all HMH programs, services, and platforms. In 2020, the Content Review Panel reviewed over 4,000 pages of content, including a full, proactive review of Math180 and Confronting Racism curriculum.

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As outlined in our Content, Equity, Inclusion and Diversity pledge available on our website at https://www.hmhco.com/diversity-equity-inclusion/our-world, we are committed to producing curriculum in which all students can see themselves and the possibilities for their future success. Our programs are strongest when they resonate with learners, inspire connections and spark dialogue, and honor the unique qualities and experiences of every learner.

 

In 2020, a cross-functional Supplier Diversity Council was formed to drive HMH’s Supplier Diversity Program forward. The council is focused on fostering meaningful partnerships with diverse suppliers in all areas of HMH’s business – aiming to establish new partnerships with small and diverse suppliers while also deepening relationships with diverse suppliers that HMH already works with. As part of our commitment to supplier diversity, HMH is a member of the National Minority Supplier Development Council and the Women’s Business Enterprise National Council.

 

COVID-19 Safety Initiatives

 

At HMH, employee safety and welfare is one of our highest priorities. The COVID-19 pandemic has required additional healthy and safety measures be implemented company-wide. Upon daily arrival at our Distribution Centers, all employees, vendors and visitors are screened by medical personnel for COVID-19 symptoms or exposures.  HMH staff and visitors wear masks to help prevent community spread. Breaks and lunches are staggered to maintain CDC-guided social distancing. Workstations are sanitized daily and shared equipment is sanitized after each use. In the event an employee is sick or under quarantine with COVID-19, they will receive full COVID-pay.  If an employee has been in a facility and has tested positive for COVID-19, the entire facility is closed for 24-48 hours and is sanitized before anyone can return.

Additional information

We are headquartered in Boston, Massachusetts. Our corporate website is www.hmhco.com. We make available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, as well as other information, free of charge through our corporate website under the “Financial Information” link located at: ir.hmhco.com, as soon as reasonably practicable after being filed with or furnished to the Securities and Exchange Commission (the “SEC”). The information found on our website or any other website we refer to in this Annual Report on Form 10-K is not part of this Annual Report on Form 10-K or any other report we file with or furnish to the SEC.

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Item 1A. Risk Factors

Risks Related to the COVID-19 Pandemic

The ongoing COVID-19 pandemic has had, and are likely to continue to have, material adverse effects on our business, financial position, results of operations and cash flows.

Our business and financial results has been negatively impacted by the current COVID-19 pandemic which has had, and is likely to continue to have, negative impacts on our business, including causing significant volatility in demand for our products, our ability to service our customers, changes in consumer behavior and preference, disruptions in our supply chain operations and warehousing operations, limitations on our employees’ ability to work and travel, adverse impacts on third parties upon which we rely, our ability to satisfy our debt and other obligations, our liquidity, declines in state revenues and related impacts on educational budgets, and significant changes in the economic or political conditions in markets in which we operate, both near-term and potentially long-term. Moreover, significant uncertainties exist regarding the format and other safety procedures schools may follow at various points during the school year. The decisions various schools make with regards to in-person and/or remote learning and whether to deviate from a chosen format due to outbreaks will impact demand for our products and services in ways that we cannot predict and may be challenging for us to respond to. Despite our efforts to manage these risks, their ultimate impact will depend on factors beyond our knowledge or control, including the duration and severity of the current pandemic and actions taken to contain its spread and mitigate its public health effects.

Risks Related to Our Industry and Operations

Our business and results of operations may be adversely affected by changes in federal, state and local education funding, and changes in legislation and public policy.

A majority of our sales are to public school districts in the United States, most of which rely primarily on a combination of local tax revenues and state legislative appropriations for general operating funds and to pay for purchases of goods and services, including instructional materials. Funding for public schools at both the state and local levels can be affected by tax collections, which are typically sensitive to general economic conditions, and by political and policy choices made by state and local governments. A reduction in funding levels, whether due to an economic downturn or legislative action, or a failure of projected funding increases to materialize, can constrain resources available to school districts for making purchases of instructional materials and adversely affect our business and results of operations. The economic slowdown resulting from the COVID-19 pandemic has had a negative impact on tax revenues and other financial resources in some states and localities, which could adversely affect public school finances and spending in those places, including for instructional materials and professional learning services.

Some states, including most adoption states, provide dedicated state funding for the purchase of instructional content and/or classroom technology, and expenditures for instructional materials in those states tend to be highly dependent on appropriation of those funds. If dedicated funding is not appropriated, or if the amount is substantially less than anticipated or legislative action is taken to lift restrictions on the use of those funds, then purchases of instructional materials may be significantly reduced and our net sales may be adversely impacted.

In addition, many school districts, including most large urban districts, receive substantial federal funding through the Elementary and Secondary Education Act (“ESEA”), the Individuals with Disabilities Act (“IDEA”), and other federal education programs. These funds supplement state and local funding and are used primarily to serve specific populations, such as low-income students and families, students with disabilities, and English language learners as well as to support programs to improve the quality of instruction, including educator professional learning. The funding of these programs is subject to Congressional appropriation. A significant reduction in appropriation levels could have an adverse effect on our sales, particularly sales of intervention, supplemental and professional learning products and services.

Federal and state legislative and policy changes can also affect our business. At the federal level, ESEA governs to a significant degree how states approach assessment and accountability, support and improvement of low performing schools, and take into account evidence of effectiveness in adopting strategies and selecting educational products and services paid for with federal funds. Changes in ESEA and/or state legislation and administrative policy decisions on matters such as assessment and accountability, curriculum and intervention could affect demand for our products.

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State instructional materials adoptions, which account for a significant portion of our net sales of K-12 instructional materials, are highly cyclical and pose significant inherent risks that could materially impact our results of operations.

Due to the revolving and staggered nature of state adoption schedules, sales of K-12 instructional materials have traditionally been cyclical, with some years offering more and/or larger sales opportunities than others. Since a large portion of our sales are derived from state adoptions, our overall results can be materially affected from year to year by the adoption schedule, particularly in large adoption states. Our failure to secure approval for our programs or perform according to our expectations in larger new adoption opportunities could materially and adversely affect our net sales for the year of the adoption and in subsequent years.

In any state adoption, there is the inherent risk that one or more of our programs will not be approved by a particular state board of education or other adopting authority. While school districts in most adoption states are not precluded from purchasing materials that have not been approved by the state, in many cases, exclusion of a program on the state-adopted list can materially and adversely impact our ability to compete effectively at the school district level. Moreover, even if our program is approved by the state, we face significant competition and there is no guarantee that school districts will select our program or that we will be able to capture a meaningful share of the sales in such state.

State adoptions can be delayed, postponed or cancelled—sometimes with little or no warning and after we have made significant investments in anticipation of the adoption—due to various reasons, such as funding shortfalls, delays in development and approval of state academic standards and specifications, competing priorities or school readiness. In addition, individual school districts may decline to purchase new programs in accordance with the state’s adoption schedule. A substantial delay, postponement or cancellation of a large adoption opportunity can adversely affect the amount and timing of our net sales return on investment for the affected product, our business and our results of operations.

Further, the timing of the legislative appropriations process in most states is such that it is often impossible to know with certainty whether implementation of an adoption will be funded until after products have been submitted for review. By that time, investments have been made for product development and substantial expenses incurred for sales, marketing and other costs. If the legislature in a state that provides dedicated funding for instructional materials decides not to appropriate those funds or appropriates substantially less than anticipated, due to a revenue shortfall or other reasons, or if the legislature lifts restrictions on use of those funds, then implementation of that adoption could be substantially compromised or delayed and our net sales and return on investment could be adversely affected.

Changes in state academic standards could affect our market and require investment in development of new programs or modifications to our existing programs and any delays or controversies in the implementation of such standards could impact our results of operations.

States may adopt new academic standards or revise existing standards, which may affect our market and require investment in the development of new programs or modifications to our existing programs offered for sale in states that adopt such changes. Delays or controversies in the implementation of the adoption of new or revised academic standards may result in insufficient lead time before the deadline to submit instructional materials for an adoption. As a result, we have in the past and may again have to invest more than planned in order to complete product development or make the modifications in the compressed timeframe to bring our program into alignment with the new or revised standards, adversely affecting our return on investment. Alternatively, we may determine that completing product development or making the modifications within the available timeframe is not practicable, and elect not to participate in the adoption, forgoing what might have been a significant sales opportunity which could materially and adversely affect our net sales for the year of the adoption and subsequent years.

We operate in a highly competitive environment where the risks from competition are intensified due to rapid changes in our markets and industry; as a result, we must continue to adapt to remain competitive.

We operate in highly competitive markets. The risks of competition are intensified in the current environment where investment in new technology is ongoing and there are rapid changes in the products and services our customers are seeking and our competitors are offering, as well as new technologies, sales and distribution channels.

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In addition to national curriculum publishers, we compete with a variety of specialized or regional publishers that focus on select disciplines and/or geographic regions in the K-12 market. There are multiple competitors in the HMH Books & Media segment and supplemental market offering content that school districts increasingly are using as part of their core classroom instructional materials. Our larger competitors in the educational market include Savvas Learning Co. (formerly Pearson Education, Inc.), McGraw Hill Education, Stride Inc. (formerly K-12 Inc.), Cengage Learning, Inc., Scholastic Corporation, John Wiley & Sons, Inc., Curriculum Associates, LLC, Benchmark Education, LLC, Accelerate Learning, Inc., and Amplify Education, Inc. Some of these established competitors may have greater resources and less debt than us and, therefore, may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products and services than we can. Also competing in our market as a substitute are open source educational resources. In addition, the market shift toward digital education solutions has induced both established technology companies and new start-up companies to enter certain segments of our market. These new competitors have the possible advantage of not needing to transition from a print business to a digital business. In addition, many established technology companies have substantial resources that they could devote to developing or acquiring digital educational products and/or content and, distributing their own and/or aggregated educational content to the K-12 market, which could negatively affect our business, financial condition and results of operations. There is also a risk of further disintermediation, which is the occurrence of state, district and other customers contracting directly with technology companies, enabling technology companies to develop direct relationships with our customers, and accordingly, have significant influence over access to and, pricing and distribution of, digital and print education materials. We may not be able to adapt as needed to remain competitive in the market given the foregoing factors.

The availability of free and low-cost open education resources could adversely affect our net sales and exert downward pressure on prices for our education products.

In the K-12 market, we face growing competition from free, openly licensed content, often referred to as open education resources (“OER”). Free or low-cost OER content is typically delivered via the internet, and in some cases print versions and related services are available for purchase. A number of states support the use of OER by providing curated resources and others, including New York, Louisiana, Michigan, Tennessee, and Texas, are funding development of OER or have done so in the past. In addition, not-for-profit organizations such as the Gates Foundation and the Hewlett Foundation have supported the development of open source educational content that can be made available to educational institutions for free or at nominal costs. The increased availability of free and low-cost OER could negatively affect our customers’ perception of the value of our content, reduce demand for our educational products, and/or exert downward pressure on prices for our products, and adversely impact our net sales.

If we fail to maintain strong relationships with our authors, illustrators and other creative talent, as well as to develop relationships with new creative talent, our net sales and results of operations could be adversely affected.

Our HMH Books & Media business and certain aspects of our K-12 business are highly dependent on maintaining strong relationships with the authors, illustrators and other creative talent who produce books and other products sold to our customers. We operate in a number of highly visible industry segments where there is intense competition for successful authors, illustrators and other creative talent. Any overall weakening of these relationships, or the failure to develop successful new relationships, could have an adverse effect on our net sales and results of operations.

If we are unable to attract, retain and focus a strong leadership team, a dynamic sales force, software engineers and other key personnel, it could have an adverse effect on our business and ability to remain competitive, financial condition and results from operations.

Our success depends, in part, on our ability to continue to attract, focus and retain a strong leadership team, a dynamic sales force, software engineers and other key personnel at economically reasonable compensation levels. We operate in highly competitive industry segments that continue to change to adapt to customer needs and technological advances and in which there is intense competition for experienced and highly effective personnel. If we are unable to timely attract and retain key personnel with relevant skills for our evolving industry segments it could adversely affect our business and ability to remain competitive, financial condition and results of operations.

In addition, our business results depend largely upon the experience and knowledge of local market dynamics and long-standing customer relationships of our sales personnel. Our inability to attract, retain and focus effective

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sales and other key personnel at economically reasonable compensation levels could materially and adversely affect our ability to operate profitably and grow our business.

 

We have announced our intent to explore a sale of our HMH Books & Media business, and such proposed divestiture may introduce significant risks and uncertainties.

In order to position our business to move forward with our digital first, connected K-12 strategy, we have announced our intent to explore a sale of our HMH Books & Media business. We have also divested and may in the future divest certain assets or businesses that no longer fit with our strategic direction or growth targets. Divestitures involve significant risks and uncertainties that could adversely affect our business, results of operations and financial condition. These include, among others, the inability to find potential buyers on favorable terms, disruption to our business and/or diversion of management attention from other business concerns, difficulties in separating the operations of the divested business and retention of certain liabilities related to the divested business.

Risks Related to Operations and Strategic Plans

We may not be able to execute on our long-term growth strategy or achieve expected benefits from actions taken in furtherance of our strategy, which could materially and adversely affect our business, financial condition and results of operations and/or our growth.

If we are not able to execute on our long-term growth strategy or achieve expected benefits from our actions in furtherance of our strategy, it could materially and adversely affect our business, financial condition and results of operations and/or our growth. In any event, actions taken in furtherance of our strategy, such as transitioning to new business models or entering into new market segments could adversely impact our cash flow and our business in unforeseen ways.

Our investments in new products, service offerings, platforms and/or technologies could impact our profitability.

We operate in highly competitive markets that continue to change to adapt to customer needs. These needs include an increasing demand for integrated learning solutions. In order to address these needs, we are investing in new products, new technology and infrastructure, and a new common platform to integrate our products, services and solutions. These investments may be less profitable than what we have experienced historically, may consume substantial financial resources and/or may divert management’s attention from existing operations, all of which could materially and adversely affect our business, results of operations and financial condition.

We rely on third-party software and technology development as part of our digital platform.

We rely on third parties for some of our software and technology development. For example, some of the technologies and software that compose our instruction and assessment technologies are developed by third parties. We rely on those third parties for the development of future components and modules. Thus, we face risks associated with technology and software product development and the ability of those third parties to meet our needs and their obligations under our contracts with them. In addition, we rely on third parties for our internet-based product hosting. The loss of one or more of these third-party partners, a material disruption in their business or their failure to otherwise perform in the expected manner could cause disruptions in our business that may materially and adversely affect our results of operations and financial condition.

Defects in our digital products and platforms could cause financial loss and reputational damage.

In the fast-changing digital marketplace, demand for innovative technology has generally resulted in short lead times for producing products that meet customer needs. Growing demand for innovation and additional functionality in digital products increases the risk that our digital products and platforms may contain flaws or corrupted data that may only become apparent after product launch, particularly for new products and platforms and new features for existing products and platforms that are developed and brought to market under tight time constraints. Problems with the performance of our digital products and platforms could result in liability, loss of revenue or harm to our reputation.

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Changes in product distribution channels and concentration of retailer power may restrict our ability to grow and affect our profitability in our HMH Books & Media segment.

Distribution channels such as online retailers and ecommerce sites, digital delivery platforms, expanding social media, digital discovery and marketing platforms, combined with the increased concentration of retailer power, pose threats and provide opportunities to traditional consumer publishing models of our HMH Books & Media segment, potentially impacting both sales volume and profitability. The reduction in “brick and mortar” booksellers, the resulting concentration of power held by our largest retailers, and the increased concentration of consumer book spending on best-selling titles could negatively affect our business, financial condition and results of operations.

We are dependent on a small number of third parties to print and bind our products and to supply paper, a principal material for our products. If we were to lose our relationship with our key print vendor and/or paper merchant, our business and results of operations may be materially and adversely affected.

We outsource the printing and binding of our products and currently rely on a small group of vendors that handle approximately 49% of our printing requirements, and we expect a small number of print vendors will continue to account for a substantial portion of our printing requirements for the foreseeable future. The loss of, or a significant adverse change in our relationship with our key print vendor could have a material adverse effect on our business and cost of sales.

 

In addition, we purchase paper, a principal raw material for our print products, primarily through one paper merchant. Further, paper merchants, including our paper merchant, rely on paper mills to produce the paper that they broker. There can be no assurance that our relationships with our print vendor and/or paper merchant will continue or that their business or operations will not be affected by disruptions in the industries that they rely on, including a disruption in the paper mill industry, major disasters or other external factors. The loss of our key print vendor and/or paper merchant, a material change in our relationship with them, a material disruption in their business or their failure to otherwise perform in the expected manner could cause disruptions in our business that may materially and adversely affect our results of operations and financial condition.

Operational disruption to our business caused by a major disaster or other external threats could restrict our ability to supply products and services to our customers.

 

Across all our businesses, we manage complex operational and logistical arrangements including distribution centers, data centers and large office facilities. Failure to recover from a major disaster (such as fire, flood or other natural disaster) or other external threat (such as terrorist attacks, strikes, weather, outbreaks of pandemic or contagious diseases, or political unrest or other external factors) at a key center or facility could affect our business and employees, disrupt our daily business activities and/or restrict our ability to supply products and services to our customers.

 

Risks Related to Information Technology Systems and Cybersecurity

We are subject to risks based on information technology systems. A major breach in security or information technology system failure could interrupt the availability of our internet-based products and services, result in corruption and/or loss of data, cause liability or reputational damage to our brands and business and/or result in financial loss.

Our business is dependent on information technology systems to support our complex operational and logistical arrangements across our businesses. We provide software and/or internet-based products and services to our customers. We also use complex information technology systems and products to support our business activities, particularly in infrastructure and as we move our products and services to an increasingly digital delivery platform.

We face several technological risks associated with software and/or internet-based product and service delivery in our educational businesses, including with respect to information technology capability, reliability and security, enterprise resource planning, system implementations and upgrades. Failures of our information technology systems and products (including because of operational failure, natural disaster, computer virus or hacker attacks)

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could interrupt the availability of our internet-based products and services, result in corruption or loss of data or breach in security and result in liability, reputational damage to our brands and/or adversely impact our operating results.

While we have policies, processes, internal controls and cybersecurity mechanisms in place intended to maintain the stability of our information technology, provide security from unauthorized access to our systems and maintain business continuity, no mechanisms are entirely free from the risk of failure and we have no guarantee that our security mechanisms will be adequate to prevent all security threats. Our brand, reputation, especially in the K-12 market, and consequently our operating results may be adversely impacted by unanticipated system failures, corruption, loss of data and/or breaches in security.

Failure to prevent or detect a malicious cyber-attack on our information technology systems could result in liability, reputational damage, loss of revenue and/or financial loss.

Cyber-attacks and hackers are becoming more sophisticated and pervasive. Our business is dependent on information technology systems to support our complex operational and logistical arrangements across our businesses. We provide software and/or internet-based products and services to our customers. We also use complex information technology systems and products to support our business activities, particularly in infrastructure and as we move our products and services to an increasingly digital delivery platform. Across our businesses we hold large volumes of personal data, including that of employees, customers and students.

Efforts to prevent cyber-attacks and hackers from entering our systems are expensive to implement and may limit the functionality of our systems. Individuals try to gain unauthorized access to our systems and data for malicious purposes, and our security measures may fail to prevent such unauthorized access. Cyber-attacks and/or intentional hacking of our systems could adversely affect the performance or availability of our products, result in loss of customer data, adversely affect our ability to conduct business, or result in theft of our funds or proprietary information, the occurrence of which could result in liability, reputational damage, loss of revenue and/or financial loss.

Risks Related to Financial Condition, Credit Facilities and Liquidity

Our operating results fluctuate on a seasonal and quarterly basis and our business has historically been dependent on our results of operations for the third quarter.

Our business is seasonal. Approximately 81% of our net sales for the year ended December 31, 2020 were derived from our Education segment, which is a markedly seasonal business. Purchases of K-12 products are typically made in the second and third quarters of the calendar year in preparation for the beginning of the school year. We typically realize a significant portion of net sales during the third quarter, making third-quarter results material to full-year performance. This sales seasonality affects operating cash flow from quarter to quarter. We typically incur a net cash deficit from all of our activities into the third quarter of the year. We cannot be sure that our second and third quarter net sales will continue to be sufficient to fund our business and meet our obligations or that they will be higher than our net sales for our other quarters or in the prior-year periods. In the event that we do not derive sufficient net sales for the second and third quarter, we may have a liquidity shortfall and be unable to fund our business and/or meet our debt service requirements and other obligations.

Our net sales, operating profit or loss and net cash provided or used by operations are impacted by the inherent seasonality of the academic calendar. As purchases of K-12 products are typically made in the second and third quarters of a given calendar year, changes in our customers’ ordering patterns may impact the comparison of results between a quarter and the same quarter of the prior year, between a quarter and the prior consecutive quarter or between a fiscal year and the prior fiscal year, which can make it difficult for us to forecast the timing of customer purchases and assess our financial performance until late in the year.

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Our history of operations includes periods of operating and net losses, and we may incur operating and net losses in the future. Such losses may impact our liquidity.

For the years ended December 31, 2020, 2019 and 2018, we generated operating losses of $429.1 million, $163.2 million, and $90.5 million, respectively, and net losses of $479.8 million, $213.8 million, and $94.2 million, respectively. If we continue to suffer operating and net losses, our liquidity may suffer and we may not be able to fund our business and/or meet our debt service requirements and other obligations. Furthermore, the market price of our common stock may decline significantly.

Our major operating costs and expenses include employee compensation as well as paper, printing and binding costs and expenses for product-related manufacturing, and a significant increase in such costs and expenses could have a material adverse effect on our profitability.

Our major operating costs and expenses include employee compensation as well as paper, printing and binding costs for product-related manufacturing.

We offer competitive salary and benefit packages in order to attract and retain the employees required to grow and expand our businesses. Compensation costs are influenced by general economic and business factors, including those affecting the cost of health insurance, payout of commissions and incentive compensation and post-retirement benefits, as well as trends specific to the employee skillsets we require.

Paper is one of our principal raw materials. Paper prices fluctuate based on the worldwide demand for and supply of paper in general and for the specific types of paper we use. The price of paper may fluctuate significantly in the future, and changes in the market supply of, or demand for paper, could affect delivery times and prices. Paper mills and other suppliers may consolidate or there may be disruptions in their industry and as a result, there may be future shortfalls in quality and quantity supplies necessary to meet the demands of the entire marketplace, including our demands. As a result, we may need to find alternative sources for paper from time to time. In addition, we have extensive printing and binding requirements. We outsource the printing and binding of our books, workbooks and other printed products to third parties, typically under multi-year contracts. Increases in any of these operating costs and expenses could materially and adversely affect our business, profitability, financial condition and results of operations. Further, higher energy costs and other factors affecting the cost of publishing, transporting and distributing our products could adversely affect our financial results.

We also have other significant operating costs, and unanticipated increases in these costs could adversely affect our operating margins. Our inability to absorb the impact of increases in paper, printing and binding costs and other costs of publishing, transporting and distributing our products or any strategic determination not to pass on all or a portion of these increases to our customers could adversely affect our business, financial condition and results of operations.

 

We are subject to contingent liabilities that may affect liquidity and our ability to meet our obligations.

In the ordinary course of business, we issue performance-related surety bonds and letters of credit posted as security for our operating activities, some of which obligate us to make payments if we fail to perform under certain contracts in connection with the sale of instructional materials and assessment programs. The surety bonds are partially backstopped by letters of credit. As of December 31, 2020, our contingent liability for all letters of credit was approximately $18.8 million, of which $1.1 million were issued to backstop $1.4 million of surety bonds. The letters of credit reduce the borrowing availability on our revolving credit facility, which could affect liquidity and, therefore, our ability to meet our obligations. We may increase the number and amount of contracts that require the use of letters of credit, which may further restrict liquidity and, therefore, our ability to meet our obligations in the future.

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Our substantial level of indebtedness could adversely affect our financial condition and results of operations.

As of December 31, 2020, we had approximately $667.0 million ($643.7 million, net of discount and issuance costs) of total indebtedness outstanding, comprised of $361.0 million of term loans and $306.0 million of senior secured notes. Our substantial outstanding indebtedness could have important consequences, including the following:

 

our high level of indebtedness could make it more difficult for us to satisfy our obligations;

 

our high level of indebtedness could adversely impact our credit rating;

 

the restrictions imposed on the operation of our business under the agreements governing such indebtedness may hinder our ability to take advantage of strategic opportunities to grow our business and to make attractive investments;

 

our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, restructuring, acquisitions or general corporate purposes may be impaired, which could be exacerbated by volatility in the credit markets;

 

we must use a substantial portion of our cash flow from operations to pay principal and interest on our indebtedness, which will reduce the funds available to us for operations, working capital, capital expenditures and other purposes;

 

our high level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt;

 

our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited;

 

our failure to satisfy our obligations under the agreements governing our indebtedness could result in an event of default, which could result in all of our debt becoming immediately due and payable and could permit our secured lenders to foreclose on our assets securing such indebtedness;

 

our high level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business and industry; and

 

we may be vulnerable to interest rate increases, as certain of our borrowings bear interest at variable rates. A 1% increase or decrease in the interest rate will change our interest expense by approximately $3.6 million on an annual basis for our term loan facility and $2.5 million on an annual basis for our revolving credit facility, assuming it is fully drawn.

Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our obligations. In addition, we may incur substantial additional indebtedness in the future. The terms of the agreements governing our existing indebtedness do not, and any future debt may not, fully prohibit us from doing so. If new indebtedness is added to our current indebtedness levels, the related risks that we now face could substantially intensify.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments or to refinance our debt obligations and to fund planned capital expenditures and other growth initiatives depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flow from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including our senior secured notes, or to fund our other liquidity needs.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. Our senior secured term loan and revolving credit facilities have certain restrictions on our ability to use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at

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prices that we believe are fair and proceeds that we do receive may not be adequate to meet any debt service obligations then due.

We may record future goodwill or additional indefinite-lived intangibles impairment charges related to our reporting units, which could have a material adverse impact on our results of operations.

We test our goodwill and indefinite-lived intangibles asset balances for impairment during the fourth quarter of each year, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. In evaluating the potential for impairment of goodwill and indefinite-lived intangible assets, we make assumptions regarding estimated net sales projections, growth rates, cash flows and discount rates. Although we use consistent methodologies in developing the assumptions and estimates underlying the fair value calculations used in our impairment tests, these estimates are uncertain by nature and can vary from actual results. Declines in the future performance and cash flows of the business or small changes in other key assumptions may result in future impairment charges, which could have a material adverse impact on our results of operations. We had goodwill and indefinite-lived intangible assets of approximately $438.0 million and $161.0 million and $717.0 million and $161.0 million as of December 31, 2020 and 2019, respectively. There was a goodwill impairment charge of $279.0 million for the year ended December 31, 2020. There were no goodwill impairment charges for the years ended December 31, 2019 and 2018. There were also no impairment charges for indefinite-lived intangible assets for the years ended December 31, 2020, 2019 and 2018.

A change from up-front payment by school districts for multi-year programs and actions taken in furtherance of our long-term growth strategy could adversely affect our cash flow.

In keeping with the past practice of payments, school districts typically pay up-front when buying multi-year programs. If school districts changed their payment practices to spread their payments to us over the term of a program, our cash flow could be adversely affected. Further, as we execute on our long-term growth strategy, actions taken in furtherance of our strategy, such as transitioning to new business models could adversely impact our cash flow and our business in unforeseen ways.

The shift to sales of greater digital content or an increase in consumable print core programs may affect the comparability of our revenue to prior periods and cause increases or decreases in our sales to be reflected in our results of operations on a delayed basis.

Our customers typically pay for purchased products up-front; however, we recognize a significant portion of our time-based digital sales over their respective terms, as required by Generally Accepted Accounting Principles in the United States. As a result, an increase in the portion of our sales coming from digital sales may impact the comparison of our revenue results for a period with the same prior-year or consecutive period. Further, sales of consumable print core programs typically result in net sales being recognized over longer periods similar to time-based digital products. As more product offerings move to a consumable print format, more revenue will be deferred and recognized over a longer period of time.

Another effect of recognizing revenue from digital and consumable print core program sales over their respective terms is that any increases or decreases in sales during a particular period may not translate into proportional increases or decreases in revenue during that period. Consequently, deteriorating sales activity may be less immediately observable in our results of operations.

 

Risks Related to Laws and Regulations

Our ability to enforce our intellectual property and proprietary rights may be limited, which may harm our competitive position and materially and adversely affect our business and results of operations.

Our products are largely comprised of intellectual property content delivered through a variety of media, including print, digital and web-based media. We rely on a combination of copyright, trademark and other intellectual property laws and rights as well as employee agreements and other contracts to establish and protect our proprietary rights in our products and technology. However, our efforts to protect our intellectual property and proprietary rights may not be sufficient and we cannot make assurances that our proprietary rights will not be challenged, invalidated or circumvented. Moreover, we conduct business in certain other countries where the extent of effective legal protection for intellectual property rights is uncertain. It is possible we could be involved in expensive and time-consuming litigation to maintain, defend or enforce our intellectual property.

24


Furthermore, despite the existence of copyright and trademark protection under applicable laws, third parties may nonetheless violate our intellectual property rights, and our ability to remedy such violations, including in certain foreign countries where we conduct or seek to conduct business, may be limited. In addition, the copying and distribution of content over the Internet creates additional challenges for us in protecting our proprietary rights. If we are unable to adequately protect and enforce our intellectual property and proprietary rights, our competitive position may be harmed, and our business and financial results could be materially and adversely affected.

Failure to comply with privacy laws or adequately protect personal data could cause financial loss and reputational damage.

Across our businesses we hold large volumes of personal data, including that of employees, customers and students. We are subject to a wide array of different privacy laws, rules, regulations and standards in the U.S. as well as in foreign jurisdictions where we conduct business, including, but not limited to (i) the Children’s Online Privacy Protection Act and state student data privacy laws in connection with personally identifiable information of students, (ii) the Payment Card Industry Data Security Standards in connection with collection of credit card information from customers, and (iii) various EU data protection and privacy laws, including a comprehensive General Data Privacy Regulation that became effective in May 2018.

There has been increased public attention regarding the use of personal information and data transfer, accompanied by legislation and regulations intended to strengthen data protection, information security and consumer and personal privacy. The law in these areas continues to develop and the changing nature of privacy laws in the U.S., the European Union and elsewhere could impact our processing of personal and sensitive information of our employees, vendors and customers.

Continued privacy concerns may result in new or amended laws and regulations. Our brands and customer relationships are important assets. Future laws and regulations with respect to the collection, compilation, use, and publication of information and consumer privacy could result in limitations on our operations, increased compliance or litigation expense, adverse publicity, reputational damage to our brands and customer relationships, potential cancellation of existing business and diminished ability to compete for future business. It is also possible that we could be prohibited from collecting or disseminating certain types of data, which could affect our ability to meet our customers’ needs.

Changes in U.S. federal, state and local or foreign tax law, interpretations of existing tax law, or adverse determinations by tax authorities, could increase our tax burden or otherwise adversely affect our financial condition or results of operations.

We are subject to taxation at the federal, state or provincial and local levels in the U.S. and various other countries and jurisdictions. The change in administration in the United States may lead to new tax legislative initiatives. As any tax reform may result in further changes in tax laws and related regulations, our financial results could be materially impacted. Given the unpredictability of these possible changes and their potential interdependency, it is very difficult to assess whether the overall effect of such potential tax changes would be cumulatively positive or negative for our earnings and cash flow, but such changes could adversely impact our financial results.

 

Other Risks Related to Our Business

We may not be able to identify and complete any future acquisitions or achieve the expected benefits from any future acquisitions, which could materially and adversely affect our business, financial condition and results of operations and/or our growth.

We have at times used acquisitions as a means of expanding our business and technologies and expect that we will continue to do so in the future as part of our capital allocation strategy. We may be unable to identify suitable acquisition opportunities and, even if we were able to do so, we may not be able to finance or complete any such future acquisition on terms satisfactory to us. Further, we may not be able to successfully integrate acquisitions into our existing business, achieve anticipated operating advantages and/or realize anticipated cost savings or other synergies. The acquisition and integration of businesses involve a number of risks, including: use of available cash,

25


issuance of equity or debt securities, incurrence of new indebtedness or borrowings under our revolving credit facility to consummate the acquisition and/or integrate the acquired business; diversion of management’s attention from operations of our existing businesses and those of the acquired business to the integration; integration of complex systems, technologies and networks into our existing systems; difficulties in the assimilation and retention of employees; unexpected costs, delays or other risks related to transition support services provided under any transition services agreement that may be executed as part of the acquisition. These transactions may create multiple and overlapping product lines that are offered, priced and supported differently, which could cause customer confusion and delays in service. The demands on our management related to the increase in our size after an acquisition also may have potential adverse effects on our operating results.

If we are unable to finance or complete any future acquisition on terms satisfactory to us (or at all) and/or we are unable to successfully integrate any acquisitions into our existing business, achieve anticipated operating advantages and/or realize anticipated cost savings or other synergies from any such acquired business, it could materially and adversely affect our business, financial condition and results of operations.

Exposure to litigation could have a material effect on our financial position and results of operations.

In the ordinary course of business, we are involved in legal actions, claims, litigation, investigations and other matters arising from our business operations and face the risk that additional actions and claims will be filed in the future.

Litigation alleging infringement of copyrights and other intellectual property rights, particularly with respect to proprietary photographs and images, is common in the educational publishing industry. While management does not expect any of the existing legal actions and claims arising from our business operations to have a material adverse effect on our results of operations, financial position or cash flows, due to the inherent uncertainty of the litigation process, the costs of pursuing or defending against any particular legal proceeding, or the resolution of any particular legal proceeding could have a material effect on our financial position and results of operations.

We have insurance in such amounts and with such coverage and deductibles as management believes is reasonable. However, our coverage for certain product lines has been exhausted and there can be no assurance that our liability insurance for other product lines will cover all events or that the limits of such coverage will be sufficient to fully cover all potential liabilities thereunder.

We face risks of doing business abroad.

We conduct business in a number of regions outside of the U.S., including emerging markets in South America, Asia, Africa and the Middle East. Accordingly, we face exposure to the risks of doing business abroad, including, but not limited to, longer customer payment terms in certain countries; increased credit risk; difficulties in protecting intellectual property, enforcing or terminating agreements and collecting receivables under certain foreign legal systems; compliance under local privacy laws, rules, regulations and standards; the need to comply with U.S. Foreign Corrupt Practices Act and local laws, rules and regulations; and in some countries, a higher risk of political instability, economic volatility, terrorism, corruption, and social and ethnic unrest.

Although we are committed to conducting business in a legal and ethical manner in compliance with local and international statutory requirements and standards applicable to our business, there is a risk that our management, employees or representatives may take actions that violate applicable laws and regulations prohibiting the making of improper payments for the purposes of obtaining or keeping business, including laws such as the U.S. Foreign Corrupt Practices Act or the U.K. Bribery Act. Responding to investigations is costly and requires a significant amount of management’s time and attention. In addition, investigations may adversely impact our reputation, or lead to litigation and financial impacts.

Item 1B. Unresolved Staff Comments

None.

26


Item 2. Properties

Our principal executive office is located at 125 High Street, Boston, Massachusetts 02110. The following table describes the approximate building areas in square feet, principal uses and the years of expiration on leased premises of our significant operating properties as of December 31, 2020. We believe that these properties are suitable and adequate for our present and anticipated business needs, satisfactory for the uses to which each is put, and, in general, fully utilized.

 

 

 

Expiration

 

Approximate

 

 

Principal use

 

Segment

Location

 

year

 

area

 

 

of space

 

used by

Owned Premises:

 

 

 

 

 

 

 

 

 

 

Indianapolis, Indiana

 

Owned

 

 

491,779

 

 

Warehouse

 

Both segments

Troy, Missouri

 

Owned

 

 

575,000

 

 

Warehouse

 

Education

Leased Premises:

 

 

 

 

 

 

 

 

 

 

Boston, Massachusetts

   (Corporate office)

 

2033

 

 

194,946

 

 

Office

 

Both segments

Orlando, Florida

 

2029

 

 

111,073

 

 

Office

 

Education

Evanston, Illinois

 

2027

 

 

60,522

 

 

Office

 

Education

Geneva, Illinois

 

2022

 

 

513,512

 

 

Office and warehouse

 

Education

Portsmouth, New Hampshire (a)

 

2021

 

 

25,352

 

 

Office

 

Education

New York, New York

 

2027

 

 

101,441

 

 

Office

 

Both segments

Austin, Texas

 

2028

 

 

87,570

 

 

Office

 

Education

Dublin, Ireland

 

2025

 

 

28,994

 

 

Office

 

Education

Orlando, Florida

 

2025

 

 

25,400

 

 

Warehouse

 

Both segments

St Charles, Illinois

 

2024

 

 

26,029

 

 

Office

 

Education

 

In addition, we lease several other offices that are not material to our operations and, in some instances, are partially or fully subleased. Portions of certain properties listed above are also subleased.

(a)

HMH has entered into a new lease agreement to lease approximately 40,000 square feet with expected lease commencement in 2021 coinciding with the expiration of the current Portsmouth, New Hampshire lease.

We are involved in legal actions, claims, litigation and other matters incidental to our business. Litigation alleging infringement of copyrights and other intellectual property rights, particularly with respect to proprietary photographs and images, is common in the educational publishing industry.

While management believes there is a reasonable possibility we may incur a loss associated with the existing legal actions, claims and litigation, we are not able to estimate such amount, but we do not expect any of these matters to have a material adverse effect on our results of operations, financial position or cash flows. We have insurance in such amounts and with such coverage and deductibles as management believes is reasonable. However, there can be no assurance that our liability insurance will cover all events or that the limits of such coverage will be sufficient to fully cover all potential liabilities thereunder. Refer to Note 15 of the Consolidated Financial Statements included in Item 8. for a discussion of such matters.

Item 4. Mine Safety Disclosures

Not applicable.

27


Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market information. Our common stock is listed on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “HMHC”.

 

Holders. As of February 1, 2021, there were approximately six stockholders of record of our common stock, one of which was Cede & Co., a nominee for The Depository Trust Company. All of our common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are considered to be held of record by Cede & Co., who is considered to be one stockholder of record. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares of common stock are held of record by banks, brokers and other financial institutions. Because such shares of common stock are held on behalf of stockholders, and not by the stockholders directly, and because a stockholder can have multiple positions with different brokerage firms, banks and other financial institutions, we are unable to determine the total number of stockholders we have.

Dividends. We have never paid or declared any cash dividends on our common stock. At present, we intend to retain our future earnings, if any, to fund operations and the growth of our business. Our future decisions concerning the payment of dividends on our common stock will depend upon our results of operations, financial condition and capital expenditure plans, as well as other factors as our board of directors, in its discretion, may consider relevant, and the extent to which the declaration or payment of dividends may be limited by agreements we have entered into or cause us to lose the benefits of certain of our agreements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

28


Performance Graph. The graph below matches the cumulative return of holders of the Company’s common stock with the cumulative returns of the Nasdaq Composite index, the Russell 2000 index, and a Peer Group index of certain public companies in the educational space, comprised of Pearson PLC, Scholastic Corporation, Stride Inc. (formerly K-12 Inc.), and John Wiley & Sons, Inc. The graph assumes that the value of the investment in the Company’s common stock, in each index (including reinvestment of dividends) was $100 on December 31, 2015 and tracks it through February 1, 2021. All prices reflect closing prices on the last day of trading at the end of each period. Notwithstanding any general incorporation by reference of this Annual Report on Form 10-K into any other document, the information contained in the graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act of 1934, as amended (the “Exchange Act”) or to the liabilities of Section 18 of the Exchange Act, except: (i) as expressly required by applicable law or regulation; or (ii) to the extent that the Company specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act of 1933, as amended, or the Exchange Act.

 

 

 

 

The stock price performance shown on the graph is not necessarily indicative of future price performance. Information used in the graph was obtained from a source we believe to be reliable, but we do not assume responsibility for any errors or omissions in such information.

Recent sales of unregistered securities. There have been no sales of unregistered securities by the Company in the three-year period ended December 31, 2020.

Issuer Purchases of Equity Securities

There were no purchases of equity securities in the fourth quarter of 2020 and for the year ended December 31, 2020.

29


Item 6. Selected Financial Data

The following table summarizes the consolidated historical financial data of Houghton Mifflin Harcourt Company. We derived the consolidated historical financial data as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019, and 2018 from our audited consolidated financial statements included in this Annual Report on Form 10-K. We derived the consolidated historical financial statement data as of December 31, 2018, 2017 and 2016 and for the years ended December 31, 2017 and 2016 from our consolidated financial statements for such years, which are not included in this Annual Report on Form 10-K. The sale of the Riverside Business on October 1, 2018 is considered a Discontinued Operation and accordingly, all results of the Riverside Business have been removed from continuing operations for all periods presented. Historical results for any prior period are not necessarily indicative of results to be expected in any future period. The data set forth in the following table should be read together with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto.

 

 

 

Years Ended December 31,

 

 

 

2020 (1)

 

 

2019 (1)

 

 

2018 (1)

 

 

2017

 

 

2016

 

Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,031,292

 

 

$

1,390,674

 

 

$

1,322,417

 

 

$

1,327,029

 

 

$

1,291,978

 

Cost and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

497,816

 

 

 

668,108

 

 

 

581,467

 

 

 

588,518

 

 

 

578,317

 

Publishing rights amortization

 

 

20,056

 

 

 

26,557

 

 

 

34,713

 

 

 

46,238

 

 

 

61,351

 

Pre-publication amortization

 

 

126,180

 

 

 

149,515

 

 

 

109,257

 

 

 

119,908

 

 

 

121,866

 

Cost of sales

 

 

644,052

 

 

 

844,180

 

 

 

725,437

 

 

 

754,664

 

 

 

761,534

 

Selling and administrative

 

 

478,101

 

 

 

662,606

 

 

 

649,295

 

 

 

636,326

 

 

 

681,170

 

Other intangible asset amortization

 

 

25,585

 

 

 

25,310

 

 

 

26,933

 

 

 

29,248

 

 

 

26,375

 

Impairment charge for goodwill, pre-publication costs and intangible assets

 

 

279,000

 

 

 

 

 

 

 

 

 

3,980

 

 

 

130,205

 

Restructuring/severance and other charges

 

 

33,643

 

 

 

21,742

 

 

 

11,478

 

 

 

37,952

 

 

 

15,371

 

Gain on sale of assets

 

 

 

 

 

 

 

 

(201

)

 

 

 

 

 

 

Operating loss

 

 

(429,089

)

 

 

(163,164

)

 

 

(90,525

)

 

 

(135,141

)

 

 

(322,677

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement benefits non-service (expense) income

 

 

(856

)

 

 

167

 

 

 

1,280

 

 

 

3,486

 

 

 

4,253

 

Interest expense

 

 

(65,959

)

 

 

(48,778

)

 

 

(45,680

)

 

 

(42,805

)

 

 

(39,181

)

Interest income

 

 

899

 

 

 

3,157

 

 

 

2,550

 

 

 

1,338

 

 

 

518

 

Change in fair value of derivative instruments

 

 

672

 

 

 

(899

)

 

 

(1,374

)

 

 

1,366

 

 

 

(614

)

Gain on investments

 

 

2,091

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from transition services agreement

 

 

 

 

 

4,248

 

 

 

1,889

 

 

 

 

 

 

 

Loss on extinguishment of debt

 

 

 

 

 

(4,363

)

 

 

 

 

 

 

 

 

 

Loss from continuing operations before taxes

 

 

(492,242

)

 

 

(209,632

)

 

 

(131,860

)

 

 

(171,756

)

 

 

(357,701

)

Income tax expense (benefit) for continuing operations

 

 

(12,404

)

 

 

4,201

 

 

 

5,597

 

 

 

(51,419

)

 

 

(51,556

)

Loss from continuing operations

 

 

(479,838

)

 

 

(213,833

)

 

 

(137,457

)

 

 

(120,337

)

 

 

(306,145

)

     Earnings from discontinued operations, net of tax

 

 

 

 

 

 

 

 

12,833

 

 

 

17,150

 

 

 

21,587

 

     Gain on sale of discontinued operations, net of tax

 

 

 

 

 

 

 

 

30,469

 

 

 

 

 

 

 

Income from discontinued operations, net of tax

 

 

 

 

 

 

 

 

43,302

 

 

 

17,150

 

 

 

21,587

 

Net loss

 

$

(479,838

)

 

$

(213,833

)

 

$

(94,155

)

 

$

(103,187

)

 

$

(284,558

)

Net loss per share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(3.82

)

 

$

(1.72

)

 

$

(1.11

)

 

$

(0.98

)

 

$

(2.50

)

Discontinued operations

 

 

 

 

 

 

 

 

0.35

 

 

 

0.14

 

 

 

0.18

 

Net loss

 

$

(3.82

)

 

$

(1.72

)

 

$

(0.76

)

 

$

(0.84

)

 

$

(2.32

)

Weighted average shares outstanding: basic and diluted

 

 

125,455,487

 

 

 

124,152,984

 

 

 

123,444,943

 

 

 

122,949,064

 

 

 

122,418,474

 

Balance Sheet Data (as of period end):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments

 

$

281,200

 

 

$

296,353

 

 

$

303,198

 

 

$

235,428

 

 

$

306,943

 

Working capital (2)

 

 

69,105

 

 

 

157,944

 

 

 

218,586

 

 

 

126,567

 

 

 

209,982

 

Total assets (2)

 

 

2,021,126

 

 

 

2,513,172

 

 

 

2,495,124

 

 

 

2,439,830

 

 

 

2,604,307

 

Debt (short-term and long-term)

 

 

643,692

 

 

 

657,187

 

 

 

763,649

 

 

 

768,194

 

 

 

772,738

 

Stockholders’ equity

 

 

90,463

 

 

 

566,360

 

 

 

768,470

 

 

 

795,193

 

 

 

880,040

 

Statement of Cash Flows Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

115,248

 

 

 

254,975

 

 

 

104,084

 

 

 

104,748

 

 

 

111,785

 

Investing activities

 

 

(112,271

)

 

 

(96,320

)

 

 

427

 

 

 

(193,895

)

 

 

(106,117

)

Financing activities

 

 

(18,130

)

 

 

(115,667

)

 

 

(4,124

)

 

 

(7,330

)

 

 

(37,960

)

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-publication capital expenditures

 

 

61,331

 

 

 

102,562

 

 

 

123,403

 

 

 

131,282

 

 

 

118,603

 

Property, plant, and equipment capital expenditures

 

 

50,940

 

 

 

37,561

 

 

 

53,741

 

 

 

55,092

 

 

 

103,152

 

Depreciation and intangible asset amortization