0001564590-21-024496.txt : 20210506 0001564590-21-024496.hdr.sgml : 20210506 20210506070050 ACCESSION NUMBER: 0001564590-21-024496 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 77 CONFORMED PERIOD OF REPORT: 20210331 FILED AS OF DATE: 20210506 DATE AS OF CHANGE: 20210506 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36166 FILM NUMBER: 21895702 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-Q 1 hmhc-10q_20210331.htm 10-Q hmhc-10q_20210331.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2021

OR

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

For the transition period from                      to                     

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

 

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of common stock, par value $0.01 per share, outstanding as of May 3, 2021 was 127,410,353.

 

 

 


 

Table of Contents

 

 

  

Page (s)

 

 

 

 

 

 

Special Note Regarding Forward-Looking Statements

  

 

3

 

 

 

 

PART I.

 

FINANCIAL INFORMATION

  

 

4

 

 

 

 

Item 1.

 

Consolidated Financial Statements (Unaudited):

  

 

4

 

 

 

 

 

 

Consolidated Balance Sheets

  

 

4

 

 

 

 

 

 

Consolidated Statements of Operations

  

 

5

 

 

 

 

 

 

Consolidated Statements of Comprehensive Loss

  

 

6

 

 

 

 

 

 

Consolidated Statements of Cash Flows

  

 

7

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity

  

 

8

 

 

 

 

 

 

Notes to Consolidated Financial Statements

  

 

9

 

 

 

 

Item 2.

 

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

  

 

26

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  

 

36

 

 

 

 

Item 4.

 

Controls and Procedures

  

 

37

 

 

 

 

PART II.

 

OTHER INFORMATION

  

 

38

 

 

 

 

Item 1.

 

Legal Proceedings

  

 

38

 

 

 

 

Item 1A.

 

Risk Factors

  

 

38

 

 

 

 

Item 6.

 

Exhibits

  

 

39

 

 

 

SIGNATURES

  

 

40

 

 

2


 

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 timetable for closing the disposition of HMH Books & Media, including the satisfaction or waiver of closing conditions; the use of the net proceeds from the proposed transaction to pay down debt; 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 from expectations include, but are not limited to the duration and severity of the COVID-19 pandemic and its impact on the federal, state and local economies and on K-12 schools; any delays in receiving required regulatory approvals for the proposed sale of HMH Books & Media; the risk that disruption resulting from the proposed transaction may adversely affect the Company’s businesses and business relationships, including with employees and suppliers; delays in satisfying other closing conditions and disruptions in the global credit and financial markets that could have a negative impact on the completion of the proposed transaction; the rate and state of technological change; state requirements related to digital instructional materials; our ability to execute on our Digital First, Connected growth strategy; increases in our operating costs; management and personnel changes; timing, higher costs and unintended consequences of our operational efficiency and cost-reduction initiatives and other factors discussed in the “Risk Factors” section of the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (and our subsequent filings pursuant to the Securities Exchange Act of 1934, as amended). In light of these risks, uncertainties and assumptions, the forward-looking events described herein may not occur.

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

3


PART 1 – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Houghton Mifflin Harcourt Company

Consolidated Balance Sheets (Unaudited)

 

 

 

March 31,

 

 

December 31,

 

(in thousands of dollars, except share information)

 

2021

 

 

2020

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

170,901

 

 

$

281,200

 

Accounts receivable, net of allowances for bad debts and book returns of

   $8.2 million and $8.4 million, respectively

 

 

92,477

 

 

 

88,830

 

Inventories

 

 

175,790

 

 

 

145,553

 

Prepaid expenses and other assets

 

 

25,105

 

 

 

19,276

 

Assets held for sale

 

 

140,971

 

 

 

160,053

 

Total current assets

 

 

605,244

 

 

 

694,912

 

 

 

 

 

 

 

 

 

 

Property, plant, and equipment, net

 

 

86,248

 

 

 

88,801

 

Pre-publication costs, net

 

 

191,232

 

 

 

202,820

 

Royalty advances to authors, net

 

 

2,064

 

 

 

2,425

 

Goodwill

 

 

437,977

 

 

 

437,977

 

Other intangible assets, net

 

 

391,412

 

 

 

402,484

 

Operating lease assets

 

 

123,565

 

 

 

126,850

 

Deferred income taxes

 

 

2,415

 

 

 

2,415

 

Deferred commissions

 

 

30,319

 

 

 

30,659

 

Other assets

 

 

29,991

 

 

 

31,783

 

Total assets

 

$

1,900,467

 

 

$

2,021,126

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

19,000

 

 

$

19,000

 

Accounts payable

 

 

47,336

 

 

 

38,751

 

Royalties payable

 

 

21,503

 

 

 

34,765

 

Salaries, wages, and commissions payable

 

 

14,460

 

 

 

21,723

 

Deferred revenue

 

 

320,988

 

 

 

342,605

 

Interest payable

 

 

4,136

 

 

 

11,017

 

Severance and other charges

 

 

11,434

 

 

 

19,590

 

Accrued pension benefits

 

 

1,593

 

 

 

1,593

 

Accrued postretirement benefits

 

 

1,555

 

 

 

1,555

 

Operating lease liabilities

 

 

9,948

 

 

 

9,669

 

Other liabilities

 

 

23,468

 

 

 

22,912

 

Liabilities held for sale

 

 

32,505

 

 

 

30,662

 

Total current liabilities

 

 

507,926

 

 

 

553,842

 

 

 

 

 

 

 

 

 

 

Long-term debt, net of discount and issuance costs

 

 

621,319

 

 

 

624,692

 

Operating lease liabilities

 

 

129,269

 

 

 

132,014

 

Long-term deferred revenue

 

 

542,065

 

 

 

562,679

 

Accrued pension benefits

 

 

17,240

 

 

 

24,061

 

Accrued postretirement benefits

 

 

15,605

 

 

 

16,566

 

Deferred income taxes

 

 

18,503

 

 

 

16,411

 

Other liabilities

 

 

152

 

 

 

398

 

Total liabilities

 

 

1,852,079

 

 

 

1,930,663

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: 20,000,000 shares authorized; no shares issued

    and outstanding at March 31, 2021 and December 31, 2020

 

 

 

 

 

 

Common stock, $0.01 par value: 380,000,000 shares authorized; 151,987,387 and

   150,459,034 shares issued at March 31, 2021 and December 31, 2020, respectively; 127,410,353 and 125,882,000 shares outstanding at March 31, 2021 and December 31, 2020, respectively

 

 

1,520

 

 

 

1,505

 

Treasury stock, 24,577,034 shares as of March 31, 2021 and December 31, 2020, respectively, at cost

 

 

(518,030

)

 

 

(518,030

)

Capital in excess of par value

 

 

4,921,845

 

 

 

4,918,542

 

Accumulated deficit

 

 

(4,307,813

)

 

 

(4,255,830

)

Accumulated other comprehensive loss

 

 

(49,134

)

 

 

(55,724

)

Total stockholders’ equity

 

 

48,388

 

 

 

90,463

 

Total liabilities and stockholders’ equity

 

$

1,900,467

 

 

$

2,021,126

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


Houghton Mifflin Harcourt Company

Consolidated Statements of Operations (Unaudited)

 

 

 

Three Months Ended

March 31,

 

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

 

2021

 

 

2020

 

Net sales

 

$

146,195

 

 

$

151,843

 

Costs and expenses

 

 

 

 

 

 

 

 

Cost of sales, excluding publishing rights and pre-publication

   amortization

 

 

58,137

 

 

 

63,652

 

Publishing rights amortization

 

 

3,166

 

 

 

4,432

 

Pre-publication amortization

 

 

25,051

 

 

 

30,562

 

Cost of sales

 

 

86,354

 

 

 

98,646

 

Selling and administrative

 

 

89,235

 

 

 

123,341

 

Other intangible assets amortization

 

 

7,906

 

 

 

5,856

 

Impairment charge for goodwill

 

 

 

 

 

262,000

 

Operating loss

 

 

(37,300

)

 

 

(338,000

)

Other income (expense)

 

 

 

 

 

 

 

 

Retirement benefits non-service (expense) income

 

 

(200

)

 

 

61

 

Interest expense

 

 

(8,564

)

 

 

(9,253

)

Interest income

 

 

20

 

 

 

766

 

Change in fair value of derivative instruments

 

 

(674

)

 

 

(380

)

Loss from continuing operations before taxes

 

 

(46,718

)

 

 

(346,806

)

Income tax expense (benefit) for continuing operations

 

 

2,310

 

 

 

(8,780

)

Loss from continuing operations

 

 

(49,028

)

 

 

(338,026

)

Loss from discontinued operations, net of tax

 

 

(2,955

)

 

 

(7,947

)

Net loss

 

$

(51,983

)

 

$

(345,973

)

Net loss per share attributable to common stockholders

 

 

 

 

 

 

 

 

Basic and diluted:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.39

)

 

$

(2.71

)

Discontinued operations

 

 

(0.02

)

 

 

(0.06

)

Net loss

 

$

(0.41

)

 

$

(2.77

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

Basic and diluted

 

 

126,473,317

 

 

 

124,688,974

 

 

The accompanying notes are an integral part of these consolidated financial statements.

5


Houghton Mifflin Harcourt Company

Consolidated Statements of Comprehensive Loss (Unaudited)

 

 

 

Three Months Ended

March 31,

 

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

 

2021

 

 

2020

 

Net loss

 

$

(51,983

)

 

$

(345,973

)

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax

 

 

(335

)

 

 

(113

)

Net change in pension and benefit plan liabilities, net of tax

 

 

6,925

 

 

 

 

Net change in unrealized loss on derivative

   financial instruments, net of tax

 

 

 

 

 

(331

)

Other comprehensive income (loss), net of taxes

 

 

6,590

 

 

 

(444

)

Comprehensive loss

 

$

(45,393

)

 

$

(346,417

)

 

The accompanying notes are an integral part of these consolidated financial statements.

6


Houghton Mifflin Harcourt Company

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Three Months Ended

March 31,

 

(in thousands of dollars)

 

2021

 

 

2020

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(51,983

)

 

$

(345,973

)

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

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

 

2,955

 

 

 

7,947

 

Depreciation and amortization expense

 

 

47,818

 

 

 

53,033

 

Amortization of operating lease assets

 

 

3,285

 

 

 

3,632

 

Amortization of debt discount and deferred financing costs

 

 

660

 

 

 

646

 

Deferred income taxes

 

 

2,085

 

 

 

(9,128

)

Stock-based compensation expense

 

 

2,607

 

 

 

3,268

 

Impairment charge for goodwill

 

 

 

 

 

262,000

 

Change in fair value of derivative instruments

 

 

674

 

 

 

380

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,647

)

 

 

29,057

 

Inventories

 

 

(30,238

)

 

 

(51,580

)

Other assets

 

 

(3,851

)

 

 

(335

)

Accounts payable and accrued expenses

 

 

3,322

 

 

 

(19,878

)

Royalties payable and author advances, net

 

 

(12,924

)

 

 

(34,816

)

Deferred revenue

 

 

(42,231

)

 

 

(59,529

)

Interest payable

 

 

(6,881

)

 

 

(12

)

Severance and other charges

 

 

(8,156

)

 

 

(5,320

)

Accrued pension and postretirement benefits

 

 

(855

)

 

 

(1,108

)

Operating lease liabilities

 

 

(2,466

)

 

 

(3,304

)

Other liabilities

 

 

(720

)

 

 

(948

)

Net cash used in operating activities - continuing operations

 

 

(100,546

)

 

 

(171,968

)

Net cash provided by operating activities - discontinued operations

 

 

19,290

 

 

 

15,201

 

Net cash used in operating activities

 

 

(81,256

)

 

 

(156,767

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Additions to pre-publication costs

 

 

(14,354

)

 

 

(18,489

)

Additions to property, plant, and equipment

 

 

(9,949

)

 

 

(11,875

)

Net cash used in investing activities - continuing operations

 

 

(24,303

)

 

 

(30,364

)

Net cash used in investing activities - discontinued operations

 

 

(400

)

 

 

(262

)

Net cash used in investing activities

 

 

(24,703

)

 

 

(30,626

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

 

 

 

150,000

 

Payments of long-term debt

 

 

(4,750

)

 

 

(4,750

)

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

 

 

 

 

 

(48

)

Issuance of common stock under employee stock purchase plan

 

 

410

 

 

 

503

 

Net cash (used in) provided by financing activities - continuing operations

 

 

(4,340

)

 

 

145,705

 

Net (decrease) increase in cash and cash equivalents

 

 

(110,299

)

 

 

(41,688

)

Cash and cash equivalents at beginning of the period

 

 

281,200

 

 

 

296,353

 

Cash and cash equivalents at end of the period

 

$

170,901

 

 

$

254,665

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Interest paid – continuing operations

 

$

14,746

 

 

$

7,993

 

Interest paid – discontinued operations

 

 

5,803

 

 

 

7,360

 

Income taxes paid

 

 

 

 

 

1

 

Non-cash investing activities

 

 

 

 

 

 

 

 

Pre-publication costs included in accounts payable and accruals

 

$

4,392

 

 

$

5,978

 

Property, plant, and equipment included in accounts payable and accruals

 

 

1,452

 

 

 

3,787

 

Property, plant, and equipment acquired under finance leases

 

 

123

 

 

 

288

 

 

The accompanying notes are an integral part of these consolidated financial statements.

7


Houghton Mifflin Harcourt Company

Consolidated Statements of Stockholders’ Equity (Unaudited)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands of dollars, except share information)

 

Shares

Issued

 

 

Par

Value

 

 

Treasury

Stock

 

 

Capital

in excess

of Par

Value

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

Balance at December 31, 2019

 

 

148,928,328

 

 

$

1,489

 

 

$

(518,030

)

 

$

4,906,165

 

 

$

(3,775,992

)

 

$

(47,272

)

 

$

566,360

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(345,973

)

 

 

 

 

 

(345,973

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(444

)

 

 

(444

)

Issuance of common stock for employee purchase plan

 

 

104,331

 

 

 

1

 

 

 

 

 

 

678

 

 

 

 

 

 

 

 

 

679

 

Issuance of common stock for vesting of restricted stock units

 

 

950,496

 

 

 

10

 

 

 

 

 

 

(10

)

 

 

 

 

 

 

 

 

 

Stock withheld to cover tax withholdings

   requirements upon vesting of restricted stock units

 

 

 

 

 

 

 

 

 

 

 

(48

)

 

 

 

 

 

 

 

 

(48

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

3,386

 

 

 

 

 

 

 

 

 

3,386

 

Balance at March 31, 2020

 

 

149,983,155

 

 

$

1,500

 

 

$

(518,030

)

 

$

4,910,171

 

 

$

(4,121,965

)

 

$

(47,716

)

 

$

223,960

 

Balance at December 31, 2020

 

 

150,459,034

 

 

$

1,505

 

 

$

(518,030

)

 

$

4,918,542

 

 

$

(4,255,830

)

 

$

(55,724

)

 

$

90,463

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(51,983

)

 

 

 

 

 

(51,983

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,590

 

 

 

6,590

 

Issuance of common stock for employee purchase plan

 

 

239,144

 

 

 

2

 

 

 

 

 

 

634

 

 

 

 

 

 

 

 

 

636

 

Issuance of common stock for vesting of restricted stock units

 

 

1,289,209

 

 

 

13

 

 

 

 

 

 

(13

)

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

2,682

 

 

 

 

 

 

 

 

 

2,682

 

Balance at March 31, 2021

 

 

151,987,387

 

 

$

1,520

 

 

$

(518,030

)

 

$

4,921,845

 

 

$

(4,307,813

)

 

$

(49,134

)

 

$

48,388

 

 

The accompanying notes are an integral part of these consolidated financial statements.

8


 Houghton Mifflin Harcourt Company

Notes to Consolidated Financial Statements (Unaudited)

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

1.

Basis of Presentation

Houghton Mifflin Harcourt Company (“HMH,” “Houghton Mifflin Harcourt,” “we,” “us,” “our,” or the “Company”) is a learning technology company committed to delivering connected solutions that engage learners, empower educators and improve student outcomes. As a leading provider of Kindergarten through 12th grade (“K-12”) core curriculum, supplemental and intervention solutions and professional learning services, HMH partners with educators and school districts to uncover solutions that unlock students’ potential and extend teachers’ capabilities. HMH estimates that it serves more than 50 million students and three million educators in 150 countries.

 We focus on the 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.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted consistent with Article 10 of Regulation S-X. In the opinion of management, our unaudited consolidated financial statements and accompanying notes include all adjustments (consisting of normal recurring adjustments) considered necessary by management to fairly state the results of operations, financial position and cash flows for the interim periods presented. Interim results of operations are not necessarily indicative of the results for the full year or for any future period. These financial statements should be read in conjunction with the annual financial statements and the notes thereto also included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Our accompanying consolidated financial statements include the results of operations of the Company and our wholly-owned subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.

On March 26, 2021, we entered into a definitive asset purchase agreement to sell the HMH Books & Media segment and that segment is now classified as a discontinued operation. We determined that the HMH Books & Media business met the “held for sale” criteria and the “discontinued operations” criteria in accordance with Financial Accounting Standard Boards (“FASB”) Accounting Standards Codification (“ASC”) 205, Presentation of Financial Statements, (“FASB ASC 205”) as of March 31, 2021 due to its relative size and strategic rationale. The Consolidated Balance Sheets and Consolidated Statements of Operations, and the notes to the Consolidated Financial Statements were restated for all periods presented to reflect the discontinuation of the HMH Books & Media business, in accordance with FASB ASC 205. The discussion in the notes to these Consolidated Financial Statements, unless otherwise noted, relate solely to our continuing operations. As a result, our revenues and financial results from continuing operations are reported under one reportable segment.  

We expect our net cash provided by operations combined with our cash and cash equivalents and borrowing availability under our revolving credit facility to provide sufficient liquidity to fund our current obligations, capital spending, debt service requirements and working capital requirements over at least the next twelve months.

The ability of the Company to fund planned operations is based on assumptions which involve significant judgment and estimates of future revenues, capital spend and other operating costs.

Seasonality and Comparability

Our net sales, operating profit or loss and net cash provided by or used in operations are impacted by the inherent seasonality of the academic calendar, which typically results in a cash flow usage in the first half of the year and a cash flow generation in the second half of the year. Consequently, the performance of our business may not be comparable quarter to consecutive quarter and should be

9


considered on the basis of results for the whole year or by comparing results in a quarter with results in the same quarter for the previous year. Moreover, uncertainty resulting from the COVID-19 pandemic may result in our business not following this historic pattern.

 Schools typically 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, for the years ended December 31, 2020, 2019 and 2018, approximately 69% of our consolidated net sales were realized in the second and third quarters. Sales of K-12 instructional materials and customized testing products are also cyclical with some years offering more sales opportunities than others in light of the state adoption 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.

2.

Impact of the COVID-19 Pandemic

 

The unprecedented and rapid spread of COVID-19 and the resulting social distancing measures, including business and school closures implemented by federal, state and local authorities, significantly reduced customer demand for our solutions and services, disrupted portions of our supply chain and warehousing operations and also disrupted our ability to deliver our educational solutions and services. Prior to the spread of COVID-19 in the United States, we experienced net sales results consistent with our historical first quarters; however, as the COVID-19 pandemic progressed we experienced a decline in net sales and sales orders beginning in the second half of March 2020. We continue to monitor indicators of demand, including our sales pipeline, customer orders and product shipments, as well as observe the impact to state revenues and related educational budgets to ascertain an estimate of the impact; however, the length and severity of the reduction in demand due to the pandemic and its impact on educational spending remains uncertain. Accordingly, our full year results for 2021 will continue to be impacted compared to pre-pandemic prior years.

 

While we are planning for a demand recovery, the exact timing and pace of recovery is uncertain given the significant disruption caused by the pandemic on the operations of our customers. Our expense management and liquidity measures may be modified as we obtain additional clarity on the timing of customer demand recovery. In response to these developments, we implemented a number of measures intended to help protect our shareholders, employees, and customers amid the COVID-19 pandemic and to help mitigate its’ impact on our financial position, profitability and cash flow. These measures included, but were not limited to furloughs, salary reductions, spending freezes, and proactive outreach to schools to support them through this period of disruption with virtual learning resources.

 

2020 Restructuring Plan

 

On September 4, 2020, we completed a voluntary retirement incentive program, which was offered to all U.S. based employees at least 55 years of age with at least five years of service. Of the eligible employees, 165 elected to participate representing approximately 5% of our workforce. The majority of the employees voluntarily retired as of September 4, 2020 with select employees leaving later in the year. Each of the employees received or will receive separation payments in accordance with our severance policy.  

On September 30, 2020, we undertook a restructuring program, including a reduction in force, as part of the ongoing assessment of our cost structure amid the COVID-19 pandemic. The reduction in force resulted in a 22% reduction in our workforce, including positions eliminated as part of the voluntary retirement incentive program mentioned above, and net of newly created positions to support our digital first operations. The reduction in force resulted in the departure of approximately 525 employees and was completed in October 2020. Each of the employees received or will receive separation payments in accordance with our severance policy. The total one-time, non-recurring cost incurred in connection with the restructuring program, inclusive of the voluntary retirement incentive program (collectively the “2020 Restructuring Plan”), all of which represents cash expenditures, was approximately $33.6 million.

 

Forward-looking

After reviewing our ability to meet future financial obligations over the next twelve months, including consideration of our recent actions described above in addition to the planned divestiture of the HMH Books & Media business, we have concluded our net cash from operations combined with our cash and cash equivalents and borrowing availability under our revolving credit facility provides sufficient liquidity to fund our current obligations, capital spending, debt service requirements and working capital requirements over at least the next twelve months. Our primary credit facilities do not require us to comply with financial maintenance covenants.

 

10


 

The ability of the Company to fund planned operations is based on assumptions which involve significant judgment and estimates of future revenues, capital spend and other operating costs. Our current assumptions are that our industry will begin to recover and we have performed a sensitivity analysis on various recovery assumptions. Based on the actions in 2020 described above, we have concluded we have sufficient liquidity to fund our current obligations, capital spending, debt service requirements and working capital requirements over at least the next twelve months.

 

Valuation of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets

 

We perform an impairment test to assess the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as of October 1) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. 

 

During the three months ended March 31, 2020, our stock price declined to historical lows since our 2013 initial public offering. We determined that the significant decline in our market capitalization and broader economic downturn arising from the COVID-19 pandemic was a triggering event. We concluded that quantitative analyses were required to be performed due to the triggering event occurring during the first quarter of 2020.

 

Goodwill is allocated entirely to our Education reporting unit. We utilized an implied market value method under the market approach to calculate the fair value of the Education reporting unit as of March 31, 2020, which we determined was the best approximation of fair value of the Education reporting unit in the current social and economic environment. This method included the determination of the Company's overall enterprise value, from which the fair value of the HMH Books & Media reporting unit was deducted to derive the fair value of the Education reporting unit. The HMH Books & Media reporting unit has been recorded as a discontinued operation during the first quarter of 2021 (refer to Note 5). The relevant inputs and assumptions used in the valuation of the Education reporting unit include our market capitalization, selection of a control premium, and the determination of an appropriate market multiple to value the HMH Books & Media reporting unit, as well as the fair value of individual assets and liabilities. Based on our interim impairment assessment, we concluded that our goodwill, which is wholly attributed to the Education reporting unit, was impaired and, accordingly, recorded a goodwill impairment charge in the first quarter of 2020 of $262.0 million. During the fourth quarter of 2020, we recorded an adjustment of $17.0 million and $1.0 million to increase both the goodwill impairment charge and income tax benefit recorded, respectively, to correct an error of the previously recorded goodwill impairment and related income tax benefit.

 

Additionally, as a result of the triggering event identified in the first quarter of 2020, we performed quantitative impairment analyses over our indefinite-lived intangible assets and long-lived assets. With regards to indefinite-lived intangible assets, which includes the Houghton Mifflin Harcourt tradename, the recoverability was evaluated using a one-step process whereby we determined the fair value by asset and then compared it to its carrying value to determine if the asset was impaired. We estimated the fair value by preparing a relief-from-royalty discounted cash flow analysis using forward looking revenue projections. The significant assumptions used in discounted cash flow analysis included: future net sales, a long-term growth rate, a royalty rate and a discount rate used to present value future cash flows. The discount rate was based on the weighted-average cost of capital method at the date of the evaluation. The fair value of the indefinite-lived intangible assets was in excess of its carrying value by approximately 12% as of March 31, 2020. We also performed an impairment test on our long-lived assets using an undiscounted cash flow model in determining the fair value, which was then compared to book value of the asset groups evaluated. The long-lived impairment analysis was performed over the Education reporting unit and the HMH Books & Media reporting unit. Estimates and significant assumptions included in the long-lived asset impairment analysis included identification of the primary asset in each asset group and undiscounted cash flow projections. We concluded that our indefinite-lived intangible assets and long-lived assets were not impaired based on the results of the quantitative analyses performed.

 

Due to the HMH Books & Media segment being classified as held for sale as of March 31, 2021, we performed an impairment analysis over the HMH Books & Media long-lived asset group. As the sale price was in excess of the carrying value of the asset group, no impairment was identified. Additionally, we considered the impacts of the pending HMH Books & Media sale and related segment change on our Education reporting unit, to which goodwill and indefinite-lived intangibles are entirely allocated. During the three months ended March 31, 2021, no changes to our reporting units were identified and no impairment triggering events were identified as it relates to our Education reporting unit assets.

 

3.

Significant Accounting Policies and Estimates

Our financial results are affected by the selection and application of accounting policies and methods. There were no material changes during the three months ended March 31, 2021 to the application of significant accounting policies and estimates as described in our audited consolidated financial statements, which were included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

11


We evaluate our estimates, judgments and methodologies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenues and expenses. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat it, as well as the economic impact on local, regional, national and international customers and markets. We have made estimates of the impact of the COVID-19 pandemic within our financial statements and there may be changes to those estimates in future periods. Actual results may differ from these estimates.

4.

Recent Accounting Standards

Recent accounting pronouncements, not included below, are not expected to have a material impact on our consolidated financial position or results of operations.

Recently Adopted Accounting Standards

In December 2019, the Financial Accounting Standards Board (“FASB”) issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles, including simplification of areas such as franchise taxes, step-up in tax basis of goodwill, intraperiod allocations, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. We adopted the guidance on January 1, 2021. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In August 2018, the FASB issued new guidance on a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor (i.e., a service contract). Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement to develop or obtain internal use software. Accordingly, the guidance requires a customer to determine the stage of a project that the implementation activity relates to and the nature of the associated costs in order to determine whether those costs should be expensed as incurred or capitalized. The guidance also requires the customer to amortize the capitalized implementation costs as an expense over the term of the hosting arrangement. We adopted the guidance on January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In January 2017, the FASB issued updated guidance to simplify the test for goodwill impairment by the elimination of Step 2 in the determination on whether goodwill should be considered impaired. The annual assessments are still required to be completed. We adopted the guidance on January 1, 2020.  

In June 2016, the FASB issued new guidance that requires credit losses on financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, not based on incurred losses, as well as additional disclosures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. We adopted the guidance on January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements.

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We are exposed to credit losses primarily through our accounts receivable. We develop estimates to reflect the risk of credit loss which are based on an evaluation of accounts receivable aging, prior collection experience, current conditions and reasonable and supportable forecasts of the economic conditions that will exist through the contractual life of the financial asset. We write off the asset when it is no longer deemed collectible. We monitor our ongoing credit exposure through an active review of collection trends. Our activities include monitoring the timeliness of payment collection and performing timely account reconciliations. At March 31, 2021, we reported allowances for doubtful accounts of $3.7 million, compared to $3.8 million at December 31, 2020, reflecting write-offs of $0.1 million for the three months ended March 31, 2021.

We are also exposed to losses on our royalty advances. Royalty advances to authors are capitalized and represent amounts paid in advance of the sale of an author’s product and are recovered as earned. As advances are recorded, a partial reserve may be recorded immediately based primarily upon historical sales experience. Additionally, advances are evaluated periodically to determine if they are expected to be recovered on a title-by-title basis. Any portion of a royalty advance that is not expected to be recovered is fully reserved. At March 31, 2021, we reported a reserve for royalty advances of $7.4 million, compared to $7.3 million at December 31, 2020, reflecting an increase of $0.1 million for the three months ended March 31, 2021.

5.

Discontinued Operations

On March 26, 2021, we entered into a definitive asset purchase agreement to sell the HMH Books & Media segment, our consumer publishing business, for cash consideration of $349.0 million, subject to a customary working capital adjustment, and the purchaser’s assumption of all liabilities relating to the HMH Books & Media business, subject to specified exceptions. The transaction is expected to close in the second quarter of 2021 subject to customary closing conditions, including regulatory approvals. Upon closing of the transaction, all HMH Books & Media employees will become employees of the purchaser. Net proceeds from the sale after the payment of transaction costs are estimated to be approximately $337.0 million, all of which we intend to use to pay down debt. In connection with the sale of the HMH Books & Media business, we will enter into a Transition Services Agreement (“TSA”) with the purchaser whereby we will perform certain support functions for a period of up to 12 months. Upon the signing of the asset purchase agreement, the HMH Books & Media business qualified as a discontinued operation, and we now report our revenues and financial results from continuing operations under one reportable segment.

Selected financial information of the HMH Books & Media business included in discontinued operations is below. Included within the loss from discontinued operations is interest expense which was allocated to the HMH Books & Media business as we are intending to use the proceeds from the sale to pay down debt as required by our debt facilities given we are not intending to reinvest such amounts in the business.

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Net sales

 

$

42,706

 

 

$

38,082

 

Costs

 

 

37,615

 

 

 

36,373

 

Amortization

 

 

1,395

 

 

 

1,885

 

Interest expense

 

 

6,557

 

 

 

7,530

 

Loss from discontinued operations before taxes

 

$

(2,861

)

 

$

(7,706

)

Income tax expense

 

 

(94

)

 

 

(241

)

Loss from discontinued operations, net of tax

 

$

(2,955

)

 

$

(7,947

)

 

 

 

 

 

 

 

 

 

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