Houghton Mifflin Harcourt Reports Record Billings Growth in 2019; Sets Guidance for 2020

New Core Programs and Extensions Drive Strong Growth Nationwide; 2020 Financial Outlook Features Continued Positive Cash Flow

BOSTON , Feb. 27, 2020 /PRNewswire/ -- Learning company Houghton Mifflin Harcourt ("HMH" or the "Company") (Nasdaq: HMHC) today announced strong financial results for the year ended December 31, 2019 .

Houghton Mifflin Harcourt Logo (PRNewsFoto/Houghton Mifflin Harcourt)

2019 Highlights:

  • Net sales grew 5%
  • Record Billings 1 growth of 21%
  • Net cash provided by operating activities of $255 million
  • Strong free cash flow 4 growth to $115 million

 



Three Months Ended December 31,



Years Ended December 31,


(in millions of dollars)


2019



2018 (4)



Change



2019



2018 (4)



Change


Net sales


$

241



$

249




(3.0)

%


$

1,391



$

1,322




5.2

%

Change in deferred revenue



(41)




(42)




3.4

%



201




(7)



NM


Billings 1



201




207




(3.0)

%



1,591




1,315




21.0

%

Loss from continuing operations



(125)




(86)




(44.8)

%



(214)




(137)




(55.6)

%

Adjusted EBITDA from continuing operations 4



(4)




2



NM




166




192




(13.7)

%

Pre-publication or content development costs



(21)




(31)




32.6

%



(103)




(123)




16.9

%

Net cash provided by operating activities


128



78




63.6

%



255




104



NM


Free cash flow 4


96




35



NM




115




(73)



NM


____________

1

An operating measure which we derive from net sales taking into account the change in deferred revenue.

2

Billings for Core Solutions and Extensions is an operating measure based on invoiced sales adjusted for returns, other publishing income and the change in deferred revenue.

3

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

4

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



NM = not meaningful

 

"This was a very strong year for execution and growth at HMH, and our financial results indicate the progress we are making in transforming our business. We raised our billings guidance twice reflecting the strength we saw during the year. As we look forward to 2020, we will continue to focus on our strategy to expand our market leadership, create greater impact on student achievement and deliver greater returns for our shareholders," said Jack Lynch , President and Chief Executive Officer of Houghton Mifflin Harcourt.

Joe Abbott , Chief Financial Officer of HMH added, "Strength in both Core Solutions and Extensions were driven by our new core programs as well as growth in Heinemann. HMH delivered free cash flow of $115 million , in the upper half of our recently updated guidance range. Our strategy and the transformational initiatives we accomplished in 2019 have dramatically improved our financial model and set the stage for another strong year of free cash flow in 2020."

2020 Outlook

HMH expects 2020 billings to be at or below the low end of the 'mid-cycle' range of $1.5 to $1 .65 billion described at our October Investor Event. Unlevered free cash flow margin for 2020 is expected to be approximately 9% of billings, the low end of our 'mid-cycle' range, with free cash flow after interest payments in the range of $65 to $90 million.

Full year 2019 Financial Results:

Net Sales:  HMH reported net sales of $1 ,391 million for the full year of 2019, up 5% or $69 million compared to $1 ,322 million in 2018. The net sales increase was driven by a $88 million increase in our Education segment, offset by a $19 million decrease in our HMH Books & Media segment. Within our Education segment, the increase was due to higher net sales in Extensions, which increased by $47 million from $585 million in 2018 to $632 million primarily driven by sales of the Fountas & Pinnell Classroom and Calkins products. Net sales from Core Solutions increased by $41 million from $538 million in 2018 to $579 million. The primary driver of the increase in Core Solutions were net sales of the Texas and national versions of the Into Reading and Into Literature programs.

Billings 1 :  Billings for 2019 increased $277 million, or 21%, from 2018. The billings increase was driven by a $298 million increase in our Education segment, offset by a $21 million decrease in our HMH Books & Media segment. Within our Education segment, the increase was primarily due to higher Core Solutions billings, driven by billings of the Texas and national versions of the Into Reading and Into Literature programs. Extensions billings increased $65 million, driven by continued growth of Heinemann's Fountas & Pinnell Classroom and Calkins products. The HMH Books & Media billings decrease was primarily due to licensing income of $16 million in 2018, pertaining to our classic backlist titles 1984 and Animal Farm, which did not repeat in 2019.

Cost of Sales:  Overall cost of sales increased by $119 million to $844 million in 2019 from $725 million in 2018, primarily due to product mix and an increase in pre-publication amortization expense related to the timing of 2019 major product releases.

Selling and Administrative Costs:  Selling and administrative costs increased by $13 million in 2019, primarily due to increases in labor and variable costs due to $277 million of higher billings compared to 2018.

Operating Loss:  Operating loss for 2019 was $163 million, a $72 million unfavorable change from the $91 million operating loss recorded in 2018. The unfavorable change was primarily the result of higher cost of sales coupled with the increase in selling and administrative expenses.

Net Loss:  Net loss of $214 million for 2019 was $120 million more than the net loss of $94 million in 2018. Net loss from continuing operations for 2019 was $214 million, a $77 million unfavorable change from the $137 million net loss from continuing operations in 2018, due primarily to the same factors impacting operating loss.

Adjusted EBITDA from Continuing Operations:  Adjusted EBITDA from continuing operations for 2019 was $166 million, a $26 million unfavorable change from $192 million in 2018. Certain variable costs such as royalty, transportation and commissions were higher due to the increase in billings over 2018.

Cash Flows:  Net cash provided by operating activities for 2019 was $255 million compared with $115 million in 2018. Net cash provided by operating activities from continuing operations was $255 million in 2019, an increase of $151 million compared to $104 million in 2018. Net cash provided by operating activities included $11 million of cash flow from discontinued operations in 2018. HMH's free cash flow, defined as net cash from operating activities minus capital expenditures, for 2019 was $115 million, a $188 million improvement compared to usage of $73 million in 2018. The primary driver of the favorable change in free cash flow was an increase in net working capital associated with the increased billings in 2019 of $277 million offset by reduction in accounts payable. As of December 31, 2019 , no amounts were outstanding on the revolving credit facility.

1 Education and HMH Books and Media segment billings represent operating measure which we derive from net sales taking into account the change in deferred revenue.  Billings for Core Solutions and Extensions is an operating measure based on invoiced sales adjusted for returns, other publishing income and change in deferred revenue.

Conference Call:

At 8:30 a.m. ET on Thursday, February 27, 2020 , HMH will host a conference call to discuss the results and management's outlook with its investors. The call will be webcast live at ir.hmhco.com. The following information is provided for investors who would like to participate:

Toll Free:  (844) 835-6565
International:  (484) 653-6719 
Passcode: 7846064    
Moderator:  Brian Shipman, Senior Vice President, Investor Relations 
Webcast Link: https://edge.media-server.com/mmc/p/yr4fs8cy

An archived webcast with the accompanying slides will be available at ir.hmhco.com  for one year for those unable to participate in the live event. An audio replay of this conference call will also be available until March 8, 2020 via the following telephone numbers: (855) 859-2056 in the United States and (404) 537-3406 internationally using passcode 7846064.

Use of Non-GAAP Financial Measures:

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

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

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

About Houghton Mifflin Harcourt

Houghton Mifflin Harcourt (Nasdaq: HMHC) is a learning company committed to delivering connected solutions that engage learners, empower educators and improve student outcomes. As a leading provider of K12 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, while its award-winning children's books, novels, non-fiction, and reference titles are enjoyed by readers throughout the world. For more information, visit www.hmhco.com   

Follow HMH on Twitter , Facebook and YouTube .

Contact

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

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

Forward-Looking Statements

The statements contained herein include forward-looking statements, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes," "estimates," "projects," "anticipates," "expects," "could," "intends," "may," "will," "should," "forecast," "intend," "plan," "potential," "project," "target" or, in each case, their negative, or other variations or comparable terminology. Forward-looking statements include all statements that are not statements of historical facts. They include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, including billings and net sales; financial performance, financial condition; liquidity; products and services, including for new adoptions; outlook for full year 2020; prospects; growth; markets and our positions therein; strategies, including with respect to investing in our Core Solutions and Extensions offerings and operational excellence; efficiency and cost savings initiatives, including actions thereunder and expected impact; the industry in which we operate; and potential business decisions. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this report.

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

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

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

 

 

Houghton Mifflin Harcourt Company

Consolidated Balance Sheets




December 31,


(in thousands of dollars, except share information)


2019



2018


Assets









Current assets









Cash and cash equivalents


$

296,353



$

253,365


Short-term investments






49,833


Accounts receivable, net



184,425




203,574


Inventories



213,059




184,209


Prepaid expenses and other assets



19,257




15,297


Total current assets



713,094




706,278











Property, plant, and equipment, net



100,388




125,925


Pre-publication costs, net



268,197




323,641


Royalty advances to authors, net



44,743




47,993


Goodwill



716,977




716,073


Other intangible assets, net



474,225




520,892


Operating lease assets



132,247





Deferred income taxes



2,520




3,259


Deferred commissions



29,291




22,635


Other assets



31,490




28,428


Total assets


$

2,513,172



$

2,495,124


Liabilities and Stockholders' Equity









Current liabilities









Current portion of long-term debt


$

19,000



$

8,000


Accounts payable



52,128




76,313


Royalties payable



72,985




66,893


Salaries, wages, and commissions payable



54,938




50,225


Deferred revenue



305,285




251,944


Interest payable



3,826




136


Severance and other charges



12,407




6,020


Accrued postretirement benefits



1,571




1,512


Operating lease liabilities



8,685





Other liabilities



24,325




26,649


Total current liabilities



555,150




487,692











Long-term debt, net of discount and issuance costs



638,187




755,649


Operating lease liabilities



134,994





Long-term deferred revenue



542,821




395,500


Accrued pension benefits



23,648




29,320


Accrued postretirement benefits



15,113




14,300


Deferred income taxes



30,871




27,075


Other liabilities



6,028




17,118


Total liabilities



1,946,812




1,726,654


Commitments and contingencies









Stockholders' equity









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







Common stock, $0.01 par value: 380,000,000 shares authorized; 148,928,328 and
   148,164,854 shares issued at December 31, 2019 and 2018, respectively; 124,351,294
   and 123,587,820 shares outstanding at December 31, 2019 and 2018, respectively



1,489




1,481


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



(518,030)




(518,030)


Capital in excess of par value



4,906,165




4,893,174


Accumulated deficit



(3,775,992)




(3,562,971)


Accumulated other comprehensive loss



(47,272)




(45,184)


Total stockholders' equity



566,360




768,470


Total liabilities and stockholders' equity


$

2,513,172



$

2,495,124


 

 

...

Houghton Mifflin Harcourt Company

Consolidated Statements of Operations




(Unaudited)

Three Months Ended December 31,



Years Ended December 31,


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


2019



2018



2019



2018


Net sales


$

241,475



$

249,038



$

1,390,674



$

1,322,417


Costs and expenses

















Cost of sales, excluding publishing rights and pre-publication

   amortization



134,695




119,928




668,108




581,467


Publishing rights amortization



6,340




8,237




26,557




34,713


Pre-publication amortization



41,375




29,210




149,515




109,257


Cost of sales



182,410




157,375




844,180




725,437


Selling and administrative



146,400




158,243




662,606




649,295


Other intangible asset amortization



5,791




6,695




25,310




26,933


Restructuring/severance and other charges



15,821




2,021




21,742




11,478


Gain on sale of assets






(585)







(201)


Operating loss



(108,947)




(74,711)




(163,164)




(90,525)


Other income (expense)

















Retirement benefits non-service income



42




320




167




1,280


Interest expense



(13,636)




(11,645)




(48,778)




(45,680)


Interest income



1,459




1,650




3,157




2,550


Change in fair value of derivative instruments



272




(400)




(899)




(1,374)


Income from transition services agreement






1,889




4,248




1,889


Loss on extinguishment of debt



(4,363)







(4,363)





Loss from continuing operations before taxes



(125,173)




(82,897)




(209,632)




(131,860)


Income tax expense (benefit) for continuing operations



(55)




3,493




4,201




5,597


Loss from continuing operations



(125,118)




(86,390)




(213,833)




(137,457)


Earnings from discontinued operations, net of tax












12,833


Gain on sale of discontinued operations, net of tax






30,469







30,469


Income from discontinued operations, net of tax






30,469







43,302


Net loss


$

(125,118)



$

(55,921)



$

(213,833)



$

(94,155)


Net loss per share attributable to common stockholders

















Basic and diluted: