HMH reaffirms guidance for full year 2014
New sales orders up 13.7% year over year
Global education leader Houghton Mifflin Harcourt Company (“HMH”
or the “Company”) (NASDAQ: HMHC) today announced its financial
results for the first quarter ended March 31, 2014.
Linda K. Zecher, HMH’s President and Chief Executive Officer,
commented, “In the first quarter, we made active strides to
capitalize on the growing K-12 market, as evidenced by the
approximately 50% market share we captured among adoption state
school districts that announced content provider selections. These
early indicators, including a nearly 14% increase in new orders ,
confirm our optimism about HMH’s performance and the guidance we
have provided for the year. Despite several short-term challenges
during this seasonally low quarter, such as lower sales from movie
tie-ins, shifts in order shipment timing and severe winter weather,
our business remains healthy and our confidence in our long-term
potential has not wavered.”
Eric Shuman, Chief Financial Officer of HMH, stated, “Although
the first quarter constituted a seasonally low period for the K-12
industry and typically represents only approximately 10% of our
annual sales, the market remains strong and our performance in
districts that have made their decisions gives us confidence in our
full-year outlook.”
First Quarter Business Highlights:
- Education segment: HMH remains
well-positioned to capitalize on the growing adoption market, and
in the first quarter it was identified as the content provider for
approximately 50% of school districts that announced content
provider selections. These decisions are expected to lead to
contracts within some of the largest U.S. states, including
California, Florida and Texas. HMH programs GO Math! and
ScienceFusion were recently selected by key districts across Texas,
which represents a user base of 1.5 million students. The Company
also had solid performance in open territories, especially within
the grade 9-12 segment in California, New York, Michigan and Puerto
Rico.
- Trade Publishing segment: First
quarter performance within the Trade Publishing segment faced a
tough comparison following the success of the Hobbit and Life of Pi
movies in late 2012 and early 2013. HMH continues to optimize its
beloved brands for digital platforms as well as expand upon its
title lineup, including the recently acquired rights to BEOWULF: A
Translation and Commentary, a previously unseen work by J.R.R.
Tolkien, to ensure a strong pipeline for future revenue
growth.
- New Product Releases: HMH
further built upon its strategy to leverage classroom content to
strengthen its direct-to-consumer offering, recently launching Go
Math! Academy, a subscription-based, online program that extends
the learning continuum into the home. Early conversion rates from
visits to trial starters as well as a strong response to social
media promotion are positive indicators that the product possesses
strong growth potential.
In the first quarter, HMH released Tribal Nova’s iRead With,
which is designed to foster language development across the early
childhood category. The app is available in English and French
exclusively for the iPad and will be available for other platforms
later this year.
HMH recently extended the accessibility of its educational
offerings through the launch of Common Core Reading Practice and
Assessment tablet apps for grades K-6, available for download in
the App Store℠ and on Google Play™. The apps have received positive
feedback and reviews for their usability and additive educational
value.
First Quarter 2014 Unaudited Financial Results
Net Sales. HMH reported total net sales of $154 million
for the quarter ended March 31, 2014, $13 million or 8% lower
compared to $167 million in the same quarter of last year. The
first quarter of 2013 included non-recurring professional
development and services net sales of $8 million that were
recognized upon the completion of a contract. Excluding the 2013
non-recurring net sales, the domestic education net sales were up
$3 million over the same quarter of last year. The decrease in
total net sales was largely driven by an $8 million decrease in
Trade Publishing net sales as the prior year period benefitted from
strong net sales of backlist titles associated with the theatrical
releases of the movies The Hobbit and Life of Pi, which did not
occur in the current period and book store sales declines
attributable to the severe winter weather conditions across the
country. There was also a $4 million net sales decline in
assessment renewals and state contracts in the current period along
with $2 million in lower net sales from professional development
workshops due to the severe winter weather. Offsetting the above
negative factors were higher net sales of $8 million from
Heinemann’s Leveled Literacy Intervention and Units of Study
product lines as both continue to show strong performance. Net
sales for the Company’s Education segment accounted for $122
million in the first quarter of 2014, compared to $127 million,
inclusive of the aforementioned non-recurring net sales, in the
first quarter of 2013, and HMH’s Trade Publishing segment accounted
for $32 million in sales, compared to $40 million in the first
quarter of 2013.
Cost of Sales. Cost of sales, excluding pre-publication
and publishing rights amortization, was $93 million, up $6 million
or 7% from $87 million in the first quarter of 2013 due to a shift
in our product mix impacting production costs and royalty costs. We
also incurred higher depreciation on digital platforms.
Selling and Administrative Costs. In the first quarter of
2014, HMH recorded Selling and Administrative costs of $137
million, compared to $130 million for the same period in 2013. The
$7 million increase was primarily due to higher commission costs
and increased outside labor costs to support the anticipated
adoptions in 2014, as well as higher fees associated with the
refinancing of HMH’s debt and with the resale registration
statement filed on Form S-1 on March 28th 2014.
Operating Income (Loss). Operating loss for the first
quarter of 2014 was $140 million, compared to a loss of $129
million in the first quarter of 2013. The $11 million increase is
primarily due to the decline in net sales coupled with higher cost
of sales from our aforementioned product mix and royalty costs,
excluding pre-publication and publishing rights amortization and
increased selling and administrative costs, which were partially
offset by a reduction in amortization expense related to publishing
rights, pre-publication and other intangible assets.
Net Income (Loss). Net loss for the quarter was $146
million, an increase of $9 million compared to a loss of $137
million in the first quarter of 2013, primarily due to the same
drivers impacting the operating loss partially offset by reduced
interest expense as a result of our debt refinancing to a lower
interest rate.
Adjusted EBITDA. Adjusted EBITDA for the first quarter
was a loss of $53 million, compared to a loss of $32 million in the
first quarter of 2013, a decline of $21 million. Adjusted EBITDA
for HMH’s Education segment was a loss of $40 million, compared to
a loss of $27 million in the same quarter of last year, and
adjusted EBITDA with the Trade Publishing segment was a loss of $1
million compared to earnings of $7 million in the first quarter of
2013. Corporate and Other costs, which represent certain general
overhead costs not fully allocated to the business segments, such
as legal, accounting, treasury, human resources and executive
functions, were a loss of $12 million for both the first quarters
of 2014 and 2013.
Cash Flow. Net cash used by operating activities for the
quarter ended March 31, 2014 was $103 million as compared to $98
million for the same quarter in 2013. Our operating cash flows are
impacted by the inherent seasonality of the academic calendar.
Consequently, the performance of our businesses is difficult to
compare quarter to consecutive quarter and should be considered on
the basis of results for the whole year.
Conference Call
At 8:30 a.m. EDT on Thursday May 8, 2014, HMH
will also host a conference call to discuss the results with its
investors. The call will be webcast live
at www.hmhco.com under the Investor Relations section.
The following information is provided for investors who would like
to participate:
Toll Free: (866) 318-8618International: (617) 399-5137Passcode:
13827619Moderator: Rima Hyder, Vice President, Investor
Relations
Webcast Link: http://www.media-server.com/m/p/fuysjqrz
An archived webcast with the accompanying slides will be
available at hmhco.com for those unable to participate in
the live event. An audio replay of this conference will also be
available until May 22, 2014, via the following telephone
numbers: (888) 286-8010 in the United States and (617)
801-6888 internationally using passcode 99066028.
Use of Non-GAAP Financial Measures
To supplement our financial statements presented in accordance
with GAAP, we have presented Adjusted EBITDA in addition to our
GAAP results. 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
Adjusted EBITDA provides useful information to investors regarding
our results of operations because it assists both investors and
management in analyzing and benchmarking the performance and value
of our business. Adjusted EBITDA provides an indicator of general
economic performance that is not affected by debt restructurings,
fluctuations in interest rates or effective tax rates, or levels of
depreciation or amortization. Accordingly, our management believes
that this measurement is useful for comparing general operating
performance from period to period. In addition, targets and
positive trends in Adjusted EBITDA are used as performance measures
and to determine certain compensation of management. Other
companies may define Adjusted EBITDA differently and, as a result,
our measure of Adjusted EBITDA may not be directly comparable to
Adjusted EBITDA of other companies. Although we use Adjusted EBITDA
as a financial measure to assess the performance of our business,
the use of Adjusted EBITDA is limited because it does not include
certain material costs, such as interest and taxes, necessary to
operate our business. Adjusted EBITDA should be considered in
addition to, and not as a substitute for, net earnings in
accordance with GAAP as a measure of performance. Adjusted EBITDA
is not intended to be a measure of liquidity or free cash flow for
discretionary use. You are cautioned not to place undue reliance on
Adjusted EBITDA. A reconciliation of non-GAAP financial measures to
the most directly comparable GAAP financial measures is provided in
the appendix to this news release.
About Houghton Mifflin Harcourt
Company
Houghton Mifflin Harcourt Company is a leading global provider
of education solutions, delivering content, technology, services
and media to more than 50 million students in over 150 countries
worldwide. The Company delivers its offerings to both educational
institutions and consumers around the world. In the United States,
it is the leading provider of kindergarten through twelfth grade,
or K-12, educational content by market share. Furthermore, since
1832, it has published trade and reference materials, including
adult and children’s fiction and non-fiction books that have won
industry awards such as the Pulitzer Prize, Newbery and Caldecott
medals and National Book Award.
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” or “should,” “forecast,” “intend,” “plan,”
“potential,” “project,” “target” or, in each case, their negative,
or other variations or comparable terminology. These
forward-looking statements include all matters that are not
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, strategies, 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 of operations, financial
condition and liquidity, and the development of the industry in
which we operate may differ materially from those made in or
suggested by the forward-looking statements contained herein. In
addition, even if our results of operations, financial condition
and liquidity and the development of the industry in which we
operate 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; adverse or worsening economic trends or the
continuation of current economic conditions; changes in consumer
demand for, and acceptance of, our products; changes in competitive
factors; offerings by technology companies that compete with our
products; industry cycles and trends; conditions and/or changes in
the publishing industry; changes or the loss of our key third-party
print vendors; restrictions under agreements governing our
outstanding indebtedness; changes in laws or regulations governing
our business and operations; changes or failures in the information
technology systems we use; demographic trends; uncertainty
surrounding our ability to enforce our intellectual property
rights; inability to retain management or hire employees; impact of
potential impairment of goodwill and other intangibles in a
challenging economy; decline or volatility of our stock price
regardless of our operating performance; 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
(Unaudited)
(in thousands of dollars, except share information)
March 31,2014 December 31,2013
Assets Current assets Cash and cash equivalents $ 167,763 $
313,628 Short-term investments 100,561 111,721 Accounts receivable,
net 260,247 318,101 Inventories 208,831 182,194 Deferred income
taxes 29,402 29,842 Prepaid expenses and other assets 17,155
16,130 Total current assets 783,959 971,616
Property, plant, and equipment, net 135,522 140,848
Pre-publication costs, net 267,473 269,488 Royalty advances to
authors, net 51,489 46,881 Goodwill 531,786 531,786 Other
intangible assets, net 886,298 919,994 Other assets 26,109
29,773 Total assets $ 2,682,636 $
2,910,386
Liabilities and Stockholders’ Equity
Current liabilities Current portion of long-term debt $ 2,500 $
2,500 Accounts payable 67,562 105,012 Royalties payable 50,403
65,387 Salaries, wages, and commissions payable 18,405 29,945
Deferred revenue 105,277 107,905 Interest payable 48 55 Severance
and other charges 7,232 8,184 Accrued postretirement benefits 2,141
2,141 Other liabilities 28,923 32,002
Total current liabilities 282,491 353,131 Long-term debt
242,500 243,125 Royalties payable — 1,520 Long-term deferred
revenue 182,443 189,258 Accrued pension benefits 21,904 24,405
Accrued postretirement benefits 23,420 23,860 Deferred income taxes
117,506 116,999 Other liabilities 106,188
107,812 Total liabilities 976,452
1,060,110 Commitments and contingencies Stockholders’
equity Preferred stock, $0.01 par value: 20,000,000 shares
authorized; no shares issued and outstanding at March 31, 2014 and
December 31, 2013 — — Common stock, $0.01 par value: 380,000,000
shares authorized; 140,076,413 and 140,044,400 shares issued at
March 31, 2014 and December 31, 2013, respectively; 139,994,391 and
139,962,378 shares outstanding at March 31, 2014 and December 31,
2013, respectively 1,400 1,400 Treasury stock, 82,022 shares as of
March 31, 2014 and December 31, 2013 — — Capital in excess of par
value 4,752,620 4,750,589 Accumulated deficit (3,034,757 )
(2,888,422 ) Accumulated other comprehensive income (loss)
(13,079 ) (13,291 ) Total stockholders’ equity
1,706,184 1,850,276 Total liabilities and
stockholders’ equity $ 2,682,636 $ 2,910,386
Houghton Mifflin Harcourt
Company
Consolidated Statements of
Operations
(Unaudited)
(in thousands of dollars, except share and per share data)
Three Months Ended March 31, 2014
2013 Net sales $ 153,933 $ 166,594
Costs and expenses Cost of sales, excluding pre-publication
and publishing rights amortization 92,648 87,060 Publishing rights
amortization 30,751 39,450 Pre-publication amortization
28,974 26,157 Cost of sales 152,373 152,667
Selling and administrative 137,010 130,236 Other intangible asset
amortization 2,945 10,752 Severance and other charges 1,757
1,928 Operating loss (140,152 )
(128,989 )
Other income (expense) Interest expense (4,297 )
(5,907 ) Change in fair value of derivative instruments (103
) (530 ) Loss before taxes (144,552 ) (135,426 ) Income tax
expense 1,783 1,955 Net loss $ (146,335
) $ (137,381 ) Net loss per share attributable to common
stockholders, basic and diluted $ (1.05 ) $ (0.98 ) Weighted
average shares outstanding, basic and diluted 139,982,297
139,917,978
Houghton Mifflin Harcourt
Company
Consolidated Statements of Cash
Flows
(Unaudited)
Three Months Ended March 31, (in thousands of
dollars)
2014 2013 Cash flows from
operating activities Net loss $ (146,335 ) $ (137,381 )
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities Depreciation and amortization expense 79,909
90,700 Amortization of deferred financing costs 1,188 1,217
Deferred income taxes 947 1,285 Noncash stock-based compensation
expense 2,397 1,586 Change in fair value of derivative instruments
103 530 Changes in operating assets and liabilities, net of
acquisitions Accounts receivable 57,854 49,125 Inventories (26,637
) (38,589 ) Accounts payable and accrued expenses (34,269 ) (17,342
) Royalties, net (21,112 ) (17,795 ) Deferred revenue (9,443 )
(24,970 ) Interest payable (7 ) 57 Severance and other charges
(1,769 ) (1,407 ) Accrued pension and postretirement benefits
(2,941 ) (3,342 ) Other, net (2,429 ) (2,036 ) Net cash
(used in) provided by operating activities (102,544 )
(98,362 )
Cash flows from investing activities Proceeds from
sale of short-term investments 19,000 42,250 Purchases of
short-term investments (8,053 ) (36,053 ) Additions to
pre-publication costs (38,283 ) (31,995 ) Additions to property,
plant, and equipment (14,994 ) (15,399 ) Net cash (used in)
provided by investing activities (42,330 ) (41,197 )
Cash
flows from financing activities Payments of long-term debt (625
) (625 ) Income tax withholding payments associated with restricted
stock units vesting (366 ) — Net cash (used in)
provided by financing activities (991 ) (625 ) Net
(decrease) increase in cash and cash equivalents (145,865 )
(140,184 )
Cash and cash equivalents Beginning of period
313,628 329,078 Net (decrease) increase in cash and cash
equivalents (145,865 ) (140,184 ) End of period $ 167,763
$ 188,894
Houghton Mifflin Harcourt
Company
Adjusted EBITDA
(Unaudited)
(in thousands of dollars)
Three Months Ended March
31, 2014 2013
Net loss $ (146,335 ) $ (137,381 ) Interest expense 4,297
5,907 Provision (benefit) for income taxes 1,783 1,955 Depreciation
expense 17,239 14,342 Amortization expense (1) 62,670 76,358
Non-cash charges—stock compensation 2,397 1,587 Non-cash
charges—gain (loss) on foreign currency hedge 103 530 Purchase
accounting adjustments (2) 575 2,045 Fees, expenses or charges for
equity offerings, debt or acquisitions 2,114 288 Restructuring 205
— Severance separation costs and facility closures (3) 1,757
1,928 Adjusted EBITDA $ (53,195 ) $ (32,441 )
(1) Includes pre-publication amortization of $28,974, and
$26,157 for the three months ended March 31, 2014 and 2013,
respectively.
(2) Represents certain non-cash accounting adjustments, most
significantly relating to deferred revenue and inventory costs.
(3) Represents costs associated with restructuring. Included in
such costs are severance and vacancy of excess facilities.
Houghton Mifflin Harcourt
Company
Adjusted EBITDA
(Unaudited)
Education
(in thousands of dollars)
Three Months Ended March
31, 2014 2013 Net loss
$ (114,890)
$ (113,590)
Depreciation expense 15,160 12,645 Amortization expense 58,928
72,266 Purchase accounting adjustments 575 2,045 Fees, expenses or
charges for equity offerings, debt or acquisitions - 21
Adjusted EBITDA
$ (40,227)
$ (26,613)
Trade Publishing
(in thousands of dollars)
Three Months Ended
March 31, 2014 2013 Net income
(loss)
$
(5,184
)
$
2,451
Depreciation expense 124 117 Amortization expense 3,742 4,092
Adjusted EBITDA
$
(1,318
)
$
6,660
Corporate and Other
(in thousands of dollars)
Three Months Ended
March 31,
2014
2013 Net loss $ (26,261 )
$ (26,242 ) Interest expense 4,297 5,907 Provision (benefit) for
income taxes 1,783 1,955 Depreciation expense 1,955 1,580 Non-cash
charges—stock compensation 2,397 1,587 Non-cash charges—gain (loss)
on foreign currency hedge 103 530 Fees, expenses or charges for
equity offerings, debt or acquisitions 2,114 267 Restructuring 205
— Severance separation costs and facility closures 1,757
1,928 Adjusted EBITDA $ (11,650 ) $ (12,488 )
Houghton Mifflin Harcourt CompanyRima Hyder, 617-351-3309Vice
President, Investor Relationsrima.hyder@hmhco.comorBianca Olson,
617-351-3841 | 646-932-1241Senior Vice President, Corporate
Affairsbianca.olson@hmhco.com
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