The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per
share information)
Houghton Mifflin Harcourt Company (HMH, Houghton Mifflin Harcourt, we, us, our, or
the Company) is a global learning company, committed to delivering integrated solutions that engage learners, empower educators and improve student outcomes. As a leading provider of Kindergarten through 12
th
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 serves more than 50 million students and 3 million educators in 150 countries, while its award-winning childrens books, novels, non-fiction, and reference
titles are enjoyed by readers throughout the world.
The K-12 market is our primary market, and in the United States, we are a leading
provider of educational content by market share. Some of our core educational offerings include
HMH Science Dimensions
,
Collections
,
GO Math!
,
Read 180
Universal, and
Journeys
. We believe our long-standing
reputation and trusted brand enable us to capitalize on trends in the education market through our existing and developing channels.
Furthermore, for nearly two centuries, we have published renowned and awarded childrens, fiction, nonfiction, culinary and reference
titles enjoyed by readers throughout the world. Our distinguished author list includes ten Nobel Prize winners, forty-eight Pulitzer Prize winners, and fifteen National Book Award winners. We are home to popular characters and titles such as Curious
George, Carmen Sandiego,
The Lord of the Rings, The Whole30,
The Best American Series, the Peterson Field Guides, CliffsNotes, and
The Polar Express,
and published distinguished authors such as Philip Roth, Temple Grandin, Tim
OBrien, Amos Oz, Kwame Alexander, Lois Lowry, and Chris Van Allsburg.
We sell our products and services across multiple media and
distribution channels. Leveraging our portfolio of content, including some of our best-known childrens brands and titles, such as Carmen Sandiego and Curious George, we have created interactive digital content, mobile applications and
educational games that can be used by families at home or on the go.
Our digital products portfolio, combined with our content development
or distribution agreements with recognized technology leaders such as Apple, Google, Intel and Microsoft, enable us to bring our next-generation educational solutions and content to learners across virtually all platforms and devices. Additionally,
we believe our technology and development capabilities allow us to enhance content engagement and effectiveness with embedded assessment, interactivity and personalized adaptable content as well as increased accessibility.
The consolidated financial statements of HMH include the accounts of all of our wholly-owned subsidiaries as of December 31, 2018 and 2017
and for the periods ended December 31, 2018, 2017 and 2016.
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). 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.
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.
67
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
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 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 businesses may not be comparable quarter to
consecutive quarter and should be 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.
Approximately 85% of our net sales for the year ended December 31, 2018 were derived from our Education segment, which is a markedly
seasonal business. Schools conduct the majority of their purchases in the second and third quarters of the calendar year in preparation for the beginning of the school year. Thus, for the years ended December 31, 2018, 2017 and 2016,
approximately 67% 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.
|
Significant Accounting Policies
|
Use of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates, assumptions and judgments by management that affect the reported amounts of assets,
liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities in the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and assumptions including, but
not limited to, book returns, deferred revenue and related standalone selling price estimates, allowance for bad debts, recoverability of advances to authors, valuation of inventory, financial instruments valuation, income taxes, pensions and other
postretirement benefits obligations, contingencies, litigation, depreciation and amortization periods, and the recoverability of long-term assets such as property, plant, and equipment, capitalized pre-publication costs, other identified intangibles
and goodwill. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from those estimates.
Adoption of New Revenue
Recognition Accounting Standard
On January 1, 2018, we adopted the new revenue standard utilizing the modified retrospective
method. As a result, we changed our accounting policy for revenue recognition as detailed below. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit. Using
the modified retrospective approach, we applied the standard only to contracts that were not completed at the date of initial application. The comparative information has not been restated and continues to be reported under the accounting standards
in effect for those periods as we believe it is still comparable.
There was a significant impact relating to the requirement to capitalize
incremental costs to acquire new contracts, which consist of sales commissions. During previous periods, these costs were expensed as incurred. Further, there is an impact to our accounting for software license revenue. Under the previous
68
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
guidance, when vendor specific objective evidence (VSOE) was not established for undelivered maintenance services, software licenses were recognized ratably over the life of the
service period due to the separation criteria of the software license and related maintenance services not being met. The requirement for establishing VSOE does not exist under the new standard, thus software licenses are no longer recognized over
the maintenance term, but rather as the software licenses are delivered as fair value can be established to allow for separate recognition.
The cumulative effect of the changes made to our consolidated balance sheets at January 1, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Adjustments
due to
Adoption
|
|
|
January 1, 2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
192,569
|
|
|
$
|
(1,092
|
)
|
|
$
|
191,477
|
|
Contract assets (1)
|
|
|
|
|
|
|
1,092
|
|
|
|
1,092
|
|
Deferred commissions
|
|
|
|
|
|
|
24,040
|
|
|
|
24,040
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue (current and long-term)
|
|
$
|
683,808
|
|
|
$
|
(28,671
|
)
|
|
$
|
655,137
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit (2)
|
|
$
|
(3,521,527
|
)
|
|
$
|
52,711
|
|
|
$
|
(3,468,816
|
)
|
(1)
|
Contract assets are included in prepaid expenses and other assets on our consolidated balance sheets.
|
(2)
|
The adoption resulted in the write off of a portion of a deferred tax asset for deferred revenue. However, due
to our valuation allowance position, there is no net tax effect on accumulated deficit as the valuation allowance will also be reversed commensurate to the reduction in the deferred tax asset.
|
Impact of New Revenue Recognition Accounting Standard on Financial Statement Line Items
In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated balance sheets,
statements of operations and cash flows were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
As Reported
|
|
|
Balances Without
Adoption
|
|
|
Effect of Change
Higher / (Lower)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
203,574
|
|
|
$
|
203,648
|
|
|
$
|
(74
|
)
|
Contract assets
|
|
|
74
|
|
|
|
|
|
|
|
74
|
|
Deferred commissions
|
|
|
22,635
|
|
|
|
|
|
|
|
22,635
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue (current and long-term)
|
|
$
|
647,444
|
|
|
$
|
693,678
|
|
|
$
|
(46,234
|
)
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(3,562,971
|
)
|
|
$
|
(3,625,345
|
)
|
|
$
|
(62,374
|
)
|
69
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
As Reported
|
|
|
Balances Without
Adoption
|
|
|
Effect of Change
Higher / (Lower)
|
|
Net sales
|
|
$
|
1,322,417
|
|
|
$
|
1,304,854
|
|
|
$
|
17,563
|
|
Selling and administrative
|
|
|
649,295
|
|
|
|
647,891
|
|
|
|
1,404
|
|
Operating loss
|
|
|
(90,525
|
)
|
|
|
(106,684
|
)
|
|
|
16,159
|
|
Loss from continuing operations
|
|
|
(131,860
|
)
|
|
|
(148,019
|
)
|
|
|
16,159
|
|
Income from discontinued operations, net of tax
|
|
|
43,302
|
|
|
|
43,302
|
|
|
|
|
|
Net loss
|
|
|
(94,155
|
)
|
|
|
(110,314
|
)
|
|
|
16,159
|
|
The adoption resulted in offsetting shifts in cash flows through net loss within cash flows from operating
activities for deferred commissions, which are included within other assets, and deferred revenue consistent with the effects on our consolidated statements of operations as noted in the table above. The adoption had no impact on our overall cash
flows from operating, investing or financing activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
As Reported
|
|
|
Balances Without
Adoption
|
|
|
Effect of Change
Higher / (Lower)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(94,155
|
)
|
|
$
|
(110,314
|
)
|
|
$
|
16,159
|
|
Adjustments to reconcile net loss to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
3,908
|
|
|
|
2,504
|
|
|
|
1,404
|
|
Deferred revenue
|
|
|
(7,692
|
)
|
|
|
9,871
|
|
|
|
(17,563
|
)
|
Net cash provided by operating activitiescontinuing operations
|
|
|
104,084
|
|
|
|
104,084
|
|
|
|
|
|
Net cash provided by operating activitiesdiscontinued operations
|
|
|
10,831
|
|
|
|
10,831
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
114,915
|
|
|
|
114,915
|
|
|
|
|
|
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which we
expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of the new revenue recognition accounting standard, we perform the following five steps:
(i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and
(v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we
transfer to the customer. At contract inception, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize as
revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services to a customer. To the
extent the transaction price includes variable consideration, which generally reflects estimated future product returns, we estimate the amount of variable consideration that
70
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
should be included in the transaction price utilizing the expected value method to which we expect to be entitled. Variable consideration is included in the transaction price if, in our judgment,
it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based largely
on all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
We estimate the collectability of contracts upon execution. For contracts with rights of return, the transaction price is adjusted to reflect
the estimated returns for the arrangement on these sales and is made at the time of sale based on historical experience by product line or customer. The transaction prices allocated are adjusted to reflect expected returns and are based on
historical return rates and sales patterns. Shipping and handling fees charged to customers are included in net sales.
When determining
the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. We do not assess whether a significant
financing component exists if the period between when we perform our obligations under the contract and when the customer pays is one year or less. Significant financing components income is included in interest income.
Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications exist when the
modification either creates new, or changes the existing, enforceable rights and obligations. Generally, contract modifications are for products or services that are not distinct from the existing contract due to the inability to use, consume or
sell the products or services on their own to generate economic benefits and are accounted for as if they were part of that existing contract. The effect of such a contract modification on the transaction price and measure of progress for the
performance obligation to which it relates is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
Physical product revenue is generally recognized when the customer obtains control of our product, which occurs at a point in time, and may be
upon shipment or upon delivery based on the contractual shipping terms of a contract. Revenues from static digital content commence upon delivery to the customer of the digital entitlement that is required to access and download the content and is
typically recognized at a point in time. Revenues from subscription software licenses, related hosting services and product support are recognized evenly over the license term as we believe this best represents the pattern of transfer to the
customer. The perpetual software licenses provide the customer with a functional license to our products and their related revenues are recognized when the customer receives entitlement to the software. For the technical services provided to
customers in connection with the software license, including hosting services related to perpetual licenses, we recognize revenue upon delivery of the services. As the invoices are based on each day of service, this is directly linked to the
transfer of benefit to the customer.
If the contract contains a single performance obligation, the entire transaction price is allocated
to the single performance obligation. We enter into certain contracts that have multiple performance obligations, one or more of which may be delivered subsequent to the delivery of other performance obligations. These performance obligations may
include print and digital media, professional development services, training, software licenses, access to hosted content, and various services related to the software including, but not limited to hosting, maintenance and support, and
implementation. We allocate the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. We determine standalone selling prices based on the price at
which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as
71
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
market conditions and internally approved standard pricing discounts related to the performance obligations. Generally, our performance obligations include print and digital textbooks and
instructional materials, trade books, reference materials, formative assessment materials and multimedia instructional programs; licenses to book rights and content; access to hosted content; and services including professional development,
consulting and training. Our contracts may also contain software performance obligations including perpetual and subscription based licenses and software maintenance and support services.
Accounts Receivable
Accounts receivable include amounts billed and currently due from customers and are recorded net of allowances for doubtful accounts and
reserves for returns. In the normal course of business, we extend credit to customers that satisfy predefined criteria. Allowances for doubtful accounts are established through the evaluation of accounts receivable aging and prior collection
experience to estimate the ultimate collectability of these receivables.
Contract Assets
Contract assets include unbilled amounts where revenue is recognized over time as the services are delivered to the customer based on the
extent of progress towards completion and revenue recognized exceeds the amount billed to the customer, and right of payment is not subject to the passage of time. Amounts may not exceed their net realizable value. Contract assets are included in
prepaid expenses and other assets on our consolidated balance sheets.
Deferred Commissions
Our incremental direct costs of obtaining a contract, which consist of sales commissions, are deferred and amortized over the period of
contract performance. Applying the practical expedient, we recognize sales commission expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. At December 31, 2018 and
January 1, 2018, we had $22.6 million and $24.0 million of deferred commissions, respectively. We had $10.5 million of amortization expense related to deferred commissions during the year ended December 31, 2018. These costs
are included in selling and administrative expenses.
Deferred Revenue
Our contract liabilities consist of advance payments and billings in excess of revenue recognized and are classified as deferred revenue on our
consolidated balance sheets. Our contract assets and liabilities are accounted for and presented on a net basis as either a contract asset or contract liability at the end of each reporting period. We classify deferred revenue as current or
noncurrent based on the timing of when we expect to recognize revenue. In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the
beginning of the period until the revenue exceeds that balance. If additional advances are received on those contracts in subsequent periods, we assume all revenue recognized in the reporting period first applies to the beginning contract liability
as opposed to a portion applying to the new advances for the period.
Advertising Costs and Sample Expenses
Advertising costs are charged to selling and administrative expenses as incurred. Advertising costs were $12.0 million, $12.4 million
and $11.0 million for the years ended December 31, 2018, 2017 and 2016,
72
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
respectively. Sample expenses are charged to selling and administrative expenses when the samples are shipped.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of cash in banks and highly liquid investment securities that have maturities of three months or
less when purchased. The carrying amount of cash equivalents approximates fair value because of the short-term maturity of these investments.
Short-term Investments
Short-term investments typically consist of marketable securities with maturities between three and twelve months at the balance sheet date. We
have classified all of our short-term investments as available-for-sale at December 31, 2018 and 2017. The investments are reported at fair value with any unrealized gains or losses excluded from earnings and reported as a separate component of
stockholders equity as other comprehensive income (loss).
Accounts Receivable
Accounts receivable are recorded net of allowances for doubtful accounts and reserves for returns. In the normal course of business, we extend
credit to customers that satisfy predefined criteria. We estimate the collectability of our receivables. Allowances for doubtful accounts are established through the evaluation of accounts receivable aging and prior collection experience to estimate
the ultimate collectability of these receivables. Reserves for returns are based on historical return rates and sales patterns.
Inventories
Inventories
are stated at the lower of weighted-average cost or net realizable value. The level of obsolete and excess inventory is estimated on a program or title level-basis by comparing the number of units in stock with past usage and the expected future
demand. The expected future demand of a program or title is determined by the copyright year, the previous years usage, the subsequent years sales forecast, and known forward-looking trends including our development cycle to replace the
title or program and competing titles or programs.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost, or in the case of assets acquired in business combinations, at fair value as of the
acquisition date, less accumulated depreciation. Equipment under capital lease is stated at fair value at inception of the lease, less accumulated depreciation. Maintenance and repair costs are charged to expense as incurred, and renewals and
improvements that extend the useful life of the assets are capitalized. Costs associated with developing film and episodic series assets are deferred if such amounts are expected to be recovered through future revenues. Film and episodic series
costs are amortized on a pro rata basis of revenue earned and total revenue expected to be earned from the film or episodic series. Depreciation on property, plant, and equipment is calculated using the straight-line method over the estimated useful
lives of the assets or, in the case of assets acquired in business combinations, over their remaining lives. Equipment held under capital leases and leasehold improvements are amortized using the
73
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
straight-line method over the shorter of the lease term or estimated useful life of the asset. Estimated useful lives of property, plant, and equipment are as follows:
|
|
|
|
|
|
|
Estimated
Useful Life
|
|
Building and building equipment
|
|
|
10 to 35 years
|
|
Machinery and equipment
|
|
|
2 to 15 years
|
|
Capitalized software
|
|
|
3 to 5 years
|
|
Leasehold improvements
|
|
|
Lesser of useful life or lease term
|
|
Film and media
|
|
|
Revenue earned
|
|
Capitalized Internal-Use Software and Software Development Costs
Capitalized internal-use and external-use software are included in property, plant and equipment on the consolidated balance sheets.
We capitalize certain costs related to obtaining or developing computer software for internal use including external customer-facing websites.
Costs incurred during the application development stage, including external direct costs of materials and services, and payroll and payroll related costs for employees who are directly associated with the internal-use software project, are
capitalized and amortized on a straight-line basis over the expected useful life of the related software. The application development stage includes design of chosen path, software configuration and integration, coding, hardware installation and
testing. Costs incurred during the preliminary project stage, as well as maintenance, training and upgrades that do not result in additional functionality subsequent to general release are expensed as incurred.
Certain computer software development costs for software that is to be sold or marketed are capitalized in the consolidated balance sheets.
Capitalization of computer software development costs begins upon the establishment of technological feasibility. We define the establishment of technological feasibility as a working model. Amortization of capitalized computer software development
costs is provided on a product-by-product basis using the straight-line method, beginning upon commercial release of the product, and continuing over the remaining estimated economic life of the product. The carrying amounts of computer software
development costs are annually compared to net realizable value and impairment charges are recorded, as appropriate, when amounts expected to be realized are lower.
We review internal-use software and software development costs for impairment. For the years ended December 31, 2018, 2017 and 2016, there
was no impairment of software developments costs.
Pre-publication Costs
We capitalize the art, prepress, manuscript and other costs incurred in the creation of the master copy of a book or other media (the
pre-publication costs). Pre-publication costs are primarily amortized from the year of sale over five years using the sum-of-the-years-digits method, which is an accelerated method for calculating an assets amortization. Under this
method, the amortization expense recorded for a pre-publication cost asset is approximately 33% (year 1), 27% (year 2), 20% (year 3), 13% (year 4) and 7% (year 5). This policy is used throughout the Company, except for the Trade Publishing young
readers and general interest books, which generally expenses such costs as incurred. Additionally, pre-publication costs recorded in connection with the acquisition of the EdTech business are amortized over 7 years on a projected sales pattern. The
amortization methods and periods chosen best reflects the pattern of expected sales generated from individual titles or programs. We periodically evaluate the remaining lives and recoverability of capitalized pre-publication costs, which are often
dependent upon program acceptance by state adoption authorities.
74
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Amortization expense related to pre-publication costs for the years ended December 31,
2018, 2017 and 2016 were $109.3 million, $119.9 million and $121.9 million, respectively.
For the year ended
December 31, 2017, an impairment charge for pre-publication costs of $4.0 million was recorded as certain products will no longer be sold in the marketplace. For the years ended December 31, 2018 and 2016, there was no impairment of
pre-publication costs.
Goodwill and Indefinite-lived Intangible Assets
Goodwill is the excess of the purchase price paid over the fair value of the net assets of the business acquired. Other intangible assets
principally consist of branded trademarks and trade names, acquired publishing rights and customer relationships. Goodwill and indefinite-lived intangible assets (certain tradenames) are not amortized, but are reviewed at least annually for
impairment or earlier, if an indication of impairment exists. Goodwill is allocated entirely to our Education reporting unit. Determining the fair value of a reporting unit is judgmental in nature, and involves the use of significant estimates and
assumptions. These estimates and assumptions may include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, the determination of appropriate
market comparables as well as the fair value of individual assets and liabilities.
We have the option of first assessing qualitative
factors to determine whether it is necessary to perform the current two-step impairment test for goodwill or we can perform the two-step impairment test without performing the qualitative assessment. In performing the qualitative (Step 0)
assessment, events and circumstances specific to the reporting unit and to the entity as a whole, such as macroeconomic conditions, industry and market considerations, overall financial performance and cost factors are considered when evaluating
whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount.
Recoverability of goodwill
can also be evaluated using a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit,
goodwill is considered not impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, the second step of the impairment test is performed in order to
determine the implied fair value of a reporting units goodwill. Determining the implied fair value of goodwill requires valuation of a reporting units tangible and intangible assets and liabilities in a manner similar to the allocation
of purchase price in a business combination. If the carrying value of a reporting units goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the extent of the difference. We estimate total fair value of
the Education reporting unit by using various valuation techniques including an evaluation of our market capitalization and peer company multiples. With regard to indefinite-lived intangible assets, which includes the Houghton Mifflin Harcourt
tradename at December 31, 2018 and 2017, the recoverability is evaluated using a one-step process whereby we determine the fair value by asset and then compare it to its carrying value to determine if the asset is impaired. We estimate the fair
value based by preparing a relief-from-royalty discounted cash flow analysis using forwarding looking revenue projections. The significant assumptions used in discounted cash flow analysis include: future net sales, a long-term growth rate, a
royalty rate and a discount rate used to present value future cash flows and the terminal value of the Education reporting unit. The discount rate is based on the weighted-average cost of capital method at the date of the evaluation.
We completed our annual goodwill impairment tests as of October 1, 2018 and 2017. In 2018 and 2017, we used income and market valuation
approaches to determine the fair value of the Education reporting unit. The fair value of the Education reporting unit substantially exceeded its carrying value as of the evaluation dates. No goodwill was deemed to be impaired for the years ended
December 31, 2018, 2017 and 2016, respectively.
75
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
We completed our annual indefinite-lived intangible assets impairment tests as of
October 1, 2018 and 2017. No indefinite-lived intangible assets were deemed to be impaired for the years ended December 31, 2018 and 2017. We recorded non-cash impairment charges of $130.2 million for the year ended December 31,
2016. The impairment charges related to four specific tradenames within the Education segment in 2016 and primarily resulted from the strategic decision to market our products under the Houghton Mifflin Harcourt and HMH name rather than legacy
imprints along with certain declining sales projections.
Publishing Rights
A publishing right is an acquired right that allows us to publish and republish existing and future works as well as create new works based on
previously published materials. We determine the fair market value of the publishing rights arising from business combinations by discounting the after-tax cash flows projected to be derived from the publishing rights and titles to their net present
value using a rate of return that accounts for the time value of money and the appropriate degree of risk. The useful life of the publishing rights is based on the lives of the various copyrights involved. We calculate amortization using the
percentage of the projected operating income before taxes derived from the titles in the current year as a percentage of the total estimated operating income before taxes over the remaining useful life. Acquired publication rights, as well as
customer-related intangibles with definitive lives, are primarily amortized on an accelerated basis over periods ranging from 3 to 20 years.
Impairment of Other Long-lived Assets
We review our other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. If the future undiscounted cash flows are less than their book value, impairment exists. The impairment is measured as the difference between the book value and the fair value of the underlying asset. Fair value is
normally determined using an undiscounted cash flow model.
Severance
We accrue postemployment benefits if the obligation is attributable to services already rendered, rights to those benefits accumulate, payment
of benefits is probable, and amount of benefit is reasonably estimated. Postemployment benefits include severance benefits.
Subsequent to
recording such accrued severance liabilities, changes in market or other conditions may result in changes to assumptions upon which the original liabilities were recorded that could result in an adjustment to the liabilities.
Royalty Advances
Royalty
advances to authors are capitalized and represent amounts paid in advance of the sale of an authors 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, with consideration given to the other titles in the authors portfolio also earning against the
outstanding advance. Any portion of a royalty advance that is not expected to be recovered is fully reserved. Cash payments for royalty advances are included within cash flows from operating activities, under the caption Royalties payable and
author advances, net, in our consolidated statements of cash flows.
76
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Income Taxes
We record income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax basis, and operating loss and tax credit carryforwards. Our consolidated financial
statements contain certain deferred tax assets which have arisen primarily as a result of interest expense limitations, as well as other temporary differences between financial and tax accounting. We establish a valuation allowance if the likelihood
of realization of the deferred tax assets is reduced based on an evaluation of objective verifiable evidence. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against those deferred tax assets. We evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized.
We also evaluate any uncertain tax positions and only recognize the tax benefit from an uncertain tax position if it is more likely than not
that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest
benefit that has a greater than 50 percent likelihood of being realized upon settlement. We record a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Any change in
judgment related to the expected ultimate resolution of uncertain tax positions is recognized in earnings in the period in which such change occurs. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax
expense.
We had accounted for the tax effects of The Tax Cuts and Jobs Act, enacted on December 22, 2017, on a provisional basis and
have subsequently finalized our accounting analysis based on guidance, interpretations available at December 31, 2018. Adjustments made in the fourth quarter of 2018 upon finalization of our accounting analysis were not material to our
financial statements. See Note 8 to the consolidated financial statements for further detail.
Stock-Based Compensation
Certain employees and directors have been granted stock options, restricted stock and restricted stock units in our common stock. Stock-based
compensation expense reflects the fair value of stock-based awards measured at the grant date and recognized over the relevant service period. We estimate the fair value of each stock-based award on the measurement date using the current market
price based on the target value of the award for restricted stock and restricted stock units, the Monte Carlo simulation for market-based restricted stock units and the Black-Scholes valuation model for stock options. We recognize stock-based
compensation expense over the awards requisite service period on a straight-line basis for time based stock options, restricted stock and restricted stock units and on a graded basis for restricted stock and restricted stock units that are
contingent on the achievement of performance conditions.
Comprehensive Loss
Comprehensive loss is defined as changes in the equity of an enterprise except those resulting from stockholder transactions. The amounts shown
on the consolidated statements of stockholders equity and comprehensive loss relate to the cumulative effect of changes in pension and postretirement liabilities, foreign currency translation gain and loss adjustments, unrealized gains and
losses on short-term investments and gains and losses on derivative instruments.
77
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Foreign Currency Translation
The functional currency for each of our subsidiaries is the currency of the primary economic environment in which the subsidiary operates,
generally defined as the currency in which the entity generates and expends cash. Foreign currency denominated assets and liabilities are translated into United States dollars at current rates as of the balance sheet date and the revenue, costs and
expenses are translated at the average rates established during each reporting period. Cumulative translation gains or losses are recorded in equity as an element of accumulated other comprehensive income.
Financial Instruments
Derivative financial instruments are employed to manage risks associated with interest rate exposures and are not used for trading or
speculative purposes. We recognize all derivative instruments in our consolidated balance sheets at fair value. Changes in the fair value of derivatives are recognized periodically either in earnings or in stockholders equity as a component of
accumulated other comprehensive loss, depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or a cash flow hedge. Gains and losses on derivatives designated as
hedges, to the extent they are effective, are recorded in other comprehensive loss, and subsequently reclassified to earnings to offset the impact of the hedged items when they occur. Changes in the fair value of derivatives not qualifying as hedges
are reported in earnings. During 2018, 2017 and 2016, our interest rate swaps were designated as hedges and qualify for hedge accounting. Accordingly, we recorded an unrealized gain of $3.5 million and $4.9 million, and an unrealized loss
of $2.5 million in our statements of comprehensive loss to account for the changes in fair value of these derivatives during the periods ended December 31, 2018, 2017 and 2016, respectively. The corresponding $2.4 million hedge asset
is included within long-term other assets in our consolidated balance sheet as of December 31, 2018. The corresponding $1.2 million and $6.1 million hedge liability is included within long-term other liabilities in our consolidated
balance sheet as of December 31, 2017 and 2016, respectively. Our foreign exchange forward contracts did not qualify for hedge accounting because we did not contemporaneously document our hedging strategy upon entering into the hedging
arrangements.
Treasury Stock
We account for treasury stock under the cost method. When shares are reissued or retired from treasury stock they are accounted for at an
average price. Upon retirement the excess over par value is charged against capital in excess of par value.
Net Loss per Share
Basic net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by
the weighted-average common shares outstanding during the period. Except where the result would be anti-dilutive, net loss per share is computed using the treasury stock method for the exercise of stock options. For periods in which the Company has
reported net losses, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is
anti-dilutive. Diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders for the years ended December 31, 2018, 2017 and 2016.
78
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Recent Accounting Standards
Recent accounting pronouncements, not included below, are not expected to have a material impact on our consolidated financial position and
results of operations.
Recently Issued Accounting Standards
In January 2017, the Financial Accounting Standards Board (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. The guidance will be effective in 2020, with early adoption permitted. We do
not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
In February 2016, the
FASB issued guidance that primarily requires lessees to recognize most leases on their balance sheets but record expenses on their income statements in a manner similar to current accounting. For lessors, the guidance modifies the classification
criteria and the accounting for sales-type and direct financing leases. The guidance will be effective for us on January 1, 2019. We will apply the guidance at the adoption date and recognize right of use assets and lease liabilities in the
period of adoption. We will adopt using the transition method, which will not require adjustments to comparative periods nor require modified disclosures in those comparative periods. The new guidance provides a number of optional practical
expedients in transition. We will elect the package of practical expedients, which among other things, allows the carryforward of the historical lease classification. Further, upon implementation of the new guidance, we will elect the practical
expedients to combine lease and non-lease components, and to not recognize right-of-use assets and lease liabilities for short-term leases. We have identified appropriate changes to our accounting policies, information technology systems, business
processes, and related internal controls to support recognition and disclosure requirements under the new guidance. We are currently in the process of evaluating the impact of this guidance on our consolidated financial statements and footnote
disclosures, but we believe the adoption of this guidance will have a material impact on our consolidated balance sheets due to the recognition of the lease rights and obligations related to our office space leases as assets and liabilities. The
impact on our results of operations and cash flows is not expected to be material.
Recently Adopted Accounting Standards
In May 2014, the FASB issued new guidance related to revenue recognition. This new accounting standard replaced most current U.S. GAAP guidance
on this topic and eliminated most industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that an entity should recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Entities may adopt the new standard either retrospectively to all
periods presented in the financial statements (the full retrospective method) or as a cumulative-effect adjustment as of the date of adoption (modified retrospective method) in the year of adoption without applying to comparative periods financial
statements. We adopted the guidance on January 1, 2018 applying the modified retrospective method.
The new standard superseded
substantially all existing revenue recognition guidance. It impacts the revenue recognition for a significant number of our contracts, in addition to our business processes and our information technology systems. As a result, we established a
cross-functional coordinated team to implement the new revenue recognition standard. We have implemented changes to our systems, processes and internal controls to meet the standards reporting and disclosure requirements.
79
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Refer to Adoption of New Revenue Recognition Accounting Standard in this Note 2
for a detailed description of the impact of the adoption of the revenue standard.
In March 2017, the FASB issued guidance to improve the
presentation of net periodic pension cost and net periodic post-retirement benefit cost. The changes to the guidance required employers to report the service cost component in the same line item as other compensation costs arising from services
rendered by employees during the reporting period. The other components of net benefit costs have been presented in the income statement separately from the service cost and outside of a subtotal of income from operations. The guidance became
effective January 1, 2018 and the adoption of the guidance did not have a material impact on our consolidated financial statements.
In November 2016, the FASB issued guidance on restricted cash, which required amounts generally described as restricted cash and restricted
cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The guidance became effective January 1, 2018 using a retrospective
transition method to each period presented. The adoption of the guidance did not have a material impact on our consolidated financial statements.
In August 2016, the FASB issued a guidance update to classifications of certain cash receipts and cash payments on the Statement of Cash Flows
with the objective of reducing the existing diversity in practice. This updated guidance addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other
debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims;
proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately
identifiable cash flows and application of the predominance principle. The guidance became effective January 1, 2018 and the adoption of the guidance did not have a material impact on our consolidated financial statements.
In March 2016, the FASB issued guidance that changes the accounting for certain aspects of share-based payments to employees. The guidance
requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. The guidance also allows for the employer to repurchase more of an
employees shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The guidance became
effective January 1, 2017. The adoption of the guidance resulted in the recognition of approximately $12.3 million (tax effected) of previously unrecorded additional paid-in capital net operating losses as of January 1, 2017. The
additional net operating losses were offset by an increase to the valuation allowance, accordingly no income tax benefit was recognized as a result of the adoption.
3.
|
Discontinued Operations
|
On October 1, 2018, we completed the previously announced sale of all the assets, including intellectual property, used primarily in our
Riverside clinical and standardized testing business (Riverside Business) for cash consideration received of $140.0 million and the purchasers assumption of all liabilities relating to the Riverside Business subject to
specified exceptions. Net proceeds from the sale after the payment of transaction costs were approximately $135.0 million with a post-tax book gain on sale of approximately $30.5 million. The gain was recorded in the fourth quarter of 2018
as the transaction closed on October 1, 2018. The tax gain on the sale was offset by current year losses. The results of the Riverside Business were
80
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
previously reported in our Education segment. In connection with the sale of the Riverside Business, we entered into a Transition Services Agreement (TSA) with the purchaser whereby we will
perform certain support functions for a period of up to 18 months from the disposition date in the fourth quarter of 2018.
Upon the
signing of the asset purchase agreement on September 12, 2018, the Riverside Business qualified as a discontinued operation, and goodwill originally included in the Education reportable segment was transferred to the Riverside Business.
The amount of transferred goodwill was $67.0 million and was determined using the relative fair value method. The relative fair value was determined based on the purchase price of the Riverside Business compared to the Education reportable
segment fair value. The Education reportable segment fair value was based primarily on the market value of the overall Company at the date that the Riverside Business qualified as a discontinued operation. The allocation also required the
assessment for impairment for each of the Riverside Business and Education reportable segments goodwill and indefinite-lived intangible assets carrying values. No impairment was deemed to exist.
Selected financial information of the Riverside Business included in discontinued operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net sales
|
|
$
|
56,562
|
|
|
$
|
80,482
|
|
|
$
|
80,707
|
|
Costs
|
|
|
37,714
|
|
|
|
54,718
|
|
|
|
55,304
|
|
Amortization
|
|
|
4,954
|
|
|
|
7,630
|
|
|
|
8,752
|
|
Impairment charge for intangible assets
|
|
|
|
|
|
|
|
|
|
|
9,000
|
|
Earnings from discontinued operations before taxes
|
|
|
13,894
|
|
|
|
18,134
|
|
|
|
7,651
|
|
Income tax expense (benefit)
|
|
|
1,061
|
|
|
|
984
|
|
|
|
(13,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations, net of tax
|
|
$
|
12,833
|
|
|
$
|
17,150
|
|
|
$
|
21,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assets and liabilities of the Riverside Business have been classified as assets of discontinued operations
and liabilities of discontinued operations on our consolidated balance sheets. The major categories of assets and liabilities of the Riverside Business included in assets of discontinued operations and liabilities of discontinued operations are as
follows:
|
|
|
|
|
|
|
December 31,
2017
|
|
Accounts receivable, net
|
|
$
|
8,511
|
|
Inventories
|
|
|
3,950
|
|
Prepaid expenses and other assets
|
|
|
28
|
|
Property, plant, and equipment, net
|
|
|
5,247
|
|
Pre-publication costs, net
|
|
|
10,900
|
|
Goodwill
|
|
|
67,000
|
|
Other intangible assets, net
|
|
|
28,125
|
|
|
|
|
|
|
Total assets of discontinued operations
|
|
$
|
123,761
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
692
|
|
Royalties payable
|
|
|
6,194
|
|
Salaries, wages, and commissions payable
|
|
|
2,133
|
|
Deferred revenue
|
|
|
10,398
|
|
Other liabilities
|
|
|
5,289
|
|
|
|
|
|
|
Total liabilities of discontinued operations
|
|
$
|
24,706
|
|
|
|
|
|
|
81
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
4.
|
Balance Sheet Information
|
Short-term Investments
The following table shows the gross unrealized losses and market value of our available-for-sale securities with unrealized losses that
are not deemed to be other-than-temporary, aggregated by investment category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency securities
|
|
$
|
49,824
|
|
|
$
|
31
|
|
|
$
|
(22
|
)
|
|
$
|
49,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agency securities
|
|
$
|
86,467
|
|
|
$
|
25
|
|
|
$
|
(43
|
)
|
|
$
|
86,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturities of our short-term investments are one year or less.
Account Receivable
Accounts receivable at December 31, 2018 and 2017 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Accounts receivable
|
|
$
|
224,306
|
|
|
$
|
215,657
|
|
Allowance for bad debt
|
|
|
(2,173
|
)
|
|
|
(2,508
|
)
|
Reserve for book returns
|
|
|
(18,559
|
)
|
|
|
(20,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
203,574
|
|
|
$
|
192,569
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018, no individual customer comprised more than 10% of our accounts receivable, net
balance. As of December 31, 2017, there was one individual customer that comprised approximately 10% of our accounts receivable, net balance. We believe that our accounts receivable credit risk exposure is limited and we have not experienced
significant write-downs in our accounts receivable balances.
Inventories
Inventories at December 31, 2018 and 2017 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Finished goods
|
|
$
|
162,890
|
|
|
$
|
141,925
|
|
Raw materials
|
|
|
21,319
|
|
|
|
8,769
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
184,209
|
|
|
$
|
150,694
|
|
|
|
|
|
|
|
|
|
|
82
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Property, Plant, and Equipment
Balances of major classes of assets and accumulated depreciation and amortization at December 31, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Land and land improvements
|
|
$
|
4,923
|
|
|
$
|
4,923
|
|
Building and building equipment
|
|
|
9,415
|
|
|
|
9,867
|
|
Machinery and equipment
|
|
|
11,630
|
|
|
|
31,234
|
|
Capitalized software
|
|
|
563,314
|
|
|
|
522,826
|
|
Leasehold improvements
|
|
|
22,171
|
|
|
|
22,784
|
|
Film and media
|
|
|
14,920
|
|
|
|
8,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
626,373
|
|
|
|
599,690
|
|
Less: Accumulated depreciation and amortization
|
|
|
(500,448
|
)
|
|
|
(451,031
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
$
|
125,925
|
|
|
$
|
148,659
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2018, 2017 and 2016, depreciation and amortization expense related to
property, plant, and equipment were $81.2 million, $71.0 million and $74.5 million, respectively.
Property, plant, and
equipment at December 31, 2018 and 2017 included approximately $0.7 million and $6.9 million, respectively, acquired under capital lease agreements, of which the majority is included in machinery and equipment. The future minimum lease
payments required under non-cancelable capital leases as of December 31, 2018 are $0.2 million in 2019, 2020 and 2021.
Included
within property, plant, and equipment on our consolidated balance sheets are film and media assets. Our film and media assets are comprised of the cost to develop our animated series Carmen Sandiego. These assets will be amortized proportionally to
the revenues recognized relative to the total estimated revenue consistent with the guidance over episodic television series development. In the fourth quarter of 2018, we recorded amortization expense of $6.1 million against this asset upon
recognition of revenue, and is included within cost of sales, excluding publishing rights and pre-publication amortization, in the statement of operations. No amortization expense was previously recorded.
Substantially all property, plant, and equipment are pledged as collateral under our term loan and revolving credit facility.
Contract Assets, Contract Liabilities and Deferred Commissions
Contract assets consist of unbilled amounts at the reporting date and are transferred to accounts receivable when the rights become
unconditional. Contract assets are included in prepaid expenses and other assets on our consolidated balance sheets. Contract liabilities consist of deferred revenue (current and long-term). The following table presents changes in contract assets
and contract liabilities during the year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
January 1,
2018
|
|
|
$ Change
|
|
|
% Change
|
|
Contract assets
|
|
$
|
74
|
|
|
$
|
1,092
|
|
|
$
|
(1,018
|
)
|
|
|
NM
|
|
Contract liabilities (deferred revenue)
|
|
|
647,444
|
|
|
|
655,137
|
|
|
|
(7,693
|
)
|
|
|
(1.2
|
)%
|
NM = not meaningful
83
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The $6.7 million increase in our net contract liabilities from January 1, 2018 to
December 31, 2018 was primarily due to a $7.7 million decrease in our contract liabilities, primarily due to the satisfaction of performance obligations related to physical and digital products during the period.
During the year ended December 31, 2018, we recognized the following net sales as a result of changes in the contract asset and contract
liabilities balances:
|
|
|
|
|
|
|
Year Ended
December 31,
2018
|
|
Net sales recognized in the period from:
|
|
|
|
|
Amounts included in contract liabilities at the
beginning of the period
|
|
$
|
220,769
|
|
As of December 31, 2018, the aggregate amount of the transaction price allocated to the remaining
performance obligations was $694.1 million, and we will recognize approximately 80% over the next 1 to 3 years to net sales.
Prior to
the adoption of the new revenue standard, we expensed incremental commissions paid to sales representatives for obtaining product sales as well as service contracts. We expect that the costs are recoverable, and under the new standard, we capitalize
these incremental costs of obtaining customer contracts unless the capitalization and amortization of such costs are not expected to have a material impact on the financial statements. We did not record any impairment against contract assets during
the year ended December 31, 2018. Applying the practical expedient, we recognize sales commission expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. We had deferred
commissions in the amount of $22.6 million at December 31, 2018 and amortized $10.5 million during the year ended December 31, 2018. The amortization is included in selling and administrative expenses.
5.
|
Goodwill and Other Intangible Assets
|
Goodwill and other intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Total
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Total
|
|
Goodwill
|
|
$
|
716,073
|
|
|
$
|
|
|
|
$
|
716,073
|
|
|
$
|
716,073
|
|
|
$
|
|
|
|
$
|
716,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and tradenames: indefinite-lived
|
|
$
|
161,000
|
|
|
$
|
|
|
|
$
|
161,000
|
|
|
$
|
161,000
|
|
|
$
|
|
|
|
$
|
161,000
|
|
Trademarks and tradenames: definite-lived
|
|
|
164,130
|
|
|
|
(28,087
|
)
|
|
|
136,043
|
|
|
|
164,130
|
|
|
|
(17,226
|
)
|
|
|
146,904
|
|
Publishing rights
|
|
|
1,180,000
|
|
|
|
(1,112,869
|
)
|
|
|
67,131
|
|
|
|
1,180,000
|
|
|
|
(1,078,156
|
)
|
|
|
101,844
|
|
Customer related and other
|
|
|
444,640
|
|
|
|
(287,922
|
)
|
|
|
156,718
|
|
|
|
444,640
|
|
|
|
(271,850
|
)
|
|
|
172,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets, net
|
|
$
|
1,949,770
|
|
|
$
|
(1,428,878
|
)
|
|
$
|
520,892
|
|
|
$
|
1,949,770
|
|
|
$
|
(1,367,232
|
)
|
|
$
|
582,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no changes in the carrying amount of goodwill related to continuing operations for the year ended
December 31, 2018. Goodwill related to continuing operations decreased $67.0 million compared to previously reported amounts. The decrease arises from the allocation of goodwill to the Riverside Business (i.e., discontinued operations) from the
Education reportable segment goodwill amount. Refer to Note 3.
84
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
In accordance with the provisions of the accounting standard for goodwill and other
intangible assets, goodwill and certain indefinite-lived tradenames are not amortized but rather are assessed for impairment on an annual basis. In connection with this assessment, we recorded an impairment charge of approximately
$130.2 million for certain of our indefinite-lived intangible assets, which has been reflected as of the measurement date of October 1, 2016, which are now definite-lived. There was no impairment charge recorded in the years ended
December 31, 2018 and 2017. There was no goodwill impairment for the years ended December 31, 2018, 2017 and 2016, respectively.
During 2017, we acquired the remaining intellectual property rights to certain educational content and recorded an intangible asset of
$2.0 million.
During 2016, certain tradenames were deemed to be definite-lived and, accordingly, are being amortized over their
estimated useful lives. This was due to our strategic decision to gradually migrate away from specific imprints, primarily the Holt McDougal and various supplemental brands, and in favor of marketing our products under the Houghton Mifflin Harcourt
and HMH names. As a result of this change in estimate from indefinite-lived to definite-lived intangible assets, we recorded amortization expense of $8.1 million, $8.1 million and $2.0 million during 2018, 2017 and 2016, respectively,
related to these tradenames. During 2016, $109.4 million of previously indefinite-lived intangible assets were transferred to definite-lived intangible assets and $130.2 million of indefinite-lived intangible assets were impaired.
Amortization expense for publishing rights and customer related and other intangibles were $61.6 million, $75.5 million and $87.7 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Estimated aggregate amortization expense expected for each of the next five years related to intangibles subject to amortization is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
and
Tradenames
|
|
|
Publishing
Rights
|
|
|
Other
Intangible
Assets
|
|
2019
|
|
$
|
10,862
|
|
|
$
|
26,557
|
|
|
$
|
13,444
|
|
2020
|
|
|
10,862
|
|
|
|
20,056
|
|
|
|
9,594
|
|
2021
|
|
|
10,862
|
|
|
|
11,642
|
|
|
|
9,320
|
|
2022
|
|
|
10,862
|
|
|
|
7,569
|
|
|
|
9,119
|
|
2023
|
|
|
10,862
|
|
|
|
1,307
|
|
|
|
8,939
|
|
Thereafter
|
|
|
81,733
|
|
|
|
|
|
|
|
106,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
136,043
|
|
|
$
|
67,131
|
|
|
$
|
156,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
$800,000 term loan due May 29, 2021 interest payable quarterly (net of discount and issuance
costs)
|
|
$
|
763,649
|
|
|
$
|
768,194
|
|
Less: Current portion of long-term debt
|
|
|
8,000
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, net of discount and issuance costs
|
|
$
|
755,649
|
|
|
$
|
760,194
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
85
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Long-term debt repayments due in each of the next five years and thereafter is as follows:
|
|
|
|
|
Year
|
|
2019
|
|
|
8,000
|
|
2020
|
|
|
8,000
|
|
2021
|
|
|
756,000
|
|
|
|
|
|
|
|
|
$
|
772,000
|
|
|
|
|
|
|
Term Loan Facility
On May 29, 2015, we entered into an amended and restated $800.0 million term loan credit facility (the term loan facility).
The term loan facility matures on May 29, 2021 and the interest rate is based on LIBOR plus 3.0% or an alternative base rate plus applicable margins. LIBOR is subject to a floor of 1.0% with the length of the LIBOR contracts ranging up to six
months at the option of the Company.
The term loan facility is required to be repaid in quarterly installments of $2.0 million, and
may be prepaid, in whole or in part, at any time, without premium.
The term loan facility was issued at a discount equal to 0.5% of the
outstanding borrowing commitment. As of December 31, 2018, the interest rate of the term loan facility was 5.5%.
The term loan
facility does not require us to comply with financial maintenance covenants. We are currently required to meet certain incurrence based financial covenants as defined under our term loan facility. The term loan facility is subject to usual and
customary conditions, representations, warranties and covenants, including restrictions on additional indebtedness, liens, investments, mergers, acquisitions, asset dispositions, dividends to stockholders, repurchase or redemption of our stock,
transactions with affiliates and other matters. The term loan facility is subject to customary events of default. If an event of default occurs and is continuing, the administrative agent may, or at the request of certain required lenders shall,
accelerate the obligations outstanding under the term loan facility.
We are subject to an excess cash flow provision under our term loan
facility which is predicated upon our leverage ratio and cash flow. There was no payment required under the excess cash flow provision in 2018 and 2017.
Interest Rate Hedging
On
August 17, 2015, we entered into interest rate derivative contracts with various financial institutions having an aggregate notional amount of $400.0 million to convert floating rate debt into fixed rate debt and had $400.0 million
outstanding as of December 31, 2018. We assessed at inception, and re-assess on an ongoing basis, whether the interest rate derivative contracts are highly effective in offsetting changes in the fair value of the hedged variable rate debt.
These interest rate swaps were designated as cash flow hedges and qualify for hedge accounting under the accounting guidance related to
derivatives and hedging. Accordingly, we recorded an unrealized gain of $3.5 million and $4.9 million, and an unrealized loss of $2.5 million in our statements of comprehensive loss to account for the changes in fair value of these
derivatives during the periods ended December 31, 2018, 2017 and 2016, respectively. The corresponding $2.4 million hedge asset is included within long-term other assets and $1.2 million hedge liability is included within long-term
other liabilities in our consolidated balance sheet as of December 31, 2018 and 2017, respectively. The interest rate derivative contracts mature on July 22, 2020.
86
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Revolving Credit Facility
On July 22, 2015, we entered into an amended and restated revolving credit facility (the revolving credit facility). The
revolving credit facility provides borrowing availability in an amount equal to the lesser of either $250.0 million or a borrowing base that is computed monthly or weekly and comprised of the Borrowers and the Guarantors (as such
terms are defined below) eligible inventory and receivables. The revolving credit facility includes a letter of credit subfacility of $50.0 million, a swingline subfacility of $20.0 million and the option to expand the facility by up to
$100.0 million in the aggregate under certain specified conditions. The revolving credit facility may be prepaid, in whole or in part, at any time, without premium.
The revolving credit facility requires the Company to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 on a trailing four-quarter
basis only during certain periods commencing when excess availability under the revolving credit facility is less than certain limits prescribed by the terms of the revolving credit facility. The revolving credit facility is subject to usual and
customary conditions, representations, warranties and covenants, including restrictions on additional indebtedness, liens, investments, mergers, acquisitions, asset dispositions, dividends to stockholders, repurchase or redemption of our stock,
transactions with affiliates and other matters. The revolving credit facility is subject to customary events of default. As of December 31, 2018, no amounts are outstanding on the revolving credit facility.
As of December 31, 2018, the minimum fixed charge coverage ratio covenant under our revolving credit facility was not applicable, due to
our level of borrowing availability. The minimum fixed charge coverage ratio, which is only tested in limited situations, is 1.0 to 1.0 through the end of the facility.
Guarantees
Under both
the revolving credit facility and the term loan facility, Houghton Mifflin Harcourt Publishers Inc., HMH Publishers LLC and Houghton Mifflin Harcourt Publishing Company are the borrowers (collectively, the Borrowers), and Citibank, N.A.
acts as both the administrative agent and the collateral agent.
The obligations under the revolving credit facility and the term loan
facility are guaranteed by the Company and each of its direct and indirect for-profit domestic subsidiaries (other than the Borrowers) (collectively, the Guarantors) and are secured by all capital stock and other equity interests of the
Borrowers and the Guarantors and substantially all of the other tangible and intangible assets of the Borrowers and the Guarantors, including, without limitation, receivables, inventory, equipment, contract rights, securities, patents, trademarks,
other intellectual property, cash, bank accounts and securities accounts and owned real estate. The revolving credit facility is secured by first priority liens on receivables, inventory, deposit accounts, securities accounts, instruments, chattel
paper and other assets related to the foregoing (the Revolving First Lien Collateral), and second priority liens on the collateral which secures the term loan facility on a first priority basis. The term loan facility is secured by first
priority liens on the capital stock and other equity interests of the Borrowers and the Guarantors, equipment, owned real estate, trademarks and other intellectual property, general intangibles that are not Revolving First Lien Collateral and other
assets related to the foregoing, and second priority liens on the Revolving First Lien Collateral.
7.
|
Restructuring, Severance and Other Charges
|
2017 Restructuring Plan
On an ongoing basis, we assess opportunities for improved operational effectiveness and efficiency and better alignment of expenses with net
sales, while preserving our ability to make the investments in content
87
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
and our people that we believe are important to our long-term success. As a result of these assessments, we have undertaken a restructuring initiative in order to enhance our growth potential and
better position us for long-term success. This initiative is described below.
Beginning at the end of 2016, we worked with a third party
consultant to review our operating model and organizational design in order to improve our operational efficiency, better focus on the needs of our customers and right-size our cost structure to create long-term shareholder value.
In March 2017, we committed to certain operational efficiency and cost-reduction actions we planned to take in order to accomplish these
objectives (2017 Restructuring Plan). These actions included making organizational design changes across layers of the Company below the executive team and other right-sizing initiatives expected to result in reductions in force,
consolidating and/or subletting certain office space under real estate leases as well as other potential operational efficiency and cost-reduction initiatives. We completed the organizational design change actions in 2017 and the remaining actions
in 2018.
Implementation of actions under the 2017 Restructuring Plan resulted in total charges of approximately $42.8 million, of
which approximately $32.6 million of these charges are estimated to result in cash outlays. We have recorded cash-related costs of $4.7 million and $27.9 million for the years ended December 31, 2018 and 2017, respectively, of which a
portion of these expenses totaling approximately $16.2 million were related to severance and termination benefits for the year ended December 31, 2017. The remaining amount of approximately $4.7 million and $11.7 million related
to implementation of the plan and real estate consolidation costs for the years ended December 31, 2018 and 2017, respectively. These costs are included in the restructuring line item within our consolidated statements of operations.
The following tables provide a summary of our total costs associated with the 2017 Restructuring Plan, included in the restructuring line item
within our consolidated statements of operations, for the years ended December 31, 2018, 2017 and 2016, respectively, by major type of cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Cost
|
|
Year Ended
December 31,
2018
|
|
|
Year Ended
December 31,
2017
|
|
|
Year Ended
December 31,
2016
|
|
|
Total Amount
Incurred to Date
|
|
Restructuring charges:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and termination benefits
|
|
$
|
|
|
|
$
|
16,206
|
|
|
$
|
|
|
|
$
|
16,206
|
|
Office space consolidation (2)
|
|
|
4,657
|
|
|
|
4,979
|
|
|
|
|
|
|
|
9,636
|
|
Implementation and impairment (3)
|
|
|
|
|
|
|
16,590
|
|
|
|
|
|
|
|
16,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,657
|
|
|
$
|
37,775
|
|
|
$
|
|
|
|
$
|
42,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
All restructuring charges are included within Corporate and Other.
|
(2)
|
During the year ended December 31, 2017, we recorded a non-cash charge for a write-off of property, plant,
and equipment of approximately $0.7 million and $4.2 million of accruals related to vacating certain office space in two of our locations.
|
(3)
|
During the year ended December 31, 2017, we recorded a non-cash impairment charge of approximately
$9.1 million related to a certain long-lived asset included within property, plant, and equipment.
|
88
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Our restructuring liabilities are primarily comprised of accruals for severance and
termination benefits and office space consolidation. The following is a rollforward of our liabilities associated with the 2017 Restructuring Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
Restructuring
accruals at
December 31, 2017
|
|
|
Charges
|
|
|
Cash payments
|
|
|
Restructuring
accruals at
December 31, 2018
|
|
Severance and termination benefits
|
|
$
|
4,306
|
|
|
$
|
|
|
|
$
|
(3,936
|
)
|
|
$
|
370
|
|
Office space consolidation
|
|
|
3,663
|
|
|
|
4,657
|
|
|
|
(1,947
|
)
|
|
|
6,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,969
|
|
|
$
|
4,657
|
|
|
$
|
(5,883
|
)
|
|
$
|
6,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
Restructuring
accruals at
December 31, 2016
|
|
|
Charges
|
|
|
Cash payments
|
|
|
Restructuring
accruals at
December 31, 2017
|
|
Severance and termination benefits
|
|
$
|
|
|
|
$
|
16,206
|
|
|
$
|
(11,900
|
)
|
|
$
|
4,306
|
|
Office space consolidation
|
|
|
|
|
|
|
4,256
|
|
|
|
(593
|
)
|
|
|
3,663
|
|
Implementation
|
|
|
|
|
|
|
7,472
|
|
|
|
(7,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
27,934
|
|
|
$
|
(19,965
|
)
|
|
$
|
7,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and Other Charges
2018
Exclusive of the
2017 Restructuring Plan, during the year ended December 31, 2018, $5.7 million of severance payments were made to employees whose employment ended in 2018 and prior years and $1.0 million of net payments were made for office space no
longer utilized by the Company as a result of prior savings initiatives. Further, we recorded an expense in the amount of $6.8 million to reflect costs for severance, which we expect to be paid over the next twelve months.
2017
Exclusive of the
2017 Restructuring Plan, during the year ended December 31, 2017, $6.4 million of severance payments were made to employees whose employment ended in 2017 and prior years and $3.1 million of net payments were made for office space no
longer utilized by the Company as a result of prior savings initiatives. Further, we recorded an expense in the amount of $0.4 million to reflect costs for severance, which have been fully paid, along with a favorable $0.2 million
adjustment for office space no longer occupied.
2016
During the year ended December 31, 2016, $7.4 million of severance payments were made to employees whose employment ended in 2016 and
prior years and $3.9 million of net payments for office space no longer utilized by the Company. Further, we recorded an expense in the amount of $12.4 million to reflect additional costs for severance, which have been fully paid, along
with a $3.3 million accrual for vacated space.
89
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
A summary of the significant components of the severance/restructuring and other charges,
which are not allocated to our segments and included in Corporate and Other, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
Severance/
other
accruals at
December 31, 2017
|
|
|
Severance/
other
expense
|
|
|
Cash payments
|
|
|
Severance/
other
accruals at
December 31, 2018
|
|
Severance costs
|
|
$
|
341
|
|
|
$
|
6,821
|
|
|
$
|
(5,742
|
)
|
|
$
|
1,420
|
|
Other accruals
|
|
|
1,299
|
|
|
|
|
|
|
|
(1,029
|
)
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,640
|
|
|
$
|
6,821
|
|
|
$
|
(6,771
|
)
|
|
$
|
1,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
Severance/
other
accruals at
December 31, 2016
|
|
|
Severance/
other
expense
|
|
|
Cash payments
|
|
|
Severance/
other
accruals at
December 31, 2017
|
|
Severance costs
|
|
$
|
6,417
|
|
|
$
|
353
|
|
|
$
|
(6,429
|
)
|
|
$
|
341
|
|
Other accruals
|
|
|
4,604
|
|
|
|
(176
|
)
|
|
|
(3,129
|
)
|
|
|
1,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,021
|
|
|
$
|
177
|
|
|
$
|
(9,558
|
)
|
|
$
|
1,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
Severance/
other
accruals at
December 31, 2015
|
|
|
Severance/
other
expense
|
|
|
Cash payments
|
|
|
Severance/
other
accruals at
December 31, 2016
|
|
Severance costs
|
|
$
|
1,455
|
|
|
$
|
12,350
|
|
|
$
|
(7,388
|
)
|
|
$
|
6,417
|
|
Other accruals
|
|
|
5,251
|
|
|
|
3,300
|
|
|
|
(3,947
|
)
|
|
|
4,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,706
|
|
|
$
|
15,650
|
|
|
$
|
(11,335
|
)
|
|
$
|
11,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The current portion of the severance and other charges was $6.0 million and $6.9 million (inclusive
of the 2017 Restructuring Plan) as of December 31, 2018 and 2017, respectively.
Effects of the Tax Cuts and Jobs Act
New tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the 2017 Tax Act), was enacted on December 22, 2017.
Accounting for income taxes requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions of the 2017 Tax Act is for tax years beginning after December 31, 2017.
Given the significance of the legislation, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows
registrants to record provisional amounts during a one year measurement period similar to that used when accounting for business combinations. However, the measurement period is deemed to have ended earlier when the registrant has
obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made,
and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.
90
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
SAB 118 summarizes a three-step process to be applied at each reporting period to account for
and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but
that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law prior to the enactment of the Tax Cuts and Jobs Act. We recorded provisional estimates and
have subsequently finalized our accounting analysis based on guidance, interpretations and information available at December 31, 2018. Adjustments made in the fourth quarter of 2018 upon finalization of our accounting analysis were not material
to our financial statements.
Other significant provisions of the Act that were effective for 2018 include: an exemption from U.S. tax on
dividends of future foreign earnings, limitations on the current deductibility of net interest expense in excess of 30% of adjustable taxable income, an incremental tax (base erosions anti-abuse tax, or BEAT) on excessive amounts paid to
foreign related parties, and a minimum tax on certain foreign earnings in excess of 10% of the foreign subsidiaries tangible assets (i.e., global intangible low-taxed income, or GILTI). Under FASB Staff Q&A, Topic 740 No. 5, we
have elected to recognize the resulting tax on GILTI as a period expense in the period the tax is incurred.
The substantial impact of the
enactment of the 2017 Tax Act is reflected in the tables below.
The components of loss before taxes by jurisdiction are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31, 2018
|
|
|
For the Year
Ended
December 31, 2017
|
|
|
For the Year
Ended
December 31, 2016
|
|
U.S.
|
|
$
|
(134,884
|
)
|
|
$
|
(172,199
|
)
|
|
$
|
(360,689
|
)
|
Foreign
|
|
|
3,024
|
|
|
|
443
|
|
|
|
2,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes
|
|
$
|
(131,860
|
)
|
|
$
|
(171,756
|
)
|
|
$
|
(357,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes by jurisdiction are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31, 2018
|
|
|
For the Year
Ended
December 31, 2017
|
|
|
For the Year
Ended
December 31, 2016
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
3,701
|
|
|
$
|
(51,106
|
)
|
|
$
|
(52,741
|
)
|
Foreign
|
|
|
1,896
|
|
|
|
(313
|
)
|
|
|
1,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,597
|
|
|
$
|
(51,419
|
)
|
|
$
|
(51,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Significant components of the (benefit) expense for income taxes attributable to loss from
continuing operations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31, 2018
|
|
|
For the Year
Ended
December 31, 2017
|
|
|
For the Year
Ended
December 31, 2016
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
1,562
|
|
|
$
|
(259
|
)
|
|
$
|
437
|
|
U.S.Federal
|
|
|
(63
|
)
|
|
|
0
|
|
|
|
92
|
|
U.S.State and other
|
|
|
(1,042
|
)
|
|
|
(1,914
|
)
|
|
|
1,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
457
|
|
|
|
(2,173
|
)
|
|
|
2,025
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
334
|
|
|
|
(54
|
)
|
|
|
748
|
|
U.S.Federal
|
|
|
2,329
|
|
|
|
(54,666
|
)
|
|
|
(49,772
|
)
|
U.S.State and other
|
|
|
2,477
|
|
|
|
5,474
|
|
|
|
(4,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
5,140
|
|
|
|
(49,246
|
)
|
|
|
(53,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
$
|
5,597
|
|
|
$
|
(51,419
|
)
|
|
$
|
(51,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation of the income tax rate computed at the statutory tax rate to the reported income tax expense
(benefit) attributable to continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31,2018
|
|
|
For the Year
Ended
December 31, 2017
|
|
|
For the Year
Ended
December 31, 2016
|
|
Statutory rate
|
|
|
21.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Permanent items
|
|
|
(2.6
|
)
|
|
|
(3.5
|
)
|
|
|
(0.8
|
)
|
Release of uncertain tax positions
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
0.3
|
|
Foreign rate differential
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
0.2
|
|
State and local taxes
|
|
|
6.8
|
|
|
|
17.1
|
|
|
|
5.9
|
|
State and local net operating loss
re-establishment
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Increase in valuation allowance
|
|
|
(26.6
|
)
|
|
|
(68.5
|
)
|
|
|
(30.2
|
)
|
Change in valuation allowance due to 2017 Tax Act
|
|
|
|
|
|
|
(43.9
|
)
|
|
|
|
|
Impact of federal rate change on deferred tax assets and liabilities due to 2017 Tax Act
|
|
|
|
|
|
|
85.7
|
|
|
|
|
|
Tax credits
|
|
|
(2.7
|
)
|
|
|
1.2
|
|
|
|
0.8
|
|
Adoption of 2016 Accounting Standard related to accounting changes for certain aspects of
share-based payments to employees (1)
|
|
|
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(4.2
|
)%
|
|
|
29.9
|
%
|
|
|
14.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The significant components of the net deferred tax assets and liabilities are shown in the
following table:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Tax assets related to
|
|
|
|
|
|
|
|
|
Net operating loss and other carryforwards
|
|
$
|
228,364
|
|
|
$
|
229,595
|
|
Returns reserve/inventory expense
|
|
|
39,113
|
|
|
|
40,687
|
|
Pension benefits
|
|
|
8,294
|
|
|
|
6,977
|
|
Postretirement benefits
|
|
|
4,338
|
|
|
|
6,285
|
|
Deferred interest (2)
|
|
|
261,647
|
|
|
|
280,246
|
|
Deferred revenue
|
|
|
118,450
|
|
|
|
122,192
|
|
Stock-based compensation
|
|
|
5,415
|
|
|
|
3,992
|
|
Deferred compensation
|
|
|
5,830
|
|
|
|
5,872
|
|
Research and Development
|
|
|
6,038
|
|
|
|
335
|
|
Other, net
|
|
|
9,064
|
|
|
|
8,540
|
|
Valuation allowance
|
|
|
(562,392
|
)
|
|
|
(571,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
124,161
|
|
|
$
|
133,068
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Tax liabilities related to
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
|
|
|
(76,715
|
)
|
|
|
(62,593
|
)
|
Definite-lived intangible assets
|
|
|
(30,882
|
)
|
|
|
(45,644
|
)
|
Depreciation and amortization expense
|
|
|
(34,210
|
)
|
|
|
(43,426
|
)
|
Other, net
|
|
|
(6,170
|
)
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(147,977
|
)
|
|
|
(151,744
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(23,816
|
)
|
|
$
|
(18,676
|
)
|
|
|
|
|
|
|
|
|
|
(1)
|
In March 2016, the FASB issued guidance that changes the accounting for certain aspects of shared-based
payments to employees. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. The guidance became effective
January 1, 2017 which resulted in the recognition of $12.3 million of previously unrecorded additional paid-in capital net operating losses at that time. The additional net operating losses were offset by an increase in the valuation
allowance, accordingly no net income tax benefit was recognized as a result of the adoption.
|
(2)
|
The deferred interest tax asset represents disallowed interest deductions under IRC Section 163(j)
(Limitation on Deduction for interest on Certain Indebtedness) for the current and prior years. At December 31, 2018 and 2017, we had gross deferred interest deductions totaling $975.2 million and $1,042.1 million, respectively. The
disallowed interest is able to be carried forward indefinitely and utilized in future years pursuant to IRC Section 163(j). A full valuation allowance has been provided against deferred tax assets, excluding $3.3 million of foreign
deferred tax assets which are expected to be realized, net of deferred tax liabilities resulting from indefinite-lived intangibles.
|
The net deferred tax liability balance is stated at prevailing statutory income tax rates. Deferred tax assets and liabilities are reflected on
our consolidated balance sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Non-current deferred tax assets
|
|
$
|
3,259
|
|
|
$
|
3,593
|
|
Non-current deferred tax liabilities
|
|
|
(27,075
|
)
|
|
|
(22,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(23,816
|
)
|
|
$
|
(18,676
|
)
|
|
|
|
|
|
|
|
|
|
93
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
A reconciliation of the gross amount of unrecognized tax benefits, excluding accrued interest
and penalties, is as follows:
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
16,311
|
|
Reductions based on tax positions related to the prior year
|
|
|
(855
|
)
|
Additions based on tax positions related to the current year
|
|
|
52
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
15,508
|
|
Reductions based on tax positions related to the prior year
|
|
|
|
|
Additions based on tax positions related to the current year
|
|
|
172
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
15,680
|
|
Reductions based on tax positions related to the prior year
|
|
|
|
|
Additions based on tax positions related to the prior year
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
$
|
15,680
|
|
|
|
|
|
|
For the year ended December 31, 2017, the Company recorded $0.2 million of uncertain tax benefits due
to its uncertainty around net operating losses that were generated in tax years ended December 31, 2014 and 2015. For the year ended December 31, 2016, the Company recognized $0.9 million of uncertain tax benefits (excluding interest
and penalties) due to the expiration of the statute of limitations. We are currently open for audit under the statute of limitation for Federal, state and foreign jurisdictions for years 2012 to 2017. However, carryforward attributes from prior
years may still be adjusted upon examination by tax authorities if they are used in a future period.
We report penalties and tax-related
interest expense on unrecognized tax benefits as a component of the provision for income taxes in the accompanying consolidated statement of operations. At December 31, 2018 and 2017, accrued interest and penalties in the accompanying
consolidated balance sheet and interest and penalties included in the provision for income taxes for the years ended December 31, 2018, 2017 and 2016 were immaterial.
As of December 31, 2018, we have approximately $611.3 million of Federal tax loss carryforwards, which will expire between 2034 and
2037. The Company has approximately $1,234.3 million of state tax loss carryforward, which will expire between 2019 and 2038. In addition, we have foreign tax credit carryforwards of $8.4 million and research and development credit
carryforwards of $4.2 million, which will expire between 2032 and 2036. The Companys Irish net operating losses of $23.6 million are not subject to expiration. The Canadian losses ($1.8 million federal and $0.8 million
provincial) will expire between 2033 and 2037. The Puerto Rico alternative minimum tax credit carryforwards of $2.7 million are not subject to expiration.
Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in the Companys ownership may limit the
amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of the Company of more than 50% within a
three-year period. Any such annual limitation may significantly reduce the utilization of net operating loss carryforwards before they expire. The Company performed an analysis through December 31, 2016, and determined any potential ownership
change under Section 382 during the year would not have a material impact on the future utilization of U.S. net operating losses and tax credits. However, future transactions in the Companys common stock could trigger an ownership change
for purposes of Section 382, which could limit the amount of net operating loss carryforwards and other attributes that could be utilized annually in the future to offset taxable income, if any. Any such limitation, whether as the result of
sales of common stock by our existing
94
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
stockholders or sales of common stock by the Company, could have a material adverse effect on results of operations in future years.
U.S. income taxes on the undistributed earnings of the Companys non-U.S. subsidiaries have not been provided for as the Company currently
plans to indefinitely reinvest these amounts and has the ability to do so. There are no cumulative undistributed and untaxed foreign earnings at December 31, 2018 and 2017.
Based on our assessment of historical pre-tax losses and the fact that we did not anticipate sufficient future taxable income in the near term
to assure utilization of certain deferred tax assets, the Company recorded a valuation allowance at December 31, 2018 and 2017 of $562.4 million and $571.7 million, respectively. We have decreased our valuation allowance by
$9.3 million in 2018 with $35.1 million as a component of continuing operations and $0.5 million as a component of other comprehensive income.
9.
|
Retirement and Postretirement Benefit Plans
|
Retirement Plan
We have a
noncontributory, qualified defined benefit pension plan (the Retirement Plan), which covers certain employees. The Retirement Plan is a cash balance plan, which accrues benefits based on pay, length of service, and interest. The funding
policy is to contribute amounts subject to minimum funding standards set forth by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. The Retirement Plans assets consist principally of common stocks, fixed income
securities, investments in registered investment companies, and cash and cash equivalents. We also have a nonqualified defined benefit plan, or nonqualified plan, that previously covered employees who earned over the qualified pay limit as
determined by the Internal Revenue Service. The nonqualified plan accrues benefits for the participants based on the cash balance plan calculation. The nonqualified plan is not funded. We use a December 31 date to measure the pension and
postretirement liabilities. In 2007, both the qualified and nonqualified pension plans eliminated participation in the plans for new employees hired after October 31, 2007.
We recognize the funded status of defined benefit pension and other postretirement plans as an asset or liability in the balance sheet and are
required to recognize actuarial gains and losses and prior service costs and credits in other comprehensive income and subsequently amortize those items in the statement of operations.
95
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The following table summarizes the Accumulated Benefit Obligations (ABO), the
change in Projected Benefit Obligation (PBO), and the funded status of our plans as of and for the financial statement period ended December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
ABO at end of period
|
|
$
|
162,096
|
|
|
$
|
176,444
|
|
Change in PBO
|
|
|
|
|
|
|
|
|
PBO at beginning of period
|
|
$
|
176,444
|
|
|
$
|
177,300
|
|
Interest cost on PBO
|
|
|
5,300
|
|
|
|
5,528
|
|
Actuarial (gain) loss
|
|
|
(9,061
|
)
|
|
|
6,206
|
|
Benefits paid
|
|
|
(10,587
|
)
|
|
|
(12,590
|
)
|
|
|
|
|
|
|
|
|
|
PBO at end of period
|
|
$
|
162,096
|
|
|
$
|
176,444
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair market value at beginning of period
|
|
$
|
152,311
|
|
|
$
|
148,344
|
|
Actual return
|
|
|
(9,052
|
)
|
|
|
16,477
|
|
Company contribution
|
|
|
104
|
|
|
|
80
|
|
Benefits paid
|
|
|
(10,587
|
)
|
|
|
(12,590
|
)
|
|
|
|
|
|
|
|
|
|
Fair market value at end of period
|
|
$
|
132,776
|
|
|
$
|
152,311
|
|
|
|
|
|
|
|
|
|
|
Unfunded status
|
|
$
|
(29,320
|
)
|
|
$
|
(24,133
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets at December 31, 2018 and 2017 consist of:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Noncurrent liabilities
|
|
$
|
(29,320
|
)
|
|
$
|
(24,133
|
)
|
Additional year-end information for pension plans with ABO in excess of plan assets at December 31, 2018
and 2017 consist of:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
PBO
|
|
$
|
162,096
|
|
|
$
|
176,444
|
|
ABO
|
|
|
162,096
|
|
|
|
176,444
|
|
Fair value of plan assets
|
|
|
132,776
|
|
|
|
152,311
|
|
Weighted average assumptions used to determine the benefit obligations (both PBO and ABO) at December 31,
2018 and 2017 are:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Discount rate
|
|
|
4.2
|
%
|
|
|
3.6
|
%
|
Increase in future compensation
|
|
|
N/A
|
|
|
|
N/A
|
|
96
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Net periodic pension (income) cost includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31,
2018
|
|
|
For the Year
Ended
December 31,
2017
|
|
|
For the Year
Ended
December 31,
2016
|
|
Interest cost on projected benefit obligation
|
|
$
|
5,300
|
|
|
$
|
5,528
|
|
|
$
|
5,224
|
|
Expected return on plan assets
|
|
|
(7,985
|
)
|
|
|
(9,263
|
)
|
|
|
(9,150
|
)
|
Amortization of net loss
|
|
|
1,420
|
|
|
|
804
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension (income) expense recognized for the period
|
|
$
|
(1,265
|
)
|
|
$
|
(2,931
|
)
|
|
$
|
(3,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant actuarial assumptions used to determine net periodic pension cost at December 31, 2018, 2017
and 2016 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Discount rate
|
|
|
3.6
|
%
|
|
|
4.0
|
%
|
|
|
4.3
|
%
|
Increase in future compensation
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Expected long-term rate of return on assets
|
|
|
5.5
|
%
|
|
|
6.3
|
%
|
|
|
6.3
|
%
|
Assumptions on Expected Long-Term Rate of Return as Investment Strategies
We employ a building block approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term
relationships between equities and fixed income are preserved congruent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and
interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is established via a building block approach and proper consideration of diversification and rebalancing. Peer data and
historical returns are reviewed for reasonability and appropriateness. We regularly review the actual asset allocation and periodically rebalances investments to a targeted allocation when appropriate. The current targeted asset allocation is 34%
with equity managers, 56% with fixed income managers, 6% with real-estate investment trust managers and 4% with hedge fund managers. For 2019, we will use a 5.50% long-term rate of return for the Retirement Plan. We will continue to evaluate the
expected rate of return assumption, at least annually, and will adjust as necessary.
Plan Assets
Plan assets for the U.S. tax qualified plans consist of a diversified portfolio of fixed income securities, equity securities, real estate, and
cash equivalents. Plan assets do not include any of our securities. The U.S. pension plan assets are invested in a variety of funds within a Collective Trust (Trust). The Trust is a group trust designed to permit qualified trusts to
comingle their assets for investment purposes on a tax-exempt basis.
Investment Policy and Investment Targets
The tax qualified plans consist of the U.S. pension plan and the U.K. pension scheme (prior to May 28, 2014). We fund amounts for our
qualified pension plans at least sufficient to meet minimum requirements of local benefit and tax laws. The investment objectives of our pension plan asset investments is to provide
97
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
long-term total growth and return, which includes capital appreciation and current income. The nonqualified noncontributory defined benefit pension plan is generally not funded. Assets were
invested among several asset classes.
The percentage of assets invested in each asset class at December 31, 2018 and 2017 is shown
below.
|
|
|
|
|
|
|
|
|
Asset Class
|
|
2018
Percentage
in Each
Asset Class
|
|
|
2017
Percentage
in Each
Asset Class
|
|
Equity
|
|
|
30.2
|
%
|
|
|
32.9
|
%
|
Fixed income
|
|
|
57.6
|
|
|
|
55.3
|
|
Real estate investment trust
|
|
|
7.1
|
|
|
|
6.5
|
|
Other
|
|
|
5.1
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
The fair value of our pension plan assets by asset category at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
Not subject
to leveling (1)
|
|
Cash and cash equivalents
|
|
$
|
85
|
|
|
$
|
85
|
|
Equity securities
|
|
|
|
|
|
|
|
|
U.S. equity
|
|
|
23,909
|
|
|
|
23,909
|
|
Non-US equity
|
|
|
11,497
|
|
|
|
11,497
|
|
Emerging markets equity
|
|
|
4,666
|
|
|
|
4,666
|
|
Fixed income
|
|
|
|
|
|
|
|
|
Government bonds
|
|
|
19,903
|
|
|
|
19,903
|
|
Corporate bonds
|
|
|
40,524
|
|
|
|
40,524
|
|
Mortgage-backed securities
|
|
|
7,248
|
|
|
|
7,248
|
|
Asset-backed securities
|
|
|
2,773
|
|
|
|
2,773
|
|
Commercial mortgage-backed securities
|
|
|
1,900
|
|
|
|
1,900
|
|
International fixed income
|
|
|
4,161
|
|
|
|
4,161
|
|
Alternatives
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
9,448
|
|
|
|
9,448
|
|
Hedge funds
|
|
|
6,662
|
|
|
|
6,662
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
132,776
|
|
|
$
|
132,776
|
|
|
|
|
|
|
|
|
|
|
98
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
|
Not subject
to leveling (1)
|
|
Cash and cash equivalents
|
|
$
|
835
|
|
|
$
|
835
|
|
Equity securities
|
|
|
|
|
|
|
|
|
U.S. equity
|
|
|
29,749
|
|
|
|
29,749
|
|
Non-US equity
|
|
|
14,306
|
|
|
|
14,306
|
|
Emerging markets equity
|
|
|
6,004
|
|
|
|
6,004
|
|
Fixed income
|
|
|
|
|
|
|
|
|
Government bonds
|
|
|
24,203
|
|
|
|
24,203
|
|
Corporate bonds
|
|
|
42,909
|
|
|
|
42,909
|
|
Mortgage-backed securities
|
|
|
8,621
|
|
|
|
8,621
|
|
Asset-backed securities
|
|
|
1,782
|
|
|
|
1,782
|
|
Commercial mortgage-backed securities
|
|
|
2,070
|
|
|
|
2,070
|
|
International fixed income
|
|
|
4,738
|
|
|
|
4,738
|
|
Alternatives
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
9,848
|
|
|
|
9,848
|
|
Hedge funds
|
|
|
7,246
|
|
|
|
7,246
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
152,311
|
|
|
$
|
152,311
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Investments that are valued using the net asset value per share (or its equivalent) practical expedient have
not been classified in the fair value hierarchy.
|
We recognize that risk and volatility are present to some degree with
all types of investments. However, high levels of risk are minimized through diversification by asset class, and by style of each fund.
Estimated Future Benefit Payments
The following benefit payments are expected to be paid.
|
|
|
|
|
Fiscal Year Ended
|
|
Pension
|
|
2019
|
|
$
|
12,892
|
|
2020
|
|
|
12,783
|
|
2021
|
|
|
14,612
|
|
2022
|
|
|
13,186
|
|
2023
|
|
|
13,149
|
|
20242028
|
|
|
64,237
|
|
Expected Contributions
We do not expect to contribute in 2019, however, the actual funding decision will be made after the 2018 valuation is completed.
Postretirement Benefit Plan
We also provide postretirement medical benefits to retired full-time, nonunion employees hired before April 1, 1992, who have provided a
minimum of five years of service and attained age 55.
99
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The following table summarizes the Accumulated Postretirement Benefit Obligation
(APBO), the changes in plan assets, and the funded status of our plan as of and for the financial statement periods ended December 31, 2018 and 2017.
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Change in APBO
|
|
|
|
|
|
|
|
|
APBO at beginning of period
|
|
$
|
21,903
|
|
|
$
|
24,012
|
|
Service cost (benefits earned during the period)
|
|
|
128
|
|
|
|
134
|
|
Interest cost on APBO
|
|
|
672
|
|
|
|
771
|
|
Employee contributions
|
|
|
139
|
|
|
|
89
|
|
Plan amendments
|
|
|
|
|
|
|
|
|
Actuarial (gain)
|
|
|
(5,184
|
)
|
|
|
(1,248
|
)
|
Benefits paid
|
|
|
(1,846
|
)
|
|
|
(1,855
|
)
|
|
|
|
|
|
|
|
|
|
APBO at end of period
|
|
$
|
15,812
|
|
|
$
|
21,903
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair market value at beginning of period
|
|
$
|
|
|
|
$
|
|
|
Company contributions
|
|
|
1,707
|
|
|
|
1,766
|
|
Employee contributions
|
|
|
139
|
|
|
|
89
|
|
Benefits paid
|
|
|
(1,846
|
)
|
|
|
(1,855
|
)
|
|
|
|
|
|
|
|
|
|
Fair market value at end of period
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded status
|
|
$
|
(15,812
|
)
|
|
$
|
(21,903
|
)
|
|
|
|
|
|
|
|
|
|
Amounts for postretirement benefits accrued in the consolidated balance sheets at December 31, 2018 and
2017 consist of:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Current liabilities
|
|
$
|
(1,512
|
)
|
|
$
|
(1,618
|
)
|
Noncurrent liabilities
|
|
|
(14,300
|
)
|
|
|
(20,285
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(15,812
|
)
|
|
$
|
(21,903
|
)
|
|
|
|
|
|
|
|
|
|
Amounts not yet reflected in net periodic benefit cost and recognized in accumulated other comprehensive income
at December 31, 2018 and 2017 consist of:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Net gain (loss)
|
|
$
|
3,856
|
|
|
$
|
(1,328
|
)
|
Prior service (cost) credit
|
|
|
(467
|
)
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
3,389
|
|
|
$
|
(1,106
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average actuarial assumptions used to determine APBO at year-end December 31, 2018 and 2017 are:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Discount rate
|
|
|
4.2
|
%
|
|
|
3.6
|
%
|
Health care cost trend rate assumed for next year
|
|
|
6.1
|
%
|
|
|
6.3
|
%
|
Rate to which the cost trend rate is assumed to decline
(ultimate trend rate)
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
2038
|
|
|
|
2038
|
|
100
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Net periodic postretirement benefit cost (income) included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Service cost
|
|
$
|
128
|
|
|
$
|
134
|
|
|
$
|
163
|
|
Interest cost on APBO
|
|
|
672
|
|
|
|
771
|
|
|
|
876
|
|
Amortization of unrecognized prior service cost
|
|
|
(690
|
)
|
|
|
(1,339
|
)
|
|
|
(1,339
|
)
|
Amortization of net loss
|
|
|
|
|
|
|
13
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic postretirement benefit expense (income)
|
|
$
|
110
|
|
|
$
|
(421
|
)
|
|
$
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant actuarial assumptions used to determine postretirement benefit cost at December 31, 2018, 2017
and 2016 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Discount rate
|
|
|
3.6
|
%
|
|
|
4.1
|
%
|
|
|
4.4
|
%
|
Health care cost trend rate assumed for next year
|
|
|
6.3
|
%
|
|
|
6.6
|
%
|
|
|
6.9
|
%
|
Rate to which the cost trend rate is assumed to decline
(ultimate trend rate)
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
2038
|
|
|
|
2038
|
|
|
|
2038
|
|
Assumed health care trend rates have a significant effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have the following effects on the expense recorded in 2017 and 2016 for the postretirement medical plan:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
One-percentage-point increase
|
|
|
|
|
|
|
|
|
Effect on total of service and interest cost components
|
|
$
|
4
|
|
|
$
|
7
|
|
Effect on postretirement benefit obligation
|
|
|
238
|
|
|
|
117
|
|
One-percentage-point decrease
|
|
|
|
|
|
|
|
|
Effect on total of service and interest cost components
|
|
|
(4
|
)
|
|
|
(6
|
)
|
Effect on postretirement benefit obligation
|
|
|
(208
|
)
|
|
|
(104
|
)
|
The following table presents the change in other comprehensive income for the year ended December 31, 2018
related to our pension and postretirement obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Plans
|
|
|
Postretirement
Benefit
Plan
|
|
|
Total
|
|
Sources of change in accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (gain) loss arising during the period
|
|
$
|
7,970
|
|
|
$
|
(5,184
|
)
|
|
$
|
2,786
|
|
Amortization of prior service credit
|
|
|
|
|
|
|
690
|
|
|
|
690
|
|
Amortization of net (gain) loss
|
|
|
(1,420
|
)
|
|
|
|
|
|
|
(1,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income recognized during the period
|
|
$
|
6,550
|
|
|
$
|
(4,494
|
)
|
|
$
|
2,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Estimated amounts that will be amortized from accumulated other comprehensive income (loss)
over the next fiscal year.
|
|
|
|
|
|
|
|
|
|
|
Pension
Plans
|
|
|
Postretirement
Benefit Plan
|
|
Prior service credit (cost)
|
|
$
|
|
|
|
$
|
(42
|
)
|
Net gain (loss)
|
|
|
(1,028
|
)
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,028
|
)
|
|
$
|
122
|
|
|
|
|
|
|
|
|
|
|
Amounts not yet reflected in net periodic benefit cost for pension plans and postretirement plan and recognized
in accumulated other comprehensive income at December 31, 2018 and 2017 consist of:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Net actuarial gain (loss)
|
|
$
|
(36,779
|
)
|
|
$
|
(34,691
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(36,779
|
)
|
|
$
|
(34,691
|
)
|
|
|
|
|
|
|
|
|
|
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, are expected to be paid:
|
|
|
|
|
Fiscal Year Ended
|
|
Postretirement
Benefit Plan
|
|
2019
|
|
$
|
1,512
|
|
2020
|
|
|
1,459
|
|
2021
|
|
|
1,409
|
|
2022
|
|
|
1,355
|
|
2023
|
|
|
1,308
|
|
2024-2028
|
|
|
5,778
|
|
Expected Contribution
We expect to contribute approximately $1.5 million in 2019.
Defined Contribution Retirement Plan
We maintain a defined contribution retirement plan, the Houghton Mifflin 401(k) Savings Plan, which conforms to Section 401(k) of the
Internal Revenue Code and covers substantially all of our eligible employees. Participants may elect to contribute up to 50.0% of their compensation subject to an annual limit. We provide a matching contribution in amounts up to 3.0% of employee
contributions. The 401(k) contribution expense amounted to $7.6 million, $8.0 million and $7.7 million for the years ended December 31, 2018, 2017 and 2016, respectively. We did not make any additional discretionary
contributions in 2018, 2017 and 2016.
10.
|
Stock-Based Compensation
|
Total compensation expense related to grants of stock options, restricted stock, restricted stock units, and purchases under the employee stock
purchase plan recorded in the years ended December 31, 2018, 2017 and 2016 was approximately $13.3 million, $10.7 million and $10.5 million, respectively, and is included in selling and administrative expense.
102
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
2015 Omnibus Incentive Plan
Our Board of Directors adopted the 2015 Omnibus Incentive Plan (Plan) in February 2015, which became effective on May 19, 2015
following stockholder approval. The Plan provides to grant up to an aggregate of 4,000,000 shares of our common stock plus 2,615,476 shares of our common stock that were reserved for issuance under the 2012 Management Incentive Plan (2012
MIP) as of May 19, 2015 but were not issuable pursuant to any outstanding awards. There were 10,604,071 additional shares underlying outstanding awards under the 2012 MIP as of May 19, 2015 that could have otherwise become available
again for grants under the 2012 MIP in the future (by potential forfeiture, withholding or otherwise) which will instead become reserved for issuance under the Plan in the event such shares become available for future grants.
Our Compensation Committee may grant awards of nonqualified stock options, incentive (qualified) stock options or cash, stock appreciation
rights, restricted stock awards, restricted stock units, performance compensation awards, other stock-based awards or any combination of the foregoing. Certain employees, directors, officers, consultants or advisors who have been selected by the
Compensation Committee and who enter into an award agreement with respect to an award granted to them under the Plan are eligible for awards under the 2015 Omnibus Incentive Plan. The stock option awards will be granted at a strike price equal to or
greater than the fair value per share of common stock as of the date of grant. The stock related to award forfeitures and stock withheld to cover tax withholding requirements upon vesting of restricted stock units remains outstanding and may be
reallocated to new recipients. The purpose of the Plan is to help us attract and retain key personnel by providing them the opportunity to acquire an equity interest in our Company.
As of May 19, 2015, there were 6,615,476 shares authorized and available for issuance under the Plan plus any amount that could have
otherwise become available again for grants under the 2012 MIP in the future by forfeiture, withholding or otherwise. As of December 31, 2018, there were 5,822,632 shares authorized and available for future issuance under the Plan. The vesting
terms for equity awards generally range from 1 to 4 years over equal annual installments and generally expire seven years after the date of grant.
Stock Options
The
following table summarizes option activity for certain employees in our stock options:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance at December 31, 2017
|
|
|
3,760,098
|
|
|
$
|
13.43
|
|
Granted
|
|
|
137,363
|
|
|
|
5.25
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(409,249
|
)
|
|
|
14.50
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
3,488,212
|
|
|
$
|
12.98
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2018
|
|
|
3,376,551
|
|
|
$
|
13.02
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2018
|
|
|
2,135,401
|
|
|
$
|
13.63
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018, the range of exercise prices is $5.25 to $22.80 with a weighted average remaining
contractual life of 3.5 years for options outstanding. The weighted average remaining contractual life for options vested and expected to vest and exercisable was 3.4 years and 2.2 years, respectively. The intrinsic
103
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
value of a stock option is the amount by which the current market value of the underlying stock exceeds the exercise price of the option as of the balance sheet date. The intrinsic value of
options outstanding, and vested and expected to vest, was $0.5 million and zero at December 31, 2018 and 2017, respectively. The intrinsic value of options exercisable was zero at December 31, 2018 and 2017.
We estimate the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of
stock options include the exercise price of the award, the expected volatility of our stock over the options expected term, the risk-free interest rate over the options expected term, and our expected annual dividend yield.
The fair value of each option granted was estimated on the grant date using the Black-Scholes valuation model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Year Ended
December 31,
2018
|
|
|
For the
Year Ended
December 31,
2017
|
|
|
For the
Year Ended
December 31,
2016
|
|
Expected term (years) (a)
|
|
|
4.75
|
|
|
|
4.75
|
|
|
|
4.75
|
|
Expected dividend yield
|
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
0.00%
|
|
Expected volatility (b)
|
|
|
35.30%
|
|
|
|
25.22%-25.50%
|
|
|
|
23.86%-24.26%
|
|
Risk-free interest rate (c)
|
|
|
2.84%
|
|
|
|
1.94%-1.99%
|
|
|
|
1.20%-1.31%
|
|
|
(a)
|
The expected term is the number of years that we estimate that options will be outstanding prior to exercise.
We have used the simplified method for estimating the expected term as we do not have sufficient stock option exercise experience to support a reasonable estimate of the expected term. The simplified method represents the best estimate of the
expected term.
|
|
(b)
|
Historically, we have estimated volatility for options granted based on the historical volatility for a group
of companies (including our own) believed to be a representative peer group, and were selected based on industry and market capitalization. During 2018, we have estimated volatility based on our historical volatility.
|
|
(c)
|
The risk-free interest rate is based on the U.S. Treasury yield for a period commensurate with the expected
life of the option.
|
We estimate forfeitures at the time of grant and periodically revise those estimates in subsequent
periods if actual forfeitures differ from those estimates. Stock-based compensation expense is recorded only for those awards expected to vest using estimated forfeiture rates based on historical forfeiture data.
As of December 31, 2018, there remained approximately $3.0 million of unearned compensation expense related to unvested stock options
to be recognized over a weighted average term of 2.5 years.
The weighted average grant date fair value was $1.82, $2.85 and $4.25 for
options granted in 2018, 2017 and 2016, respectively.
104
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Restricted Stock and Restricted Stock Units
The following table summarizes restricted stock activity for grants to certain employees and independent members of the board of directors in
our restricted stock and restricted stock units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
Restricted Stock Units
|
|
|
|
Numbers of
Units
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Numbers of
Units
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Balance at December 31, 2017
|
|
|
273,655
|
|
|
$
|
20.10
|
|
|
|
1,808,957
|
|
|
$
|
13.37
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
2,365,322
|
|
|
|
6.83
|
|
Vested
|
|
|
(9,619
|
)
|
|
|
20.10
|
|
|
|
(498,806
|
)
|
|
|
13.47
|
|
Forfeited
|
|
|
(264,036
|
)
|
|
|
20.10
|
|
|
|
(305,697
|
)
|
|
|
9.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
|
|
|
|
|
$
|
|
|
|
|
3,369,776
|
|
|
$
|
9.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2018 and 2017, we granted market-based restricted stock units to certain members of our senior
management team. The number of shares ultimately issued to the recipient is based on the total shareholder return (TSR) of our common stock as compared to the TSR of the common stock of a peer group comprised of each member of the Russell 2000 Small
Cap Market Index over a three-year performance measurement period. In addition, award recipients must remain employed by us throughout the three-year performance measurement period to attain the full amount of the market-based units that satisfy the
market performance criteria. We determined the fair value of the 2018 and 2017 market-based restricted stock units to be approximately $3.0 million and $2.7 million, respectively. We determined the fair value based on a Monte Carlo
simulation as of the date of grant, utilizing the following assumptions: the stock price on the date of grant of $7.00 and $5.25 for 2018, and $11.05 and $12.95 for 2017, a three-year performance measurement period, and a risk-free rate of 2.39% and
1.45% for 2018 and 2017, respectively. We recognize the expense on these awards on a straight-line basis over the three-year performance measurement period.
As of December 31, 2018, there remained approximately $14.5 million of unearned compensation expense related to unvested restricted
stock units to be recognized over a weighted average term of 1.7 years. The restricted stock units include a combination of time-based and performance-based vesting.
Employee Stock Purchase Plan
Our Board of Directors adopted an Employee Stock Purchase Plan (ESPP) in February 2015, which became effective on May 19, 2015
following stockholder approval. The ESPP provides for up to an aggregate of 1.3 million shares of our common stock may be made available for sale under the plan to eligible employees. At the beginning of each six-month offering period under the
ESPP each participant is deemed to have been granted an option to purchase shares of our common stock equal to the amount of their payroll deductions during the period, but in any event not more than five percent of the employees eligible
compensation, subject to certain limitations. Such options may be exercised only to the extent of accumulated payroll deductions at the end of the offering period, at a purchase price per share equal to 85% of the fair market value of our common
stock at the beginning or end of each offering period, whichever is less. As of December 31, 2018, there were approximately 0.8 million shares available for future issuance under the ESPP.
105
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Information related to shares issued or to be issued in connection with the ESPP based on
employee contributions and the range of purchase prices is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Shares issued or to be issued
|
|
|
167,991
|
|
|
|
165,145
|
|
Range of purchase prices
|
|
$
|
6.50
|
|
|
$
|
7.91$9.22
|
|
We record stock-based compensation expense related to the discount provided to participants. Also, we use the
Black-Scholes option-pricing model to calculate the grant-date fair value of shares issued under the employee stock purchase plan. We recognize expense related to shares purchased through the employee stock purchase plan ratably over the offering
period. We recognized $0.3 million and $0.5 million in expense associated with our ESPP for the years ended December 31, 2018 and 2017, respectively.
Warrants
Following our
emergence from Chapter 11 on June 22, 2012 and in accordance with the plan of reorganization, after giving effect of the 2-for-1 stock split, there were 7,368,422 shares of common stock reserved for issuance upon exercise of warrants under the
2012 MIP. Each existing common stockholder prior to bankruptcy received its pro rata share of warrants to purchase 5% of the common stock of the Company, subject to dilution for equity awards issued in connection with the 2012 MIP. The warrants have
a term of seven years. As of December 31, 2018, there were warrants outstanding for the purchase of 7,297,909 shares of common stock at a strike price of $21.14.
11.
|
Fair Value Measurements
|
The accounting standard for fair value measurements, among other things, defines fair value, establishes a consistent framework for measuring
fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. The accounting standard establishes a three-tier fair value hierarchy which prioritizes the inputs used
in measuring fair value as follows:
|
|
|
Level 1
|
|
Observable input such as quoted prices in active markets for identical assets or liabilities;
|
Level 2
|
|
Observable inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
Level 3
|
|
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Assets and liabilities measured at fair value are based on one or more of three valuation techniques identified
in the tables below. Where more than one technique is noted, individual assets or liabilities were valued using one or more of the noted techniques. The valuation techniques are as follows:
|
(a)
|
Market approach: Prices and other relevant information generated by market transactions involving identical or
comparable assets or liabilities;
|
|
(b)
|
Cost approach: Amount that would be currently required to replace the service capacity of an asset (current
replacement cost); and
|
|
(c)
|
Income approach: Valuation techniques to convert future amounts to a single present amount based on market
expectations (including present value techniques).
|
106
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
On a recurring basis, we measure certain financial assets and liabilities at fair value,
including our money market funds, short-term investments which consist of U.S. treasury securities and U.S. agency securities, foreign exchange forward contracts, and interest rate derivatives contracts. The accounting standard for fair value
measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement
that should be determined based on assumptions that market participants would use in pricing an asset or liability. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs to the extent possible as well as consider counterparty and its credit risk in its assessment of fair value.
Financial Assets and
Liabilities
The following tables present our financial assets and liabilities measured at fair value on a recurring basis at
December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Valuation
Technique
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
228,587
|
|
|
$
|
228,587
|
|
|
$
|
|
|
|
|
(a)
|
|
U.S. treasury securities
|
|
|
24,939
|
|
|
|
24,939
|
|
|
|
|
|
|
|
(a)
|
|
U.S. agency securities
|
|
|
24,894
|
|
|
|
|
|
|
|
24,894
|
|
|
|
(a)
|
|
Interest rate derivatives
|
|
|
2,382
|
|
|
|
|
|
|
|
2,382
|
|
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
280,802
|
|
|
$
|
253,526
|
|
|
$
|
27,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivatives
|
|
$
|
534
|
|
|
$
|
|
|
|
$
|
534
|
|
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
534
|
|
|
$
|
|
|
|
$
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Valuation
Technique
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
115,464
|
|
|
$
|
115,464
|
|
|
$
|
|
|
|
|
(a)
|
|
U.S. treasury securities
|
|
|
16,065
|
|
|
|
16,065
|
|
|
|
|
|
|
|
(a)
|
|
U.S. agency securities
|
|
|
70,384
|
|
|
|
|
|
|
|
70,384
|
|
|
|
(a)
|
|
Foreign exchange derivatives
|
|
|
351
|
|
|
|
|
|
|
|
351
|
|
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
202,264
|
|
|
$
|
131,529
|
|
|
$
|
70,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
|
$
|
1,159
|
|
|
$
|
|
|
|
$
|
1,159
|
|
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,159
|
|
|
$
|
|
|
|
$
|
1,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our money market funds and U.S. treasury securities are classified within Level 1 of the fair value
hierarchy because they are valued using quoted prices in active markets for identical instruments. Our U.S. agency
107
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
securities are classified within Level 2 of the fair value hierarchy because they are valued using other than quoted prices in active markets. In addition to $228.6 million and
$115.5 million invested in money market funds as of December 31, 2018 and 2017, respectively, we had $24.8 million and $33.5 million of cash invested in bank accounts as of December 31, 2018 and 2017, respectively.
Our foreign exchange derivatives consist of forward contracts and are classified within Level 2 of the fair value hierarchy because they
are valued based on observable inputs and are available for substantially the full term of our derivative instruments. We use foreign exchange forward contracts to fix the functional currency value of forecasted commitments, payments and receipts.
The aggregate notional amount of the outstanding foreign exchange forward contracts was $15.7 million and $15.8 million at December 31, 2018 and 2017, respectively. Our foreign exchange forward contracts contain netting provisions to
mitigate credit risk in the event of counterparty default, including payment default and cross default. At December 31, 2018 and 2017, the fair value of our counterparty default exposure was less than $1.0 million and spread across several
highly rated counterparties.
Our interest rate derivatives are classified within Level 2 of the fair value hierarchy because they are
valued based on observable inputs and are available for substantially the full term of our derivative instruments. Our interest rate risk relates primarily to U.S. dollar borrowings, partially offset by U.S. dollar cash investments. We have
historically used interest rate derivative instruments to manage our earnings and cash flow exposure to changes in interest rates by converting floating-rate debt into fixed-rate debt. The aggregate notional amount of the outstanding interest rate
derivative instruments was $400.0 million as of December 31, 2018. We designate these derivative instruments either as fair value or cash flow hedges under the accounting guidance related to derivatives and hedging. We record changes in
the value of fair value hedges in interest expense, which is generally offset by changes in the fair value of the hedged debt obligation. Interest payments made or received related to our interest rate derivative instruments are included in interest
expense. We record the effective portion of any change in the fair value of derivative instruments designated as cash flow hedges as unrealized gains or losses in other comprehensive income (loss), net of tax, until the hedged cash flow occurs, at
which point the effective portion of any gain or loss is reclassified to earnings. In the event the hedged cash flow does not occur, or it becomes no longer probable that it will occur, we reclassify the amount of any gain or loss on the related
cash flow hedge to interest expense at that time.
We believe we do not have significant concentrations of credit risk arising from our
interest rate derivative instruments, whether from an individual counterparty or a related group of counterparties. We manage the concentration of counterparty credit risk on our interest rate derivatives instruments by limiting acceptable
counterparties to a diversified group of major financial institutions with investment grade credit ratings, limiting the amount of credit exposure to each counterparty, and actively monitoring their credit ratings and outstanding fair values on an
ongoing basis. Furthermore, none of our derivative transactions contain provisions that are dependent on our credit ratings from any credit rating agency.
We also employ master netting arrangements that reduce our counterparty payment settlement risk on any given maturity date to the net amount of
any receipts or payments due between us and the counterparty financial institution. Thus, the maximum loss due to counterparty credit risk is limited to the unrealized gains in such contracts net of any unrealized losses should any of these
counterparties fail to perform as contracted. Although these protections do not eliminate concentrations of credit risk, as a result of the above considerations, we do not consider the risk of counterparty default to be significant.
108
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Non-Financial Assets and Liabilities
Our non-financial assets, which include goodwill, other intangible assets, property, plant, and equipment, and pre-publication costs, are not
required to be measured at fair value on a recurring basis. However, if certain trigger events occur, or if an annual impairment test is required, we evaluate the non-financial assets for impairment. If an impairment did occur, the asset is required
to be recorded at the estimated fair value. There were no non-financial liabilities that were required to be measured at fair value on a nonrecurring basis during 2018 and 2017.
The following table presents our nonfinancial assets and liabilities measured at fair value on a nonrecurring basis during 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
Impairment
|
|
|
Valuation
Technique
|
|
Nonfinancial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,119
|
|
|
|
(c
|
)
|
Pre-publication costs
|
|
|
|
|
|
|
|
|
|
|
3,980
|
|
|
|
(c
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying amounts of software development costs, included within property, plant, and equipment, are
periodically compared to net realizable value and impairment charges are recorded, as appropriate, when amounts expected to be realized are lower. During the year ended December 31, 2017 in connection with our 2017 Restructuring Plan, we
recorded an impairment charge of approximately $9.1 million related to a certain long-lived asset included within property, plant, and equipment as the carrying amount of the asset is no longer recoverable based on projected cash flows, which
was classified as Level 3 due to significant unobservable inputs. The impairment charge is included in the Restructuring line item in the consolidated statements of operations. There was no impairment of property, plant, and equipment for the
year ended December 31, 2018.
Pre-publication costs recorded on the balance sheet are periodically reviewed for impairment by
comparing the unamortized capitalized costs of the assets to the fair value of those assets. For the year ended December 31, 2017, we recorded an impairment charge of $4.0 million as the products will no longer be sold in the marketplace.
There was no impairment of pre-publication costs for the year ended December 31, 2018.
In evaluating goodwill for impairment, we
first compare our reporting units fair value to its carrying value. We estimate the fair values of our reporting units by considering market multiple and recent transaction values of peer companies, where available, and projected discounted
cash flows, if reasonably estimable. There was no impairment recorded for goodwill for the years ended December 31, 2018 and 2017.
We
perform an impairment test for our other intangible assets by comparing the assets fair value to its carrying value. Fair value is estimated based on recent market transactions, where available, and projected discounted cash flows, if reasonably
estimable. There was no impairment of other intangible assets for the years ended December 31, 2018 and 2017.
109
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Fair Value of Debt
The following table presents the carrying amounts and estimated fair market values of our debt at December 31, 2018 and 2017. The fair
value of debt is deemed to be the amount at which the instrument could be exchanged in an orderly transaction between market participants at the measurement date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan
|
|
$
|
763,649
|
|
|
$
|
691,102
|
|
|
$
|
768,194
|
|
|
$
|
710,579
|
|
The fair market values of our debt were estimated based on quoted market prices on a private exchange for those
instruments that are traded and are classified as Level 2 within the fair value hierarchy at December 31, 2018 and 2017. The fair market values require varying degrees of management judgment. The factors used to estimate these values may not be
valid on any subsequent date. Accordingly, the fair market values of the debt presented may not be indicative of their future values.
12.
|
Commitments and Contingencies
|
Lease Obligations
We have
operating leases for various real property, office facilities, and warehouse equipment that expire at various dates through 2023 and thereafter. Certain leases contain renewal and escalation clauses for a proportionate share of operating expenses.
The future minimum rental commitments under all noncancelable leases (with initial or remaining lease terms in excess of one year) for
real estate and equipment are payable as follows:
|
|
|
|
|
|
|
Operating
Leases
|
|
2019
|
|
$
|
32,694
|
|
2020
|
|
|
26,889
|
|
2021
|
|
|
26,118
|
|
2022
|
|
|
24,549
|
|
2023
|
|
|
27,469
|
|
Thereafter
|
|
|
171,203
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
308,922
|
|
|
|
|
|
|
Total future minimal rentals under subleases
|
|
$
|
10,607
|
|
|
|
|
|
|
For the years ended December 31, 2018, 2017 and 2016, rent expense, net of sublease income, was
$41.9 million, $37.6 million and $28.8 million, respectively. For the years ended December 31, 2018, 2017 and 2016, the rent expense included $4.7 million, $4.1 million and $3.3 million charge, respectively, as
additional real estate was vacated.
Commitments and Contingencies
We are involved in ordinary and routine litigation and matters incidental to our business, including claims alleging breach of contract and
seeking royalty payments. Litigation alleging infringement of copyrights and other intellectual property rights is also common in the educational publishing industry. For example, there
110
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
have been various settled, pending and threatened litigation that allege we exceeded the print run limitation or other restrictions in licenses granted to us to reproduce photographs in our
textbooks. During 2016, we settled all such pending or actively threatened litigations alleging infringement of copyrights, and made total settlement payments of $10.0 million, collectively. We received approximately $4.5 million of
insurance recovery proceeds during the first quarter of 2017.
While we may incur a loss associated with certain pending or threatened
litigation, we are not able to estimate such amount, if any, but we do not expect any of these matters to have a material adverse effect on our results of operations, financial position or cash flows. We have insurance over such amounts and with
coverage and deductibles as management believes is reasonable. There can be no assurance that our liability insurance will cover all events or that the limits of coverage will be sufficient to fully cover all liabilities.
In connection with an agreement with a development content provider, we agreed to act as guarantor to that partys loan to finance such
development. Such guarantee is expected to remain until 2020. Under the guarantee, we believe the maximum future payments to approximate $14.0 million. In the unlikely event that we are required to make payments on behalf of the development
content provider, we would have recourse against the development content provider.
We were contingently liable for $4.4 million and
$2.5 million of performance-related surety bonds for our operating activities as of December 31, 2018 and 2017, respectively. An aggregate of $24.3 million and $25.2 million of letters of credit existed each year at
December 31, 2018 and 2017, of which $0.1 million backed the aforementioned performance-related surety bonds each year in 2018 and 2017.
We routinely enter into standard indemnification provisions as part of license agreements involving use of our intellectual property. These
provisions typically require us to indemnify and hold harmless licensees in connection with any infringement claim by a third party relating to the intellectual property covered by the license agreement. Although the term of these provisions and the
maximum potential amounts of future payments we could be required to make is not limited, we have never incurred any costs to defend or settle claims related to these types of indemnification provisions. We therefore believe the estimated fair value
of these provisions is inconsequential, and have no liabilities recorded for them as of December 31, 2018 and 2017.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of the following at December 31, 2018, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net change in pension and benefit plan liabilities
|
|
$
|
(41,557
|
)
|
|
$
|
(39,501
|
)
|
|
$
|
(41,235
|
)
|
Foreign currency translation adjustments
|
|
|
(5,909
|
)
|
|
|
(5,753
|
)
|
|
|
(5,862
|
)
|
Unrealized loss on short-term investments
|
|
|
(99
|
)
|
|
|
(108
|
)
|
|
|
(90
|
)
|
Net change in unrealized loss on derivative instruments
|
|
|
2,381
|
|
|
|
(1,160
|
)
|
|
|
(6,108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(45,184
|
)
|
|
$
|
(46,522
|
)
|
|
$
|
(53,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive loss for the years ended December 31, 2018, 2017
and 2016 relating to the amortization of defined benefit pension and postretirement benefit plans totaled approximately $(0.9) million, $(0.7) million and $0.5 million, respectively, and affected the selling and administrative line
item in the consolidated statement of operations. These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost.
111
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Stock Repurchase Program
Our Board of Directors previously authorized the repurchase of up to $1.0 billion in aggregate value of the Companys common stock
through December 31, 2018. As of December 31, 2018 when this repurchase authorization expired, there was approximately $482.0 million remaining under this authorization. There was no share repurchase activity for the years ended
December 31, 2018 and 2017.
The Companys share repurchase activity during 2016 was as follows:
|
|
|
|
|
|
|
Year Ended
December 31, 2016
|
|
Cost of repurchases
|
|
$
|
55,017
|
|
Shares repurchased
|
|
|
2,903,566
|
|
Average cost per share
|
|
$
|
18.95
|
|
14.
|
Related Party Transactions
|
There were no related party transactions during 2018, 2017 and 2016.
The following table sets forth the computation of basic and diluted earnings per share (EPS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31,
2018
|
|
|
For the Year
Ended
December 31,
2017
|
|
|
For the Year
Ended
December 31,
2016
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(137,457
|
)
|
|
$
|
(120,337
|
)
|
|
$
|
(306,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations, net of tax
|
|
|
12,833
|
|
|
|
17,150
|
|
|
|
21,587
|
|
Gain on sale of discontinued operations, net of tax
|
|
|
30,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax
|
|
|
43,302
|
|
|
|
17,150
|
|
|
|
21,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(94,155
|
)
|
|
$
|
(103,187
|
)
|
|
$
|
(284,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
123,444,943
|
|
|
|
122,949,064
|
|
|
|
122,418,474
|
|
Diluted
|
|
|
123,444,943
|
|
|
|
122,949,064
|
|
|
|
122,418,474
|
|
Net loss per share attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.11
|
)
|
|
$
|
(0.98
|
)
|
|
$
|
(2.50
|
)
|
Discontinued operations
|
|
|
0.35
|
|
|
|
0.14
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.76
|
)
|
|
$
|
(0.84
|
)
|
|
$
|
(2.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As we incurred a net loss in each of the periods presented above, all outstanding stock options and restricted
stock units for those periods have an anti-dilutive effect and therefore are excluded from the computation of
112
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
diluted weighted average shares outstanding. Accordingly, basic and diluted weighted average shares outstanding are equal for such periods.
The following table summarizes our weighted average outstanding common stock equivalents that were anti-dilutive attributable to common
stockholders during the periods, and therefore excluded from the computation of diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31,
2018
|
|
|
For the Year
Ended
December 31,
2017
|
|
|
For the Year
Ended
December 31,
2016
|
|
Stock options
|
|
|
3,406,171
|
|
|
|
2,977,550
|
|
|
|
5,322,266
|
|
Restricted stock units
|
|
|
2,793,680
|
|
|
|
1,429,816
|
|
|
|
715,504
|
|
As of December 31, 2018, we had two reportable segments (Education and Trade Publishing). Our Education segment provides educational
products, technology platforms and services to meet the diverse needs of todays classrooms. These products and services include print and digital content in the form of textbooks, digital courseware, instructional aids, educational assessment
and intervention solutions, which are aimed at improving achievement and supporting learning for students who are not keeping pace with peers, professional development and school reform services. Our Trade Publishing segment primarily develops,
markets and sells consumer books in print and digital formats and licenses book rights to other publishers and electronic businesses in the United States and abroad. The principal distribution channels for Trade Publishing products are retail
stores, both physical and online, and wholesalers.
We measure and evaluate our reportable segments based on net sales and segment Adjusted
EBITDA from continuing operations. We exclude from our segments certain corporate-related expenses, as our corporate functions do not meet the definition of a segment, as defined in the accounting guidance relating to segment reporting. In addition,
certain transactions or adjustments that our Chief Operating Decision Maker considers to be non-operational, such as amounts related to goodwill and other intangible asset impairment charges, derivative instruments charges,
acquisition/disposition-related activity, restructuring/integration costs, severance, separation costs and facility closures, equity compensation charges, legal settlement charges, gains or losses from divestitures, amortization and depreciation
expenses, as well as interest and taxes, are excluded from segment Adjusted EBITDA from continuing operations. Although we exclude these amounts from segment Adjusted EBITDA from continuing operations, they are included in reported consolidated net
loss and are included in the reconciliation below.
113
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
As a result of the sale of the Riverside Business, the results of the Riverside Business are
no longer presented within continuing operations. Accordingly, the segment disclosures for the Education reportable segment has been recast for all periods to exclude the results of the Riverside Business. These changes had no impact on the
previously reported financial results for the Trade reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Year Ended December 31,
|
|
|
|
Education
|
|
|
Trade
Publishing
|
|
|
Corporate/
Other
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,122,689
|
|
|
$
|
199,728
|
|
|
$
|
|
|
Segment Adjusted EBITDA
|
|
|
210,604
|
|
|
|
21,942
|
|
|
|
(40,418
|
)
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,146,453
|
|
|
$
|
180,576
|
|
|
$
|
|
|
Segment Adjusted EBITDA
|
|
|
223,941
|
|
|
|
12,096
|
|
|
|
(50,758
|
)
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,126,363
|
|
|
$
|
165,615
|
|
|
$
|
|
|
Segment Adjusted EBITDA
|
|
|
194,632
|
|
|
|
6,255
|
|
|
|
(48,582
|
)
|
The following table disaggregates our net sales by major source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
(in thousands)
|
|
Education
|
|
|
Trade
Publishing
|
|
|
Consolidated
|
|
Core solutions (1)
|
|
$
|
538,166
|
|
|
$
|
|
|
|
$
|
538,166
|
|
Extensions businesses (2)
|
|
|
584,523
|
|
|
|
|
|
|
|
584,523
|
|
Trade products
|
|
|
|
|
|
|
199,728
|
|
|
|
199,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,122,689
|
|
|
$
|
199,728
|
|
|
$
|
1,322,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
(in thousands)
|
|
Education
|
|
|
Trade
Publishing
|
|
|
Consolidated
|
|
Core solutions (1)
|
|
$
|
595,097
|
|
|
$
|
|
|
|
$
|
595,097
|
|
Extensions businesses (2)
|
|
|
551,356
|
|
|
|
|
|
|
|
551,356
|
|
Trade products
|
|
|
|
|
|
|
180,576
|
|
|
|
180,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,146,453
|
|
|
$
|
180,576
|
|
|
$
|
1,327,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
(in thousands)
|
|
Education
|
|
|
Trade
Publishing
|
|
|
Consolidated
|
|
Core solutions (1)
|
|
$
|
602,862
|
|
|
$
|
|
|
|
$
|
602,862
|
|
Extensions businesses (2)
|
|
|
523,501
|
|
|
|
|
|
|
|
523,501
|
|
Trade products
|
|
|
|
|
|
|
165,615
|
|
|
|
165,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,126,363
|
|
|
$
|
165,615
|
|
|
$
|
1,291,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Comprehensive solutions primarily for reading, math, science and social studies programs.
|
|
(2)
|
Primarily consists of our Heinemann brand, intervention, supplemental and professional services.
|
114
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Reconciliation of Segment Adjusted EBITDA to the consolidated statements of operations is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Total Segment Adjusted EBITDA
|
|
$
|
192,128
|
|
|
$
|
185,279
|
|
|
$
|
152,305
|
|
Interest expense
|
|
|
(45,680
|
)
|
|
|
(42,805
|
)
|
|
|
(39,181
|
)
|
Interest income
|
|
|
2,550
|
|
|
|
1,338
|
|
|
|
518
|
|
Depreciation expense
|
|
|
(75,116
|
)
|
|
|
(71,049
|
)
|
|
|
(74,467
|
)
|
Amortization expensefilm asset
|
|
|
(6,057
|
)
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
|
(170,903
|
)
|
|
|
(195,394
|
)
|
|
|
(209,592
|
)
|
Non-cash chargesstock compensation
|
|
|
(13,248
|
)
|
|
|
(10,728
|
)
|
|
|
(10,491
|
)
|
Non-cash chargesloss on derivative instruments
|
|
|
(1,374
|
)
|
|
|
1,366
|
|
|
|
(614
|
)
|
Non-cash chargesasset impairment charges
|
|
|
|
|
|
|
(3,980
|
)
|
|
|
(130,205
|
)
|
Purchase accounting adjustments
|
|
|
|
|
|
|
|
|
|
|
(5,116
|
)
|
Fees, expenses or charges for equity offerings, debt or acquisitions/dispositions
|
|
|
(2,883
|
)
|
|
|
(1,464
|
)
|
|
|
(1,123
|
)
|
2017 Restructuring Plan
|
|
|
(4,657
|
)
|
|
|
(37,775
|
)
|
|
|
|
|
Restructuring/Integration
|
|
|
|
|
|
|
|
|
|
|
(14,364
|
)
|
Severance, separation costs and facility closures
|
|
|
(6,821
|
)
|
|
|
(177
|
)
|
|
|
(15,371
|
)
|
Legal reimbursement (settlement)
|
|
|
|
|
|
|
3,633
|
|
|
|
(10,000
|
)
|
Gain on sale of assets
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before taxes
|
|
|
(131,860
|
)
|
|
|
(171,756
|
)
|
|
|
(357,701
|
)
|
(Provision) benefit for income taxes
|
|
|
(5,597
|
)
|
|
|
51,419
|
|
|
|
51,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(137,457
|
)
|
|
$
|
(120,337
|
)
|
|
$
|
(306,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment information as of December 31, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Total assetsEducation segment
|
|
$
|
1,999,481
|
|
|
$
|
2,121,647
|
|
Total assetsTrade Publishing segment
|
|
|
167,510
|
|
|
|
173,395
|
|
Total assetsCorporate and Other
|
|
|
328,133
|
|
|
|
268,549
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$
|
2,495,124
|
|
|
$
|
2,563,591
|
|
|
|
|
|
|
|
|
|
|
The following represents long-lived assets (property, plant, and equipment) outside of the United States, which
are substantially in Ireland. All other long-lived assets are located in the United States.
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Long-lived assetsInternational
|
|
$
|
64
|
|
|
$
|
7,593
|
|
|
|
|
|
|
|
|
|
|
115
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The following is a schedule of net sales by geographic region:
|
|
|
|
|
(in thousands)
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
|
Net salesU.S.
|
|
$
|
1,249,568
|
|
Net salesInternational
|
|
|
72,849
|
|
|
|
|
|
|
Total net sales
|
|
$
|
1,322,417
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
|
|
Net salesU.S.
|
|
$
|
1,254,956
|
|
Net salesInternational
|
|
|
72,073
|
|
|
|
|
|
|
Total net sales
|
|
$
|
1,327,029
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
|
Net salesU.S.
|
|
$
|
1,203,855
|
|
Net salesInternational
|
|
|
88,123
|
|
|
|
|
|
|
Total net sales
|
|
$
|
1,291,978
|
|
|
|
|
|
|
17.
|
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Year
|
|
|
Net Charges
|
|
|
Utilization of
Allowances
|
|
|
Balance at
End of
Year
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2,508
|
|
|
$
|
128
|
|
|
$
|
(463
|
)
|
|
$
|
2,173
|
|
Reserve for returns
|
|
|
20,580
|
|
|
|
36,395
|
|
|
|
(38,416
|
)
|
|
|
18,559
|
|
Reserve for royalty advances
|
|
|
103,606
|
|
|
|
17,301
|
|
|
|
(3,110
|
)
|
|
|
117,797
|
|
Deferred tax valuation allowance
|
|
|
571,653
|
|
|
|
(7,667
|
)
|
|
|
(1,594
|
)
|
|
|
562,392
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
3,463
|
|
|
$
|
400
|
|
|
$
|
(1,355
|
)
|
|
$
|
2,508
|
|
Reserve for returns
|
|
|
18,671
|
|
|
|
43,682
|
|
|
|
(41,773
|
)
|
|
|
20,580
|
|
Reserve for royalty advances
|
|
|
85,526
|
|
|
|
17,861
|
|
|
|
219
|
|
|
|
103,606
|
|
Deferred tax valuation allowance
|
|
|
759,887
|
|
|
|
(187,480
|
)
|
|
|
(754
|
)
|
|
|
571,653
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
8,323
|
|
|
$
|
734
|
|
|
$
|
(5,594
|
)
|
|
$
|
3,463
|
|
Reserve for returns
|
|
|
23,889
|
|
|
|
54,058
|
|
|
|
(59,276
|
)
|
|
|
18,671
|
|
Reserve for royalty advances
|
|
|
69,978
|
|
|
|
16,270
|
|
|
|
(722
|
)
|
|
|
85,526
|
|
Deferred tax valuation allowance
|
|
|
664,730
|
|
|
|
98,949
|
|
|
|
(3,792
|
)
|
|
|
759,887
|
|
116
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
18.
|
Quarterly Results of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
199,759
|
|
|
$
|
357,365
|
|
|
$
|
516,255
|
|
|
$
|
249,038
|
|
Gross profit
|
|
|
64,315
|
|
|
|
162,827
|
|
|
|
278,175
|
|
|
|
91,663
|
|
Operating income (loss)
|
|
|
(92,905
|
)
|
|
|
(14,747
|
)
|
|
|
91,838
|
|
|
|
(74,711
|
)
|
Income (loss) from continuing operations, net of tax
|
|
|
(105,886
|
)
|
|
|
(29,089
|
)
|
|
|
83,908
|
|
|
|
(86,390
|
)
|
Income from discontinued operations, net of tax
|
|
|
4,575
|
|
|
|
5,817
|
|
|
|
2,441
|
|
|
|
30,469
|
|
Net income (loss)
|
|
|
(101,311
|
)
|
|
|
(23,272
|
)
|
|
|
86,349
|
|
|
|
(55,921
|
)
|
Net income (loss) per share attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.86
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
0.68
|
|
|
$
|
(0.70
|
)
|
Discontinued operations
|
|
|
0.04
|
|
|
|
0.05
|
|
|
|
0.02
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.82
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
0.70
|
|
|
$
|
(0.45
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.86
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
0.68
|
|
|
$
|
(0.70
|
)
|
Discontinued operations
|
|
|
0.04
|
|
|
|
0.05
|
|
|
|
0.02
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.82
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
0.70
|
|
|
$
|
(0.45
|
)
|
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
203,685
|
|
|
$
|
373,393
|
|
|
$
|
516,206
|
|
|
$
|
233,745
|
|
Gross profit
|
|
|
63,702
|
|
|
|
165,803
|
|
|
|
271,053
|
|
|
|
71,807
|
|
Operating income (loss)
|
|
|
(100,494
|
)
|
|
|
(33,837
|
)
|
|
|
88,373
|
|
|
|
(89,183
|
)
|
Income (loss) from continuing operations, net of tax
|
|
|
(123,861
|
)
|
|
|
(48,666
|
)
|
|
|
88,636
|
|
|
|
(36,446
|
)
|
Income from discontinued operations, net of tax
|
|
|
3,203
|
|
|
|
1,799
|
|
|
|
1,870
|
|
|
|
10,278
|
|
Net income (loss)
|
|
|
(120,658
|
)
|
|
|
(46,867
|
)
|
|
|
90,506
|
|
|
|
(26,168
|
)
|
Net income (loss) per share attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.01
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
0.72
|
|
|
$
|
(0.29
|
)
|
Discontinued operations
|
|
|
0.03
|
|
|
|
0.02
|
|
|
|
0.02
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.98
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
0.74
|
|
|
$
|
(0.21
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.01
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
0.72
|
|
|
$
|
(0.29
|
)
|
Discontinued operations
|
|
|
0.03
|
|
|
|
0.02
|
|
|
|
0.01
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.98
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
0.73
|
|
|
$
|
(0.21
|
)
|
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. Consequently, the performance of our businesses may not be comparable quarter to consecutive quarter and should be 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.
117
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
During the three months ended September 30, 2018, we recorded out-of-period corrections
of approximately $2.8 million increasing net sales and reducing deferred revenue that should have been recognized during the three months ended March 31, 2018. During the six months ended June 30, 2017, we recorded out-of-period
corrections of approximately $4.0 million increasing net sales and reducing deferred revenue that should have been recognized previously. Management believes these out-of-period corrections are not material to the current period financial
statements or any previously issued financial statements.
On January 14, 2019, we completed the acquisition of certain assets of PV Waggle LLC, which comprised a web-based adaptive learning
solution providing Math and ELA instruction for students in grades 2-8 for a total purchase price of approximately $5.4 million. We are currently in the process of finalizing the accounting for the transaction.
118