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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/04/21 Houghton Mifflin Harcourt Co. 10-Q 9/30/21 75:10M ActiveDisclosure/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 1.07M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 27K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 27K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 24K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 24K
12: R1 Document and Entity Information HTML 75K
13: R2 Consolidated Balance Sheets HTML 173K
14: R3 Consolidated Balance Sheets (Parenthetical) HTML 45K
15: R4 Consolidated Statements of Operations HTML 159K
16: R5 Consolidated Statements of Comprehensive Income HTML 51K
(Loss)
17: R6 Consolidated Statements of Cash Flows HTML 162K
18: R7 Consolidated Statements of Stockholders' Equity HTML 91K
19: R8 Basis of Presentation HTML 33K
20: R9 Impact of the COVID-19 Pandemic HTML 36K
21: R10 Significant Accounting Policies and Estimates HTML 26K
22: R11 Recent Accounting Standards HTML 40K
23: R12 Discontinued Operations HTML 107K
24: R13 Inventories HTML 38K
25: R14 Contract Assets, Contract Liabilities and Contract HTML 105K
Costs and Net Sales
26: R15 Goodwill and Other Intangible Assets HTML 85K
27: R16 Debt HTML 68K
28: R17 Restructuring, Severance and Other Charges HTML 90K
29: R18 Income Taxes HTML 30K
30: R19 Retirement and Postretirement Benefit Plans HTML 116K
31: R20 Fair Value Measurements HTML 167K
32: R21 Commitments and Contingencies HTML 31K
33: R22 Net Income (Loss) Per Share HTML 160K
34: R23 Significant Accounting Policies (Policies) HTML 30K
35: R24 Discontinued Operations (Tables) HTML 108K
36: R25 Inventories (Tables) HTML 39K
37: R26 Contract Assets, Contract Liabilities and Contract HTML 101K
Costs and Net Sales (Tables)
38: R27 Goodwill and Other Intangible Assets (Tables) HTML 82K
39: R28 Debt (Tables) HTML 49K
40: R29 Restructuring, Severance and Other Charges HTML 85K
(Tables)
41: R30 Retirement and Postretirement Benefit Plans HTML 109K
(Tables)
42: R31 Fair Value Measurements (Tables) HTML 154K
43: R32 Net Income (Loss) Per Share (Tables) HTML 160K
44: R33 Basis of Presentation - Additional Information HTML 38K
(Detail)
45: R34 Impact of the COVID-19 Pandemic - Additional HTML 70K
Information (Detail)
46: R35 Recent Accounting Standards - Additional HTML 34K
Information (Details)
47: R36 Discontinued Operations - Additional Information HTML 34K
(Detail)
48: R37 Discontinued Operations - Summary of Amounts HTML 49K
Included in Discontinued Operations (Detail)
49: R38 Discontinued Operations - Summary of Assets of HTML 67K
Discontinued Operations and Liabilities of
Discontinued Operations on Consolidated Balance
Sheets (Detail)
50: R39 Inventories - Schedule of Inventories (Detail) HTML 29K
51: R40 Contract Assets, Contract Liabilities and Contract HTML 36K
Costs and Net Sales - Summary of Changes in
Contract Assets and Contract Liabilities (Detail)
52: R41 Contract Assets, Contract Liabilities and Contract HTML 43K
Costs and Net Sales - Additional Information
(Detail)
53: R42 Contract Assets, Contract Liabilities and Contract HTML 25K
Costs and Net Sales - Summary of Net Sales
Recognised from Changes in Contract Asset and
Contract Liabilities (Detail)
54: R43 Contract Assets, Contract Liabilities and Contract HTML 36K
Costs and Net Sales - Summary of Net Sales
(Detail)
55: R44 Goodwill and Other Intangible Assets - Additional HTML 46K
Information (Detail)
56: R45 Goodwill and Other Intangible Assets - Schedule of HTML 43K
Other Intangible Assets (Detail)
57: R46 Debt - Long-Term Debt (Detail) HTML 42K
58: R47 Debt - Long-Term Debt (Parenthetical) (Detail) HTML 35K
59: R48 Debt - Additional Information (Detail) HTML 105K
60: R49 Restructuring, Severance and Other Charges - HTML 59K
Additional Information (Detail)
61: R50 Restructuring, Severance and Other Charges - HTML 41K
Summary of Restructuring Liabilities Comprised of
Accruals for Severance and Termination Benefits
(Detail)
62: R51 Income Taxes - Additional Information (Detail) HTML 30K
63: R52 Retirement and Postretirement Benefit Plans - HTML 30K
Additional Information (Detail)
64: R53 Retirement and Postretirement Benefit Plans - Net HTML 51K
Periodic Benefit Cost Components (Detail)
65: R54 Fair Value Measurements - Summary of Financial HTML 42K
Assets and Liabilities Measured at Fair Value on
Recurring Basis (Detail)
66: R55 Fair Value Measurements - Additional Information HTML 72K
(Detail)
67: R56 Fair Value Measurements - Summary of Non-financial HTML 32K
Assets Measured at Fair Value on Nonrecurring
Basis (Detail)
68: R57 Fair Value Measurements - Summary of Carrying HTML 33K
Amounts and Estimated Fair Market Values of Debt
(Detail)
69: R58 Commitments and Contingencies - Additional HTML 42K
Information (Detail)
70: R59 Net Income (Loss) Per Share - Computation of Basic HTML 90K
and Diluted Earnings per Share (Detail)
71: R60 Net Income (Loss) Per Share - Summary of HTML 30K
Anti-Dilutive Securities Excluded from Computation
of Diluted EPS (Detail)
73: XML IDEA XML File -- Filing Summary XML 137K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM i 10-Q
|
i ☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended i September 30, i 2021 /
OR
|
i ☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number i 001-36166
i Houghton Mifflin Harcourt Company
(Exact name of registrant as specified in its charter)
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i Delaware |
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i 27-1566372 |
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(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
i 125 High Street
( i 617) i 351-5000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class |
|
Trading Symbol(s) |
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Name of each exchange on which registered |
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i Common Stock, $0.01 par value |
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i HMHC |
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i The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. i Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). i Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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☐ |
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i Accelerated filer |
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☒ |
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Non-accelerated filer |
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☐ |
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Smaller reporting company |
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i ☒ |
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Emerging growth company |
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i ☐ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i ☐ No ☒
The number of shares of common stock, par value $0.01 per share, outstanding as of November 1, 2021 was i 127,680,750.
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PART I. |
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4 |
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Item 1. |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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24 |
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Item 3. |
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37 |
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Item 4. |
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38 |
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PART II. |
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39 |
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Item 1. |
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39 |
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Item 1A. |
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39 |
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Item 6. |
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2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained herein include forward-looking statements, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “projects,” “anticipates,” “expects,” “could,” “intends,” “may,” “will,” “should,” “forecast,” “intend,” “plan,” “potential,” “project,” “target” or, in each case, their negative, or other variations or comparable terminology. Forward-looking statements include all statements that are not statements of historical facts. They include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations; financial condition; liquidity; prospects, growth and strategies; the expected impact of the COVID-19 pandemic; our competitive strengths; the industry in which we operate; the impact of new accounting guidance and tax laws; expenses; effective tax rates; future liabilities; the outcome and impact of pending or threatened litigation; decisions of our customers; education expenditures; population growth; state curriculum adoptions and purchasing cycles; the impact of dispositions, acquisitions and other investments; the timing, structure and expected impact of our operational efficiency and cost-reduction initiatives and the estimated savings and amounts expected to be incurred in connection therewith; and potential business decisions. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. We caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this report.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that actual results may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if actual results are consistent with the forward-looking statements contained herein, those results or developments may not be indicative of results or developments in subsequent periods.
Important factors that could cause actual results to vary from expectations include, but are not limited to the duration and severity of the COVID-19 pandemic and its impact on the federal, state and local economies and on K-12 schools; any disruption resulting from the completed sale of our HMH Books & Media that adversely affects our business and business relationships, including with employees and suppliers; the rate and state of technological change; state requirements related to digital instructional materials; our ability to execute on our digital first, connected strategy; increases in our operating costs; management and personnel changes; timing, higher costs and unintended consequences of our operational efficiency and cost-reduction initiatives and other factors discussed in the “Risk Factors” section of the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (and our subsequent filings pursuant to the Securities Exchange Act of 1934, as amended). In light of these risks, uncertainties and assumptions, the forward-looking events described herein may not occur.
We undertake no obligation, and do not expect, to publicly update or publicly revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained herein.
3
PART 1 – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Houghton Mifflin Harcourt Company
Consolidated Balance Sheets (Unaudited)
|
|
|
September 30, |
|
|
December 31, |
|
||
|
(in thousands of dollars, except share information) |
|
2021 |
|
|
2020 |
|
||
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
i 420,318 |
|
|
$ |
i 281,200 |
|
|
Accounts receivable, net of allowances for bad debts and book returns of $ i 10.9 million and $ i 8.4 million, respectively |
|
|
i 299,413 |
|
|
|
i 88,830 |
|
|
Inventories |
|
|
i 96,471 |
|
|
|
i 145,553 |
|
|
Prepaid expenses and other assets |
|
|
i 26,193 |
|
|
|
i 19,276 |
|
|
Assets of discontinued operations |
|
|
— |
|
|
|
i 160,053 |
|
|
Total current assets |
|
|
i 842,395 |
|
|
|
i 694,912 |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net |
|
|
i 80,978 |
|
|
|
i 88,801 |
|
|
Pre-publication costs, net |
|
|
i 163,255 |
|
|
|
i 202,820 |
|
|
Royalty advances to authors, net |
|
|
i 1,581 |
|
|
|
i 2,425 |
|
|
Goodwill |
|
|
i 437,977 |
|
|
|
i 437,977 |
|
|
Other intangible assets, net |
|
|
i 370,047 |
|
|
|
i 402,484 |
|
|
Operating lease assets |
|
|
i 117,410 |
|
|
|
i 126,850 |
|
|
Deferred income taxes |
|
|
i 2,415 |
|
|
|
i 2,415 |
|
|
Deferred commissions |
|
|
i 37,309 |
|
|
|
i 30,659 |
|
|
Other assets |
|
|
i 32,980 |
|
|
|
i 31,783 |
|
|
Total assets |
|
$ |
i 2,086,347 |
|
|
$ |
i 2,021,126 |
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
— |
|
|
$ |
i 19,000 |
|
|
Accounts payable |
|
|
i 49,736 |
|
|
|
i 38,751 |
|
|
Royalties payable |
|
|
i 44,766 |
|
|
|
i 34,765 |
|
|
Salaries, wages, and commissions payable |
|
|
i 61,133 |
|
|
|
i 21,723 |
|
|
Deferred revenue |
|
|
i 386,431 |
|
|
|
i 342,605 |
|
|
Interest payable |
|
|
i 4,260 |
|
|
|
i 11,017 |
|
|
Severance and other charges |
|
|
i 1,283 |
|
|
|
i 19,590 |
|
|
Accrued pension benefits |
|
|
i 118 |
|
|
|
i 1,593 |
|
|
Accrued postretirement benefits |
|
|
i 1,555 |
|
|
|
i 1,555 |
|
|
Operating lease liabilities |
|
|
i 10,506 |
|
|
|
i 9,669 |
|
|
Other liabilities |
|
|
i 40,273 |
|
|
|
i 22,912 |
|
|
Liabilities of discontinued operations |
|
|
— |
|
|
|
i 30,662 |
|
|
Total current liabilities |
|
|
i 600,061 |
|
|
|
i 553,842 |
|
|
|
|
|
|
|
|
|
|
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Long-term debt, net of discount and issuance costs |
|
|
i 317,095 |
|
|
|
i 624,692 |
|
|
Operating lease liabilities |
|
|
i 131,582 |
|
|
|
i 132,014 |
|
|
Long-term deferred revenue |
|
|
i 624,953 |
|
|
|
i 562,679 |
|
|
Accrued pension benefits |
|
|
i 15,021 |
|
|
|
i 24,061 |
|
|
Accrued postretirement benefits |
|
|
i 15,338 |
|
|
|
i 16,566 |
|
|
Deferred income taxes |
|
|
i 11,885 |
|
|
|
i 16,411 |
|
|
Other liabilities |
|
|
i 215 |
|
|
|
i 398 |
|
|
Total liabilities |
|
|
i 1,716,150 |
|
|
|
i 1,930,663 |
|
|
Commitments and contingencies (Note 14) |
|
|
|
|
|
|
|
|
|
Stockholders’ equity |
|
|
|
|
|
|
|
|
|
Preferred stock, $ i i 0.01 / par value: i i 20,000,000 / shares authorized; i i i i no / / / shares issued and outstanding at September 30, 2021 and December 31, 2020 |
|
|
— |
|
|
|
— |
|
|
Common stock, $ i i 0.01 / par value: i i 380,000,000 / shares authorized; i 152,257,784 and i 150,459,034 shares issued at September 30, 2021 and December 31, 2020, respectively; i 127,680,750 and i 125,882,000 shares outstanding at September 30, 2021 and December 31, 2020, respectively |
|
|
i 1,523 |
|
|
|
i 1,505 |
|
|
Treasury stock, i i 24,577,034 / shares as of September 30, 2021 and December 31, 2020, respectively, at cost |
|
|
( i 518,030 |
) |
|
|
( i 518,030 |
) |
|
Capital in excess of par value |
|
|
i 4,927,934 |
|
|
|
i 4,918,542 |
|
|
Accumulated deficit |
|
|
( i 3,993,826 |
) |
|
|
( i 4,255,830 |
) |
|
Accumulated other comprehensive loss |
|
|
( i 47,404 |
) |
|
|
( i 55,724 |
) |
|
Total stockholders’ equity |
|
|
i 370,197 |
|
|
|
i 90,463 |
|
|
Total liabilities and stockholders’ equity |
|
$ |
i 2,086,347 |
|
|
$ |
i 2,021,126 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
Houghton Mifflin Harcourt Company
Consolidated Statements of Operations (Unaudited)
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
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(in thousands of dollars, except share and per share information) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Net sales |
|
$ |
i 417,130 |
|
|
$ |
i 331,205 |
|
|
$ |
i 871,997 |
|
|
$ |
i 699,287 |
|
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding publishing rights and pre-publication amortization |
|
|
i 152,893 |
|
|
|
i 146,155 |
|
|
|
i 335,390 |
|
|
|
i 310,351 |
|
|
Publishing rights amortization |
|
|
i 2,516 |
|
|
|
i 3,469 |
|
|
|
i 8,171 |
|
|
|
i 11,332 |
|
|
Pre-publication amortization |
|
|
i 27,620 |
|
|
|
i 31,570 |
|
|
|
i 79,177 |
|
|
|
i 93,791 |
|
|
Cost of sales |
|
|
i 183,029 |
|
|
|
i 181,194 |
|
|
|
i 422,738 |
|
|
|
i 415,474 |
|
|
Selling and administrative |
|
|
i 134,951 |
|
|
|
i 118,275 |
|
|
|
i 338,953 |
|
|
|
i 339,815 |
|
|
Other intangible assets amortization |
|
|
i 7,241 |
|
|
|
i 5,857 |
|
|
|
i 23,016 |
|
|
|
i 17,568 |
|
|
Impairment charge for goodwill |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 262,000 |
|
|
Restructuring/severance and other charges |
|
|
i 33 |
|
|
|
i 31,776 |
|
|
|
i 9,880 |
|
|
|
i 31,776 |
|
|
Gain on sale of assets |
|
|
( i 3,661 |
) |
|
|
— |
|
|
|
( i 3,661 |
) |
|
|
— |
|
|
Operating income (loss) |
|
|
i 95,537 |
|
|
|
( i 5,897 |
) |
|
|
i 81,071 |
|
|
|
( i 367,346 |
) |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefits non-service income (expense) |
|
|
i 214 |
|
|
|
i 61 |
|
|
|
( i 12 |
) |
|
|
i 183 |
|
|
Interest expense |
|
|
( i 8,239 |
) |
|
|
( i 9,311 |
) |
|
|
( i 26,788 |
) |
|
|
( i 29,178 |
) |
|
Interest income |
|
|
i 18 |
|
|
|
i 32 |
|
|
|
i 52 |
|
|
|
i 873 |
|
|
Change in fair value of derivative instruments |
|
|
( i 368 |
) |
|
|
i 432 |
|
|
|
( i 915 |
) |
|
|
i 172 |
|
|
Gain on investments |
|
|
i 606 |
|
|
|
i 1,738 |
|
|
|
i 1,442 |
|
|
|
i 1,738 |
|
|
Income from transition services agreement |
|
|
i 1,399 |
|
|
|
— |
|
|
|
i 2,253 |
|
|
|
— |
|
|
Loss on extinguishment of debt |
|
|
— |
|
|
|
— |
|
|
|
( i 12,505 |
) |
|
|
— |
|
|
Income (loss) from continuing operations before taxes |
|
|
i 89,167 |
|
|
|
( i 12,945 |
) |
|
|
i 44,598 |
|
|
|
( i 393,558 |
) |
|
Income tax benefit for continuing operations |
|
|
( i 6,192 |
) |
|
|
( i 1,060 |
) |
|
|
( i 3,891 |
) |
|
|
( i 11,210 |
) |
|
Income (loss) from continuing operations |
|
|
i 95,359 |
|
|
|
( i 11,885 |
) |
|
|
i 48,489 |
|
|
|
( i 382,348 |
) |
|
Loss from discontinued operations, net of tax |
|
|
— |
|
|
|
( i 667 |
) |
|
|
( i 1,005 |
) |
|
|
( i 14,345 |
) |
|
Gain on sale of discontinued operations, net of tax |
|
|
— |
|
|
|
— |
|
|
|
i 214,520 |
|
|
|
— |
|
|
(Loss) income from discontinued operations, net of tax |
|
|
— |
|
|
|
( i 667 |
) |
|
|
i 213,515 |
|
|
|
( i 14,345 |
) |
|
Net income (loss) |
|
$ |
i 95,359 |
|
|
$ |
( i 12,552 |
) |
|
$ |
i 262,004 |
|
|
$ |
( i 396,693 |
) |
|
Net income (loss) per share attributable to common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
i 0.75 |
|
|
$ |
( i 0.09 |
) |
|
$ |
i 0.38 |
|
|
$ |
( i 3.05 |
) |
|
Discontinued operations |
|
|
— |
|
|
|
( i 0.01 |
) |
|
|
i 1.68 |
|
|
|
( i 0.12 |
) |
|
Net income (loss) |
|
$ |
i 0.75 |
|
|
$ |
( i 0.10 |
) |
|
$ |
i 2.06 |
|
|
$ |
( i 3.17 |
) |
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
i 0.72 |
|
|
$ |
( i 0.09 |
) |
|
$ |
i 0.37 |
|
|
$ |
( i 3.05 |
) |
|
Discontinued operations |
|
|
— |
|
|
|
( i 0.01 |
) |
|
|
i 1.64 |
|
|
|
( i 0.12 |
) |
|
Net income (loss) |
|
$ |
i 0.72 |
|
|
$ |
( i 0.10 |
) |
|
$ |
i 2.01 |
|
|
$ |
( i 3.17 |
) |
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
i 127,674,513 |
|
|
|
i 125,799,018 |
|
|
|
i 127,220,429 |
|
|
|
i 125,317,284 |
|
|
Diluted |
|
|
i 131,652,417 |
|
|
|
i 125,799,018 |
|
|
|
i 130,667,785 |
|
|
|
i 125,317,284 |
|
The accompanying notes are an integral part of these consolidated financial statements.
5
Houghton Mifflin Harcourt Company
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
(in thousands of dollars, except share and per share information) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Net income (loss) |
|
$ |
i 95,359 |
|
|
$ |
( i 12,552 |
) |
|
$ |
i 262,004 |
|
|
$ |
( i 396,693 |
) |
|
Other comprehensive income (loss), net of taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax |
|
|
( i 280 |
) |
|
|
( i 86 |
) |
|
|
( i 833 |
) |
|
|
( i 266 |
) |
|
Net change in pension and benefit plan liabilities, net of tax |
|
|
i 706 |
|
|
|
— |
|
|
|
i 9,153 |
|
|
|
— |
|
|
Net change in unrealized loss on derivative financial instruments, net of tax |
|
|
— |
|
|
|
i 258 |
|
|
|
— |
|
|
|
i 987 |
|
|
Other comprehensive income, net of taxes |
|
|
i 426 |
|
|
|
i 172 |
|
|
|
i 8,320 |
|
|
|
i 721 |
|
|
Comprehensive income (loss) |
|
$ |
i 95,785 |
|
|
$ |
( i 12,380 |
) |
|
$ |
i 270,324 |
|
|
$ |
( i 395,972 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
6
Houghton Mifflin Harcourt Company
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
Nine Months Ended September 30, |
|
|||||
|
(in thousands of dollars) |
|
2021 |
|
|
2020 |
|
||
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
i 262,004 |
|
|
$ |
( i 396,693 |
) |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax |
|
|
i 1,005 |
|
|
|
i 14,345 |
|
|
Gain on sale of discontinued operations, net of tax |
|
|
( i 214,520 |
) |
|
|
— |
|
|
Gain on sale of assets |
|
|
( i 3,661 |
) |
|
|
— |
|
|
Depreciation and amortization expense |
|
|
i 144,698 |
|
|
|
i 160,073 |
|
|
Operating lease assets, amortization and impairments |
|
|
i 9,411 |
|
|
|
i 9,565 |
|
|
Amortization of debt discount and deferred financing costs |
|
|
i 2,096 |
|
|
|
i 1,979 |
|
|
Gain on investments |
|
|
( i 1,442 |
) |
|
|
( i 1,738 |
) |
|
Deferred income taxes |
|
|
( i 4,526 |
) |
|
|
( i 12,084 |
) |
|
Stock-based compensation expense |
|
|
i 8,727 |
|
|
|
i 8,295 |
|
|
Write-off of property, plant, and equipment |
|
|
i 1,606 |
|
|
|
— |
|
|
Loss on extinguishment of debt |
|
|
i 12,505 |
|
|
|
— |
|
|
Impairment charge for goodwill |
|
|
— |
|
|
|
i 262,000 |
|
|
Change in fair value of derivative instruments |
|
|
i 915 |
|
|
|
( i 172 |
) |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
( i 200,632 |
) |
|
|
( i 106,852 |
) |
|
Inventories |
|
|
i 49,081 |
|
|
|
i 38,566 |
|
|
Other assets |
|
|
( i 13,767 |
) |
|
|
( i 10,663 |
) |
|
Accounts payable and accrued expenses |
|
|
i 53,878 |
|
|
|
i 4,764 |
|
|
Royalties payable and author advances, net |
|
|
i 12,467 |
|
|
|
( i 21,169 |
) |
|
Deferred revenue |
|
|
i 106,100 |
|
|
|
i 105,347 |
|
|
Interest payable |
|
|
( i 6,757 |
) |
|
|
i 155 |
|
|
Severance and other charges |
|
|
( i 18,307 |
) |
|
|
i 22,494 |
|
|
Accrued pension and postretirement benefits |
|
|
( i 2,656 |
) |
|
|
( i 5,532 |
) |
|
Operating lease liabilities |
|
|
i 436 |
|
|
|
( i 7,598 |
) |
|
Other liabilities |
|
|
( i 5,964 |
) |
|
|
i 935 |
|
|
Net cash provided by operating activities - continuing operations |
|
|
i 192,697 |
|
|
|
i 66,017 |
|
|
Net cash provided by operating activities - discontinued operations |
|
|
i 3,880 |
|
|
|
i 9,149 |
|
|
Net cash provided by operating activities |
|
|
i 196,577 |
|
|
|
i 75,166 |
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
Additions to pre-publication costs |
|
|
( i 42,104 |
) |
|
|
( i 50,919 |
) |
|
Additions to property, plant, and equipment |
|
|
( i 28,672 |
) |
|
|
( i 35,275 |
) |
|
Proceeds from sale of business |
|
|
i 349,000 |
|
|
|
— |
|
|
Proceeds from sale of assets |
|
|
i 5,000 |
|
|
|
— |
|
|
Net cash provided by (used in) investing activities - continuing operations |
|
|
i 283,224 |
|
|
|
( i 86,194 |
) |
|
Net cash used in investing activities - discontinued operations |
|
|
( i 647 |
) |
|
|
( i 402 |
) |
|
Net cash provided by (used in) investing activities |
|
|
i 282,577 |
|
|
|
( i 86,596 |
) |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit facility |
|
|
— |
|
|
|
i 150,000 |
|
|
Payments of revolving credit facility |
|
|
— |
|
|
|
( i 150,000 |
) |
|
Payments of long-term debt |
|
|
( i 342,031 |
) |
|
|
( i 14,250 |
) |
|
Tax withholding payments related to net share settlements of restricted stock units |
|
|
— |
|
|
|
( i 48 |
) |
|
Issuance of common stock under employee stock purchase plan |
|
|
i 410 |
|
|
|
i 918 |
|
|
Net collections under transition services agreement |
|
|
i 1,585 |
|
|
|
— |
|
|
Net cash used in financing activities - continuing operations |
|
|
( i 340,036 |
) |
|
|
( i 13,380 |
) |
|
Net increase (decrease) in cash and cash equivalents |
|
|
i 139,118 |
|
|
|
( i 24,810 |
) |
|
Cash and cash equivalents at beginning of the period |
|
|
i 281,200 |
|
|
|
i 296,353 |
|
|
Cash and cash equivalents at end of the period |
|
$ |
i 420,318 |
|
|
$ |
i 271,543 |
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
Interest paid - continuing operations |
|
$ |
i 29,557 |
|
|
$ |
i 26,366 |
|
|
Interest paid - discontinued operations |
|
|
i 10,108 |
|
|
|
i 19,547 |
|
|
Income taxes paid |
|
|
i 1,021 |
|
|
|
i 1,848 |
|
|
Operating lease assets obtained in exchange for operating lease liabilities |
|
|
i 7,911 |
|
|
|
i 6,472 |
|
|
Non-cash investing activities |
|
|
|
|
|
|
|
|
|
Pre-publication costs included in accounts payable and accruals |
|
$ |
i 2,732 |
|
|
$ |
i 2,192 |
|
|
Property, plant, and equipment included in accounts payable and accruals |
|
|
i 1,366 |
|
|
|
i 1,648 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
Houghton Mifflin Harcourt Company
Consolidated Statements of Stockholders’ Equity (Unaudited)
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
(in thousands of dollars, except share information) |
|
Shares Issued |
|
|
Par Value |
|
|
Treasury Stock |
|
|
Capital in excess of Par Value |
|
|
Accumulated Deficit |
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
Total |
|
|||||||
|
Balance at December 31, 2019 |
|
|
i 148,928,328 |
|
|
$ |
i 1,489 |
|
|
$ |
( i 518,030 |
) |
|
$ |
i 4,906,165 |
|
|
$ |
( i 3,775,992 |
) |
|
$ |
( i 47,272 |
) |
|
$ |
i 566,360 |
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 345,973 |
) |
|
|
— |
|
|
|
( i 345,973 |
) |
|
Other comprehensive loss, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 444 |
) |
|
|
( i 444 |
) |
|
Issuance of common stock for employee purchase plan |
|
|
i 104,331 |
|
|
|
i 1 |
|
|
|
— |
|
|
|
i 678 |
|
|
|
— |
|
|
|
— |
|
|
|
i 679 |
|
|
Issuance of common stock for vesting of restricted stock units |
|
|
i 950,496 |
|
|
|
i 10 |
|
|
|
— |
|
|
|
( i 10 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock withheld to cover tax withholdings requirements upon vesting of restricted stock units |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 48 |
) |
|
|
— |
|
|
|
— |
|
|
|
( i 48 |
) |
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 3,386 |
|
|
|
— |
|
|
|
— |
|
|
|
i 3,386 |
|
|
Balance at March 31, 2020 |
|
|
i 149,983,155 |
|
|
$ |
i 1,500 |
|
|
$ |
( i 518,030 |
) |
|
$ |
i 4,910,171 |
|
|
$ |
( i 4,121,965 |
) |
|
$ |
( i 47,716 |
) |
|
$ |
i 223,960 |
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 38,168 |
) |
|
|
— |
|
|
|
( i 38,168 |
) |
|
Other comprehensive income, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 993 |
|
|
|
i 993 |
|
|
Issuance of common stock for employee purchase plan |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 1 |
) |
|
|
— |
|
|
|
— |
|
|
|
( i 1 |
) |
|
Issuance of common stock for vesting of restricted stock units |
|
|
i 149,495 |
|
|
|
i 1 |
|
|
|
— |
|
|
|
( i 1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 2,101 |
|
|
|
— |
|
|
|
— |
|
|
|
i 2,101 |
|
|
Balance at June 30, 2020 |
|
|
i 150,132,650 |
|
|
$ |
i 1,501 |
|
|
$ |
( i 518,030 |
) |
|
$ |
i 4,912,270 |
|
|
$ |
( i 4,160,133 |
) |
|
$ |
( i 46,723 |
) |
|
$ |
i 188,885 |
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 12,552 |
) |
|
|
— |
|
|
|
( i 12,552 |
) |
|
Other comprehensive income, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 172 |
|
|
|
i 172 |
|
|
Issuance of common stock for employee purchase plan |
|
|
i 274,588 |
|
|
|
i 3 |
|
|
|
— |
|
|
|
i 567 |
|
|
|
— |
|
|
|
— |
|
|
|
i 570 |
|
|
Issuance of common stock for vesting of restricted stock units |
|
|
i 19,910 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 2,969 |
|
|
|
— |
|
|
|
— |
|
|
|
i 2,969 |
|
|
Balance at September 30, 2020 |
|
|
i 150,427,148 |
|
|
$ |
i 1,504 |
|
|
$ |
( i 518,030 |
) |
|
$ |
i 4,915,806 |
|
|
$ |
( i 4,172,685 |
) |
|
$ |
( i 46,551 |
) |
|
$ |
i 180,044 |
|
|
Balance at December 31, 2020 |
|
|
i 150,459,034 |
|
|
$ |
i 1,505 |
|
|
$ |
( i 518,030 |
) |
|
$ |
i 4,918,542 |
|
|
$ |
( i 4,255,830 |
) |
|
$ |
( i 55,724 |
) |
|
$ |
i 90,463 |
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 51,983 |
) |
|
|
— |
|
|
|
( i 51,983 |
) |
|
Other comprehensive income, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 6,590 |
|
|
|
i 6,590 |
|
|
Issuance of common stock for employee purchase plan |
|
|
i 239,144 |
|
|
|
i 2 |
|
|
|
— |
|
|
|
i 634 |
|
|
|
— |
|
|
|
— |
|
|
|
i 636 |
|
|
Issuance of common stock for vesting of restricted stock units |
|
|
i 1,289,209 |
|
|
|
i 13 |
|
|
|
— |
|
|
|
( i 13 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 2,682 |
|
|
|
— |
|
|
|
— |
|
|
|
i 2,682 |
|
|
Balance at March 31, 2021 |
|
|
i 151,987,387 |
|
|
$ |
i 1,520 |
|
|
$ |
( i 518,030 |
) |
|
$ |
i 4,921,845 |
|
|
$ |
( i 4,307,813 |
) |
|
$ |
( i 49,134 |
) |
|
$ |
i 48,388 |
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 218,628 |
|
|
|
— |
|
|
|
i 218,628 |
|
|
Other comprehensive income, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 1,304 |
|
|
|
i 1,304 |
|
|
Issuance of common stock for employee purchase plan |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 12 |
|
|
|
— |
|
|
|
— |
|
|
|
i 12 |
|
|
Issuance of common stock for vesting of restricted stock units |
|
|
i 256,817 |
|
|
|
i 2 |
|
|
|
— |
|
|
|
( i 2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 2,972 |
|
|
|
— |
|
|
|
— |
|
|
|
i 2,972 |
|
|
Balance at June 30, 2021 |
|
|
i 152,244,204 |
|
|
$ |
i 1,522 |
|
|
$ |
( i 518,030 |
) |
|
$ |
i 4,924,827 |
|
|
$ |
( i 4,089,185 |
) |
|
$ |
( i 47,830 |
) |
|
$ |
i 271,304 |
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 95,359 |
|
|
|
— |
|
|
|
i 95,359 |
|
|
Other comprehensive income, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 426 |
|
|
|
i 426 |
|
|
Issuance of common stock for vesting of restricted stock units |
|
|
i 13,580 |
|
|
|
i 1 |
|
|
|
— |
|
|
|
( i 1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 3,108 |
|
|
|
— |
|
|
|
— |
|
|
|
i 3,108 |
|
|
Balance at September 30, 2021 |
|
|
i 152,257,784 |
|
|
$ |
i 1,523 |
|
|
$ |
( i 518,030 |
) |
|
$ |
i 4,927,934 |
|
|
$ |
( i 3,993,826 |
) |
|
$ |
( i 47,404 |
) |
|
$ |
i 370,197 |
|
The accompanying notes are an integral part of these consolidated financial statements.
8
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements (Unaudited)
(amounts in tables are in thousands of dollars, except share and per share information)
i|
1. |
Basis of Presentation |
Houghton Mifflin Harcourt Company (“HMH,” “Houghton Mifflin Harcourt,” “we,” “us,” “our,” or the “Company”) is a learning technology company committed to delivering connected solutions that engage learners, empower educators and improve student outcomes. As a leading provider of Kindergarten through 12th grade (“K-12”) core curriculum, supplemental and intervention solutions and professional learning services, HMH partners with educators and school districts to uncover solutions that unlock students’ potential and extend teachers’ capabilities. HMH estimates that it serves more than i 50 million students and i three million educators in i 150 countries.
We focus on the K-12 market and, in the United States, we are a market leader. We specialize in comprehensive core curriculum, supplemental and intervention solutions, and we provide ongoing support in professional learning and coaching for educators and administrators. Our offerings are rooted in learning science, and we work with research partners, universities and third-party organizations as we design, build, implement and iterate our offerings to maximize their effectiveness. We are purposeful about innovation, leveraging technology to create engaging and immersive experiences designed to deepen learning experiences for students and to extend teachers’ capabilities so that they can focus on making meaningful connections with their students.
Our diverse portfolio enables us to help ensure that every student and teacher has the tools needed for success. We are able to build deep partnerships with school districts and leverage the scope of our offerings to provide holistic solutions at scale with the support of our far-reaching sales force and talented field-based specialists and consultants. We provide print, digital, and blended print/digital solutions that are tailored to a district’s needs, goals and technological readiness.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted consistent with Article 10 of Regulation S-X. In the opinion of management, our unaudited consolidated financial statements and accompanying notes include all adjustments (consisting of normal recurring adjustments) considered necessary by management to fairly state the results of operations, financial position and cash flows for the interim periods presented. Interim results of operations are not necessarily indicative of the results for the full year or for any future period. These financial statements should be read in conjunction with the annual financial statements and the notes thereto also included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Our accompanying consolidated financial statements include the results of operations of the Company and our wholly-owned subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.
On May 10, 2021, we completed the sale of our HMH Books & Media segment, our consumer publishing business. We determined that the HMH Books & Media business met the “held for sale” criteria and the “discontinued operations” criteria in accordance with Financial Accounting Standard Boards (“FASB”) Accounting Standards Codification (“ASC”) 205, Presentation of Financial Statements, (“FASB ASC 205”) as of March 31, 2021 due to its relative size and strategic rationale. The Consolidated Balance Sheets and Consolidated Statements of Operations, and the notes to the Consolidated Financial Statements were restated for all periods presented to reflect the discontinuation of the HMH Books & Media business, in accordance with FASB ASC 205. The discussion in the notes to these Consolidated Financial Statements, unless otherwise noted, relate solely to our continuing operations. As a result of the disposal of the former segment, our revenues and financial results from continuing operations are reported under i one reportable segment.
We expect our net cash provided by operations combined with our cash and cash equivalents and borrowing availability under our revolving credit facility to provide sufficient liquidity to fund our current obligations, capital spending, debt service requirements and working capital requirements over at least the next twelve months.
Seasonality and Comparability
Our net sales, operating profit or loss and net cash provided by or used in operations are impacted by the inherent seasonality of the academic calendar, which typically results in a cash flow usage in the first half of the year and a cash flow generation in the second half of the year. Consequently, the performance of our business may not be comparable quarter to consecutive quarter and should be 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.
/9
Schools typically conduct the majority of their purchases in the second and third quarters of the calendar year in preparation for the beginning of the school year. Thus, for the years ended December 31, 2020, 2019 and 2018, approximately i i i 69 / / % of our consolidated net sales were realized in the second and third quarters. Sales of K-12 instructional materials and customized testing products are also cyclical with some years offering more sales opportunities than others in light of the state adoption calendar. The amount of funding available at the state level for educational materials also has a significant effect on year-to-year net sales. Although the loss of a single customer would not have a material adverse effect on our business, schedules of school adoptions and market acceptance of our products can materially affect year-to-year net sales performance.
i|
2. |
Impact of the COVID-19 Pandemic |
The unprecedented and rapid spread of COVID-19 and the resulting social distancing measures, including business and school closures implemented by federal, state and local authorities, significantly reduced customer demand for our solutions and services, disrupted portions of our supply chain and warehousing operations and also disrupted our ability to deliver our educational solutions and services in 2020. In response to these developments, we implemented a number of measures intended to help protect our shareholders, employees, and customers amid the COVID-19 pandemic and to help mitigate its impact on our financial position, profitability and cash flow. These measures included, but were not limited to furloughs, salary reductions, spending freezes, and proactive outreach to schools to support them through this period of disruption with virtual learning resources. We continue to monitor indicators of demand, including our sales pipeline, customer orders and product shipments, monitor our supply chain, as well as observe the impact to state revenues and related educational budgets.
2020 Restructuring Plan
On September 4, 2020, we completed a voluntary retirement incentive program, which was offered to all U.S. based employees at least i 55 years of age with at least i five years of service. Of the eligible employees, i 165 elected to participate representing approximately i 5% of our workforce. The majority of the employees voluntarily retired as of September 4, 2020 with select employees leaving later in the year. Each of the employees received separation payments in accordance with our severance policy.
On September 30, 2020, we undertook a restructuring program, including a reduction in force, as part of the ongoing assessment of our cost structure amid the COVID-19 pandemic. The reduction in force resulted in a i 22% reduction in our workforce, including positions eliminated as part of the voluntary retirement incentive program mentioned above, and net of newly created positions to support our digital first operations. The reduction in force resulted in the departure of approximately i 525 employees and was completed in i October 2020. Each of the employees received separation payments in accordance with our severance policy. The total one-time, non-recurring cost incurred in connection with the restructuring program, inclusive of the voluntary retirement incentive program (collectively the “2020 Restructuring Plan”), all of which represents cash expenditures, was approximately $ i 33.6 million.
Forward-looking
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. After reviewing our ability to meet future financial obligations over the next twelve months, including consideration of our actions described above in addition to the divestiture of the HMH Books & Media business, we have concluded our net cash from operations combined with our cash and cash equivalents and borrowing availability under our revolving credit facility provides sufficient liquidity to fund our current obligations, capital spending, debt service requirements and working capital requirements over at least the next twelve months. Our primary credit facilities do not require us to comply with financial maintenance covenants.
Valuation of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets
Subsequent to the sale of the HMH Books & Media segment during the second quarter of 2021, we operate as i one operating segment with i one reportable segment and have only i one reporting unit. No impairment triggering events were identified during the third quarter of 2021. We perform an impairment test to assess the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as of October 1) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis.
During the three months ended March 31, 2020, our stock price declined to historical lows since our 2013 initial public offering. We determined that the significant decline in our market capitalization and broader economic downturn arising from the COVID-19 pandemic was a triggering event. We concluded that quantitative analyses were required to be performed due to the triggering event occurring during the first quarter of 2020.
/
10
Goodwill is allocated entirely to our Education reporting unit. We utilized an implied market value method under the market approach to calculate the fair value of the Education reporting unit as of March 31, 2020, which we determined was the best approximation of fair value of the Education reporting unit in the current social and economic environment. This method included the determination of the Company's overall enterprise value, from which the fair value of the HMH Books & Media reporting unit was deducted to derive the fair value of the Education reporting unit. The relevant inputs and assumptions used in the valuation of the Education reporting unit include our market capitalization, selection of a control premium, and the determination of an appropriate market multiple to value the HMH Books & Media reporting unit, as well as the fair value of individual assets and liabilities. Based on our interim impairment assessment, we concluded that our goodwill was impaired and, accordingly, recorded a goodwill impairment charge in the first quarter of 2020 of $ i 262.0 million. During the fourth quarter of 2020, we recorded an adjustment of $ i 17.0 million and $ i 1.0 million to increase both the goodwill impairment charge and income tax benefit recorded, respectively, to correct an error of the previously recorded goodwill impairment and related income tax benefit.
Additionally, as a result of the triggering event identified in the first quarter of 2020, we performed quantitative impairment analyses over our indefinite-lived intangible assets and long-lived assets. With regards to indefinite-lived intangible assets, which includes the Houghton Mifflin Harcourt tradename, the recoverability was evaluated using a one-step process whereby we determined the fair value by asset and then compared it to its carrying value to determine if the asset was impaired. We estimated the fair value by preparing a relief-from-royalty discounted cash flow analysis using forward looking revenue projections. The significant assumptions used in discounted cash flow analysis included: future net sales, a long-term growth rate, a royalty rate and a discount rate used to present value future cash flows. The discount rate was based on the weighted-average cost of capital method at the date of the evaluation. The fair value of the indefinite-lived intangible assets was in excess of its carrying value by approximately i 12% as of March 31, 2020. We also performed an impairment test on our long-lived assets using an undiscounted cash flow model in determining the fair value, which was then compared to book value of the asset groups evaluated. The long-lived asset impairment analysis was performed over the Education reporting unit and the HMH Books & Media reporting unit. Estimates and significant assumptions included in the long-lived asset impairment analysis included identification of the primary asset in each asset group and undiscounted cash flow projections. We concluded that our indefinite-lived intangible assets and long-lived assets were not impaired based on the results of the quantitative analyses performed.
Due to the HMH Books & Media segment being classified as held for sale as of March 31, 2021, we performed an impairment analysis over the HMH Books & Media long-lived asset group during the first quarter of 2021. As the sale price was in excess of the carrying value of the asset group, i no impairment was identified. Additionally, we considered the impacts of the HMH Books & Media sale and related segment change on our Education reporting unit, to which goodwill and indefinite-lived intangibles are entirely allocated.
i
|
3. |
Significant Accounting Policies and Estimates |
Our financial results are affected by the selection and application of accounting policies and methods. There were no material changes during the three and nine months ended September 30, 2021 to the application of significant accounting policies and estimates as described in our audited consolidated financial statements, which were included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
We evaluate our estimates, judgments and methodologies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenues and expenses. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat it, as well as the economic impact on local, regional, national and international customers and markets. We have made estimates of the impact of the COVID-19 pandemic within our financial statements and there may be changes to those estimates in future periods. Actual results may differ from these estimates.
i i|
4. |
Recent Accounting Standards |
Recent accounting pronouncements, not included below, are not expected to have a material impact on our consolidated financial position or results of operations.
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles, including simplification of areas such as franchise taxes, step-up in tax basis of goodwill, intraperiod allocations, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. We adopted the guidance on January 1, 2021. The adoption of this guidance did not have a material impact on our consolidated financial statements.
/11
In August 2018, the FASB issued new guidance on a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor (i.e., a service contract). Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement to develop or obtain internal use software. Accordingly, the guidance requires a customer to determine the stage of a project that the implementation activity relates to and the nature of the associated costs in order to determine whether those costs should be expensed as incurred or capitalized. The guidance also requires the customer to amortize the capitalized implementation costs as an expense over the term of the hosting arrangement. We adopted the guidance on January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued updated guidance to simplify the test for goodwill impairment by the elimination of Step 2 in the determination on whether goodwill should be considered impaired. The annual assessments are still required to be completed. We adopted the guidance on January 1, 2020.
In June 2016, the FASB issued new guidance that requires credit losses on financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, not based on incurred losses, as well as additional disclosures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. We adopted the guidance on January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements.
We are exposed to credit losses primarily through our accounts receivable. We develop estimates to reflect the risk of credit loss which are based on an evaluation of accounts receivable aging, prior collection experience, current conditions and reasonable and supportable forecasts of the economic conditions that will exist through the contractual life of the financial asset. We write off the asset when it is no longer deemed collectible. We monitor our ongoing credit exposure through an active review of collection trends. Our activities include monitoring the timeliness of payment collection and performing timely account reconciliations. As of September 30, 2021, we reported allowances for doubtful accounts of $ i 3.4 million, compared to $ i 3.8 million at December 31, 2020, reflecting a decrease of $ i 0.4 million for the nine months ended September 30, 2021.
We are also exposed to losses on our royalty advances. Royalty advances to authors are capitalized and represent amounts paid in advance of the sale of an author’s product and are recovered as earned. As advances are recorded, a partial reserve may be recorded immediately based primarily upon historical sales experience. Additionally, advances are evaluated periodically to determine if they are expected to be recovered on a title-by-title basis. Any portion of a royalty advance that is not expected to be recovered is fully reserved. As of September 30, 2021, we reported a reserve for royalty advances of $ i 7.6 million, compared to $ i 7.4 million at December 31, 2020, reflecting an increase of $ i 0.2 million for the nine months ended September 30, 2021.
i|
5. |
Discontinued Operations |
On May 10, 2021, we completed the sale of the HMH Books & Media segment, our consumer publishing business, for cash consideration of $ i 349.0 million, subject to a customary working capital adjustment expected to approximate a payment to the purchaser of $ i 7.8 million, and the purchaser’s assumption of all liabilities relating to the HMH Books & Media business, subject to specified exceptions. Upon closing of the transaction, all HMH Books & Media employees became employees of the purchaser. Net proceeds from the sale after the payment of transaction costs and exclusive of working capital adjustment, were approximately $ i 337.0 million, all of which we used to pay down debt. In connection with the sale of HMH Books & Media, we entered into a Transition Services Agreement (“TSA”) with the purchaser whereby we will perform certain support functions for a period of up to 12 months. Upon the signing of the asset purchase agreement on March 26, 2021, the HMH Books & Media business qualified as a discontinued operation and accordingly, all results of the HMH Books & Media business have been removed from continuing operations for all periods presented. The results of the HMH Books & Media business were previously reported in its own reportable segment. We currently report our revenues and financial results from continuing operations under i one reportable segment.
iSelected financial information of the HMH Books & Media business included in discontinued operations is below. Included within the loss from discontinued operations is interest expense which was allocated to the HMH Books & Media business as we used the proceeds from the sale to pay down debt, which was required by our debt facilities, and we did not reinvest such amounts in the business.
/12
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||
|
|
|
September 30, |
|
|
|
|||||||
|
|
|
|
|
2021 |
|
|
2020 |
|
||||
|
Net sales |
|
$ |
i 55,385 |
|
|
$ |
i 63,047 |
|
|
$ |
i 128,444 |
|
|
Costs |
|
|
i 47,430 |
|
|
|
i 53,205 |
|
|
|
i 115,748 |
|
|
Amortization |
|
|
i 1,786 |
|
|
|
i 1,395 |
|
|
|
i 5,466 |
|
|
Interest expense |
|
|
i 6,857 |
|
|
|
i 9,362 |
|
|
|
i 21,255 |
|
|
Loss from discontinued operations before taxes |
|
$ |
( i 688 |
) |
|
$ |
( i 915 |
) |
|
$ |
( i 14,025 |
) |
|
Income tax (benefit) expense |
|
|
( i 21 |
) |
|
|
i 90 |
|
|
|
i 320 |
|
|
Loss from discontinued operations, net of tax |
|
$ |
( i 667 |
) |
|
$ |
( i 1,005 |
) |
|
$ |
( i 14,345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020, the assets and liabilities of the HMH Books & Media 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 HMH Books & Media business included in assets of discontinued operations and liabilities of discontinued operations are as follows:
|
|
|
|
||
|
|
|
|
||
|
Accounts receivable, net |
|
$ |
i 64,002 |
|
|
Inventories |
|
|
i 21,410 |
|
|
Prepaid expenses and other assets |
|
|
i 655 |
|
|
Property, plant, and equipment, net |
|
|
i 4,401 |
|
|
Pre-publication costs, net |
|
|
i 329 |
|
|
Royalty advances to authors, net |
|
|
i 40,060 |
|
|
Other intangible assets, net |
|
|
i 26,100 |
|
|
Other assets |
|
|
i 3,096 |
|
|
Total assets of discontinued operations |
|
$ |
i 160,053 |
|
|
Accounts payable |
|
|
i 10,353 |
|
|
Royalties payable |
|
|
i 17,628 |
|
|
Salaries and wages payable |
|
|
i 221 |
|
|
Other liabilities |
|
|
i 2,460 |
|
|
Total liabilities of discontinued operations |
|
$ |
i 30,662 |
|
i
|
6. |
Inventories |
Inventories consisted of the following:
|
|
|
|
|
|
||||
|
Finished goods |
|
$ |
i 91,449 |
|
|
$ |
i 134,349 |
|
|
Raw materials |
|
|
i 5,022 |
|
|
|
i 11,204 |
|
|
Inventories |
|
$ |
i 96,471 |
|
|
$ |
i 145,553 |
|
/
i
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). i The following table presents changes in contract assets and contract liabilities during the nine months ended September 30, 2021:
|
|
|
|
|
|
|
$ Change |
|
|
% Change |
|
||||||
|
Contract assets |
|
$ |
i 693 |
|
|
$ |
i 580 |
|
|
$ |
i 113 |
|
|
|
i 19.5 |
% |
|
Contract liabilities (deferred revenue) |
|
$ |
i 1,011,384 |
|
|
$ |
i 905,284 |
|
|
$ |
i 106,100 |
|
|
|
i 11.7 |
% |
/
13
The $ i 106.1 million increase in our contract liabilities from December 31, 2020 to September 30, 2021 was primarily due to higher billings in the period attributed to the growth during the recovery of the COVID-19 pandemic, which materially impacted 2020 along with seasonal and cyclical nature of our business, which exceeded the satisfaction of performance obligations related to physical and digital products, and services during the period.
We capitalize incremental commissions paid to sales representatives for obtaining product sales as well as service contracts unless the capitalization and amortization of such costs are not expected to have a material impact on the financial statements. Applying the practical expedient within the accounting guidance, 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 $ i 37.3 million and $ i 30.7 million at September 30, 2021 and December 31, 2020, respectively, and amortized $ i 13.0 million and $ i 11.0 million during the nine months ended September 30, 2021 and 2020, respectively. The amortization is included in selling and administrative expenses.
Costs to fulfill a contract are directly related to a contract that will be used to satisfy a performance obligation in the future and are expected to be recovered. These costs are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. Our assets associated with incremental costs to fulfill a contract were $ i 22.6 million and $ i 14.7 million at September 30, 2021 and December 31, 2020, respectively, and are included within prepaid expenses and other assets (current) and other assets (long term) on our consolidated balance sheet. The increase in costs to fulfill contracts in the period was primarily due to the mix of product being sold. We recorded amortization of $ i 4.4 million and $ i 2.6 million during the nine months ended September 30, 2021 and 2020, respectively. The amortization is included in cost of sales, excluding publishing rights and pre-publication amortization.
iDuring the three and nine months ended September 30, 2021 and 2020, we recognized the following net sales as a result of changes in the contract assets and contract liabilities balances:
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
|
|||||||||||
|
|
|
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|||||
|
Net sales recognized in the period from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in contract liabilities at the beginning of the period |
|
$ |
i 102,240 |
|
|
$ |
i 81,768 |
|
|
$ |
i 278,505 |
|
|
$ |
i 254,695 |
|
As of September 30, 2021, the aggregate amount of the transaction price allocated to the remaining performance obligations, which includes deferred revenue and open orders (received purchase orders from customers for which we have not yet fulfilled), was $ i 1,062.8 million, and we will recognize approximately i 75% to net sales over the next i 1 to i 3 years.
i
The following table disaggregates our net sales by major source:
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
(in thousands) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
|
Core solutions (1) |
|
$ |
i 234,993 |
|
|
$ |
i 206,659 |
|
|
$ |
i 469,192 |
|
|
$ |
i 391,101 |
|
|
Extensions (2) |
|
|
i 182,137 |
|
|
|
i 124,546 |
|
|
|
i 402,805 |
|
|
|
i 308,186 |
|
|
Net sales |
|
$ |
i 417,130 |
|
|
$ |
i 331,205 |
|
|
$ |
i 871,997 |
|
|
$ |
i 699,287 |
|
(1) Comprehensive solutions primarily for reading, math, science and social studies programs.
(2) Primarily consists of our Heinemann brand, intervention, supplemental, and formative assessment products as well as professional services.
/ i|
8. |
Goodwill and Other Intangible Assets |
There were no changes in the carrying amount of goodwill of $ i i 438.0 / million for the three and nine months ended September 30, 2021. Accumulated impairment losses on goodwill as of September 30, 2021 was $ i 279.0 million. Refer to Note 2 for a discussion of the valuation of goodwill, indefinite-lived intangible assets and long-lived assets.
/14
Other intangible assets consisted of the following:
|
|
|
|
|
|
||||||||||||||||||||
|
|
|
Cost |
|
|
Accumulated Amortization |
|
|
Total |
|
|
Cost |
|
|
Accumulated Amortization |
|
|
Total |
|
||||||
|
Trademarks and tradenames: indefinite-lived |
|
$ |
i 161,000 |
|
|
$ |
— |
|
|
$ |
i 161,000 |
|
|
$ |
i 161,000 |
|
|
$ |
— |
|
|
$ |
i 161,000 |
|
|
Trademarks and tradenames: definite-lived |
|
|
i 130,430 |
|
|
|
( i 59,068 |
) |
|
|
i 71,362 |
|
|
|
i 133,330 |
|
|
|
( i 46,810 |
) |
|
|
i 86,520 |
|
|
Publishing rights |
|
|
i 1,050,000 |
|
|
|
( i 1,038,608 |
) |
|
|
i 11,392 |
|
|
|
i 1,050,000 |
|
|
|
( i 1,030,437 |
) |
|
|
i 19,563 |
|
|
Customer related and other |
|
|
i 445,140 |
|
|
|
( i 318,847 |
) |
|
|
i 126,293 |
|
|
|
i 448,140 |
|
|
|
( i 312,739 |
) |
|
|
i 135,401 |
|
|
Other intangible assets, net |
|
$ |
i 1,786,570 |
|
|
$ |
( i 1,416,523 |
) |
|
$ |
i 370,047 |
|
|
$ |
i 1,792,470 |
|
|
$ |
( i 1,389,986 |
) |
|
$ |
i 402,484 |
|
Amortization expense for definite-lived trademarks and tradenames, publishing rights and customer related and other intangibles were $ i 31.2 million and $ i 28.9 million for the nine months ended September 30, 2021 and 2020, respectively. During the normal course of business, we periodically review the useful lives of our definite-lived assets and adjust the amortization periods if evidence shows a shorter life duration. During the first quarter of 2021, several definite-lived intangible assets were adjusted to shorter amortization periods due to anticipated end of life periods as we streamline our offerings.
On July 8, 2021, we sold the intellectual property, including the copyrights and trademarks, of certain product titles for total cash proceeds of $ i 5.0 million. We had approximately $ i 1.3 million of other intangible assets at the time of sale and we recorded a gain on sale of $ i 3.7 million, net of tax, during the three months ended September 30, 2021.
i|
9. |
Debt |
Our debt consisted of the following:
|
|
|
|
|
|
||||
|
$ i i 380,000 / term loan due i i November 22, 2024 / , interest payable quarterly (net of discount and issuance costs) |
|
$ |
i 20,939 |
|
|
$ |
i 346,091 |
|
|
$ i i 306,000 / senior secured notes due i i February 15, 2025 / , interest payable semi-annually (net of discount and issuance costs) |
|
$ |
i 296,156 |
|
|
$ |
i 297,601 |
|
|
|
|
|
i 317,095 |
|
|
|
i 643,692 |
|
|
Less: Current portion of long-term debt |
|
|
— |
|
|
|
( i 19,000 |
) |
|
Total long-term debt, net of discount and issuance costs |
|
$ |
i 317,095 |
|
|
$ |
i 624,692 |
|
|
Revolving credit facility |
|
$ |
— |
|
|
$ |
— |
|
/
Senior Secured Notes
On November 22, 2019, we completed the sale of $ i 306.0 million in aggregate principal amount of i 9.0% Senior Secured Notes due 2025 (the “notes”) in a private placement to qualified institutional buyers under Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to persons outside the United States pursuant to Regulation S under the Securities Act. The notes mature on i February 15, 2025 and bear interest at a rate of i 9.0% per annum. i Interest is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2020.
The notes were issued at a discount equal to i 2.0% of the outstanding borrowing commitment. We may redeem all or a portion of the notes at redemption prices as described in the notes. We redeemed $ i 2.7 million of the notes during the second quarter of 2021 utilizing proceeds from the sale of the HMH Books & Media business.
The notes do not require us to comply with financial maintenance covenants. We are currently required to meet certain incurrence based financial covenants as defined under our notes. The notes are subject to restrictions on our ability to incur additional indebtedness, issue certain preferred stock, redeem, purchase or retire subordinated debt, make certain investments, pay dividends or other amounts, enter into certain transactions with affiliates, merge or consolidate with another person, sell or otherwise dispose of all or substantially all of our assets, sell certain assets, including capital stock, designate our subsidiaries as unrestricted subsidiaries, redeem or repurchase capital stock or make other restricted payments, and incur certain liens. The notes are 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 notes.
/15
Term Loan Facility
On November 22, 2019, we entered into a second amended and restated term loan credit agreement for an aggregate principal amount of $ i 380.0 million (the “term loan facility”). The term loan facility matures on i November 22, 2024 and the interest rate per annum is equal to, at the option of the Company, either (a) LIBOR plus a margin of i 6.25% or (b) an alternate base rate plus a margin of i 5.25%. As of September 30, 2021, the interest rate on the term loan facility was i 7.25%. We repaid $ i 334.6 million of the term loan facility during the second quarter of 2021 utilizing proceeds from the sale of the HMH Books & Media business. We were required to repay debt under the term loan facility as we did not intend to reinvest the proceeds from the sale in the business. There are i no future quarterly repayment installments required and the balance is payable on the maturity date. In connection with the repayment, we recorded a loss on extinguishment of debt totaling $ i 12.5 million relating to the pro rata write-off of a portion of the unamortized deferred financing costs and discount.
On July 27, 2017, the U.K. Financial Conduct Authority (the “FCA”) announced that it will no longer require banks to submit rates for the calculation of LIBOR after 2021. Our term loan facility provides that the administrative agent may determine that (i) adequate and reasonable means do not exist for ascertaining the LIBOR rate or (ii) the FCA or the government authority having jurisdiction over the administrative agent has made a public statement identifying a specific date after which the LIBOR rate shall no longer be used for determining interest rates for loans. If the administrative agent determines that (i) or (ii) above is unlikely to be temporary then the administrative agent and the Company will agree to transition to an alternate base rate or amend the term loan facility to establish an alternate rate of interest to LIBOR that gives due consideration to the then-prevailing market convention for determining a rate of interest for syndicated loans in the United States at such time.
The term loan facility was issued at a discount equal to i 4.0% of the outstanding borrowing commitment.
The term loan facility contains customary mandatory prepayment requirements, including with respect to excess cash flow, proceeds from certain asset sales or dispositions of property, and proceeds from certain incurrences of indebtedness. The term loan facility permits the Company to voluntarily prepay outstanding amounts at any time without premium or penalty, other than customary breakage costs with respect to LIBOR loans.
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.
Interest Rate Hedging
On August 17, 2015, we entered into interest rate derivative contracts with various financial institutions having an aggregate notional amount of $ i 400.0 million to convert floating rate debt into fixed rate debt. 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. The interest rate derivative contracts matured on i July 22, 2020.
These interest rate swaps were designated as cash flow hedges and qualified for hedge accounting under the accounting guidance related to derivatives and hedging. Accordingly, we recorded an unrealized gain of $ i 1.0 million in our statements of comprehensive loss to account for the changes in fair value of these derivatives during the nine months ended September 30, 2020. We reclassified $ i 1.9 million from other comprehensive loss to earnings during the nine months ended September 30, 2020.
We had i no interest rate derivative contracts outstanding as of September 30, 2021.
Revolving Credit Facility
On November 22, 2019, we entered into a second amended and restated revolving credit agreement that provides borrowing availability in an amount equal to the lesser of either $ i 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”). The revolving credit facility includes a letter of credit subfacility of $ i 50.0 million, a swingline subfacility of $ i 20.0 million and the option to expand the facility by up to $ i 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.
16
The revolving credit facility requires the Company to maintain a minimum fixed charge coverage ratio of i 1.0 to i 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. 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 revolving credit facility. As of September 30, 2021, i no amounts were outstanding under the revolving credit facility.
i As of September 30, 2021, 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 each of the notes, the term loan facility and the revolving credit facility, Houghton Mifflin Harcourt Publishers Inc., Houghton Mifflin Harcourt Publishing Company and HMH Publishers LLC are the borrowers (collectively, the “Borrowers”), and Citibank, N.A. acts as both the administrative agent and the collateral agent.
The obligations under the notes, the term loan facility and the revolving credit 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.
i
|
10. |
Restructuring, Severance and Other Charges |
2021
During the nine months ended September 30, 2021, we recorded an impairment in the amount of $ i 10.9 million for real estate consolidation costs relating to vacated office space for certain floors in connection with the sale of our HMH Books & Media business, of which $ i 9.3 million is reflected as a reduction in operating lease assets and $ i 1.6 million as a reduction in property, plant, and equipment in our consolidated balance sheet as of September 30, 2021.
2020 Restructuring Plan
On September 4, 2020, we finalized a voluntary retirement incentive program, which was offered to all U.S. based employees at least i 55 years of age with at least i five years of service. Of the eligible employees, i 165 elected to participate representing approximately i 5% of our workforce. The majority of the employees voluntarily retired as of September 4, 2020 with select employees leaving later in the year. Each of the employees received separation payments in accordance with our severance policy.
On September 30, 2020, we undertook a restructuring program, including a reduction in force, as part of the ongoing assessment of our cost structure amid the COVID-19 pandemic and in line with our strategic transformation plan. The reduction in force resulted in a i 22% reduction in our workforce, including positions eliminated as part of the voluntary retirement incentive program mentioned above, and net of newly created positions to support our digital first operations. The reduction in force resulted in the departure of approximately i 525 employees and was completed in i October 2020. Each of the employees received separation payments in accordance with our severance policy. The total one-time, non-recurring cost incurred in connection with the restructuring program, inclusive of the voluntary retirement incentive program, (collectively the “2020 Restructuring Plan”) all of which represented cash expenditures, was approximately $ i 33.6 million.
/17
There was a favorable adjustment to severance costs associated with the 2020 Restructuring Plan in our consolidated statements of operations for the nine months ended September 30, 2021. There were i i no / costs associated with the 2020 Restructuring Plan in our consolidated statements of operations for the three and nine months ended September 30, 2020. Our restructuring liabilities are comprised of accruals for severance and termination benefits. i The following is a rollforward of our liabilities associated with the 2020 Restructuring Plan:
|
|
|
2021 |
|
|||||||||||||
|
|
|
Restructuring |
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
||
|
|
|
accruals at |
|
|
|
|
|
|
|
|
|
|
accruals at |
|
||
|
|
|
December 31, |
|
|
|
|
|
|
Cash |
|
|
|
||||
|
|
|
|
|
Charges |
|
|
payments |
|
|
2021 |
|
|||||
|
Severance and termination benefits |
|
$ |
i 19,311 |
|
|
$ |
( i 1,020) |
|
|
$ |
( i 17,008) |
|
|
$ |
i 1,283 |
|
|
|
|
$ |
19,311 |
|
|
$ |
(1,020) |
|
|
$ |
(17,008) |
|
|
$ |
1,283 |
|
2019 Restructuring Plan
There were i i i i no / / / costs associated with the 2019 Restructuring Plan in our consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020. Our restructuring liabilities are comprised of accruals for severance and termination benefits. i The following is a rollforward of our liabilities associated with the 2019 Restructuring Plan:
|
|
|
2021 |
|
||||||||||||||
|
|
|
Restructuring accruals at |
|
|
|
Charges |
|
|
Cash payments |
|
|
Restructuring accruals at |
|
||||
|
Severance and termination benefits |
|
$ |
i 279 |
|
|
|
$ |
— |
|
|
$ |
( i 279 |
) |
|
$ |
— |
|
|
|
|
$ |
279 |
|
|
|
$ |
— |
|
|
$ |
(279 |
) |
|
$ |
— |
|
i
|
11. |
Income Taxes |
The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment, including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained or as the tax environment changes.
At the end of each interim period, we estimate the annual effective tax rate and apply that rate to our ordinary quarterly earnings. The amount of interim tax benefit recorded for the year-to-date ordinary loss is limited to the amount that is expected to be realized during the year or recognizable as a deferred tax asset at year end. The tax expense or benefit related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect, are individually computed, and are recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.
For the three months ended September 30, 2021 and 2020, we recorded an income tax benefit for continuing operations of approximately $ i 6.2 million and $ i 1.1 million, respectively, and for the nine months ended September 30, 2021 and 2020, we recorded an income tax benefit for continuing operations of approximately $ i 3.9 million and $ i 11.2 million, respectively. For all periods, income tax expense was primarily attributed to movement in the deferred tax liability associated with tax amortization on indefinite-lived intangibles, state and foreign taxes, as well as the impact of certain discrete tax items, including the accrual of potential interest and penalties on uncertain tax positions. Including the tax effects of these discrete tax items, the effective rate was ( i 6.9)% and i 8.2% for the three months ended September 30, 2021 and 2020, respectively, and ( i 8.7)% and i 2.8% for the nine months ended September 30, 2021 and 2020, respectively.
Reserves for unrecognized tax benefits, excluding accrued interest and penalties, were $ i i 15.7 / million at both September 30, 2021 and December 31, 2020.
/ i|
12. |
Retirement and Postretirement Benefit Plans |
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 Plan’s 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
18
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 recognize actuarial gains and losses and prior service costs and credits in other comprehensive income (loss) and subsequently amortize those items in the statement of operations. Due to lump-sum disbursements by participants during the nine months ended September 30, 2021, we incurred a settlement charge of $ i 1.0 million. In connection with this settlement charge, we remeasured our pension liability and recorded a $ i 9.2 million benefit through other comprehensive income primarily due to changes in discount rates, disbursements and increases in market value of pension assets.
iNet periodic benefit cost (credit) for our pension and other postretirement benefit plans consisted of the following:
|
|
|
Pension Plans |
|
|||||||||||||
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|||||
|
Interest cost |
|
$ |
i 743 |
|
|
$ |
i 1,097 |
|
|
$ |
i 2,239 |
|
|
$ |
i 3,291 |
|
|
Expected return on plan assets |
|
|
( i 1,863 |
) |
|
|
( i 1,855 |
) |
|
|
( i 5,617 |
) |
|
|
( i 5,565 |
) |
|
Amortization of net loss |
|
|
i 662 |
|
|
|
i 581 |
|
|
|
i 2,107 |
|
|
|
i 1,743 |
|
|
Settlement loss recognized |
|
|
i 165 |
|
|
|
— |
|
|
|
i 1,046 |
|
|
|
— |
|
|
Net periodic benefit credit |
|
$ |
( i 293 |
) |
|
$ |
( i 177 |
) |
|
$ |
( i 225 |
) |
|
$ |
( i 531 |
) |
|
|
|
Other Post Retirement Plans |
|
|||||||||||||
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|||||
|
Service cost |
|
$ |
i 19 |
|
|
$ |
i 17 |
|
|
$ |
i 57 |
|
|
$ |
i 51 |
|
|
Interest cost |
|
|
i 68 |
|
|
|
i 107 |
|
|
|
i 204 |
|
|
|
i 321 |
|
|
Amortization of prior service cost |
|
|
i 11 |
|
|
|
i 11 |
|
|
|
i 33 |
|
|
|
i 33 |
|
|
Amortization of net loss |
|
|
— |
|
|
|
( i 2 |
) |
|
|
— |
|
|
|
( i 6 |
) |
|
Net periodic benefit cost |
|
$ |
i 98 |
|
|
$ |
i 133 |
|
|
$ |
i 294 |
|
|
$ |
i 399 |
|
There were $ i 1.1 million and $ i 3.7 million in contributions to the Retirement Plan during the nine months ended September 30, 2021 and 2020, respectively.
i
|
13. |
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). |
19
On a recurring basis, we measure certain financial assets and liabilities at fair value, including our money market funds and foreign exchange forward 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
iThe following tables present our financial assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Valuation Technique |
||||
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
i 397,938 |
|
|
$ |
i 397,938 |
|
|
$ |
— |
|
|
(a) |
|
|
|
$ |
i 397,938 |
|
|
$ |
i 397,938 |
|
|
$ |
— |
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivatives |
|
$ |
i 537 |
|
|
$ |
— |
|
|
$ |
i 537 |
|
|
(a) |
|
|
|
$ |
i 537 |
|
|
$ |
— |
|
|
$ |
i 537 |
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1) |
|
|
Significant Other Observable Inputs (Level 2) |
|
|
Valuation Technique |
||||
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
i 262,135 |
|
|
$ |
i 262,135 |
|
|
$ |
— |
|
|
(a) |
|
Foreign exchange derivatives |
|
|
i 466 |
|
|
|
— |
|
|
|
i 466 |
|
|
(a) |
|
|
|
$ |
i 262,601 |
|
|
$ |
i 262,135 |
|
|
$ |
i 466 |
|
|
|
Our money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices in active markets for identical instruments. In addition to $ i 397.9 million and $ i 262.1 million invested in money market funds as of September 30, 2021 and December 31, 2020, respectively, we had $ i 22.4 million and $ i 19.1 million of cash invested in bank accounts as of September 30, 2021 and December 31, 2020, 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 $ i 14.7 million and $ i 14.9 million at September 30, 2021 and December 31, 2020, 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 September 30, 2021 and December 31, 2020, the fair value of our counterparty default exposure was less than $ i i 1.0 / million and spread across several highly rated counterparties.
Non-Financial Assets and Liabilities
Our non-financial assets, which include goodwill, other intangible assets, property, plant, and equipment, pre-publication costs and operating lease assets, 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. An impairment analysis was performed for the preparation of the 2020 first quarter report, as there was a triggering event for the three months ended March 31, 2020 related to the decline in our stock price attributed to the market environment, which resulted in a goodwill impairment. There were i i no / non-financial liabilities that were required to be measured at fair value on a nonrecurring basis during the nine months ended September 30, 2021 and 2020.
i20
The following table presents our non-financial assets measured at fair value on a nonrecurring basis during 2020:
|
|
|
|
|
Significant Unobservable (Level 3) |
|
|
Total Impairment |
|
|
Valuation Technique |
|
|||||
|
Non-financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
i 454,977 |
|
|
$ |
i 454,977 |
|
|
$ |
i 262,000 |
|
|
|
(a) |
|
|
|
|
$ |
i 454,977 |
|
|
$ |
i 454,977 |
|
|
$ |
i 262,000 |
|
|
|
|
|
In evaluating goodwill for impairment, we first compare our reporting unit's fair value to its carrying value. We estimate the fair values of our reporting unit by considering our market capitalization and other judgments. There was i no goodwill impairment recorded for the nine months ended September 30, 2021. Impairment recorded for goodwill for the nine months ended September 30, 2020 was $ i 262.0 million. During the fourth quarter of 2020, we recorded an adjustment of $ i 17.0 million to increase the goodwill impairment charge to correct an error of the previously recorded amount.
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 i i no / impairment of other intangible assets for the nine months ended September 30, 2021 and 2020.
We test our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable or that it may exceed its fair value. During the nine months ended September 30, 2021, we recorded an impairment of our operating lease assets in the amount of $ i 9.3 million for real estate consolidation costs relating to vacated office space formerly utilized by employees of the HMH Books & Media business. The fair value of the operating lease assets was determined based on the income approach, with level 3 inputs utilizing certain market participant assumptions. These inputs included forecasted cash inflows from estimated subleases and a discount rate. The remaining carrying value was $ i 2.0 million. In connection with the real estate consolidation costs, we also recorded an impairment of property, plant, and equipment, of $ i 1.6 million during the nine months ended September 30, 2021 using the income approach with level 3 inputs. This was primarily related to leasehold improvements on the vacated office space, which had a remaining carrying value of $ i 0.3 million.
Non-Marketable Investments
At September 30, 2021 and December 31, 2020, the carrying value of our non-marketable investments, which were comprised of equity interests in educational technology private partnerships, was $ i 5.8 million and $ i 4.4 million, respectively. The amounts are included in other assets in our consolidated balance sheets. Our non-marketable investments are accounted for using the cost method and are adjusted for observable transactions as appropriate. Gains from non-marketable investments were $ i 0.6 million and $ i 1.4 million during the three and nine months ended September 30, 2021, respectively. Gains from non-marketable investments were $ i i 1.7 / million during both the three and nine months ended September 30, 2020.
Fair Value of Debt
iThe following table presents the carrying amounts and estimated fair market values of our debt at September 30, 2021 and December 31, 2020. 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.
|
|
|
|
|
|
||||||||||||
|
|
|
Carrying Amount |
|
|
Estimated Fair Value |
|
|
Carrying Amount |
|
|
Estimated Fair Value |
|
||||
|
Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$380,000 Term loan |
|
$ |
i 20,939 |
|
|
$ |
i 20,913 |
|
|
$ |
i 346,091 |
|
|
$ |
i 331,382 |
|
|
$306,000 Senior secured notes |
|
$ |
i 296,156 |
|
|
$ |
i 316,147 |
|
|
$ |
i 297,601 |
|
|
$ |
i 304,297 |
|
/
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 September 30, 2021 and December 31, 2020. 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.
i|
14. |
Commitments and Contingencies |
There were no material changes in our commitments under contractual obligations, as disclosed in our audited consolidated financial statements, which were included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
21
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. There 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.
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 April 2019, we were notified of an unasserted claim by the Commonwealth of Puerto Rico with regards to payments that we received in the normal course of business during the four year period prior to the May 3, 2017 bankruptcy petition of the Commonwealth public instrumentalities. Management believes, based on discussions with its legal counsel, that we have meritorious defenses against such an unasserted claim. The Company will vigorously defend this matter if such claim is asserted.
In September 2019, we were notified of an unasserted claim by Riverside Assessments LLC (“Riverside”) with regard to purported breaches of the Asset Purchase Agreement between the Company and Riverside dated September 12, 2018 (“APA”) and the Transition Services Agreement between the Company and Riverside dated October 1, 2018. Management believes, based on discussions with its legal counsel, that we have meritorious defenses against such unasserted claim. With regard to the alleged breaches of the APA, the APA provides that the Company may be liable only for that portion of Riverside’s damages that exceeds $ i 1.4 million, and in an amount that shall not exceed $ i 1.4 million, which we believe would be the maximum exposure. For damages above $ i 2.8 million, Riverside obtained a representation and warranty insurance policy as required by the APA. The Company will vigorously defend this matter if such claim is asserted.
We were contingently liable for $ i 0.9 million and $ i 1.4 million of performance-related surety bonds for our operating activities as of September 30, 2021 and December 31, 2020, respectively. An aggregate of $ i 16.1 million and $ i 18.8 million of letters of credit existed at September 30, 2021 and December 31, 2020, respectively, of which $ i i 1.1 / million backed the aforementioned performance-related surety bonds as of September 30, 2021 and December 31, 2020. 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 i i no / liabilities recorded for them as of September 30, 2021 and December 31, 2020
22
i
|
15. |
Net Income (Loss) Per Share |
The following table sets forth the computation of basic and diluted earnings per share (“EPS”):
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|||||
|
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
i 95,359 |
|
|
$ |
( i 11,885 |
) |
|
$ |
i 48,489 |
|
|
$ |
( i 382,348 |
) |
|
(Loss) income from discontinued operations, net of tax |
|
|
— |
|
|
|
( i 667 |
) |
|
|
i 213,515 |
|
|
|
( i 14,345 |
) |
|
Net income (loss) attributable to common stockholders |
|
$ |
i 95,359 |
|
|
$ |
( i 12,552 |
) |
|
$ |
i 262,004 |
|
|
$ |
( i 396,693 |
) |
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
i 127,674,513 |
|
|
|
i 125,799,018 |
|
|
|
i 127,220,429 |
|
|
|
i 125,317,284 |
|
|
Diluted |
|
|
i 131,652,417 |
|
|
|
i 125,799,018 |
|
|
|
i 130,667,785 |
|
|
|
i 125,317,284 |
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
i 0.75 |
|
|
$ |
( i 0.09 |
) |
|
$ |
i 0.38 |
|
|
$ |
( i 3.05 |
) |
|
Discontinued operations |
|
|
— |
|
|
|
( i 0.01 |
) |
|
|
i 1.68 |
|
|
|
( i 0.12 |
) |
|
Net income (loss) |
|
$ |
i 0.75 |
|
|
$ |
( i 0.10 |
) |
|
$ |
i 2.06 |
|
|
$ |
( i 3.17 |
) |
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
i 0.72 |
|
|
$ |
( i 0.09 |
) |
|
$ |
i 0.37 |
|
|
$ |
( i 3.05 |
) |
|
Discontinued operations |
|
|
— |
|
|
|
( i 0.01 |
) |
|
|
i 1.64 |
|
|
|
( i 0.12 |
) |
|
Net income (loss) |
|
$ |
i 0.72 |
|
|
$ |
( i 0.10 |
) |
|
$ |
i 2.01 |
|
|
$ |
( i 3.17 |
) |
As we incurred a net loss in the three and nine months ended September 30, 2020 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 diluted weighted average shares outstanding. Accordingly, basic and diluted weighted average shares outstanding are equal for such periods.
iThe 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:
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended |
|
|||||||||
|
|
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|||||
|
Stock options |
|
|
i 1,096,060 |
|
|
i 1,947,212 |
|
|
|
i 1,719,849 |
|
|
|
i 1,947,212 |
|
|
Restricted stock units |
|
|
i 2,492 |
|
|
i 5,060,063 |
|
|
|
i 840 |
|
|
|
i 4,013,767 |
|
/
23
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. See “Special Note Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are a learning technology company committed to delivering connected solutions that engage learners, empower educators and improve student outcomes. As a leading provider of K–12 core curriculum, supplemental and intervention solutions, and professional learning services, we partner with educators and school districts to uncover solutions that unlock students’ potential and extend teachers’ capabilities. We estimate that we serve more than 50 million students and three million educators in 150 countries.
Recent Developments
HMH Books & Media Consumer Publishing Business and Discontinued Operations
On May 10, 2021, we completed the sale of our HMH Books & Media segment, our consumer publishing business, for cash consideration of $349.0 million, subject to a customary working capital adjustment expected to approximate a payment to the purchaser of $7.8 million, and the purchaser’s assumption of all liabilities relating to the HMH Books & Media business subject to specified exceptions (collectively, the “Transaction”). Total net cash proceeds after the payment of transaction costs and exclusive of future working capital adjustment, were approximately $337.0 million, which we used to pay down debt. The divestiture enables HMH to focus singularly on K–12 education and accelerate growth momentum in digital sales, annual recurring revenue and free cash flow while paying down a significant portion of our debt. As part of the agreement, all HMH Books & Media business employees joined the acquiring company.
Upon entering into the asset purchase agreement on March 26, 2021, the HMH Books & Media business was classified as a Discontinued Operation due to its relative size and strategic rationale, and accordingly, all results of the HMH Books & Media business have been removed from continuing operations for all periods presented, including from discussions of total net sales and other results of operations. Included within the nine months ended September 30, 2021 discontinued operations financial results is allocated interest expense of $9.4 million, and included within the three and nine months ended September 30, 2020 discontinued operations financials results is allocated interest expense of $6.9 million and $21.4 million, respectively, based on our required repayment of the Company’s debt with the net proceeds from the sale. On the balance sheet, all assets and liabilities that transferred to the acquirer have been classified as Assets of discontinued operations or Liabilities of discontinued operations. The results of the HMH Books & Media business were previously reported in its own reportable segment. We currently report our revenues and financial results from continuing operations under one reportable segment.
Unless otherwise indicated, all financial information refers to continuing operations.
COVID-19
Prior to the spread of COVID-19 in the United States, we experienced net sales results consistent with our historical first quarters. As we proceeded through the first quarter of 2020 and the impact of the COVID-19 pandemic progressed, schools began to close in response to federal, state and local social distancing directives resulting in a decline in net sales and sales orders in the second half of March 2020. We implemented a number of measures intended to help protect our shareholders, employees, and customers amid the COVID-19 pandemic. We also took actions to help mitigate some of the adverse impact of COVID-19 to our profitability and cash flow including, but not limited to, furloughs, salary reductions, spending freezes, and proactive outreach to schools to support them through this period of disruption with virtual learning resources.
Given the ongoing COVID-19 situation, our business continues to be impacted during 2021.
2020 Restructuring Plan
We revised our cost structure amid the COVID-19 pandemic to further align our cost structure to our net sales and long-term strategy. As part of this effort, on September 4, 2020, we finalized a voluntary retirement incentive program, which was offered to all U.S. based employees at least 55 years of age with at least five years of service. Of the eligible employees, 165 elected to participate representing approximately 5% of our workforce. The majority of the employees voluntarily retired as of September 4, 2020 with select employees leaving later in the year. Each of the employees received separation payments in accordance with our severance policy.
24
On September 30, 2020, our Board of Directors committed to a restructuring program, including a reduction in force, as part of the ongoing assessment of our cost structure amid the COVID-19 pandemic. The reduction in force resulted in a 22% reduction in our workforce, including positions eliminated as part of the voluntary retirement incentive program mentioned above, and net of newly created positions to support our digital first operations. The reduction in force resulted in the departure of approximately 525 employees and was completed in October 2020. Each of the employees received separation payments in accordance with our severance policy. The total one-time, non-recurring cost incurred in connection with the 2020 restructuring program, inclusive of the voluntary retirement incentive program (collectively the “2020 Restructuring Plan”), all of which represented cash expenditures, was approximately $33.6 million. These actions are to streamline the cost structure of the Company.
Key Aspects and Trends of Our Operations
Net Sales
We derive revenue primarily from the sale of print and digital content and instructional materials, multimedia instructional programs, software and services, consulting and training. We primarily sell to customers in the United States. Our net sales are driven primarily as a function of volume and, to a certain extent, changes in price. Our net sales consist of our invoices for products and services, less revenue that will be deferred until future recognition, along with the transaction price allocation adjusted to reflect the estimated returns for the arrangement. Deferred revenues primarily derive from online interactive digital content, digital and online learning components along with undelivered work-texts, workbooks and services. The work-texts, workbooks and services are deferred until control is transferred to the customer, which often extends over the life of the contract, and our hosted online and digital content is typically recognized ratably over the life of the contract. The digitalization of education content and delivery is driving a shift in the education market. As the K-12 educational market transitions to purchasing more digital, personalized education solutions, we believe our ability now or in the future to offer embedded assessments, adaptive learning, real-time interaction and student specific personalization of educational content in a platform- and device-agnostic manner will provide new opportunities for growth. An increasing number of schools are utilizing digital content in their classrooms and implementing online or blended learning environments, which is altering the historical mix of print and digital educational materials in the classroom. As a result, our business model includes integrated solutions comprised of both print and digital offerings/products to address the needs of the education marketplace. The level of revenues being deferred can fluctuate depending upon the mix of product offering between digital and non-digital products, the length of programs and the mix of product delivered immediately or over time.
Core curriculum programs, which historically represent the most significant portion of our net sales, cover curriculum standards in a particular K-12 academic subject and include a comprehensive offering of teacher and student materials required to conduct the class throughout the school year. Products and services in these programs include print and digital offerings for students and a variety of supporting materials such as teacher’s editions, formative assessments, supplemental materials, whole group instruction materials, practice aids, educational games and professional services. The process through which materials and curricula are selected and procured for classroom use varies throughout the United States. Currently, 19 states, known as adoption states, review and approve new programs usually every six to eight years on a state-wide basis. School districts in those states typically select and purchase materials from the state-approved list. The remaining states are known as open states or open territory states. In those states, materials are not reviewed at the state level, and each individual school or school district is free to procure materials at any time, although most follow a five-to-ten year replacement cycle. The student population in adoption states represents approximately 50% of the U.S. elementary and secondary school-age population. Some adoption states provide “categorical funding” for instructional materials, which means that those state funds cannot be used for any other purpose. Our core curriculum programs typically have higher deferred sales than other parts of the business. The higher deferred sales are primarily due to the length of time that our programs are being delivered, along with greater component and digital product offerings. A significant portion of our net sales is dependent upon our ability to maintain residual sales, which are subsequent sales after the year of the original adoption, and our ability to continue to generate new business by developing new programs that meet our customers’ evolving needs. In addition, our market is affected by changes in state curriculum standards, which drive instruction, assessment and accountability in each state. Changes in state curriculum standards require that instructional materials be revised or replaced to align to the new standards, which historically has driven demand for core curriculum programs.
We also derive net sales from supplemental and intervention products that target struggling learners through comprehensive intervention solutions aimed at raising student achievement by providing solutions that combine technology, content and other educational products, as well as consulting and professional development services. We also offer products targeted at assisting English language learners.
Further, we also derive net sales from the delivery of services to K-12 educators and administrators to build instructional excellence, cultivate leadership and provide school districts with the comprehensive support they need to raise student achievement. These offerings include ongoing curriculum support and expertise in professional development, coaching, and strategic consulting.
25
In international markets, we predominantly export and sell K-12 books to premium private schools that utilize the U.S. curriculum, which are located primarily in Asia, the Pacific, the Middle East, Latin America, the Caribbean and Africa. Our international sales team utilizes a global network of distributors in local markets around the world.
Factors affecting our net sales include:
|
|
• |
general economic conditions at the federal and state level; |
|
|
• |
state and school district per student funding levels; |
|
|
• |
federal funding levels; |
|
|
• |
the cyclicality of the purchasing schedule for adoption states; |
|
|
• |
student enrollments; |
|
|
• |
adoption of new academic standards; |
|
|
• |
state acceptance of submitted programs and participation rates for accepted programs; |
|
|
• |
technological advancement and the introduction of new content and products that meet the needs of students, teachers and consumers, including through strategic agreements pertaining to content development and distribution; and |
|
|
• |
the amount of net sales subject to deferrals which is impacted by the mix of product offering between digital and non-digital products, the length of programs and the mix of product delivered immediately or over time. |
State and district per-student funding levels, which closely correlate with state and local receipts from income, sales and property taxes, impact our sales as institutional customers are affected by funding cycles. Most public school districts, the primary customers for K-12 products and services, are largely dependent on state and local funding to purchase materials.
We monitor the purchasing cycles for specific disciplines in the adoption states in order to manage our product development and to plan sales campaigns. Our sales may be materially impacted during the years that major adoption states, such as Florida, California and Texas, are or are not scheduled to make significant purchases. For example, Texas adopted Reading/English Language Arts materials in 2018 for purchase in 2019 and 2020. California adopted history and social science materials in 2017 for purchase in 2018 and 2020 and adopted Science materials in 2018 for purchase in 2019 and continuing through 2021. Florida called for K-12 English Language Arts materials in 2020 for purchase beginning in 2021 and has called for K-12 Mathematics for review in 2021 and purchase beginning in 2022. Both Florida and Texas, along with several other adoption states, provide dedicated state funding for instructional materials and classroom technology, with funding typically appropriated by the legislature in the first half of the year in which materials are to be purchased. Texas has a two-year budget cycle, and in the 2021 legislative session appropriated funds for purchases in 2021 and 2022. California funds instructional materials in part with a dedicated portion of state lottery proceeds and in part out of general formula funds, with the minimum overall level of school funding determined according to the Proposition 98 funding guarantee. There is no guarantee that our programs will be approved for purchase in future instructional materials adoptions in these states.
Long-term growth in the U.S. K-12 market is positively correlated with student enrollments, which is a driver of growth in the educational publishing industry. Although economic cycles may affect short-term buying patterns, school enrollments are highly predictable and are expected to trend upward over the longer term. From 2018 to 2028, total public school enrollment, a major long-term driver of growth in the K-12 Education market, is projected to increase by 1.4% to 57.4 million students, according to the National Center for Education Statistics.
As the K-12 educational market purchases more digital solutions, we believe our ability to offer embedded assessments, adaptive learning, real-time interaction and student specific personalized learning and educational content in a platform- and device-agnostic manner will provide new opportunities for growth.
We employ different pricing models to serve various customer segments, including institutions, government agencies, consumers and other third parties. In addition to traditional pricing models where a customer receives a product in return for a payment at the time of product receipt, we currently use the following pricing models:
|
|
• |
Pay-up-front: Customer makes a fixed payment at time of purchase and we provide a specific product/service in return; and |
|
|
• |
Pre-pay Subscription: Customer makes a one-time payment at time of purchase, but receives a stream of goods/services over a defined time horizon; for example, we currently provide customers the option to purchase a multi-year subscription to textbooks where for a one-time charge, a new copy of the work text is delivered to the customer each year for a defined time period. Pre-pay subscriptions to online textbooks are another example where the customer receives access to an online book for a specific period of time. |
26
Cost of sales, excluding publishing rights and pre-publication amortization
Cost of sales, excluding publishing rights and pre-publication amortization, include expenses directly attributable to the production of our products and services, including the non-capitalizable costs associated with our content and platform development group. The expenses within cost of sales include variable costs such as paper, printing and binding costs of our print materials, royalty expenses paid to our authors, gratis costs or products provided at no charge as part of the sales transaction, and inventory obsolescence. Also included in cost of sales are labor costs related to professional services and the non-capitalized costs associated with our content and platform development group. We also include amortization expense associated with our customer-facing software platforms. Certain products carry higher royalty costs; conversely, digital offerings usually have a lower cost of sales due to lower costs associated with their production. Also, sales to adoption states usually contain higher cost of sales. A change in the sales mix of our products or services can impact consolidated profitability.
Publishing rights and Pre-publication amortization
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. As part of our March 9, 2010 restructuring, we recorded an intangible asset for publishing rights and amortize such asset on an accelerated basis over the useful lives of the various copyrights involved. This amortization will continue to decrease approximately 25% annually through March of 2023.
We capitalize the art, prepress, manuscript and other costs incurred in the creation of the master copy of our content, known as 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 asset’s 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). We utilize this policy for all pre-publication costs, except the content of certain intervention products acquired in 2015, which we amortize over 7 years using an accelerated amortization method. The amortization methods and periods chosen best reflect 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.
Selling and administrative expenses
Our selling and administrative expenses include the salaries, benefits and related costs of employees engaged in sales and marketing, fulfillment and administrative functions. Also included within selling and administrative expenses are variable costs such as commission expense, outbound transportation costs (approximately $22.8 million for the nine months ended September 30, 2021) and depository fees, which are fees paid to state-mandated depositories that fulfill centralized ordering and warehousing functions for specific states. Additionally, significant fixed and discretionary costs include facilities, telecommunications, professional fees, promotions, sampling and advertising, along with depreciation.
Other intangible assets amortization
Our other intangible assets amortization expense primarily includes the amortization of acquired intangible assets consisting of tradenames, customer relationships, content rights and licenses. The tradenames, customer relationships, content rights and licenses are amortized over varying periods of 5 to 25 years. The expense for the nine months ended September 30, 2021 was $23.0 million.
Interest expense
Our interest expense includes interest accrued on the outstanding balances of our $306.0 million in aggregate principal amount of 9.0% Senior Secured Notes due 2025 (“notes”), our $380.0 million term loan credit facility (“term loan facility”) and, to a lesser extent, our revolving credit facility, finance leases, the amortization of any deferred financing fees and loan discounts, and payments in connection with interest rate hedging agreements. Our interest expense for the nine months ended September 30, 2021 was $26.8 million.
27
Results of Operations
Consolidated Operating Results for the Three Months Ended September 30, 2021 and 2020
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|||||
|
(dollars in thousands) |
|
2021 |
|
|
2020 |
|
|
Dollar Change |
|
|
Percent Change |
|
||||
|
Net sales |
|
$ |
417,130 |
|
|
$ |
331,205 |
|
|
$ |
85,925 |
|
|
|
25.9 |
% |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding publishing rights and pre-publication amortization |
|
|
152,893 |
|
|
|
146,155 |
|
|
|
6,738 |
|
|
|
4.6 |
% |
|
Publishing rights amortization |
|
|
2,516 |
|
|
|
3,469 |
|
|
|
(953 |
) |
|
|
(27.5 |
)% |
|
Pre-publication amortization |
|
|
27,620 |
|
|
|
31,570 |
|
|
|
(3,950 |
) |
|
|
(12.5 |
)% |
|
Cost of sales |
|
|
183,029 |
|
|
|
181,194 |
|
|
|
1,835 |
|
|
|
1.0 |
% |
|
Selling and administrative |
|
|
134,951 |
|
|
|
118,275 |
|
|
|
16,676 |
|
|
|
14.1 |
% |
|
Other intangible assets amortization |
|
|
7,241 |
|
|
|
5,857 |
|
|
|
1,384 |
|
|
|
23.6 |
% |
|
Restructuring/severance and other charges |
|
|
33 |
|
|
|
31,776 |
|
|
|
(31,743 |
) |
|
NM |
|
|
|
Gain on sale of assets |
|
|
(3,661 |
) |
|
|
— |
|
|
|
(3,661 |
) |
|
NM |
|
|
|
Operating income (loss) |
|
|
95,537 |
|
|
|
(5,897 |
) |
|
|
101,434 |
|
|
NM |
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefits non-service income |
|
|
214 |
|
|
|
61 |
|
|
|
153 |
|
|
NM |
|
|
|
Interest expense |
|
|
(8,239 |
) |
|
|
(9,311 |
) |
|
|
1,072 |
|
|
|
11.5 |
% |
|
Interest income |
|
|
18 |
|
|
|
32 |
|
|
|
(14 |
) |
|
|
(43.8 |
)% |
|
Change in fair value of derivative instruments |
|
|
(368 |
) |
|
|
432 |
|
|
|
(800 |
) |
|
NM |
|
|
|
Gain on investments |
|
|
606 |
|
|
|
1,738 |
|
|
|
(1,132 |
) |
|
|
(65.1 |
)% |
|
Income from transition services agreement |
|
|
1,399 |
|
|
|
— |
|
|
|
1,399 |
|
|
NM |
|
|
|
Income (loss) from continuing operations before taxes |
|
|
89,167 |
|
|
|
(12,945 |
) |
|
|
102,112 |
|
|
NM |
|
|
|
Income tax benefit for continuing operations |
|
|
(6,192 |
) |
|
|
(1,060 |
) |
|
|
(5,132 |
) |
|
NM |
|
|
|
Income (loss) from continuing operations |
|
|
95,359 |
|
|
|
(11,885 |
) |
|
|
107,244 |
|
|
NM |
|
|
|
Loss from discontinued operations, net of tax |
|
|
— |
|
|
|
(667 |
) |
|
|
667 |
|
|
NM |
|
|
|
Net income (loss) |
|
$ |
95,359 |
|
|
$ |
(12,552 |
) |
|
$ |
107,911 |
|
|
NM |
|
|
NM = not meaningful
Net sales for the three months ended September 30, 2021 increased $85.9 million, or 25.9%, from $331.2 million in 2020 to $417.1 million. The increase was primarily due to strong net sales in Extensions, consisting of our Heinemann brand, intervention and supplemental products as well as professional services, which increased by $58.0 million from $124.0 million in 2020 to $182.0 million. Within Extensions, net sales of our Heinemann products increased due to the return of in-person learning for most of our customers, as well as in supplemental and professional services due to strong customer demand. Further, net sales in Core Solutions increased by $28.0 million from $207.0 million in 2020 to $235.0 million, driven by strong open territory net sales as a result of the market recovery.
Operating income (loss) for the three months ended September 30, 2021 favorably changed from a loss of $5.9 million in 2020 to income of $95.5 million, due primarily to the following:
|
|
• |
An increase in net sales of $85.9 million; |
|
|
• |
A $31.7 million decrease in restructuring/severance and other charges due to the 2020 Restructuring Plan; |
|
|
• |
A $3.7 million gain on sale of assets in 2021 from the sale of intellectual property, including the copyrights and trademarks, of certain product titles; |
|
|
• |
A $3.5 million decrease in net amortization expense related to publishing rights, pre-publication and other intangible assets, primarily due to a decrease in pre-publication amortization attributed to a streamlining of capital spend; |
28
Partially offset by:
|
|
• |
A $6.7 million increase in our cost of sales, excluding publishing rights and pre-publication amortization, from $146.2 million in 2020 to $152.9 million, primarily due to increased sales volume, substantially offset by lower print costs, product mix, increased virtual delivery of products and services along with favorable inventory obsolescence due to strong net sales. Our cost of sales, excluding publishing rights and pre-publication amortization, as a percentage of sales, decreased to 36.7% from 44.1%; |
|
|
• |
A $16.7 million increase in selling and administrative expenses, primarily due to an increase of $12.8 million of variable expenses such as sales commissions and transportation due to higher billings. Further, there was an increase in incentive compensation compared to the prior year due to higher achievement of performance measures in 2021 compared to 2020. |
Interest expense for the three months ended September 30, 2021 decreased $1.1 million from $9.3 million in 2020 to $8.2 million, due to lower outstanding debt balances and net settlement payments on our interest rate derivative instruments during 2020, which did not repeat in 2021.
Change in fair value of derivative instruments for the three months ended September 30, 2021 unfavorably changed by $0.8 million due to foreign exchange forward contracts executed on the Euro that were unfavorably impacted by the strengthening of the U.S. dollar against the Euro.
Gain on investments for the three months ended September 30, 2021 decreased $1.1 million from $1.7 million in 2020 to $0.6 million and was related to the fair value change in our equity interests in educational technology private partnerships.
Income from transition services agreement for the three months ended September 30, 2021 was $1.4 million and was related to transition service fees under the transition services agreement with the purchaser of our HMH Books & Media business. We had no transition services agreement during 2020.
Income tax benefit for continuing operations for the three months ended September 30, 2021 increased $5.1 million from a benefit of $1.1 million in 2020 to a benefit of $6.2 million in 2021. For 2021, our annual effective tax rate, exclusive of discrete items used to calculate the tax provision, is expected to be approximately (8.5)%. For 2020, our effective annual tax rate exclusive of discrete items was (1.3)%. For both periods income tax expense was primarily attributed to movement in the deferred tax liability associated with tax amortization on indefinite-lived intangibles, state and foreign taxes, as well as the impact of certain discrete tax items including the accrual of potential interest and penalties on uncertain tax positions.
Loss from discontinued operations, net of tax for the three months ended September 30, 2020 was a loss of $0.7 million. The sale of our HMH Books & Media business during the second quarter of 2021 has been accounted for as a discontinued operation, whereby the direct results of its operations were removed from the results from continuing operations for the periods presented. Included within the loss is allocated interest expense of $6.9 million for 2020, based on the repayment of debt with the net proceeds from the sale, which was required by our debt facilities, as we did not reinvest such amounts in the business.
29
Consolidated Operating Results for the Nine Months Ended September 30, 2021 and 2020
|
|
|
For the Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|||||
|
(dollars in thousands) |
|
2021 |
|
|
2020 |
|
|
Dollar Change |
|
|
Percent Change |
|
||||
|
Net sales |
|
$ |
871,997 |
|
|
$ |
699,287 |
|
|
$ |
172,710 |
|
|
|
24.7 |
% |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding publishing rights and pre-publication amortization |
|
|
335,390 |
|
|
|
310,351 |
|
|
|
25,039 |
|
|
|
8.1 |
% |
|
Publishing rights amortization |
|
|
8,171 |
|
|
|
11,332 |
|
|
|
(3,161 |
) |
|
|
(27.9 |
)% |
|
Pre-publication amortization |
|
|
79,177 |
|
|
|
93,791 |
|
|
|
(14,614 |
) |
|
|
(15.6 |
)% |
|
Cost of sales |
|
|
422,738 |
|
|
|
415,474 |
|
|
|
7,264 |
|
|
|
1.7 |
% |
|
Selling and administrative |
|
|
338,953 |
|
|
|
339,815 |
|
|
|
(862 |
) |
|
|
(0.3 |
)% |
|
Other intangible assets amortization |
|
|
23,016 |
|
|
|
17,568 |
|
|
|
5,448 |
|
|
|
31.0 |
% |
|
Impairment charge for goodwill |
|
|
— |
|
|
|
262,000 |
|
|
|
(262,000 |
) |
|
NM |
|
|
|
Restructuring/severance and other charges |
|
|
9,880 |
|
|
|
31,776 |
|
|
|
(21,896 |
) |
|
|
(68.9 |
)% |
|
Gain on sale of assets |
|
|
(3,661 |
) |
|
|
— |
|
|
|
(3,661 |
) |
|
NM |
|
|
|
Operating income (loss) |
|
|
81,071 |
|
|
|
(367,346 |
) |
|
|
448,417 |
|
|
NM |
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefits non-service (expense) income |
|
|
(12 |
) |
|
|
183 |
|
|
|
(195 |
) |
|
NM |
|
|
|
Interest expense |
|
|
(26,788 |
) |
|
|
(29,178 |
) |
|
|
2,390 |
|
|
|
8.2 |
% |
|
Interest income |
|
|
52 |
|
|
|
873 |
|
|
|
(821 |
) |
|
|
(94.0 |
)% |
|
Change in fair value of derivative instruments |
|
|
(915 |
) |
|
|
172 |
|
|
|
(1,087 |
) |
|
NM |
|
|
|
Gain on investments |
|
|
1,442 |
|
|
|
1,738 |
|
|
|
(296 |
) |
|
|
(17.0 |
)% |
|
Income from transition services agreement |
|
|
2,253 |
|
|
|
— |
|
|
|
2,253 |
|
|
NM |
|
|
|
Loss on extinguishment of debt |
|
|
(12,505 |
) |
|
|
— |
|
|
|
(12,505 |
) |
|
NM |
|
|
|
Income (loss) from continuing operations before taxes |
|
|
44,598 |
|
|
|
(393,558 |
) |
|
|
438,156 |
|
|
NM |
|
|
|
Income tax benefit for continuing operations |
|
|
(3,891 |
) |
|
|
(11,210 |
) |
|
|
7,319 |
|
|
NM |
|
|
|
Income (loss) from continuing operations |
|
|
48,489 |
|
|
|
(382,348 |
) |
|
|
430,837 |
|
|
NM |
|
|
|
Loss from discontinued operations, net of tax |
|
|
(1,005 |
) |
|
|
(14,345 |
) |
|
|
13,340 |
|
|
|
93.0 |
% |
|
Gain on sale of discontinued operations, net of tax |
|
|
214,520 |
|
|
|
— |
|
|
|
214,520 |
|
|
NM |
|
|
|
Income (loss) from discontinued operations, net of tax |
|
|
213,515 |
|
|
|
(14,345 |
) |
|
|
227,860 |
|
|
NM |
|
|
|
Net income (loss) |
|
$ |
262,004 |
|
|
$ |
(396,693 |
) |
|
$ |
658,697 |
|
|
NM |
|
|
NM = not meaningful
Net sales for the nine months ended September 30, 2021 increased $172.7 million, or 24.7%, from $699.3 million in 2020 to $872.0 million. The increase was due to strong net sales in Extensions, consisting of our Heinemann brand, intervention and supplemental products as well as professional services, which increased by $95.0 million from $308.0 million in 2020 to $403.0 million. Within Extensions, nets sales of our Heinemann products increased due to strong demand across most product portfolios. Further, net sales in Core Solutions increased by $78.0 million from $391.0 million in 2020 to $469.0 million, driven by strong open territory net sales as a result of market recovery in 2021.
Operating income (loss) for the nine months ended September 30, 2021 favorably changed from a loss of $367.3 million in 2020 to income of $81.1 million, due primarily to the following:
|
|
• |
An impairment charge for goodwill in 2020 of $262.0 million that did not reoccur in 2021. This non-cash impairment was a direct result of the adverse impact that the COVID-19 pandemic had on the Company in 2020; |
|
|
• |
A $172.7 million increase in net sales; |
|
|
• |
A $21.9 million decrease in restructuring/severance and other charges. In 2021, there were $9.8 million of non-cash restructuring/severance and other charges related to vacated office space formerly utilized by employees of the HMH Books & Media business, of which $9.3 million is reflected as a reduction in operating lease assets and $1.6 million as a reduction in property, plant, and equipment. In 2020, there were $31.8 million of severance costs associated with the 2020 Restructuring Plan; |
30
|
|
• |
A $12.3 million decrease in net amortization expense related to publishing rights, pre-publication and other intangible assets, primarily due to a decrease in pre-publication amortization attributed to a streamlining of capital spend and, to a lesser extent, our use of accelerated amortization methods for publishing rights amortization, partially offset by the accelerated amortization of certain other intangible assets due to product life cycle reductions; |
|
|
• |
A $3.7 million gain on sale of assets in 2021 from the sale of intellectual property, including the copyrights and trademarks, of certain product titles; |
|
|
• |
A slight decrease in selling and administrative expenses, primarily due to the 2020 Restructuring Plan with reduced labor, professional fees and travel and marketing costs. Partially offsetting the aforementioned was an increase in variable expenses such as sales commissions and transportation due to higher billings along with an increase in incentive compensation; |
Partially offset by:
|
|
• |
A $25.0 million increase in our cost of sales, excluding publishing rights and pre-publication amortization, from $310.4 million in 2020 to $335.4 million, primarily due to an increase in sales volume, partially offset by lower print costs, product mix, increased virtual delivery of products and services along with favorable inventory obsolescence due to strong net sales. Our cost of sales, excluding publishing rights and pre-publication amortization, as a percentage of sales, decreased to 38.5% from 44.4%; |
Interest expense for the nine months ended September 30, 2021 decreased $2.4 million from $29.2 million in 2020 to $26.8 million, primarily due to net settlement payments on our interest rate derivative instruments during 2020, which did not repeat in 2021, and to a lesser extent lower term loan facility interest expense driven by lower LIBOR rates.
Interest income for the nine months ended September 30, 2021 decreased $0.8 million due to lower interest rates on our money market funds in 2021.
Change in fair value of derivative instruments for the nine months ended September 30, 2021 unfavorably changed by $1.1 million due to foreign exchange forward contracts executed on the Euro that were unfavorably impacted by the strengthening of the U.S. dollar against the Euro.
Gain on investments for the nine months ended September 30, 2021 decreased $0.3 million from $1.7 million in 2020 to $1.4 million and was related to the fair value change in our equity interests in educational technology private partnerships.
Income from transition services agreement for the nine months ended September 30, 2021 was $2.3 million and was related to transition service fees under the transition services agreement with the purchaser of our HMH Books & Media business. We had no transition services agreement during 2020.
Loss on extinguishment of debt for the nine months ended September 30, 2021 consisted of a $10.0 million write-off of the remaining balance of the debt discount associated with the term loan facility and a $2.5 million write-off related to unamortized deferred financing fees associated with the term loan facility. The total write-off of $12.5 million was proportional to the pay down in term loan debt.
Income tax benefit for continuing operations for the nine months ended September 30, 2021 decreased $7.3 million, from a benefit of $11.2 million in 2020 to a benefit of $3.9 million in 2021. For 2021, our annual effective tax rate, exclusive of discrete items used to calculate the tax provision, is expected to be approximately (8.5)%. For 2020, our effective annual tax rate exclusive of discrete items was (1.3)%. For both periods income tax expense was primarily attributed to movement in the deferred tax liability associated with tax amortization on indefinite-lived intangibles, state and foreign taxes, as well as the impact of certain discrete tax items including the accrual of potential interest and penalties on uncertain tax positions.
Income (loss) from discontinued operations, net of tax for the nine months ended September 30, 2021 favorably changed by $227.9 million from a loss of $14.3 million in 2020, to income of $213.5 million primarily due to the gain on sale of our HMH Books & Media business, which has been accounted for as a discontinued operation whereby the direct results of its operations were removed from the results from continuing operations for the periods presented. Included within the loss is allocated interest expense of $9.4 million and $21.4 million, for 2021 and 2020, respectively, based on the repayment of debt with the net proceeds from the sale, which was required by our debt facilities, as we did not reinvest such amounts in the business.
31
Adjusted EBITDA from Continuing Operations
To supplement our financial statements presented in accordance with GAAP, we have presented Adjusted EBITDA from continuing operations, which is not prepared in accordance with GAAP. This information should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. Management believes that the presentation of Adjusted EBITDA provides useful information to investors regarding our results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business. Adjusted EBITDA provides an indicator of general economic performance that is not affected by debt restructurings, fluctuations in interest rates or effective tax rates, gains or losses on investments, non-cash charges and impairment charges, levels of depreciation or amortization, and acquisition/disposition-related activity costs, restructuring costs and integration costs. Accordingly, our management believes that this measurement is useful for comparing general operating performance from period to period. In addition, targets in Adjusted EBITDA (further adjusted to include changes in deferred revenue) are used as performance measures to determine certain compensation of management, and Adjusted EBITDA is used as the base for calculations relating to incurrence covenants in our debt agreements. Other companies may define Adjusted EBITDA differently and, as a result, our measure of Adjusted EBITDA may not be directly comparable to Adjusted EBITDA of other companies. Although we use Adjusted EBITDA as a financial measure to assess the performance of our business, the use of Adjusted EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate our business. Adjusted EBITDA should be considered in addition to, and not as a substitute for, net loss/income in accordance with GAAP as a measure of performance. Adjusted EBITDA is not intended to be a measure of liquidity or free cash flow for discretionary use. You are cautioned not to place undue reliance on Adjusted EBITDA.
Below is a reconciliation of our net income (loss) from continuing operations to Adjusted EBITDA from continuing operations for the three and nine months ended September 30, 2021 and 2020:
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|||||
|
Net income (loss) from continuing operations |
|
$ |
95,359 |
|
|
$ |
(11,885 |
) |
|
$ |
48,489 |
|
|
$ |
(382,348 |
) |
|
Interest expense |
|
|
8,239 |
|
|
|
9,311 |
|
|
|
26,788 |
|
|
|
29,178 |
|
|
Interest income |
|
|
(18 |
) |
|
|
(32 |
) |
|
|
(52 |
) |
|
|
(873 |
) |
|
Provision (benefit) for income taxes |
|
|
(6,192 |
) |
|
|
(1,060 |
) |
|
|
(3,891 |
) |
|
|
(11,210 |
) |
|
Depreciation expense |
|
|
11,063 |
|
|
|
12,358 |
|
|
|
34,334 |
|
|
|
37,382 |
|
|
Amortization expense |
|
|
37,377 |
|
|
|
40,896 |
|
|
|
110,364 |
|
|
|
122,691 |
|
|
Non-cash charges – goodwill impairment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
262,000 |
|
|
Non-cash charges – stock compensation |
|
|
3,177 |
|
|
|
2,971 |
|
|
|
8,727 |
|
|
|
8,295 |
|
|
Non-cash charges – (gain) loss on derivative instruments |
|
|
368 |
|
|
|
(432 |
) |
|
|
915 |
|
|
|
(172 |
) |
|
Fees, expenses or charges for equity offerings, debt or acquisitions/dispositions |
|
|
676 |
|
|
|
339 |
|
|
|
866 |
|
|
|
366 |
|
|
Gain on investments |
|
|
(606 |
) |
|
|
(1,738 |
) |
|
|
(1,442 |
) |
|
|
(1,738 |
) |
|
Gain on sale of assets |
|
|
(3,661 |
) |
|
|
— |
|
|
|
(3,661 |
) |
|
|
— |
|
|
Loss on debt extinguishment |
|
|
— |
|
|
|
— |
|
|
|
12,505 |
|
|
|
— |
|
|
Legal settlement |
|
|
— |
|
|
|
— |
|
|
|
2,470 |
|
|
|
— |
|
|
Restructuring/severance and other charges |
|
|
33 |
|
|
|
31,776 |
|
|
|
9,880 |
|
|
|
31,776 |
|
|
Adjusted EBITDA from continuing operations |
|
$ |
145,815 |
|
|
$ |
82,504 |
|
|
$ |
246,292 |
|
|
$ |
95,347 |
|
Seasonality and Comparability
Our net sales, operating profit or loss and net cash provided by or used in operations are impacted by the inherent seasonality of the academic calendar, which typically results in a cash flow usage in the first half of the year and a cash flow generation in the second half of the year. Consequently, the performance of our business may not be comparable quarter to consecutive quarter and should be 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.
Schools conduct the majority of their purchases in the second and third quarters of the calendar year in preparation for the beginning of the school year. Thus, over the past three completed fiscal years, approximately 69% of our consolidated net sales were realized in the second and third quarters. Sales of K-12 instructional materials are also cyclical, with some years offering more sales opportunities than others based on the state 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.
32
Liquidity and Capital Resources
|
(in thousands) |
|
|
|
|
||||
|
Cash and cash equivalents |
|
$ |
420,318 |
|
|
$ |
281,200 |
|
|
Current portion of long-term debt |
|
|
— |
|
|
|
19,000 |
|
|
Long-term debt, net of discount and issuance costs |
|
|
317,095 |
|
|
|
624,692 |
|
|
Revolving credit facility |
|
|
— |
|
|
|
— |
|
|
Borrowing availability under revolving credit facility |
|
|
163,635 |
|
|
|
104,806 |
|
|
|
|
Nine Months Ended September 30, |
|
|||||
|
|
|
|
|
2020 |
|
|||
|
Net cash provided by operating activities |
|
$ |
196,577 |
|
|
$ |
75,166 |
|
|
Net cash provided by (used in) investing activities |
|
|
282,577 |
|
|
|
(86,596 |
) |
|
Net cash used in financing activities |
|
|
(340,036 |
) |
|
|
(13,380 |
) |
Operating activities
Net cash provided by operating activities was $196.6 million for the nine months ended September 30, 2021, a $121.4 million favorable change from the $75.2 million of net cash provided by operating activities for the nine months ended September 30, 2020. Net cash provided by operating activities included $3.9 million and $9.1 million of net cash provided by discontinued operations in 2021 and 2020, respectively, and net cash provided by operating activities from continuing operations of $192.7 million and $66.0 million in 2021 and 2020, respectively. The $126.7 million improvement in cash provided by operating activities from continuing operations was primarily due to an increase in operating profit, net of non-cash items, of $173.3 million. The improvement was partially offset by unfavorable changes in net operating assets and liabilities of $46.6 million primarily due to unfavorable changes in accounts receivable of $93.8 million related to higher billings and the timing of collections, unfavorable changes in severance and other charges of $40.8 million mainly attributable to the 2020 Restructuring Plan, unfavorable changes in interest payable of $6.9 million due to the timing of payments and unfavorable changes in other operating assets and liabilities of $9.2 million, offset by favorable changes in accounts payable of $49.1 million due to timing of disbursements, favorable changes in royalties and author advances of $33.6 million, favorable changes in inventory of $10.5 million, operating lease liabilities of $8.0 million and pension and postretirement benefits of $2.9 million.
Investing activities
Net cash provided by investing activities was $282.6 million for the nine months ended September 30, 2021, an increase of $369.2 million from the $86.6 million of net cash used in investing activities for the nine months ended September 30, 2020. Net cash from investing activities included $0.6 million and $0.4 million of cash usage from discontinued operations in 2021 and 2020, respectively, and net cash provided by (used in) investing activities from continuing operations of $283.2 million and $(86.2) million in 2021 and 2020, respectively. The increase in cash provided by investing activities was primarily due to proceeds from the sale of our HMH Books & Media business of $349.0 million and from the sale of assets of $5.0 million during 2021 and to a lesser extent, lower capital investing expenditures related to pre-publication costs and property, plant, and equipment of $15.4 million in connection with planned reductions in content development.
Financing activities
Net cash used in financing activities, which is all continuing operations, was $340.0 million for the nine months ended September 30, 2021, an increase of $326.6 million from the $13.4 million used in financing activities for the nine months ended September 30, 2020. The increase in cash used in financing activities was primarily due to a net increase in our debt repayments of $327.8 million primarily from the proceeds of the sale of our HMH Books & Media business. Partially offsetting the increase was net collections under the transition services agreement of $1.6 million in 2021.
Debt
Under each of the notes, the term loan facility and the revolving credit facility, Houghton Mifflin Harcourt Publishers Inc., Houghton Mifflin Harcourt Publishing Company and HMH Publishers LLC are the borrowers (collectively, the “Borrowers”), and Citibank, N.A. acts as both the administrative agent and the collateral agent.
The obligations under the senior secured notes, the term loan facility and the revolving credit facility are guaranteed by the Company and each of its direct and indirect for-profit domestic subsidiaries (other than the Borrowers) (collectively, the
33
“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.
Senior Secured Notes
On November 22, 2019, we completed the sale of $306.0 million in aggregate principal amount of 9.0% Senior Secured Notes due 2025 (the “notes”) in a private placement to qualified institutional buyers under Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to persons outside the United States pursuant to Regulation S under the Securities Act. The notes mature on February 15, 2025 and bear interest at a rate of 9.0% per annum. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2020. As of September 30, 2021, we had $303.3 million ($296.2 million, net of discount and issuance costs) outstanding under the notes.
We may redeem all or a portion of the notes at redemption prices as described in the notes. We redeemed $2.7 million of the notes during the second quarter of 2021 utilizing proceeds from the sale of the HMH Books & Media business.
The notes do not require us to comply with financial maintenance covenants. We are currently required to meet certain incurrence based financial covenants as defined under the notes.
The notes are 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 notes.
Term Loan Facility
On November 22, 2019, we entered into a second amended and restated term loan credit agreement for an aggregate principal amount of $380.0 million (the “term loan facility”). As of September 30, 2021, we had $21.7 million ($20.9 million, net of discount and issuance costs) outstanding under the term loan facility.
The term loan facility matures on November 22, 2024 and the interest rate per annum is equal to, at the option of the Company, either (a) LIBOR plus a margin of 6.25% or (b) an alternate base rate plus a margin of 5.25%. As of September 30, 2021, the interest rate on the term loan facility was 7.25%.
The term loan facility was required to be repaid in quarterly installments of approximately $4.8 million with the balance being payable on the maturity date. We repaid $334.6 million of the term loan facility during the second quarter of 2021 utilizing proceeds from the sale of the HMH Books & Media business. There are no future quarterly repayment installments required and the balance is payable on the maturity date; however, we are not prohibited from continuing to make debt payments and may elect to do so.
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 contains customary mandatory prepayment requirements, including with respect to excess cash flow, proceeds from certain asset sales or dispositions of property, and proceeds from certain incurrences of indebtedness. To the extent that we are successful in closing the divestiture of our HMH Books & Media business, we intend to use the proceeds to reduce our outstanding indebtedness, which will increase recurring free cash flow resulting from reduced interest expense. We do not intend to reinvest such proceeds in the business. The term loan facility permits the Company to voluntarily prepay outstanding amounts at any time without premium or penalty, other than customary breakage costs with respect to LIBOR loans.
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.
34
We are subject to an excess cash flow provision under our term loan facility which is predicated upon our leverage ratio and cash flow.
Revolving Credit Facility
On November 22, 2019, we entered into a second amended and restated revolving credit agreement that 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’ eligible inventory and receivables (the “revolving credit facility”).
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 amount of any outstanding letters of credit reduces borrowing availability under the revolving credit facility on a dollar-for-dollar basis. As of September 30, 2021, there were no amounts outstanding on the revolving credit facility. As of September 30, 2021, we had approximately $16.1 million of outstanding letters of credit and approximately $163.6 million of borrowing availability under the revolving credit facility. As of November 4, 2021, there were no amounts outstanding under the revolving credit facility.
The revolving credit facility has a five-year term and matures on November 22, 2024. The interest rate applicable to borrowings under the facility is based, at our election, on LIBOR plus a margin between 1.50% and 2.00% or an alternative base rate plus a margin between 0.50% and 1.00%, which margins are based on average daily availability. The revolving credit facility may be prepaid, in whole or in part, at any time, without premium.
The revolving credit facility requires us to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 on a trailing four-quarter basis for periods in which excess availability under the revolving credit facility is less than the greater of $25.0 million and 12.5% of the lesser of the total commitment and the borrowing base then in effect, or less than $20.0 million if certain conditions are met. The minimum fixed charge coverage ratio was not applicable under the facility as of September 30, 2021, due to our level of borrowing availability.
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. 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 revolving credit facility.
General
We had $420.3 million of cash and cash equivalents and no short-term investments at September 30, 2021 and $281.2 million of cash and cash equivalents and no short-term investments at December 31, 2020.
Our business is impacted by the inherent seasonality of the academic calendar, which typically results in a cash flow usage in the first half of the year and a cash flow generation in the second half of the year. 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. Our primary credit facilities do not require us to comply with financial maintenance covenants.
The ability of the Company to fund planned operations is based on assumptions which involve significant judgment and estimates of future revenues, capital spend and other operating costs. Our current assumptions are that our industry will continue to recover and we have performed a sensitivity analysis on various recovery assumptions. We have concluded we have sufficient liquidity to fund our current obligations, capital spending, debt service requirements and working capital requirements over at least the next twelve months.
Critical Accounting Policies and Estimates
Our financial results are affected by the selection and application of critical accounting policies and methods. There were no material changes in the nine months ended September 30, 2021 to the application of critical accounting policies and estimates as described in our audited consolidated financial statements, which were included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
The critical accounting estimates used in the preparation of the Company’s consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and the Company’s operating environment changes. Actual results may differ from these estimates due to the uncertainty around the magnitude and duration of the COVID-19 pandemic, as well as other factors.
35
Impact of Inflation and Changing Prices
We believe that inflation has not had a material impact on our results of operations during the year ended December 31, 2020 or the first nine months of 2021. We cannot be sure that future inflation will not have an adverse impact on our operating results and financial condition in future periods. Our ability to adjust selling prices has always been limited by competitive factors and long-term contractual arrangements which either prohibit price increases or limit the amount by which prices may be increased. Further, a weak domestic economy at a time of low inflation could cause lower tax receipts at the state and local level, and the funding and buying patterns for textbooks and other educational materials could be adversely affected.
Covenant Compliance
As of September 30, 2021, we were in compliance with all of our debt covenants and we expect to be in compliance over the next twelve months.
We are currently required to meet certain incurrence-based financial covenants as defined under our term loan facility, notes and revolving credit facility. We have incurrence based financial covenants primarily pertaining to a maximum leverage ratio and fixed charge coverage ratio. A breach of any of these covenants, ratios, tests or restrictions, as applicable, for which a waiver is not obtained could result in an event of default, in which case our lenders could elect to declare all amounts outstanding to be immediately due and payable and result in a cross-default under other arrangements containing such provisions. A default would permit lenders to accelerate the maturity for the debt under these agreements and to foreclose upon any collateral securing the debt owed to these lenders and to terminate any commitments of these lenders to lend to us. If the lenders accelerate the payment of the indebtedness, our assets may not be sufficient to repay in full the indebtedness and any other indebtedness that would become due as a result of any acceleration. Further, in such an event, the lenders would not be required to make further loans to us, and assuming similar facilities were not established and we are unable to obtain replacement financing, it would materially affect our liquidity and results of operations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Recently Issued Accounting Pronouncements
See Note 4 to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recently issued accounting pronouncements.
36
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. We manage exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. These derivative financial instruments are utilized to hedge economic exposures as well as reduce our earnings and cash flow volatility resulting from shifts in market rates. As permitted, we may designate certain of these derivative contracts for hedge accounting treatment in accordance with authoritative guidance regarding accounting for derivative instruments and hedging activities. However, certain of these instruments may not qualify for, or we may choose not to elect, hedge accounting treatment and, accordingly, the results of our operations may be exposed to some level of volatility. Volatility in our results of operations will vary with the type and amount of derivative hedges outstanding, as well as fluctuations in the currency and interest rate market during the period. Periodically, we may enter into derivative contracts, including interest rate swap agreements and interest rate caps and collars to manage interest rate exposures, and foreign currency spot, forward, swap and option contracts to manage foreign currency exposures. The fair market values of all of these derivative contracts change with fluctuations in interest rates and/or currency rates and are designed so that any changes in their values are offset by changes in the values of the underlying exposures. Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes.
By their nature, all derivative instruments involve, to varying degrees, elements of market and credit risk not recognized in our financial statements. The market risk associated with these instruments resulting from currency exchange and interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. Our policy is to deal with counterparties having a single A or better credit rating at the time of the execution. We manage our exposure to counterparty risk of derivative instruments by entering into contracts with a diversified group of major financial institutions and by actively monitoring outstanding positions.
We continue to review liquidity sufficiency by performing various stress test scenarios, such as cash flow forecasting, which considers hypothetical interest rate movements. Furthermore, we continue to closely monitor current events and the financial institutions that support our credit facility, including monitoring their credit ratings and outlooks, credit default swap levels, capital raising and merger activity.
As of September 30, 2021, we had $21.7 million ($20.9 million, net of discount and issuance costs) of aggregate principal amount indebtedness outstanding under our term loan facility that bears interest at a variable rate. An increase or decrease of 1% in the interest rate will change our interest expense by approximately $0.2 million on an annual basis. We also have up to $250.0 million of borrowing availability, subject to borrowing base availability, under our revolving credit facility, and borrowings under the revolving credit facility bear interest at a variable rate. As of September 30, 2021, there were no amounts outstanding on the revolving credit facility. Assuming that the revolving credit facility is fully drawn, an increase or decrease of 1% in the interest rate will change our interest expense associated with the revolving credit facility by $2.5 million on an annual basis.
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. 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, which we designated as cash flow hedges. These contracts were effective beginning September 30, 2016 and matured on July 22, 2020. We have no outstanding interest rate derivative contracts as of September 30, 2021.
We conduct various digital development activities in Ireland, and as such, our cash flows and costs are subject to fluctuations from changes in foreign currency exchange rates. We manage our exposures to this market risk through the use of short-term foreign exchange forward and option contracts, when deemed appropriate, which were not significant as of September 30, 2021 and December 31, 2020. We do not enter into derivative transactions or use other financial instruments for trading or speculative purposes.
37
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”), and our Executive Vice President and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2021 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on their evaluation, our CEO and CFO concluded that, as of September 30, 2021 our disclosure controls and procedures were effective.
During the quarter ended September 30, 2021, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
38
Part II. Other Information
Item 1. Legal Proceedings
We are involved in legal actions, claims, litigation and other matters incidental to our business. Litigation alleging infringement of copyrights and other intellectual property rights, particularly with respect to proprietary photographs and images, is common in the educational publishing industry.
While management believes there is a reasonable possibility we may incur a loss associated with the existing legal actions, claims and litigation, we are not able to estimate such amount, but we do not expect any of these matters to have a material adverse effect on our results of operations, financial position or cash flows. We have insurance in such amounts and with such coverage and deductibles as management believes is reasonable. However, there can be no assurance that our liability insurance will cover all events or that the limits of such coverage will be sufficient to fully cover all potential liabilities thereunder. Refer to Note 14 of the Consolidated Financial Statements included in Part I, Item 1. for a discussion of such matters.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which could materially affect our business, financial condition or future results.
39
Item 6. Exhibits
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Exhibit No. |
|
Description |
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3.1 |
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|
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31.1* |
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31.2* |
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32.1** |
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32.2** |
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101.INS* |
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The instance document does not appear in the interactive file because its XBRL tags are embedded within the inline XBRL document |
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101.SCH* |
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Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL* |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF* |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB* |
|
Inline XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE* |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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|
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
** |
This certification shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities under that section. Furthermore, this certification shall not be deemed to be incorporated by reference into the filings of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, regardless of any general incorporation language in such filing. |
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Houghton Mifflin Harcourt Company (Registrant) |
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By: |
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|
|
Chief Executive Officer (Principal Executive Officer) |
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Houghton Mifflin Harcourt Company (Registrant) |
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By: |
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|
Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
41
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 2/15/25 | ||||
| 11/22/24 | ||||
| Filed on: | 11/4/21 | 8-K | ||
| 11/1/21 | ||||
| For Period end: | 9/30/21 | |||
| 7/8/21 | ||||
| 6/30/21 | 10-Q | |||
| 5/10/21 | 8-K | |||
| 3/31/21 | 10-Q | |||
| 3/26/21 | 8-K | |||
| 1/1/21 | ||||
| 12/31/20 | 10-K, SD | |||
| 9/30/20 | 10-Q, 8-K | |||
| 9/4/20 | 8-K | |||
| 7/22/20 | ||||
| 6/30/20 | 10-Q | |||
| 3/31/20 | 10-Q | |||
| 2/15/20 | ||||
| 1/1/20 | ||||
| 12/31/19 | 10-K, SD | |||
| 11/22/19 | 8-K | |||
| 12/31/18 | 10-K, SD | |||
| 10/1/18 | 8-K | |||
| 9/12/18 | 8-K | |||
| 7/27/17 | ||||
| 5/3/17 | ||||
| 9/30/16 | 10-Q | |||
| 8/17/15 | 4 | |||
| 3/9/10 | ||||
| 10/31/07 | ||||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 10/06/20 Houghton Mifflin Harcourt Co. 8-K:5,9 9/30/20 11:333K ActiveDisclosure/FA |