2019 ANNUAL REPORT
CONNECT & GROW
DEAR
SHAREHOLDERS
At HMH, we are committed to driving
measurable social impact alongside top
business performance and strong shareholder
returns. In fact, the greater impact we achieve
in classrooms across America, the greater the
returns will be for our shareholders—joining
together two mutually reinforcing goals:
Purpose and Profits, the hallmark of a double
bottom line company.
RECORD RESULTS IN 2019
I’m proud to share that in 2019, the continued
execution of our strategy fueled record results,
including 21% overall growth in billings, with
44% growth in billings for our Core Solutions,
11% growth in Extensions and $115 million in free
cash flow. These impressive results reflect our
focus on delivering connected solutions that
empower educators to meet the needs of all
learners, regardless of where they may be on
the achievement spectrum.
In spite of our success, there is much more
to be done.
Now more than ever, teachers need our help
and support. They are overwhelmed and crave
simplicity. They are working nights and weekends,
with low pay and insufficient funds, to foster
the learning and development of 30 unique
humans—each with their own set of challenges
and needs across the achievement spectrum.
In 2019, we released our Fifth Annual HMH
Educator Confidence Report, which surveyed
over 1,300 educators nationwide on the state
of learning, as well as key issues ranging from
salaries to technology in the classroom to
students’ social and emotional needs.
What did we learn? That teachers’ optimism
in their profession has dramatically declined—
having dropped from 50% in 2018 to 34% in 20191.
When it comes to curriculum, we know that
teachers are looking for comprehensive
core programs that offer flexibility and
opportunities to infuse lessons with their own
flair and creativity. They are expected to meet
the individual social and emotional needs of
each student, while simultaneously juggling
multiple district-mandated platforms and
initiatives and administrative responsibilities.
In what little time they have left, they are
seeking professional development and
coaching that is relevant and customized.
1 HMH’s 5th Annual Educator Confidence Report, which surveyed a total of 1,305
educators, including 1,102 teachers and 203 administrators between May 23
and June 5, 2019.
3
This is all against a wider and pervasive
backdrop of educational inequity–where the
most vulnerable students are disproportionally
falling behind their better-off contemporaries.
Where classrooms even in our top 100 school
districts today will have ten children who
live in poverty, three who live in extreme
poverty, one who is homeless, and seven who
have experienced trauma. Where literacy
proficiency rates are declining for fourth
graders, rather than improving2. Where one
high school student drops out of school every
26 seconds3. These statistics remind us how
great an impact we can have when we reach
the students who need us most.
Surely, we can do better. The experiences of our
students and educators are rich and nuanced,
deserving of our full respect and understanding.
We need to work together to better support
teachers as they work tirelessly each day to
nurture and inspire the next generation.
ADVANCING HMH’S TRANSFORMATION
At HMH, one simple belief unites us: all children
can learn. This powerful idea drives us each
and every day to create a better world–one
that is more tolerant, more just, and a more
inclusive place for all.
As The Learning Company, we are committed
to championing the change needed to create
a more equitable education system and to
provide the educators and students we serve
with the very best resources and tools. Our
transformation reflects our position as a double
bottom line company, and we will continue to
evolve as an organization to successfully deliver
on our vision for the future.
2 National Assessment of Educational Progress. (2019). The Nation’s Report Card.
Retrieved from https://www.nationsreportcard.gov/highlights/reading/2019/.
3 Miller, Tony (2011). “Partnering for Education Reform.” U.S. Department of
Education. Retrieved from http://ed.gov.
4
“
It’s critical that we
listen . . . Teachers’
optimism in their
profession has
dramatically
declined–having
dropped from
50% in 2018 to
34% today.”
5
2019 REVIEW
In 2019, we worked with great passion toward
our goal of providing teachers with the high-
quality resources they need to improve student
outcomes. We made significant progress and
had a number of achievements.
reach to advance student learning. Our
Professional Services team also introduced
the HMH Coaching Studio, a student-focused
coaching model proven to help teachers improve
their practice and raise student achievement.
This includes the introduction of two new
performance indicators that mark the progress
in our transformation and a step-change
in our digital capabilities. First, we grew our
emerging SaaS-based Extensions business by
78% in 2019—this includes subscription billings
from our digital products in the supplemental,
intervention and assessment categories,
underscoring the momentum we are seeing in
this space. Second, we saw a 260% growth in
student assignments on our Ed platform
over
the last year, representing the increasing value
teachers place on our digital platform to
manage the learning of their students.
EEdEdEdEddddddddEEdEd
d
e
g
Our next-generation core Into Reading and
Into Literature products captured a 56% share
in the TeTT xas ELA adoption and a leading share
in all other state adoptions–in part due to new,
innovative features on our Ed platform that help
teachers differentiate instruction.
d
We augmented our strong ELA offerings with
three new AI-based SIS products–Amira,
Waggle and Writable–to help extend teachers’
Our connected vision is a differentiator and
integrates the power of our core, supplemental,
intervention and services capabilities, carving
out the unique opportunity HMH has to provide
our offerings on a single platform that underpins
all of our solutions, giving our teachers a 360-
degree view of student growth and the time-
saving convenience to advance student growth.
In HMH Books & Media, we delivered award-
winning multimedia content, including the
Emmy-nominated Netflix original animated
series Carmen Sandiego–the first project
produced for the screen by our in-house
production company, HMH Productions. We
launched two new imprints in our Books for
Young Readers group: Etch, which is dedicated to
publishing graphic novels exemplifying the best in
art and storytelling across genres and reflecting
the diversity of readers, and Versify, curated
by award-winning poet, educator and author
Kwame Alexander and dedicated to publishing
books that will engage, entertain and empower
young people to create a better world.
yy
SaaS Growth
Ed Platform Usage is Accelerating
(Billings in Millions)
Student Assignments—Last Twelve Months (Millions)
$48
78% Growth
78% Growth
$27
5
1
18
260% Growth
12/18
12/19
12/17
12/18
12/19
6
We doubled down on our efforts to achieve greater capital efficiency, accelerating our move to a
continuous development and delivery model, backed by data and learning science to adapt our
programs over the course of time–which will result in approximately 20% less content development
expenditures than previously planned over the next three years starting in 2020. We did all this
while continuing to significantly re-align and reduce our cost structure to position the company for
sustained and positive cash flow and margin expansion.
In terms of our financial performance, our results were in line with our guidance. On a consolidated
basis, the Company generated $1.391 billion in net sales and $1.591 billion of billings for 2019.
In our Education Segment, we delivered record Core Solutions billings growth of 44% year over year.
This segment also benefitted by performance in our Extensions business, which grew 11% from 2018.
In HMH Books & Media, billings were down 10%, to $179 million from $200 million in 2018. This was
primarily due to a tough year-over-year comparison from one-time licensing income in 2018 from
our classic backlist titles 19
digit growth expected over the long term.
and Animal arm. Our fundamentals remain solid, with low single-
We successfully completed a debt refinancing, enabling us to have an improved balance sheet
and a significantly extended maturity profile. With a new capital structure, HMH now has even
greater strategic flexibility to invest in growth, execute our strategy, and generate greater free
cash flow at all points in our business cycle.
Our performance in 2019 with respect to important Company financial measures (including those
forming our guidance and from which financial performance metrics used in our incentive plans are
derived) was as follows on a consolidated basis.
KEY OPERATING METRICS
(In millions of dollars)
Net sales
Billings1
Loss from continuing operations
Adjusted EBITDA2
Prepublication costs (“Plate Spend”)
Net cash provided by operating activities
Free cash flow
Year Ended December 31
2019
1,391
1,591
(214)
166
(103)
255
115
2018
1,322
1,315
(137)
192
(123)
104
(73)
Change
5.2%
21.0%
(55.6%)
(13.7%)
16.9%
Not meaningful
Not meaningful
1 Billings is an operating measure. For a calculation of this measure, please see reconciliations in the following pages.
2 Adjusted EBITDA and free cash flow are not prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).
For a reconciliation of this financial measure to the most directly comparable GAAP financial measure, please see reconciliations in the following pages.
In 2019, we drove change and led the way with new and exciting innovations–and our results show
it. As we look to 2020, we have tremendous confidence in our strategy and ability to meet our
commitments ahead.
7
ACCELERATING OUR
STRATEGIC PROGRESS
Two years ago, we unveiled our strategy—a roadmap
for our transformation—under three key pillars: enhance
and extend the core, develop integrated solutions
and achieve operational excellence. Our execution on
our strategy in 2019 produced great results, and our
top priority now is continuing to deliver.
8
ND EXTEND
E CORE
EN
AN
THE
1 ENHANCE
We continued to strengthen our Core
Solutions and develop products and services
that are truly unique in the market.
This year, we captured 56% share in Texas ELA
through our new next-generation programs.
We also captured a leading share for other
state adoptions, and importantly, in open
territory, we increased our win rate by 10
points for reading.
One of our biggest areas of investment has
also been in Heinemann, which had record
sales growth this year, and has now had 14
consecutive years of growth.
DEVELO
INTEGR
SOLUT
2 OP
RATED
IONS
This second pillar shifted more into focus
for us in 2019, encompassing our strategic
vision to create a truly connected system
of solutions. With a platform that includes
all of our categories of products – core
next-generation programs, as well as the
extensions to those that fuel personalized
and adaptive learning and deliver
professional services – we can address
the entire achievement spectrum, deepen
our support for educators and deliver an
enhanced “better together” experience for
our customers.
ACHI
OPER
EXC
3 IEVE
RATIONAL
CELLENCE
Finally, we accelerated our efforts to streamline
our operations company-wide for greater
efficiency. This included the announcement of
a tough, but necessary, decision to eliminate
approximately 10% of HMH’s workforce – better
realigning our organization to meet the needs
of our customers and create value for our
shareholders.
We are proud of our achievements in 2019
on our strategy, improving the underlying
fundamentals of our company while creating
a business that is even better positioned to
deliver value to all of our stakeholders.
Importantly, through our strategy, HMH is
uniquely qualified to deliver connected
teaching solutions designed to improve
student outcomes. As we continue to benefit
from growth from enhancing and extending
our core, higher share capture from our
integrated solutions approach, and further
simplification of our business model, we will
continue to increase our free cash flow and
margins over time.
9
10
LOOKING
AHEAD
2019 was another year that reminded us that people with passion and a
plan can change the world–nowhere is that more true than at HMH, The
Learning Company, where learning is the instrument for transforming lives
and creating opportunity.
We are proud of what we accomplished this year–not only in terms of our
commercial achievements, but also in the social impact of our actions, not
only in classrooms across America but the communities in which we work.
The values that we hold paramount at HMH can trace their origins back to
our founding in 1832, when authors like Emerson, Thoreau and Hawthorne
wrote about the inherent goodness of people and nature. Since then, we
have evolved and so have our values, but we have never grown too far
away from that fundamental belief at the core of this company: that there is
undeniable good in this world, and that it is our duty to cultivate it.
At HMH, we are driven by our belief in the better world we can create together.
We truly are a force for good and a force for change, and we are grateful and
honored to be heading into a new decade with renewed confidence and a
commitment to action.
Jack Lynch
President and Chief Executive Officer
Notett : As we go to prerr ss, globallyl we arerr all grarr ppling with the impactstt of the
COVIVV D-19 outbrerr ak. Our foff rerr most priority has been to ensurerr
the health and
safeff ty of our HMH colleagues and their faff milies, and we havevv takekk n prerr cautionaryr
measurerr s while adhering to the guidance of authorities and public health exee px ertstt .
Morerr brorr adlyl ,yy at a time when an increrr asing number of studentstt and teachersrr arerr
havivv ng to studyd and work rerr motelyl ,yy it is clear that our mission to makekk learning morerr
engaging, effective and equitable and our strategy to invest in next-generation,
connected solutions is morerr
on delivevv ring foff r our customersrr and crerr ating vavv lue foff r our sharerr holdersrr .
important than evevv r.rr As alwaysyy , we rerr main fuff llyl
—
—
foff cused
11
RECONCILIATIONS OF BILLINGS AND
NON-GAAP FINANCIAL MEASURES
TO GAAP FINANCIAL MEASURES
To supplement our financial statements
presented in accordance with Generally
Accepted Accounting Principles (GAAP)
and to provide additional insights into our
performance, we have presented adjusted
EBITDA from continuing operations and free
cash flow. These measures are not prepared
in accordance with GAAP. This information
should be considered as supplemental in
nature and should not be considered in
isolation or as a substitute for the related
financial information prepared in accordance
with GAAP.
Management believes that the presentation
of these non-GAAP measures provides
useful information to investors regarding our
results of operations and/or our expected
results of operations because it assists both
investors and management in analyzing and
benchmarking the performance and value of
our business.
Management believes that the presentation
of adjusted EBITDA provides useful information
to our investors and management as an
indicator of our performance and believes
that this measure is useful for comparing
our performance from period to period and
makes decisions based on it. Management
also believes that the presentation of free
cash flow provides useful information to our
investors because management regularly
reviews free cash flow as an important
indicator of how much cash is generated by
general business operations, excluding capital
expenditures, and makes decisions based on
it.
Other companies may define these non-
GAAP measures differently and, as a result,
our use of these non-GAAP measures may not
be directly comparable to adjusted EBITDA
and free cash flow used by other companies.
Although we use these non-GAAP measures
as financial measures to assess our business,
the use of non-GAAP measures is limited as
they include and/or do not include certain
items not included and/or included in the
most directly comparable GAAP measure. You
are cautioned not to place undue reliance on
these non-GAAP measures.
The following is a calculation of the Billings operating measure as disclosed by the Company in our
Exhibit 99.1 to current report on Form 8-K for the year ended December 31, 2019, filed with the SEC:
(In millions of dollars)
Net sales
Change in deferred revenue
Billings
12
20191
$ 1,391
201
1,591
20181
$ 1,322
(8)
1,315
The following is a reconciliation of loss from continuing operations prepared in accordance with GAAP
to adjusted EBITDA as disclosed by the Company in our Annual Report on Form 10-K for the year ended
December 31, 2019, filed with the SEC:
(In millions of dollars)
Loss from continuing operations
Interest expense
Interest income
Provision for income taxes
Depreciation expense
Amortization expense
Amortization expense—film asset
Noncash charges—stock compensation
Noncash charges—loss on derivative instruments
Excess inventory obsolescence
Fees, expenses or charges for equity offerings,
debt or acquisitions
Restructuring/severance and other charges
Gain on sale of assets
Loss on extinguishment
Adjusted EBITDA
20191
$ (214)
20181
$ (137)
49
(3)
4
61
201
10
14
1
10
6
22
—
4
46
(3)
6
75
171
6
13
1
—
3
11
0
0
$ 166
$ 192
The following is a reconciliation of cash flows from operating and investing activities to free cash flow
as disclosed by the Company in our Exhibit 99.1 to to current report on form 8-K for the year ended
December 31, 2019, filed with the SEC:
(In millions of dollars)
Cash flows from operating activities
Net cash provided by operating activities
Cash flows from investing activities
Additions to prepublication costs
Additions to property, plant, and equipment
Free cash flow
1
Details may not sum to total due to rounding.
20191
$ 255
(103)
(38)
$ 115
20181
$ 104
(123)
(54)
$ (73)
13
HMH LEADERSHIP
John J. Lynch, Jr.*
President and Chief Executive Officer
Jospeh P. Abbott, Jr.*
Executive Vice President,
Chief Financial Officer
William F. Bayers*
Executive Vice President,
Secretary, and General Counsel
Ellen Archer*
President, HMH Books & Media
Vicki Boyd
Executive Vice President,
General Manager, Heinemann
Amy L. Dunkin*
Executive Vice President
and General Manager,
Professional Services
Michael Evans*
Executive Vice President,
Chief Revenue Officer
Matthew Mugo Fields*
Executive Vice President and
General Manager, Supplemental
and Intervention Solutions
Peter George
Executive Vice President,
Chief Technology Officer
Kristen Duffy Lavelle
Executive Vice President,
Global Operations and
Customer Experience
Amy Metet
Senior Vice President and
Chief Information Officer
Bianca Olson
Senior Vice President,
Corporate Affairs
James P. O’Neill*
Executive Vice President
and General Manager,
Core Solutions
14
Alejandro Reyes*
Senior Vice President
and Chief People Officer
*Executive officers as defined under Rule 3b-7 promulgated under
the Securities Exchange Act of 1934, as amended.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, or
For the fiscal year ended December 31, 2019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 001-36166
Houghton Mifflin Harcourt Company
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
27-1566372
(I.R.S. Employer
Identification No.)
125 High Street
Boston, MA 02110
(617) 351-5000
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol(s)
HMHC
Securities registered pursuant to Section 12(g) of the Act: None
Title of each class
Common Stock, $0.01 par value
The Nasdaq Stock Market LLC
Name of each exchange on which registered
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was
required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer smaller reporting company and
emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Non-accelerated filer
☐
Emerging growth company ☐
Accelerated filer
☐
Smaller reporting company ☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2019, was
approximately $600.8 million.
The number of shares of common stock, par value $0.01 per share, outstanding as of January 31, 2020 was 124,461,495.
Documents incorporated by reference and made a part of this Form 10-K:
The information required by Part III of this Form 10-K, to the extent not set forth herein, is incorporated herein by reference from the
Registrants Definitive Proxy Statement for its 2020 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission
not later than 120 days after December 31, 2019.
Table of Contents
Special Note Regarding Forward-Looking Statements
Business
PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Managements Discussion and Analysis of Financial Condition and Results of Operations
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
SIGNATURES
Exhibits, Financial Statement Schedules
Form 10-K Summary
Page(s)
3
4
14
23
24
24
24
25
27
28
51
52
108
108
109
109
109
109
109
109
111
116
117
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; 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:
changes in state and local education funding and/or related programs, legislation and procurement processes;
changes in state academic standards; industry cycles and trends; the rate and state of technological change; state
requirements related to digital instructional materials; changes in product distribution channels and concentration of
retailer power; changes in our competitive environment, including free and low-cost open educational resources;
periods of operating and net losses; our ability to enforce our intellectual property and proprietary rights; risks based
on information technology systems and potential breaches of those systems; dependence on a small number of print
and paper vendors; third-party software and technology development; possible defects in digital products; our ability
to identify, complete, or achieve the expected benefits of, acquisitions; our ability to execute on our long-term
growth strategy; increases in our operating costs; exposure to litigation; major disasters or other external threats;
contingent liabilities; risks related to our indebtedness; future impairment charges; changes in school district
payment practices; a potential increase in the portion of our sales coming from digital sales; risks related to doing
business abroad; changes in tax law or interpretation; management and personnel changes; timing, higher costs and
unintended consequences of our operational efficiency and cost-reduction initiatives, including our recently
announced workforce reduction; and other factors discussed in the Risk Factors section of our Annual Report on
Form 10-K (this Annual Report). 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
Item 1. Business
As used in this Annual Report on Form 10-K, the terms we, us, our, HMH and the Company refer
to Houghton Mifflin Harcourt Company, formerly known as HMH Holdings (Delaware), Inc., and its consolidated
subsidiaries, unless otherwise expressly stated or the context otherwise requires.
Our Company
We are a learning company committed to delivering connected solutions that engage learners, empower
educators and improve student outcomes. As a leading provider of K12 core curriculum, supplemental and
intervention solutions, and professional learning services, 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, while our award-winning childrens books, novels,
non-fiction, and reference titles are enjoyed by readers throughout the world.
We are organized along two business segments: Education and HMH Books & Media (formerly referred to as
Trade Publishing). Within our Education division, we focus on the kindergarten through 12th grade (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 districts needs, goals
and technological readiness.
For nearly two centuries, our HMH Books & Media division has brought renowned and awarded childrens,
fiction, non-fiction, culinary and reference titles to readers throughout the world. Our distinguished author list
includes 10 Nobel Prize winners, 49 Pulitzer Prize winners, and 26 National Book Award winners. We are home to
popular characters and titles such as Curious George, Carmen Sandiego, The Lord of the Rings, The Whole 30, The
Best American Series, the Peterson Field Guides, CliffsNotes, and The Polar Express, and published distinguished
authors such as Tim OBrien, Temple Grandin, Tim Ferriss, Kwame Alexander, Lois Lowry, and Chris Van
Allsburg.
On October 1, 2018, we completed the previously announced sale of all the assets, including intellectual
property, used primarily in our Riverside clinical and standardized testing business (Riverside Business).
Market Overview
We operate predominantly within the U.S. K-12 Education market, which represents over $650 billion of total
spending annually. Specifically, we focus on the U.S. market for K-12 instructional materials and services, which
we estimate to be approximately $11.0 billion in size.
The U.S. Education market comprises approximately 13,000 K-12 public school districts, 130,000 public and
private schools, nearly four million teachers and 50 million total student enrollment across public, private and
charter schools. From Fall 2019 to Fall 2028, total elementary and secondary school enrollment, an important driver
of long-term 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.
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The primary sources of funding for public schools in the U.S. are state and local tax collections, with Federal
funding accounting for approximately 9% of public education spending nationally. Consequently, general or
localized economic conditions as well as legislative and political decisions which affect the ability of state and
school districts to raise revenue through tax collections can have a significant impact on spending and growth in the
K-12 Education market. Public K-12 education has been, and remains, a high priority for political leaders,
accounting for more than one-fifth of all state and local government spending.
Education policy and curriculum choices have traditionally been local prerogatives in the U.S., but Federal
law and policy also play an important role. The Elementary and Secondary Education Act, reauthorized in 2015 by
the Every Student Succeeds Act (ESSA), requires that states, as a condition to receiving Federal education funds,
adopt challenging academic content standards, administer annual student tests aligned to those standards, develop
systems of accountability tied to specific goals for student achievement, and take measures to identify and support
low performing schools. ESSA gives states more flexibility than they had under prior law, but still requires
standards-based, largely assessment-driven accountability with a focus on the achievement of students in all
demographic subgroups.
One important change brought about by ESSA is that states are now permitted to use growth in student
achievement as measured by statewide assessments, in addition to grade-level proficiency, as an academic indicator
for purposes of accountability. Instructional solutions that incorporate interim assessments and data analytics to help
monitor student performance in real time can be especially useful in states that incorporate student growth as a
significant element of their accountability systems. Other changes brought about by ESSA include a greater
emphasis on English language learners, with progress towards English proficiency now a required element of state
accountability plans, a requirement that products and solutions paid for with Federal education funds have evidence
of effectiveness, and new requirements and expectations for Federally funded educator professional learning
programs. The new law also gives states and school districts greater flexibility in how they spend Federal dollars and
how they demonstrate that Federal funds are used to supplement and not supplant state and local spending.
Title I, the largest program within ESSA, and other ESSA programs also provide targeted funding for specific
activities, such as early childhood education, school improvement, dropout prevention, and before- and after-school
programs. The Individuals with Disabilities Education Act (IDEA) governs how states and public agencies
provide early intervention, special education and related services to children with disabilities. In addition, school
districts in many states are now able to spend educational funds on instructional materials that include core and
supplemental materials, computer software, digital media, digital courseware, and online services.
Academic content standards, which are grade-level expectations for student learning, are established at the
state level. States generally review and revise standards in each of the various subject areas every six to eight years,
and the revision or adoption of new standards typically gives rise to the need for new instructional materials and
services aligned to the new or revised standards. A large percentage of states have adopted the Common Core State
Standards (CCSS) in English language arts and mathematics or standards largely based on the Common Core,
and, as of December 2018, 19 states had adopted Next Generation Science Standards (NGSS). Both the CCSS and
NGSS are products of state-led collaborations. The adoption of these standards has led to greater uniformity among
states, but has not completely eliminated differences or the need for customized state-specific instructional
materials.
Internationally, we export and sell K-12 English language education products to premium private schools that
utilize the U.S. curriculum, who are located primarily in Asia, the Pacific, the Middle East, Latin America, the
Caribbean and Africa. We also participate in the U.S. consumer book publishing market, which is estimated to be
approximately $16.0 billion per year according to the Association of American Publishers.
Education net sales and billings are derived from Core Solutions and Extensions. Core Solutions products
address the core curriculum market with grade-level, educational standards-aligned materials. Extensions products
address the markets for supplemental programs, intervention programs, and professional learning. HMH Books &
Media products primarily address the consumer book publishing market.
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Market Segments
Core Curriculum
Our core curriculum offerings cover state-level educational standards within a subject and include a
comprehensive offering of teacher and student materials necessary to conduct grade-level instruction throughout the
entire school year. Products and services include students print and digital resources and a variety of supporting
materials such as teachers editions, formative assessments, whole group instruction materials, practice aids and
ancillary materials.
Core curriculum programs traditionally have been the primary resource for classroom instruction in most K-12
academic subjects, and as a result, enrollment trends are a major driver of industry growth. Although economic
cycles may affect short-term buying patterns, school enrollments, a driver of growth in the educational content
industry, are highly predictable and are expected to trend upward over the longer term.
Demand for core curriculum programs is also affected by changes in state curriculum standards, which drive
instruction, assessment, and accountability in each state. A significant change in state curriculum standards requires
that assessments, teacher training programs, and instructional materials be revised or replaced to align to the new
standards, which historically has driven demand for new comprehensive curriculum programs.
In the U.S., core curriculum is typically selected and purchased at the school district level and, in some cases,
at the individual school level. In 19 states, before districts make their selections, programs are first evaluated at the
state level for alignment to state academic standards and other criteria. These states are commonly referred to as
adoption states, while states that do not have a state level review process are called open states or open
territory states. The student population in adoption states represented approximately 51% of the U.S. public school
elementary and secondary school-age population in 2016 (the most recent year for which the National Center for
Education Statistics has provided this data). In some adoption states, districts are required to select materials from
the state-adopted list; in other adoption states, the state list serves as a recommendation, and districts are free to
purchase and use any materials they choose, whether or not adopted by the state. Adoption states typically review
materials in the various subject areas on a six- to eight-year cycle. School districts in those states tend to follow the
state review cycle and replace core programs in the year or years immediately following state adoption. In open
territory states, each individual school or school district evaluates and purchases materials independently, typically
according to a five- to ten-year cycle. As a result, in individual adoption states, purchases of core instructional
materials in a particular subject area tend to be clustered in a window of one to three years, while in individual open
territory states they may occur over several years.
Supplemental
Supplemental resources encompass a wide variety of targeted solutions that enrich learning and support
student achievement beyond core curriculum. Supplemental resources can be print and/or digital, and can include
software, workbooks, test-prep materials, formative assessment, games, and apps. Newer technologies, such as
artificial intelligence and machine learning, combined with more sophisticated algorithms are also driving the rise in
supplemental computer-adaptive practice solutions that can both support teachers who are often time and bandwidth
constrained, as well as improve personalization of learning for students.
Many teachers augment their core curriculum with supplemental resources for additional practice and
personalized instruction around particular areas of need, such as Math, Reading, Writing, or Vocabulary.
Supplemental materials are purchased by districts, schools, or individual teachers. These purchases are typically not
tied to adoption schedules and leverage funding from local, state and federal sources. We estimate this market to be
$2.0 billion per year.
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Intervention
Intervention solutions are generally purchased by individual schools or districts. Demand for intervention
materials is significant and growing in the United States. We estimate this market to be $1.5 billion per year. In the
latest National Assessment of Educational Progress assessments conducted in 2017, more than 60 percent of public
school students performed below proficiency in both literacy and mathematics. These students are strong candidates
for intervention programs that are focused on improving outcomes and ensuring students perform at grade level. As
demand for digital content and personalized learning solutions is growing, traditional distinctions between core,
supplemental and intervention materials and assessments are blurring.
Intervention products and services are funded through state and local funding as well as federal funding
allocations pursuant to the ESSA and IDEA. Title I provides funding to schools and school districts with high
concentrations of students from low income families and is often used to purchase intervention products and
services.
Professional Learning
The professional learning market includes consulting and support services to assist individual schools and
school districts in raising student achievement, implementing new programs and technology effectively, developing
effective teachers, principals and leaders, as well as school and school-district turnaround and improvement
solutions. We believe all districts and schools contract for some level of professional services. These services may
include support for up-front training, in-classroom coaching, institutes, author workshops, professional learning
communities, leadership development, technical support and maintenance, and program management.
Professional learning is directly addressed in ESSA. ESSA restructured Title II, the section of the law
addressing teacher quality, and eliminated federal highly qualified teacher requirements. ESSA prohibits U.S.
Department of Education mandates and incentives to evaluate teachers based on student test scores, which in recent
years have channeled resources and attention to the development of educator evaluation systems, measurement
tools, and related training. Title II now focuses instead on the role of the profession in improving student
achievement, including new requirements to ensure professional development is not only sustained (no one-day
workshops), but also job-embedded, data-driven, and personalized. It is expected that school districts will
need to focus their applications for teacher training to ensure teacher alignment with high quality standards, as well
as priorities for funds to low-performing schools where comprehensive support and improvement plans are in place.
There are also significant funding opportunities for professional learning as part of state programs, especially in
states where they have consolidated program funding and want solutions that are evidence-based.
The professional learning market, which is relatively fragmented in the United States, is expected to grow as
the transition to digital learning in classrooms increases the need for technology training and implementation support
for educators. We currently estimate the professional learning market to be $2.3 billion per year. We believe that the
use of interim data, differentiation, teacher content knowledge (in mathematics) and the use of technology in the
classroom are the areas in which teachers and leaders are most seeking support. Also, demand for teacher training
and professional development opportunities tied to the implementation of new or revised standards at the state level
is expected to continue. In addition, the need for new teacher development over the next several years is expected to
grow as we continue to see the greening of the teaching force, with approximately 355,000 new teachers hired
every year and approximately 44% of teachers leaving within their first five years in the profession.
Consumer Book Publishing
The consumer book publishing market includes childrens, fiction, non-fiction, culinary and reference titles
offered to consumers in print hardcover and softcover, ebook and audio formats, as well as multimedia extensions of
the titles, content and intellectual property associated with these titles. Our sales in this market consist of frontlist
titles (newly introduced titles, in their first year of publication) and backlist titles (current and updated copyright
editions of titles sold after their first year of publication). In addition to new frontlist sales, market growth is driven
by extended branding (e.g., movie tie-ins and anniversary releases of backlist titles) and new intellectual property
creation (e.g., extension of characters and franchises into additional formats).
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Between 2017 and 2018, the consumer book publishing market grew 1.5% to $16.2 billion, according to the
Association of American Publishers (the AAP). Since 2014, the same market has increased by approximately
$760 million according to the AAP.
Over the last five years, non-fiction books have seen the largest percentage sales growth with childrens and
young adult non-fiction sales growing 38.5% from 2014 to 2018 and adult non-fiction revenue growing 22.8% over
the same time period, according to the AAP.
Digital formats have gained traction in recent years with downloaded audio sales growing 28.7% from 2017 to
2018 and 181.8% from 2014 to 2018, according to the AAP. However, print remains the primary format in which
consumer books are produced and distributed. Within online retail channels, which is where most books are sold,
45.1% of 2018 sales were in print; 24.5% were ebooks; and 13.7% were downloaded audio.
Our Products and Services
We are organized in two business segments: Education and HMH Books & Media. Our primary segment
measures are net sales and Adjusted EBITDA. The Education segment is our largest business, representing
approximately 87%, 85% and 86% of our total net sales for the years ended December 31, 2019, 2018 and 2017,
respectively.
Education
Our Education segment provides connected solutions that engage learners, empower educators and improve
student outcomes. The principal customers for our Education products are K-12 school districts, which purchase
core curriculum, supplemental and intervention solutions and professional learning services.
The Education segment net sales and Adjusted EBITDA were $1,210.6 million and $196.9 million,
$1,122.7 million and $210.6 million, and $1,146.5 million and $223.9 million for the years ended December 31,
2019, 2018 and 2017, respectively. Our Education offerings consist of the following:
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Core Solutions: Our core curriculum offerings include education programs in disciplines including
Reading, Literature, Math, Science and Social Studies that serve as primary sources of classroom
instruction and represented 54% and 47% of our Education segment billings for the years ended
December 31, 2019 and 2018, respectively.
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Our core programs are developed based on extensive hours of research, including educator input.
Educators are the centerpiece of the classroom, but count on comprehensive core curriculum to be
the backbone of their instruction. Our core solutions are created to provide educators with the
resources needed to align with state standards and support students in their mastery of grade-level
subject matter.
Between 2016-2018, we launched our next generation of core programs for each of the major
subject areas: English Language Arts (Reading and Literature), Mathematics, Science and Social
Studies. In Texas, where the largest English Language Arts (ELA) K-8 adoption was held in
2018 and 2019, we captured what we estimate to be over 50% of the addressable market with our
new Into Reading and Into Literature programs. Further, our Into Reading and Into Literature
national programs, our Into Math national offerings for grades 3-5 and 6-8 along with the K-8
Florida version all received top all green scores from EdReports.org. Science Dimensions,
which was co-authored by Dr. Cary Sneider, a writer of the Next Generation Science Standards,
was approved by the State Board of Education of California in 2018. HMH Social Studies, our
next generation social studies program for grades 6-12, incorporates innovative technology like
Google Expeditions to offer curriculum-aligned virtual reality field trips.
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Extensions: Our extensions offerings include supplemental solutions, intervention solutions,
professional services, and our Heinemann brand that provides professional resources and educational
services for teachers. Our extensions offerings collectively accounted for 46% and 53% of our
Education segment billings for the years ended December 31, 2019 and 2018, respectively.
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The extensions category represents a notable growth opportunity. We estimate this category
accounts for about $6 billion in market opportunity. We believe we hold approximately 10% of
this market.
Through our Heinemann brand, we provide professional books, curricular resources, and
professional services for teachers. Heinemann is a leading professional publisher for educators,
and features well-known, respected authors and thought leaders such as Irene Fountas, Gay Su
Pinnell, Lucy Calkins, and Jennifer Serravallo, who support the practice of teachers through
books, videos, workshops, online courses, and curricular resources.
Our intervention solutions include: READ 180 Universal, one of a select number of programs that
the independent, government-run What Works Clearing House has awarded its highest
effectiveness ratings for improving comprehension and literacy achievement; MATH 180, a math
intervention program focusing on deep understanding and mastery of essential skills and concepts
enabling access to algebra and advanced mathematics; System 44, a stand-alone program with a
holistic, blended learning model that delivers just-in-time intensive intervention for the most
challenged readers in grades 3-12; and iRead, an adaptive technology-based solution focused on
helping early learners in grades K-2 become more proficient readers using personalized learning.
These solutions are called upon to help students with unique needs, such as the growing
population of English language learners.
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Our professional services offerings bring together world-renowned authors and education experts
to work directly with 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 from trusted names like the
International Center for Leadership in Education, Literacy Solutions, and Math Solutions.
Our supplemental solutions include award-winning solutions like Waggle (which won the CODiE
award for Best Learning Capacity-Building Solution), as well as artificial intelligence and state-
of-the-art speech recognition-driven Amira Assessment and writing-enhancing online tool
Writable that we offer through strategic partnerships. We also offer HMH Classroom Libraries,
which provide individually curated collections of just-right books to strengthen literacy
development and foster independent reading.
By leveraging our leading position in the U.S. instructional materials market, we aim to engage our customers
with solutions addressing the variety of instructional needs across the educational achievement spectrum. We
believe that by integrating our solutions on a single platform, which uses a common student dataset, and by
developing ongoing connections with the teachers who use our solutions, we will be well positioned to increase and
sustain market share and grow our Education segment revenues.
HMH Books & Media
Founded in 1832, HMH Books & Media develops, markets and sells consumer books in print and digital
formats and licenses book rights to other publishers and electronic businesses in the United States and abroad. Our
principal distribution channels for this segment are retail stores (both physical and online) and wholesalers.
Reference materials are also sold to schools, colleges, libraries, office supply distributors and other businesses.
HMH Books & Media offers an extensive library of general interest, young readers and reference works that
include well-known characters and brands. Our award-winning general interest titles include literary fiction,
culinary, and non-fiction in hardcover, ebook and paperback formats, including the Mariner Books paperback line.
Among the general interest properties are the popular J.R.R. Tolkien titles, the prolific The Best American Series
and major cookbook brands such as Betty Crocker and Better Homes and Gardens in addition to recent best sellers
including the How to Cook Everything series and The Whole30.
In young readers publishing, our list addresses a broad age group and includes recognized characters and titles
such as Curious George and Martha Speaks, Five Little Monkeys, Gossie & Friends, Polar Express, Little Blue
Truck, and many more. We also publish novels for young adults, a growing genre, including titles from Lois Lowry,
author of The Giver, and Kwame Alexander. Our HMH Books & Media business collaborated on the launch of a
new animated series Carmen Sandiego on Netflix as part of our strategy to expand our content across media
platforms. In February 2019, we also launched HMH Audio with the goal of capitalizing on the growth of
downloaded audiobooks; in Fall 2019, we released new audiobook editions of many of our adult and young reader
frontlist books, as well as select titles from our substantial backlist.
For the years ended December 31, 2019, 2018 and 2017, HMH Books & Media net sales and Adjusted
EBITDA were approximately $180.0 million and $14.9 million, $199.7 million and $21.9 million, and
$180.6 million and $12.1 million, respectively.
Seasonality
Approximately 87% of our net sales for the year ended December 31, 2019 were derived from our Education
segment, which is a markedly seasonal business. Schools conduct the majority of their purchases in the second and
third quarters of the calendar year in preparation for the beginning of the school year. Thus, over the latest three
completed fiscal years, approximately 67% 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 adoptions 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.
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Competition
We sell our products in highly competitive markets. In these markets, product quality, innovation and
customer service are major differentiating factors between companies. Other factors affecting competition include:
(i) competitive pricing, sampling and gratis costs; (ii) digitization and innovative delivery; and (iii) educational
effectiveness of the program. In addition to national curriculum publishers, we also compete with a variety of
specialized or regional publishers that focus on select disciplines and/or geographic regions in the K-12 market.
There are also multiple competitors in the HMH Books & Media, supplemental and assessment markets offering
content that school districts increasingly are using as part of their core classroom instructional materials. In addition,
school districts in many states are able to spend educational funds on instructional materials that include core and
supplemental materials, computer software, digital media, digital courseware, and online services. Our larger
competitors in the educational market include Savvas Learning Co. (formerly Pearson Education, Inc.), McGraw
Hill Education, Cengage Learning, Inc., Scholastic Corporation, John Wiley & Sons, Inc., Curriculum Associates,
LLC, Benchmark Education, LLC, Accelerate Learning, Inc., and Amplify Education, Inc. Also competing in our
market as a substitute are open educational resources. These resources are free, digital solutions that range from
supplemental resources to full Core Solutions programs.
Printing and binding; raw materials
We outsource the printing and binding of our products, with approximately 44% of our printing requirements
handled by one major supplier. We have procurement agreements that provide volume and scheduling flexibility and
price predictability. We have a longstanding relationship with these parties. Approximately 25% of our printed
materials (consisting primarily of teachers editions and other ancillary components) are printed outside of the U.S.
and approximately 75% of our printed materials (including most student editions) are printed within the U.S. Paper
is one of our principal raw materials. We purchase our paper primarily through one paper merchant and also directly
through suppliers for limited product types. We maintain various agreements that protect against supply availability
and unbound price increases. We manage our paper supply concentration by having primary and secondary sources
and staying ahead of dramatic market changes.
Distribution
We operate three distribution facilities from which we coordinate our own distribution process: one each in
Indianapolis, Indiana; Geneva, Illinois; and Troy, Missouri. We also utilize select suppliers to assist us with
coordinating the distribution process for a limited number of product types. Additionally, some adoption states
require us to use in-state textbook depositories for educational materials sold in that particular state. We utilize
various delivery firms, such as United Parcel Service Inc., FedEx Freight, etc., to facilitate the principally ground
transportation of products.
Employees
As of December 31, 2019, we had approximately 3,400 employees, none of which were covered by collective
bargaining agreements. These employees are substantially located in the United States with 235 employees located
outside of the United States. We believe that relations with employees are generally good.
Intellectual property
Our principal intellectual property assets consist of our trademarks and copyrights in our content.
Substantially all of our publications are protected by copyright, whether registered or unregistered, either in our
name as the author of a work made for hire or the assignee of copyright, or in the name of an author who has
licensed us to publish the work. Ownership of such copyrights secures the exclusive right to publish the work in the
United States and in many countries abroad for specified periods: in the United States, in most cases, either 95 years
from publication or for the authors life plus 70 years, but in any event a minimum of 28 years for works published
prior to 1978 and 35 years for works published thereafter. In most cases, the authors who retain ownership of their
copyright have licensed to us exclusive rights for the full term of copyright. Under U.S. copyright law, for licenses
granted by an author during or after 1978, such exclusive licenses are subject to termination by the author or certain
of the authors heirs for a five year period beginning at the end of 35 years after the date of publication of the work
or 40 years after the date of the license grant, whichever term ends earlier.
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We do not own any material patents, franchises or concessions, but we have registered certain trademarks and
service marks in connection with our publishing businesses. We believe we have taken, and take in the ordinary
course of business, appropriate available legal steps to reasonably protect our intellectual property in all material
jurisdictions.
Environmental matters
We generally contract with independent printers and binders for their services, and our operations are
generally not otherwise affected by environmental laws and regulations. However, as the owner and lessee of real
property, we are subject to environmental laws and regulations, including those relating to the discharge of
hazardous materials into the environment, the remediation of contaminated sites and the handling and disposal of
wastes. It is possible that we could face liability, regardless of fault, and can be held jointly or severally liable, if
contamination were to be discovered on the properties that we own or lease or on properties that we have formerly
owned or leased. We are currently unaware of any material environmental liabilities or other material environmental
issues relating to our properties or operations and anticipate no material expenditures for compliance with
environmental laws or regulations.
Environmental, Social and Governance (ESG)
As a corporate citizen, we accept and promote a community responsibility to minimize our impact on the
environment to ensure that we will be able to serve teachers, students and all readers for years to come. As such, we
seek to make environmentally responsible choices in our business practices. We set objectives for continual
improvement of our environmental and sustainability management procedures. Looking ahead, we are working to
expand our company-wide sustainability efforts, setting additional goals and measuring progress in other areas
material to our business.
Responsible Paper Usage
One of our on-going sustainability focus areas is our approach to how we source, use and dispose of
paper related to our products. In 2019, we strengthened and updated our Paper Sourcing and Usage Policy that
reflects our continuing commitments to our environment and surroundings. Key 2019 progress highlights
were: 99% of HMH purchased paper for education products was manufactured with no less than 10%
recycled fiber; 81% of paper we procured domestically for HMH Books & Media segment products was
Forest Stewardship Council (FSC)-certified; and 86% of the paper we procured internationally for HMH
Books & Media segment products was FSC-certified.
Transportation
A major aspect of our business involves the transportation of our products, and we work to promote
environmentally friendly modes of such transportation. In 2019, HMH estimates that it saved 964,000 pounds
of CO2 by managing our carbon footprint by consolidating shipments, shipping directly from vendors to end
recipients when possible and utilizing intermodal rail shipments.
HMH participates in the Environmental Protection Agencys (EPA) SmartWay program. The EPAs
SmartWay program helps companies advance supply chain sustainability by measuring, benchmarking, and
improving freight transportation efficiency. Through this program, HMH partners with the EPA to improve
our shipping operations to achieve a more sustainable transportation process that directly facilitates a
reduction in our carbon footprint. In 2019, HMH estimates that it saved 208,000 pounds of CO2 by
participating in the SmartWay program.
Waste Management and Recycling
Whenever possible, we aim to recycle our excess product and waste generated at our Distribution
Centers to avoid sending recyclable products and other waste to landfills.
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destruction)
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Donation is HMHs preferred method of disposal for excess books and materials (rather than
96% of the waste generated at HMHs Distribution Centers is recycled
In our corporate offices, each employee has a recycling and a garbage bin. We work to increase
employee awareness regarding waste management and recycling with bins and signage.
Energy Use
We strive to reduce energy consumption at our HMH Warehouses and related offices through:
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Conversion to high efficiency fluorescent bulbs
Conference rooms with motion sensor lighting
Energy-efficient HVAC and Heating Units
LED light fixtures in parking lots
In addition, the building that houses HMHs Boston Headquarters at 125 High Street has received the
LEED® (Leadership in Energy and Environmental Design) Gold Certification for Existing Buildings,
which is the second highest LEED Certification level attainable.
Further, HMH is listed in Forbes Work from Home 2019: The Top 100 Companies for Remote Jobs
due to our remote location positions across the company that contribute to the reduction in facility energy use
and employee transportation fuel consumption.
Additional information
We are headquartered in Boston, Massachusetts. Our corporate website is www.hmhco.com. We make
available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to these reports, as well as other information, free of charge through our corporate website under the
Financial Information link located at: ir.hmhco.com, as soon as reasonably practicable after being filed with or
furnished to the Securities and Exchange Commission (the SEC). The information found on our website or any
other website we refer to in this Annual Report on Form 10-K is not part of this Annual Report on Form 10-K or any
other report we file with or furnish to the SEC.
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Item 1A. Risk Factors
Our business and results of operations may be adversely affected by changes in federal, state and local education
funding, and changes in legislation and public policy.
A majority of our sales are to public school districts in the United States, most of which rely primarily on a
combination of local tax revenues and state legislative appropriations for general operating funds and to pay for
purchases of goods and services, including instructional materials. Funding for public schools at both the state and
local levels can be affected by tax collections, which are typically sensitive to general economic conditions, and by
political and policy choices made by state and local governments. A reduction in funding levels, whether due to an
economic downturn or legislative action, or a failure of projected funding increases to materialize, can constrain
resources available to school districts for making purchases of instructional materials and adversely affect our
business and results of operations.
Some states, including a majority of adoption states, provide dedicated state funding for the purchase of
instructional content and/or classroom technology, and expenditures for instructional materials in those states tend to
be highly dependent on appropriation of those funds. If dedicated funding is not appropriated, or if the amount is
substantially less than anticipated or legislative action is taken to lift restrictions on the use of those funds, then
purchases of instructional materials may be significantly reduced and our net sales may be adversely impacted.
In addition, many school districts, including most large urban districts, receive substantial federal funding
through Title I of the Elementary and Secondary Education Act (ESEA), the Individuals with Disabilities Act
(IDEA), and other federal education programs. These funds supplement state and local funding and are used
primarily to serve specific populations, such as low-income students and families, students with disabilities, and
English language learners as well as to support programs to improve the quality of instruction, including educator
professional learning. The funding of these programs is subject to Congressional appropriation. A significant
reduction in appropriation levels could have an adverse effect on our sales, particularly sales of intervention and
professional learning products and services.
Federal and state legislative and policy changes can also affect our business. For example, changes to federal
education law in the Every Student Succeeds Act (ESSA) give states greater latitude in how they approach
assessment and accountability, support and improvement of low performing schools, as well as accounting for the
expenditure of federal program funds. The changes in ESSA also provided for new requirements regarding evidence
of effectiveness of educational products and services purchased with federal funds. The changes in ESSA and state
legislation and administrative policy decisions on matters such as assessment and accountability, curriculum and
intervention with respect thereto could affect demand for our products.
State instructional materials adoptions, which account for a significant portion of our net sales of K-12
instructional materials, are highly cyclical and pose significant inherent risks that could materially impact our
results of operations.
Due to the revolving and staggered nature of predetermined state adoption schedules, sales of K-12
instructional materials have traditionally been cyclical, with some years offering more and/or larger sales
opportunities than others. Since a large portion of our sales are derived from state adoptions, our overall results can
be materially affected from year to year by the adoption schedule, particularly in large adoption states. For example,
over the next few years adoptions are scheduled or have already begun in one or more of the primary subjects of
reading, language arts and literature, social studies, science and mathematics in, among other states, California,
Florida and Texas, which are the three largest adoption states. Our failure to secure approval for our programs or
perform according to our expectations in larger new adoption opportunities could materially and adversely affect our
net sales for the year of the adoption and in subsequent years.
In any state adoption, there is the inherent risk that one or more of our programs will not be approved by a
particular state board of education or other adopting authority. While school districts in most adoption states are not
precluded from purchasing materials that have not been approved by the state, in many cases, exclusion of a
program on the state-adopted list can materially and adversely impact our ability to compete effectively at the school
district level. Moreover, even if our program is approved by the state, we face significant competition and there is no
guarantee that school districts will select our program or that we will be able to capture a meaningful share of the
sales in such state.
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State adoptions can be delayed, postponed or cancelledsometimes with little or no warning and after we
have made significant investments in anticipation of the adoptiondue to various reasons, such as funding
shortfalls, delays in development and approval of state academic standards and specifications, competing priorities
or school readiness. In addition, individual school districts may decline to purchase new programs in accordance
with the states adoption schedule. A substantial delay, postponement or cancellation of a larger adoption
opportunity can adversely affect the amount and timing of our net sales return on investment for the affected
product, our business and our results of operations.
Further, the timing of the legislative appropriations process in most states is such that it is often impossible to
know with certainty whether implementation of an adoption will be funded until after products have been submitted
for review. By that time, investments have been made for product development and substantial expenses incurred for
sales, marketing and other costs. If the legislature in a state that provides dedicated funding for instructional
materials decides not to appropriate those funds or appropriates substantially less than anticipated, due to a revenue
shortfall or other reasons, or if the legislature lifts restrictions on use of those funds, then implementation of that
adoption could be substantially compromised or delayed and our net sales and return on investment could be
adversely affected.
Changes in state academic standards could affect our market and require investment in development of new
programs or modifications to our existing programs and any delays or controversies in the implementation of
such standards could impact our results of operations.
States may adopt new academic standards or revise existing standards, which may affect our market and
require investment in the development of new programs or modifications to our existing programs offered for sale in
states that adopt such changes. Delays or controversies in the implementation of the adoption of new or revised
academic standards may result in insufficient lead time before the deadline to submit instructional materials for an
adoption. As a result, we have in the past and may again have to invest more than planned in order to complete
product development or make the modifications in the compressed timeframe to bring our program into alignment
with the new or revised standards, adversely affecting our return on investment. Alternatively, we may determine
that completing product development or making the modifications within the available timeframe is not practicable,
and elect not to participate in the adoption, forgoing what might have been a significant sales opportunity which
could materially and adversely affect our net sales for the year of the adoption and subsequent years.
We may not be able to execute on our long-term growth strategy or achieve expected benefits from actions taken
in furtherance of our strategy, which could materially and adversely affect our business, financial condition and
results of operations and/or our growth.
If we are not able to execute on our long-term growth strategy or achieve expected benefits from our actions in
furtherance of our strategy, it could materially and adversely affect our business, financial condition and results of
operations and/or our growth. In any event, actions taken in furtherance of our strategy, such as transitioning to new
business models or entering into new market segments could adversely impact our cash flow and our business in
unforeseen ways.
Our investments in new products, service offerings, platforms and/or technologies could impact our profitability.
We operate in highly competitive markets that continue to change to adapt to customer needs. These needs
include an increasing demand for integrated learning solutions. In order to address these needs, we are investing in
new products, new technology and infrastructure, and a new common platform to integrate our products, services
and solutions. These investments may be less profitable than what we have experienced historically, may consume
substantial financial resources and/or may divert managements attention from existing operations, all of which
could materially and adversely affect our business, results of operations and financial condition.
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We rely on third-party software and technology development as part of our digital platform.
We rely on third parties for some of our software and technology development. For example, some of the
technologies and software that compose our instruction and assessment technologies are developed by third parties.
We rely on those third parties for the development of future components and modules. Thus, we face risks
associated with technology and software product development and the ability of those third parties to meet our needs
and their obligations under our contracts with them. In addition, we rely on third parties for our internet-based
product hosting. The loss of one or more of these third-party partners, a material disruption in their business or their
failure to otherwise perform in the expected manner could cause disruptions in our business that may materially and
adversely affect our results of operations and financial condition.
Defects in our digital products and platforms could cause financial loss and reputational damage.
In the fast-changing digital marketplace, demand for innovative technology has generally resulted in short lead
times for producing products that meet customer needs. Growing demand for innovation and additional functionality
in digital products increases the risk that our digital products and platforms may contain flaws or corrupted data that
may only become apparent after product launch, particularly for new products and platforms and new features for
existing products and platforms that are developed and brought to market under tight time constraints. Problems
with the performance of our digital products and platforms could result in liability, loss of revenue or harm to our
reputation.
Changes in product distribution channels and concentration of retailer power may restrict our ability to grow and
affect our profitability in our HMH Books & Media segment.
Distribution channels such as online retailers and ecommerce sites, digital delivery platforms, expanding
social media, digital discovery and marketing platforms, combined with the increased concentration of retailer
power, pose threats and provide opportunities to traditional consumer publishing models of our HMH Books &
Media segment, potentially impacting both sales volume and profitability. The reduction in brick and mortar
booksellers, the resulting concentration of power held by our largest retailers, and the increased concentration of
consumer book spending on best-selling titles could negatively affect our business, financial condition and results of
operations.
We operate in a highly competitive environment where the risks from competition are intensified due to rapid
changes in our markets and industry; as a result, we must continue to adapt to remain competitive.
We operate in highly competitive markets. The risks of competition are intensified in the current environment
where investment in new technology is ongoing and there are rapid changes in the products and services our
customers are seeking and our competitors are offering, as well as new technologies, sales and distribution channels.
In addition to national curriculum publishers, we compete with a variety of specialized or regional publishers that
focus on select disciplines and/or geographic regions in the K-12 market. There are multiple competitors in the
HMH Books & Media segment and supplemental market offering content that school districts increasingly are using
as part of their core classroom instructional materials. Our larger competitors in the educational market include
Savvas Learning Co. (formerly Pearson Education, Inc.), McGraw Hill Education, Cengage Learning, Inc.,
Scholastic Corporation, John Wiley & Sons, Inc., Curriculum Associates, LLC, Benchmark Education, LLC,
Accelerate Learning, Inc., and Amplify Education, Inc. Some of these established competitors may have greater
resources and less debt than us and, therefore, may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or devote greater resources to the development, promotion and sale of their
products and services than we can. Also competing in our market as a substitute are open educational resources. In
addition, the market shift toward digital education solutions has induced both established technology companies and
new start-up companies to enter certain segments of our market. These new competitors have the possible advantage
of not needing to transition from a print business to a digital business. In addition, many established technology
companies have substantial resources that they could devote to developing or acquiring digital educational products
and/or content and, distributing their own and/or aggregated educational content to the K-12 market, which could
negatively affect our business, financial condition and results of operations. There is also a risk of further
disintermediation, which is the occurrence of state, district and other customers contracting directly with technology
companies, enabling technology companies to develop direct relationships with our customers, and accordingly,
have significant influence over access to and, pricing and distribution of digital and print education materials. We
may not be able to adapt as needed to remain competitive in the market given the foregoing factors.
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The availability of free and low-cost open education resources could adversely affect our net sales and exert
downward pressure on prices for our education products.
In the K-12 market, we face growing competition from free, openly licensed content, often referred to as open
education resources (OER). Free or low-cost OER content is typically delivered via the internet, and in some cases
print versions and related services are available for purchase. A number of states support the use of OER by
providing curated resources and others, including New York, Louisiana, Michigan and Texas, are funding
development of OER or have done so in the past. Twenty states have signed on to the U.S. Department of
Educations GoOpen campaign, which seeks to support users of OER and promote coordination and sharing of OER
among states. In addition, in recent years there have been initiatives by not-for-profit organizations such as the Gates
Foundation and the Hewlett Foundation to develop educational content that can be open sourced and made
available to educational institutions for free or nominal costs. The increased availability of free and low-cost OER
could negatively affect our customers perception of the value of our content, reduce demand for our educational
products, and/or exert downward pressure on prices for our products, and adversely impact our net sales.
Our operating results fluctuate on a seasonal and quarterly basis and our business has historically been
dependent on our results of operations for the third quarter.
Our business is seasonal. Approximately 87% of our net sales for the year ended December 31, 2019 were
derived from our Education segment, which is a markedly seasonal business. Purchases of K-12 products are
typically made in the second and third quarters of the calendar year in preparation for the beginning of the school
year. We typically realize a significant portion of net sales during the third quarter, making third-quarter results
material to full-year performance. This sales seasonality affects operating cash flow from quarter to quarter. We
typically incur a net cash deficit from all of our activities through the middle of the third quarter of the year. We
cannot be sure that our second and third quarter net sales will continue to be sufficient to fund our business and meet
our obligations or that they will be higher than our net sales for our other quarters or in the prior-year periods. In the
event that we do not derive sufficient net sales for the second and third quarter, we may have a liquidity shortfall and
be unable to fund our business and/or meet our debt service requirements and other obligations.
Our net sales, operating profit or loss and net cash provided or used by operations are impacted by the inherent
seasonality of the academic calendar. As purchases of K-12 products are typically made in the second and third
quarters of a given calendar year, changes in our customers ordering patterns may impact the comparison of results
between a quarter and the same quarter of the prior year, between a quarter and the prior consecutive quarter or
between a fiscal year and the prior fiscal year, which can make it difficult for us to forecast the timing of customer
purchases and assess our financial performance until late in the year.
Our history of operations includes periods of operating and net losses, and we may incur operating and net losses
in the future. Such losses may impact our liquidity.
For the years ended December 31, 2019, 2018 and 2017, we generated operating losses of $163.2 million,
$90.5 million and $135.1 million, respectively, and net losses of $213.8 million, $94.2 million and $103.2 million,
respectively. If we continue to suffer operating and net losses, our liquidity may suffer and we may not be able to
fund our business and/or meet our debt service requirements and other obligations. Furthermore, the market price of
our common stock may decline significantly.
Our ability to enforce our intellectual property and proprietary rights may be limited, which may harm our
competitive position and materially and adversely affect our business and results of operations.
Our products are largely comprised of intellectual property content delivered through a variety of media,
including print, digital and web-based media. We rely on a combination of copyright, trademark and other
intellectual property laws and rights as well as employee agreements and other contracts to establish and protect our
proprietary rights in our products and technology. However, our efforts to protect our intellectual property and
proprietary rights may not be sufficient and we cannot make assurances that our proprietary rights will not be
challenged, invalidated or circumvented. Moreover, we conduct business in certain other countries where the extent
of effective legal protection for intellectual property rights is uncertain. It is possible we could be involved in
expensive and time-consuming litigation to maintain, defend or enforce our intellectual property.
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Furthermore, despite the existence of copyright and trademark protection under applicable laws, third parties
may nonetheless violate our intellectual property rights, and our ability to remedy such violations, including in
certain foreign countries where we conduct or seek to conduct business, may be limited. In addition, the copying and
distribution of content over the Internet creates additional challenges for us in protecting our proprietary rights. If we
are unable to adequately protect and enforce our intellectual property and proprietary rights, our competitive
position may be harmed, and our business and financial results could be materially and adversely affected.
Failure to comply with privacy laws or adequately protect personal data could cause financial loss and
reputational damage.
Across our businesses we hold large volumes of personal data, including that of employees, customers and
students. We are subject to a wide array of different privacy laws, rules, regulations and standards in the U.S. as well
as in foreign jurisdictions where we conduct business, including, but not limited to (i) the Childrens Online Privacy
Protection Act and state student data privacy laws in connection with personally identifiable information of students,
(ii) the Payment Card Industry Data Security Standards in connection with collection of credit card information from
customers, and (iii) various EU data protection and privacy laws, including a comprehensive General Data Privacy
Regulation that became effective in May 2018.
There has been increased public attention regarding the use of personal information and data transfer,
accompanied by legislation and regulations intended to strengthen data protection, information security and
consumer and personal privacy. The law in these areas continues to develop and the changing nature of privacy laws
in the U.S., the European Union and elsewhere could impact our processing of personal and sensitive information of
our employees, vendors and customers.
Continued privacy concerns may result in new or amended laws and regulations. Our brands and customer
relationships are important assets. Future laws and regulations with respect to the collection, compilation, use, and
publication of information and consumer privacy could result in limitations on our operations, increased compliance
or litigation expense, adverse publicity, reputational damage to our brands and customer relationships, potential
cancellation of existing business and diminished ability to compete for future business. It is also possible that we
could be prohibited from collecting or disseminating certain types of data, which could affect our ability to meet our
customers needs.
We are subject to risks based on information technology systems. A major breach in security or information
technology system failure could interrupt the availability of our internet-based products and services, result in
corruption and/or loss of data, cause liability or reputational damage to our brands and business and/or result in
financial loss.
Our business is dependent on information technology systems to support our complex operational and
logistical arrangements across our businesses. We provide software and/or internet-based products and services to
our customers. We also use complex information technology systems and products to support our business activities,
particularly in infrastructure and as we move our products and services to an increasingly digital delivery platform.
We face several technological risks associated with software and/or internet-based product and service
delivery in our educational businesses, including with respect to information technology capability, reliability and
security, enterprise resource planning, system implementations and upgrades. Failures of our information technology
systems and products (including because of operational failure, natural disaster, computer virus or hacker attacks)
could interrupt the availability of our internet-based products and services, result in corruption or loss of data or
breach in security and result in liability, reputational damage to our brands and/or adversely impact our operating
results.
While we have policies, processes, internal controls and cybersecurity mechanisms in place intended to
maintain the stability of our information technology, provide security from unauthorized access to our systems and
maintain business continuity, no mechanisms are entirely free from the risk of failure and we have no guarantee that
our security mechanisms will be adequate to prevent all security threats. Our brand, reputation, especially in the K-
12 market, and consequently our operating results may be adversely impacted by unanticipated system failures,
corruption, loss of data and/or breaches in security.
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Failure to prevent or detect a malicious cyber-attack on our information technology systems could result in
liability, reputational damage, loss of revenue and/or financial loss.
Cyber-attacks and hackers are becoming more sophisticated and pervasive. Our business is dependent on
information technology systems to support our complex operational and logistical arrangements across our
businesses. We provide software and/or internet-based products and services to our customers. We also use complex
information technology systems and products to support our business activities, particularly in infrastructure and as
we move our products and services to an increasingly digital delivery platform. Across our businesses we hold large
volumes of personal data, including that of employees, customers and students.
Efforts to prevent cyber-attacks and hackers from entering our systems are expensive to implement and may
limit the functionality of our systems. Individuals try to gain unauthorized access to our systems and data for
malicious purposes, and our security measures may fail to prevent such unauthorized access. Cyber-attacks and/or
intentional hacking of our systems could adversely affect the performance or availability of our products, result in
loss of customer data, adversely affect our ability to conduct business, or result in theft of our funds or proprietary
information, the occurrence of which could result in liability, reputational damage, loss of revenue and/or financial
loss.
We are dependent on a small number of third parties to print and bind our products and to supply paper, a
principal material for our products. If we were to lose our relationship with our key print vendor and/or paper
merchant, our business and results of operations may be materially and adversely affected.
We outsource the printing and binding of our products and currently rely on one key third-party print vendor
that handles approximately 44% of our printing requirements, and we expect a small number of print vendors will
continue to account for a substantial portion of our printing requirements for the foreseeable future. The loss of, or a
significant adverse change in our relationship with our key print vendor could have a material adverse effect on our
business and cost of sales.
In addition, we purchase paper, a principal raw material for our print products, primarily through one paper
merchant. Further, paper merchants, including our paper merchant, rely on paper mills to produce the paper that they
broker. There can be no assurance that our relationships with our print vendor and/or paper merchant will continue
or that their business or operations will not be affected by disruptions in the industries that they rely on, including a
disruption in the paper mill industry, major disasters or other external factors. The loss of our key print vendor
and/or paper merchant, a material change in our relationship with them, a material disruption in their business or
their failure to otherwise perform in the expected manner could cause disruptions in our business that may materially
and adversely affect our results of operations and financial condition.
We may not be able to identify and complete any future acquisitions or achieve the expected benefits from any
future acquisitions, which could materially and adversely affect our business, financial condition and results of
operations and/or our growth.
We have at times used acquisitions as a means of expanding our business and technologies and expect that we
will continue to do so in the future as part of our capital allocation strategy. We may be unable to identify suitable
acquisition opportunities and, even if we were able to do so, we may not be able to finance or complete any such
future acquisition on terms satisfactory to us. Further, we may not be able to successfully integrate acquisitions into
our existing business, achieve anticipated operating advantages and/or realize anticipated cost savings or other
synergies. The acquisition and integration of businesses involve a number of risks, including: use of available cash,
issuance of equity or debt securities, incurrence of new indebtedness or borrowings under our revolving credit
facility to consummate the acquisition and/or integrate the acquired business; diversion of managements attention
from operations of our existing businesses and those of the acquired business to the integration; integration of
complex systems, technologies and networks into our existing systems; difficulties in the assimilation and retention
of employees; unexpected costs, delays or other risks related to transition support services provided under any
transition services agreement that may be executed as part of the acquisition. These transactions may create multiple
and overlapping product lines that are offered, priced and supported differently, which could cause customer
confusion and delays in service. The demands on our management related to the increase in our size after an
acquisition also may have potential adverse effects on our operating results.
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If we are unable to finance or complete any future acquisition on terms satisfactory to us (or at all) and/or we
are unable to successfully integrate any acquisitions into our existing business, achieve anticipated operating
advantages and/or realize anticipated cost savings or other synergies from any such acquired business, it could
materially and adversely affect our business, financial condition and results of operations.
If we are unable to attract, retain and focus a strong leadership team, a dynamic sales force, software engineers
and other key personnel, it could have an adverse effect on our business and ability to remain competitive,
financial condition and results from operations.
Our success depends, in part, on our ability to continue to attract, focus and retain a strong leadership team, a
dynamic sales force, software engineers and other key personnel at economically reasonable compensation levels.
We operate in highly competitive industry segments that continue to change to adapt to customer needs and
technological advances and in which there is intense competition for experienced and highly effective personnel. If
we are unable to timely attract and retain key personnel with relevant skills for our evolving industry segments it
could adversely affect our business and ability to remain competitive, financial condition and results of operations.
In addition, our business results depend largely upon the experience and knowledge of local market dynamics
and long-standing customer relationships of our sales personnel. Our inability to attract, retain and focus effective
sales and other key personnel at economically reasonable compensation levels could materially and adversely affect
our ability to operate profitably and grow our business.
If we fail to maintain strong relationships with our authors, illustrators and other creative talent, as well as to
develop relationships with new creative talent, our net sales and results of operations could be adversely affected.
Our HMH Books & Media business and certain aspects of our K-12 business are highly dependent on
maintaining strong relationships with the authors, illustrators and other creative talent who produce books and other
products sold to our customers. We operate in a number of highly visible industry segments where there is intense
competition for successful authors, illustrators and other creative talent. Any overall weakening of these
relationships, or the failure to develop successful new relationships, could have an adverse effect on our net sales
and results of operations.
Our major operating costs and expenses include employee compensation as well as paper, printing and binding
costs and expenses for product-related manufacturing, and a significant increase in such costs and expenses
could have a material adverse effect on our profitability.
Our major operating costs and expenses include employee compensation as well as paper, printing and
binding costs for product-related manufacturing.
We offer competitive salary and benefit packages in order to attract and retain the employees required to grow
and expand our businesses. Compensation costs are influenced by general economic and business factors, including
those affecting the cost of health insurance, payout of commissions and incentive compensation and post-retirement
benefits, as well as trends specific to the employee skillsets we require.
Paper is one of our principal raw materials. Paper prices fluctuate based on the worldwide demand for and
supply of paper in general and for the specific types of paper we use. The price of paper may fluctuate significantly
in the future, and changes in the market supply of, or demand for paper, could affect delivery times and prices. Paper
mills and other suppliers may consolidate or there may be disruptions in their industry and as a result, there may be
future shortfalls in quality and quantity supplies necessary to meet the demands of the entire marketplace, including
our demands. As a result, we may need to find alternative sources for paper from time to time. In addition, we have
extensive printing and binding requirements. We outsource the printing and binding of our books, workbooks and
other printed products to third parties, typically under multi-year contracts. Increases in any of these operating costs
and expenses could materially and adversely affect our business, profitability, financial condition and results of
operations. Further, higher energy costs and other factors affecting the cost of publishing, transporting and
distributing our products could adversely affect our financial results.
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We also have other significant operating costs, and unanticipated increases in these costs could adversely
affect our operating margins. Our inability to absorb the impact of increases in paper, printing and binding costs and
other costs of publishing, transporting and distributing our products or any strategic determination not to pass on all
or a portion of these increases to our customers could adversely affect our business, financial condition and results
of operations.
Exposure to litigation could have a material effect on our financial position and results of operations.
In the ordinary course of business, we are involved in legal actions, claims, litigation, investigations and other
matters arising from our business operations and face the risk that additional actions and claims will be filed in the
future.
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 does
not expect any of the existing legal actions and claims arising from our business operations to have a material
adverse effect on our results of operations, financial position or cash flows, due to the inherent uncertainty of the
litigation process, the costs of pursuing or defending against any particular legal proceeding, or the resolution of any
particular legal proceeding could have a material effect on our financial position and results of operations.
We have insurance in such amounts and with such coverage and deductibles as management believes is
reasonable. However, our coverage for certain product lines has been exhausted and there can be no assurance that
our liability insurance for other product lines will cover all events or that the limits of such coverage will be
sufficient to fully cover all potential liabilities thereunder.
Operational disruption to our business caused by a major disaster or other external threats could restrict our
ability to supply products and services to our customers.
Across all our businesses, we manage complex operational and logistical arrangements including distribution
centers, data centers and large office facilities. Failure to recover from a major disaster (such as fire, flood or other
natural disaster) or other external threat (such as terrorist attacks, strikes, weather, outbreaks of pandemic or
contagious diseases, such as the novel coronavirus, or political unrest or other external factors) at a key center or
facility could affect our business and employees, disrupt our daily business activities and/or restrict our ability to
supply products and services to our customers.
We are subject to contingent liabilities that may affect liquidity and our ability to meet our obligations.
In the ordinary course of business, we issue performance-related surety bonds and letters of credit posted as
security for our operating activities, some of which obligate us to make payments if we fail to perform under certain
contracts in connection with the sale of instructional materials and assessment programs. The surety bonds are
partially backstopped by letters of credit. As of December 31, 2019, our contingent liability for all letters of credit
was approximately $23.7 million, of which $0.7 million were issued to backstop $2.5 million of surety bonds. The
letters of credit reduce the borrowing availability on our revolving credit facility, which could affect liquidity and,
therefore, our ability to meet our obligations. We may increase the number and amount of contracts that require the
use of letters of credit, which may further restrict liquidity and, therefore, our ability to meet our obligations in the
future.
Our substantial level of indebtedness could adversely affect our financial condition and results of operations.
As of December 31, 2019, we had approximately $686.0 million ($657.2 million, net of discount and issuance
costs) of total indebtedness outstanding, comprised of $380.0 million of term loans and $306.0 million of senior
secured notes. Our substantial outstanding indebtedness could have important consequences, including the
following:
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our high level of indebtedness could make it more difficult for us to satisfy our obligations;
our high level of indebtedness could adversely impact our credit rating;
the restrictions imposed on the operation of our business under the agreements governing such
indebtedness may hinder our ability to take advantage of strategic opportunities to grow our business
and to make attractive investments;
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•
•
•
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•
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our ability to obtain additional financing for working capital, capital expenditures, product development,
debt service requirements, restructuring, acquisitions or general corporate purposes may be impaired,
which could be exacerbated by volatility in the credit markets;
we must use a substantial portion of our cash flow from operations to pay principal and interest on our
indebtedness, which will reduce the funds available to us for operations, working capital, capital
expenditures and other purposes;
our high level of indebtedness could place us at a competitive disadvantage compared to our
competitors that may have proportionately less debt;
our flexibility in planning for, or reacting to, changes in our business and the industry in which we
operate may be limited;
our failure to satisfy our obligations under the agreements governing our indebtedness could result in an
event of default, which could result in all of our debt becoming immediately due and payable and could
permit our secured lenders to foreclose on our assets securing such indebtedness;
our high level of indebtedness makes us more vulnerable to economic downturns and adverse
developments in our business and industry; and
we may be vulnerable to interest rate increases, as certain of our borrowings bear interest at variable
rates. A 1% increase or decrease in the interest rate will change our interest expense by approximately
$3.8 million on an annual basis for our term loan facility and $2.5 million on an annual basis for our
revolving credit facility, assuming it is fully drawn.
Any of the foregoing could have a material adverse effect on our business, financial condition, results of
operations, prospects and ability to satisfy our obligations. In addition, we may incur substantial additional
indebtedness in the future. The terms of the agreements governing our existing indebtedness do not, and any future
debt may not, fully prohibit us from doing so. If new indebtedness is added to our current indebtedness levels, the
related risks that we now face could substantially intensify.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other
actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments or to refinance our debt obligations and to fund planned capital
expenditures and other growth initiatives depends on our financial and operating performance, which is subject to
prevailing economic and competitive conditions and to certain financial, business and other factors beyond our
control. We may not be able to maintain a level of cash flow from operating activities sufficient to permit us to pay
the principal, premium, if any, and interest on our indebtedness, including our senior secured notes, or to fund our
other liquidity needs.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced
to reduce or delay capital expenditures, sell assets, seek additional capital or seek to restructure or refinance our
indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt
service obligations. In the absence of such operating results and resources, we could face substantial liquidity
problems and might be required to sell material assets or operations to attempt to meet our debt service and other
obligations. Our senior secured term loan and revolving credit facilities have certain restrictions on our ability to use
the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at
prices that we believe are fair and proceeds that we do receive may not be adequate to meet any debt service
obligations then due.
We may record future goodwill or additional indefinite-lived intangibles impairment charges related to our
reporting units, which could have a material adverse impact on our results of operations.
We test our goodwill and indefinite-lived intangibles asset balances for impairment during the fourth quarter
of each year, or more frequently if indicators are present or changes in circumstances suggest that impairment may
exist. In evaluating the potential for impairment of goodwill and indefinite-lived intangible assets, we make
assumptions regarding estimated net sales projections, growth rates, cash flows and discount rates. Although we use
consistent methodologies in developing the assumptions and estimates underlying the fair value calculations used in
our impairment tests, these estimates are uncertain by nature and can vary from actual results. Declines in the future
performance and cash flows of the business or small changes in other key assumptions may result in future
impairment charges, which could have a material adverse impact on our results of operations.
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A change from up-front payment by school districts for multi-year programs and actions taken in furtherance of
our long-term growth strategy could adversely affect our cash flow.
In keeping with the past practice of payments, school districts typically pay up-front when buying multi-year
programs. If school districts changed their payment practices to spread their payments to us over the term of a
program, our cash flow could be adversely affected. Further, as we execute on our long-term growth strategy,
actions taken in furtherance of our strategy, such as transitioning to new business models could adversely impact our
cash flow and our business in unforeseen ways.
The shift to sales of greater digital content or an increase in consumable print core programs may affect the
comparability of our revenue to prior periods and cause increases or decreases in our sales to be reflected in our
results of operations on a delayed basis.
Our customers typically pay for purchased products up-front; however, we recognize a significant portion of
our time-based digital sales over their respective terms, as required by Generally Accepted Accounting Principles in
the United States. As a result, an increase in the portion of our sales coming from digital sales may impact the
comparison of our revenue results for a period with the same prior-year or consecutive period. Further, sales of
consumable print core programs typically result in net sales being recognized over longer periods similar to time-
based digital products. As more product offerings move to a consumable print format, more revenue will be deferred
and recognized over a longer period of time.
Another effect of recognizing revenue from digital and consumable print core program sales over their
respective terms is that any increases or decreases in sales during a particular period may not translate into
proportional increases or decreases in revenue during that period. Consequently, deteriorating sales activity may be
less immediately observable in our results of operations.
We face risks of doing business abroad.
We conduct business in a number of regions outside of the U.S., including emerging markets in
South America, Asia, Africa and the Middle East. Accordingly, we face exposure to the risks of doing business
abroad, including, but not limited to, longer customer payment terms in certain countries; increased credit risk;
difficulties in protecting intellectual property, enforcing or terminating agreements and collecting receivables under
certain foreign legal systems; compliance under local privacy laws, rules, regulations and standards; the need to
comply with U.S. Foreign Corrupt Practices Act and local laws, rules and regulations; and in some countries, a
higher risk of political instability, economic volatility, terrorism, corruption, and social and ethnic unrest.
Although we are committed to conducting business in a legal and ethical manner in compliance with local and
international statutory requirements and standards applicable to our business, there is a risk that our management,
employees or representatives may take actions that violate applicable laws and regulations prohibiting the making of
improper payments for the purposes of obtaining or keeping business, including laws such as the U.S. Foreign
Corrupt Practices Act or the U.K. Bribery Act. Responding to investigations is costly and requires a significant
amount of managements time and attention. In addition, investigations may adversely impact our reputation, or lead
to litigation and financial impacts.
Item 1B. Unresolved Staff Comments
None.
23
Item 2. Properties
Our principal executive office is located at 125 High Street, Boston, Massachusetts 02110. The following
table describes the approximate building areas in square feet, principal uses and the years of expiration on leased
premises of our significant operating properties as of December 31, 2019. We believe that these properties are
suitable and adequate for our present and anticipated business needs, satisfactory for the uses to which each is put,
and, in general, fully utilized.
Location
Owned Premises:
Indianapolis, Indiana
Troy, Missouri
Leased Premises:
Boston, Massachusetts
(Corporate office)
Orlando, Florida
Evanston, Illinois
Geneva, Illinois
Portsmouth, New Hampshire (a)
New York, New York
Austin, Texas
Dublin, Ireland
Orlando, Florida
St Charles, Illinois
Expiration Approximate
year
area
Principal use
of space
Segment
used by
Owned
Owned
491,779
575,000 Office and warehouse
Warehouse
Both segments
Education
2033
2029
2027
2022
2020
2027
2028
2025
2021
2024
Office
Office
Office
194,946
111,073
60,522
513,512 Office and warehouse
25,352
101,441
87,570
28,994
25,400
26,029
Office
Office
Office
Office
Warehouse
Office
Both segments
Education
Education
Education
Education
Both segments
Education
Education
Both segments
Education
In addition, we lease several other offices that are not material to our operations and, in some instances, are
partially or fully subleased. Portions of certain properties listed above are also subleased.
(a) HMH has entered into a new lease agreement to lease approximately 40,000 square feet with expected lease
commencement in 2021 coinciding with the expiration of the current Portsmouth, New Hampshire lease.
Item 3. 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.
Item 4. Mine Safety Disclosures
Not applicable.
24
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market information. Our common stock is listed on the Nasdaq Global Select Market (Nasdaq) under the
symbol HMHC.
Holders. As of January 31, 2020, there were approximately 5 stockholders of record of our common stock,
one of which was Cede & Co., a nominee for The Depository Trust Company. All of our common stock held by
brokerage firms, banks and other financial institutions as nominees for beneficial owners are considered to be held
of record by Cede & Co., who is considered to be one stockholder of record. A substantially greater number of
holders of our common stock are street name or beneficial holders, whose shares of common stock are held of
record by banks, brokers and other financial institutions. Because such shares of common stock are held on behalf of
stockholders, and not by the stockholders directly, and because a stockholder can have multiple positions with
different brokerage firms, banks and other financial institutions, we are unable to determine the total number of
stockholders we have.
Dividends. We have never paid or declared any cash dividends on our common stock. At present, we intend to
retain our future earnings, if any, to fund operations and the growth of our business. Our future decisions concerning
the payment of dividends on our common stock will depend upon our results of operations, financial condition and
capital expenditure plans, as well as other factors as our board of directors, in its discretion, may consider relevant,
and the extent to which the declaration or payment of dividends may be limited by agreements we have entered into
or cause us to lose the benefits of certain of our agreements. See Managements Discussion and Analysis of
Financial Condition and Results of OperationsLiquidity and Capital Resources.
25
Performance Graph. The graph below matches the cumulative return of holders of the Companys common
stock with the cumulative returns of the Nasdaq Composite index, the Russell 2000 index, and a Peer Group index
of certain public companies in the educational space, comprised of Pearson PLC, Scholastic Corporation, K-12 Inc.,
and John Wiley & Sons, Inc. The graph assumes that the value of the investment in the Companys common stock,
in each index (including reinvestment of dividends) was $100 on December 31, 2014 and tracks it through
January 31, 2020. All prices reflect closing prices on the last day of trading at the end of each period.
Notwithstanding any general incorporation by reference of this Annual Report on Form 10-K into any other
document, the information contained in the graph shall not be deemed to be soliciting material or to be filed
with the SEC or subject to Regulation 14A or 14C under the Exchange Act of 1934, as amended (the Exchange
Act) or to the liabilities of Section 18 of the Exchange Act, except: (i) as expressly required by applicable law or
regulation; or (ii) to the extent that the Company specifically requests that such information be treated as soliciting
material or specifically incorporates it by reference into a filing under the Securities Act of 1933, as amended, or the
Exchange Act.
200
180
160
140
120
100
80
60
40
20
HMHC
NASDAQ Composite
Russell 2000
Peer Group
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
1/31/2020
HMHC
NASDAQ Composite
Russell 2000
Peer Group
100
100
100
100
105
106
94
79
52
114
113
105
45
146
127
102
43
140
112
116
30
189
138
101
27
193
134
85
The stock price performance shown on the graph is not necessarily indicative of future price performance.
Information used in the graph was obtained from a source we believe to be reliable, but we do not assume
responsibility for any errors or omissions in such information.
Recent sales of unregistered securities. There have been no sales of unregistered securities by the Company in
the three year period ended December 31, 2019.
Issuer Purchases of Equity Securities
There were no purchases of equity securities in the fourth quarter of 2019 and for the year ended
December 31, 2019.
26
Item 6. Selected Financial Data
The following table summarizes the consolidated historical financial data of Houghton Mifflin Harcourt
Company. We derived the consolidated historical financial data as of December 31, 2019 and 2018 and for the years
ended December 31, 2019, 2018, and 2017 from our audited consolidated financial statements included in this
Annual Report on Form 10-K. We derived the consolidated historical financial statement data as of December 31,
2017, 2016 and 2015 and for the years ended December 31, 2016 and 2015 from our consolidated financial
statements for such years, which are not included in this Annual Report on Form 10-K. The sale of the Riverside
Business on October 1, 2018 is considered a Discontinued Operation and accordingly, all results of the Riverside
Business have been removed from continuing operations for all periods presented. Historical results for any prior
period are not necessarily indicative of results to be expected in any future period. The data set forth in the following
table should be read together with the section entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated financial statements and related notes thereto.
Operating Data:
Net sales
Cost and expenses:
Cost of sales, excluding publishing rights and pre-publication
amortization
Publishing rights amortization
Pre-publication amortization
Cost of sales
Selling and administrative
Other intangible asset amortization
Impairment charge for pre-publication costs and intangible assets
Restructuring/severance and other charges
Gain on sale of assets
Operating loss
Other income (expense)
Retirement benefits non-service income
Interest expense
Interest income
Change in fair value of derivative instruments
Income from transition services agreement
Loss on extinguishment of debt
Loss from continuing operations before taxes
Income tax expense (benefit) for continuing operations
Loss from continuing operations
Earnings from discontinued operations, net of tax
Gain on sale of discontinued operations, net of tax
Income from discontinued operations, net of tax
Net loss
Net loss per share attributable to common stockholders
Basic and diluted:
Continuing operations
Discontinued operations
Net loss
Weighted average shares outstanding: basic and diluted
Balance Sheet Data (as of period end):
Cash, cash equivalents and short-term investments
Working capital (2)
Total assets (2)
Debt (short-term and long-term)
Stockholders equity
Statement of Cash Flows Data:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Other Data:
Capital expenditures:
Pre-publication capital expenditures
Property, plant, and equipment capital expenditures
Depreciation and intangible asset amortization
2019 (1)
Years Ended December 31,
2017
2018 (1)
2016
2015
$
1,390,674
$
1,322,417
$
1,327,029
$
1,291,978
$
1,319,416
668,108
26,557
149,515
844,180
662,606
25,310
21,742
(163,164 )
167
(48,778 )
3,157
(899 )
4,248
(4,363 )
(209,632 )
4,201
(213,833 )
(213,833 )
(1.72 )
(1.72 )
124,152,984
296,353
157,944
2,513,172
657,187
566,360
254,975
(96,320 )
(115,667 )
102,562
37,561
123,177
$
$
$
$
581,467
34,713
109,257
725,437
649,295
26,933
11,478
(201 )
(90,525 )
1,280
(45,680 )
2,550
(1,374 )
1,889
(131,860 )
5,597
(137,457 )
12,833
30,469
43,302
(94,155 )
(1.11 )
0.35
(0.76 )
123,444,943
303,198
218,586
2,495,124
763,649
768,470
104,084
427
(4,124 )
123,403
53,741
142,819
$
$
$
$
588,518
46,238
119,908
754,664
636,326
29,248
3,980
37,952
(135,141 )
3,486
(42,805 )
1,338
1,366
(171,756 )
(51,419 )
(120,337 )
17,150
17,150
(103,187 )
(0.98 )
0.14
(0.84 )
122,949,064
235,428
126,567
2,439,830
768,194
795,193
$
$
$
$
578,317
61,351
121,866
761,534
681,170
26,375
130,205
15,371
(322,677 )
4,253
(39,181 )
518
(614 )
(357,701 )
(51,556 )
(306,145 )
21,587
21,587
(284,558 )
(2.50 )
0.18
(2.32 )
122,418,474
306,943
209,982
2,604,307
772,738
880,040
$
$
$
$
582,411
81,007
112,892
776,310
655,887
22,038
4,146
(138,965 )
2,787
(32,254 )
209
(2,362 )
(3,051 )
(173,636 )
(20,411 )
(153,225 )
19,356
19,356
(133,869 )
(1.12 )
0.14
(0.98 )
136,760,107
432,403
384,912
2,976,759
777,283
1,198,321
$
$
$
$
104,748
(193,895 )
(7,330 )
111,785
(106,117 )
(37,960 )
311,906
(667,739 )
106,104
131,282
55,092
146,535
118,603
103,152
162,193
100,465
77,183
168,787
(1)
(2)
The 2018 amounts and all following years have been impacted by the January 1, 2018 adoption of the new revenue standard.
The 2019 amounts have been impacted by the January 1, 2019 adoption of the new leases standard. Please refer to Note 2 and Note 8
included in Item 8. for further details.
27
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to facilitate an understanding of our results of operations
and financial condition and should be read in conjunction with our consolidated financial statements and the related
notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion and analysis of our
financial condition and results of operations contains forward-looking statements about our business, operations and
industry that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations and
intentions. Actual results and the timing of events may differ materially from those expressed or implied in such
forward-looking statements due to a number of factors, including those set forth under Risk Factors and elsewhere
in this Annual Report on Form 10-K. See Risk Factors and Special Note Regarding Forward-Looking
Statements.
Discussion and analysis of the year ended December 31, 2018 compared to the year ended December 31, 2017
is included under the heading Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on
February 28, 2019.
Overview
We are a learning company committed to delivering connected solutions that engage learners, empower
educators and improve student outcomes. As a leading provider of K12 core curriculum, supplemental and
intervention solutions, and professional learning services, 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, while our award-winning childrens books, novels,
non-fiction, and reference titles are enjoyed by readers throughout the world.
For nearly two centuries, our HMH Books & Media division has brought renowned and awarded childrens,
fiction, non-fiction, culinary and reference titles to readers throughout the world. Our distinguished author list
includes 10 Nobel Prize winners, 49 Pulitzer Prize winners, and 26 National Book Award winners. We are home to
popular characters and titles such as Curious George, Carmen Sandiego, The Lord of the Rings, The Whole 30, The
Best American Series, the Peterson Field Guides, CliffsNotes, and The Polar Express, and published distinguished
authors such as Tim OBrien, Temple Grandin, Tim Ferriss, Kwame Alexander, Lois Lowry, and Chris Van
Allsburg.
Recent Developments
Strategic Transformation Plan
On October 15, 2019, our Board of Directors approved changes connected with our ongoing strategic
transformation to simplify our business model and accelerate growth. This includes new product development and
go-to-market capabilities, as well as the streamlining of operations company-wide for greater efficiency. These
actions, which we refer to as our 2019 Restructuring Plan, resulted in the net elimination of approximately 10% of
our workforce, after taking into account new strategy-aligned positions that are expected to be added, and additional
operating and capitalized cost reductions, including an approximately 20% reduction in previously planned content
development expenditures over the next three years. These steps are intended to further simplify our business model
while delivering increased value to customers, teachers and students. The workforce reductions were completed
during the first quarter of 2020.
After considering additional headcount actions, implementation of the planned actions resulted in total charges
of $15.8 million which was recorded in the fourth quarter of 2019. With respect to each major type of cost
associated with such activities, substantially all costs were severance and other termination benefit costs and will
result in cash expenditures.
Further, as part of such strategic transformation plan, we recorded an incremental $9.8 million inventory
obsolescence charge in the fourth quarter of 2019 which is recorded in cost of sales in the statement of operations.
28
Key Aspects and Trends of Our Operations
Business Segments
We are organized along two business segments: Education and HMH Books & Media (formerly referred to as
Trade Publishing). Our Education segment is our largest segment and represented approximately 87%, 85% and
86% of our total net sales for the years ended December 31, 2019, 2018 and 2017, respectively. Our HMH Books &
Media segment represented approximately 13%, 15% and 14% of our total net sales for the years ended
December 31, 2019, 2018 and 2017, respectively. The Corporate and Other category represents certain general
overhead costs not fully allocated to the business segments, such as legal, accounting, treasury, human resources and
executive functions.
Net Sales
We derive revenue primarily from the sale of print and digital content and instructional materials, trade books,
multimedia instructional programs, license fees for book rights, content, 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 billings 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 Education segment
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 teachers
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 51% 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 Education segment 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.
29
We also derive our Education segment 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.
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.
Our HMH Books & Media segment sells works of fiction and non-fiction in the General Interest and Young
Readers categories, dictionaries and other reference works. While print remains the primary format in which trade
books are produced and distributed, the market for trade titles in digital format, primarily ebooks, generally
represents approximately 8% to 10% of our annual HMH Books & Media net sales. Further, HMH Books & Media
licenses content to other publishers along with media companies.
Factors affecting our net sales include:
Education
•
•
•
•
•
•
•
•
state or district per student funding levels;
federal funding levels;
the cyclicality of the purchasing schedule for adoption states;
student enrollments;
adoption of new education 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.
HMH Books & Media
•
consumer spending levels as influenced by various factors, including the U.S. economy and consumer
confidence;
•
•
•
the publishing of bestsellers along with obtaining recognized authors;
film and series tie-ins to our titles that spur sales of current and backlist titles, which are titles that have
been on sale for more than a year; and
market growth or contraction.
State or 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, Florida adopted Science materials in 2017 for purchase in 2018. Texas adopted Reading/English Language
Arts materials in 2018 for purchase in 2019. California adopted history and social science materials in 2017 for
purchase in 2018 and continuing through 2020 and adopted Science materials in 2018 for purchase in 2019 and
30
continuing through 2021. 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
2018 legislative session appropriated funds for purchases in 2018 and 2019. 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. We do not currently
have contracts with these states for future instructional materials adoptions and there is no guarantee that our
programs will be accepted by the state.
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.
Our HMH Books & Media segment is heavily influenced by the U.S. and broader global economy, consumer
confidence and consumer spending. As the economy continues to grow, both consumer confidence and consumer
spending have increased.
While print remains the primary format in which trade books are produced and distributed, the market for
trade titles in digital format, primarily ebooks, has developed in the recent decade, as the industry evolved to
embrace new technologies for developing, producing, marketing and distributing trade works. We continue to focus
on the development of innovative new digital products which capitalize on our strong content, our digital expertise
and the consumer demand for these products.
In the HMH Books & Media segment, annual results can be driven by bestselling trade titles. Furthermore,
backlist titles can experience resurgence in sales when made into films or series. In past years, a number of our
backlist titles such as The Hobbit, The Lord of the Rings, Life of Pi, The Handmaids Tale, The Polar Express, The
Giver and The Time Travelers Wife have benefited in popularity due to movie or series releases and have
subsequently resulted in increased trade sales.
We employ several 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;
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; and
Pay-as-you-go Subscription: Similar to the pre-pay subscription, except that the customer makes
periodic payments in a pre-described manner.
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
31
development group. We also include amortization expense associated with our customer-facing software platforms.
Certain products such as trade books and products associated with our renowned authors 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 assets
amortization. Under this method, the amortization expense recorded for a pre-publication cost asset is approximately
33% (year 1), 27% (year 2), 20% (year 3), 13% (year 4) and 7% (year 5). We utilize this policy for all pre-
publication costs, except with respect to our HMH Books & Media segments consumer books, for which we
generally expense such costs as incurred, and the acquired 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
$35.6 million for the year ended December 31, 2019) 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 asset amortization
Our other intangible asset 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 6 to 25 years. The expense for the
year ended December 31, 2019 was $25.3 million.
Interest expense
Our interest expense includes interest accrued on 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 (new term loan facility) and
our previous $800.0 million term loan credit facility (previous term loan facility) along with, 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 year ended
December 31, 2019 was $48.8 million. However, we expect this amount to be approximately $69.0 million in 2020.
32
Results of Operations
Consolidated Operating Results for the Years Ended December 31, 2019 and 2018
Year Ended
Year Ended
December 31, December 31,
(dollars in thousands)
Net sales
Costs and expenses:
Cost of sales, excluding publishing rights and
pre-publication amortization
Publishing rights amortization
Pre-publication amortization
Cost of sales
Selling and administrative
Other intangible asset amortization
Restructuring/severance and other charges
Gain on sale of assets
Operating loss
Other income (expense):
Retirement benefits non-service income
Interest expense
Interest income
Change in fair value of derivative instruments
Income from transition services agreement
Loss on extinguishment of debt
Loss from continuing operations before taxes
Income tax expense (benefit)
Net loss from continuing operations
Income from discontinued operations, net of tax
Gain on sale of discontinued operations, net of
2019
2018
$ 1,390,674 $ 1,322,417 $ 68,257
Dollar
change
668,108
26,557
149,515
844,180
662,606
25,310
21,742
(163,164)
581,467
34,713
109,257
725,437
649,295
26,933
11,478
(201)
(90,525)
86,641
(8,156)
40,258
118,743
13,311
(1,623)
10,264
201
(72,639)
1,280
(45,680)
2,550
(1,374)
1,889
(131,860)
5,597
167
(48,778)
3,157
(899)
4,248
(4,363)
(209,632)
4,201
(1,113)
(3,098)
607
475
2,359
(4,363)
(77,772)
(1,396)
$ (213,833) $ (137,457) $ (76,376)
(12,833)
12,833
Percent
Change
5.2%
14.9%
(23.5)%
36.8%
16.4%
2.1%
(6.0)%
89.4%
NM
(80.2)%
(87.0)%
(6.8)%
23.8%
34.6%
NM
NM
(59.0)%
(24.9)%
(55.6)%
NM
tax
Net loss
NM = not meaningful
$ (213,833) $
30,469
(30,469)
(94,155) $ (119,678)
NM
NM
Net sales for the year ended December 31, 2019 increased $68.3 million, or 5.2%, from $1,322.4 million in
2018 to $1,390.7 million. The net sales increase was driven by a $88.0 million increase in our Education segment,
offset by a $19.7 million decrease in our HMH Books & Media segment. Within our Education segment, the
increase was due to higher net sales in Extensions, which primarily consist of our Heinemann brand, intervention
and supplemental products as well as professional services, which increased by $47.0 million from $585.0 million in
2018 to $632.0 million. Within Extensions, Heinemann net sales continued to grow driven by sales of the Fountas &
Pinnell Classroom and Calkins products. Such net sales were partially offset by lower intervention and supplemental
product sales within Extensions. Further, net sales from Core Solutions increased by $41.0 million from
$538.0 million in 2018 to $579.0 million. The primary driver of the increase in Core Solutions were net sales of the
Texas and national versions of the Into Reading and Into Literature programs. Our billings associated with our
Education segment increased approximately $298.0 million from 2018; however, due to the digital and print
subscription nature of our offerings, a substantial portion of such billings were deferred and will be recognized in the
future. Within our HMH Books & Media segment, the decrease in net sales was primarily due to 2018 licensing
income of $16.0 million, pertaining to our classic backlist titles 1984 and Animal Farm, which did not repeat in
2019. Further, the prior year benefited from strong net sales of the print titles Instant Pot Miracle and The Whole 30
series. Partially offsetting the aforementioned was an increase in net sales of the Little Blue Truck series and strong
net sales of the frontlist title Maybe You Should Talk to Someone.
33
Operating loss for the year ended December 31, 2019 unfavorably changed by $72.6 million from a loss of
$90.5 million in 2018 to a loss of $163.2 million, due primarily to the following:
•
•
•
•
•
A $86.6 million increase in our cost of sales, excluding publishing rights and pre-publication
amortization, from $581.5 million for the same period in 2018 to $668.1 million. Our cost of sales,
excluding publishing rights and pre-publication amortization, as a percentage of sales, increased to
48.0% from 44.0% due to our mix of products, increased inventory obsolescence in connection with our
strategic transformation plan and an increase in royalties due to higher billings,
A $30.5 million increase in net amortization expense related to publishing rights, pre-publication and
other intangible assets, primarily due to an increase in pre-publication amortization attributed to the
timing of 2019 major product releases, partially offset by our use of accelerated amortization methods
for publishing rights amortization,
A $10.3 million increase in restructuring/severance and other charges due to our 2019 Restructuring
Plan actions and other 2019 activity,
A $13.3 million increase in selling and administrative expenses, primarily due to higher labor costs of
$14.6 million, mainly attributable to support the increased billings, which increased $277.0 million from
2018. Further, there was an increase of variable expenses such as an increase in transportation and
commissions of $9.7 million due to product mix and higher billings. Partially offsetting the increase in
selling and administrative expenses was lower depreciation expense of $11.0 million and lower fixed
costs, and
Partially offset by a $68.3 million increase in net sales.
Retirement benefits non-service income for the year ended December 31, 2019 changed unfavorably by
$1.1 million due to the lowering of the expected return on plan assets assumption and greater interest costs in the
calculation of net periodic benefit cost in 2019.
Interest expense for the year ended December 31, 2019 increased $3.1 million from $45.7 million in 2018 to
$48.8 million, primarily due to an increase in interest on the previous term loan facility of $4.2 million due to an
increase in variable interest rates coupled with our debt refinancing during the fourth quarter of 2019 in which the
previous term loan facility was replaced with the new term loan facility and the notes with higher interest rates (the
2019 Refinancing). Partially offsetting the aforementioned was a reduction of $1.2 million of net settlement
payments on our interest rate derivative instruments during 2019.
Interest income for the year ended December 31, 2019 increased $0.6 million from $2.6 million in 2018 to
$3.2 million, primarily due to higher cash balances invested in money market funds in 2019.
Change in fair value of derivative instruments for the year ended December 31, 2019 favorably changed by
$0.5 million from a loss of $1.4 million in 2018 to a loss of $0.9 million. The change in fair value of derivative
instruments was related to foreign exchange forward contracts executed on the Euro that were favorably impacted
by the weakening of the U.S. dollar against the Euro compared to the prior year.
Income from transition services agreement for the year ended December 31, 2019 increased by $2.4 million
from 2018 as the prior year included one quarter of income and was related to transition service fees under the
transition services agreement with the purchaser of the Riverside Business pursuant to which we performed certain
support functions through September 30, 2019.
Loss on extinguishment of debt for the year ended December 31, 2019 consisted of a $3.4 million write-off
related to unamortized deferred financing fees associated with the portion of our previous term loan facility that was
accounted for as an extinguishment. Further, there was a $1.0 million write off of the remaining balance of the debt
discount associated with the previous term loan facility.
34
Income tax expense for the year ended December 31, 2019 decreased $1.4 million, from $5.6 million in
2018, to $4.2 million. The 2019 and 2018 income tax expense was primarily related to movement in the deferred tax
liability associated with tax amortization on indefinite-lived intangibles, and state and foreign taxes. The effective
tax rate was (2.0)% and (4.2)% for the years ended December 31, 2019 and 2018, respectively.
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, non-cash charges, or levels of depreciation or amortization along
with costs such as severance, separation and facility closure costs, inventory obsolescence related to our strategic
transformation plan, 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 loss from continuing operations to Adjusted EBITDA from continuing
operations for the years ended December 31, 2019 and 2018:
Net loss from continuing operations
Interest expense
Interest income
Provision for income taxes
Depreciation expense
Amortization expensefilm asset
Amortization expense
Non-cash chargesstock-compensation
Non-cash charges loss on derivative
instruments
Inventory obsolescence related to strategic transformation
plan
Fees, expenses or charges for equity offerings,
debt or acquisitions/dispositions
Restructuring/severance and other charges
Gain on sale of assets
Loss on extinguishment of debt
Adjusted EBITDA from continuing operations
Years Ended December 31,
2019
(213,833) $
48,778
(3,157)
4,201
61,475
9,835
201,382
13,968
2018
(137,457)
45,680
(2,550)
5,597
75,116
6,057
170,903
13,248
899
9,758
1,374
6,327
21,742
4,363
165,738 $
2,883
11,478
(201)
192,128
$
$
35
Segment Operating Results
Results of OperationsComparing Years Ended December 31, 2019 and 2018
Education
Net sales
Costs and expenses:
Cost of sales, excluding publishing rights and
pre-publication amortization
Publishing rights
amortization
Pre-publication
amortization
Cost of sales
Selling and administrative
Other intangible asset
amortization
Gain on sale of assets
Operating loss from
continuing operations
Net loss from
continuing operations
Adjustments from net loss from continuing
operations to Education segment
Adjusted EBITDA
Depreciation expense
Amortization expense
Inventory obsolescence related to strategic
transformation plan
Gain on sale of assets
Education segment
Years Ended December 31,
2019
2018
$ 1,122,689
$ 1,210,646
2019 vs. 2018
Dollar
change
Percent
change
$
87,957
7.8%
547,094
451,195
95,899
21.3%
20,611
28,059
(7,448)
(26.5)%
148,850
716,555
520,153
19,878
(45,940)
(45,940)
43,749
189,340
9,758
$
$
$
$
$
$
108,953
588,207
518,014
39,897
128,348
2,139
20,989
(201)
(1,111)
201
(4,320) $
(41,620)
(4,320) $
(41,620)
36.6%
21.8%
0.4%
(5.3)%
NM
NM
NM
57,124
158,001
$
(13,375)
31,339
(23.4)%
19.8%
(201)
9,758
201
NM
NM
Adjusted EBITDA
$
196,907
$
210,604
$
(13,697)
(6.5)%
NM = not meaningful
Our Education segment net sales for the year ended December 31, 2019 increased $88.0 million, or 7.8%,
from $1,122.7 million in 2018 to $1,210.6 million. The net sales increase was due to higher net sales in Extensions,
which primarily consist of our Heinemann brand, intervention and supplemental products as well as professional
services, which increased by $47.0 million from $585.0 million in 2018 to $632.0 million. Within Extensions,
Heinemann net sales continued to grow, driven by sales of the Fountas & Pinnell Classroom and Calkins products.
Such net sales were partially offset by lower intervention and supplemental product sales within Extensions. Further,
net sales from Core Solutions increased by $41.0 million from $538.0 million in 2018 to $579.0 million in 2019.
The primary driver of the increase in Core Solutions were net sales of the Texas and national versions of the Into
Reading and Into Literature programs. Our billings associated with our Education segment increased $298.0 million
from 2018; however, due to the digital and print subscription nature of our offerings, a substantial portion of such
billings were deferred and will be recognized in the future.
Our Education segment cost of sales for the year ended December 31, 2019 increased $128.3 million, or
21.8%, from $588.2 million in 2018 to $716.6 million. Our cost of sales, excluding publishing rights and pre-
publication amortization, increased $95.9 million from $451.2 million in 2018 to $547.1 million. Our cost of sales,
excluding publishing rights and pre-publication amortization, as a percentage of sales, increased to 45.2% from
36
40.2%, primarily due to our mix of products, increased inventory obsolescence in connection with our strategic
transformation plan and an increase in royalties due to higher billings. Pre-publication amortization increased by
$39.9 million from 2018 primarily due to the timing of 2019 major product releases. Publishing rights amortization
decreased by $7.4 million due to our use of accelerated amortization methods.
Our Education segment selling and administrative expense for the year ended December 31, 2019 increased
$2.1 million, or 0.4%, from $518.0 million in 2018 to $520.2 million. The increase was driven by higher labor costs
and variable expenses such as samples, commissions and travel and entertainment attributed to higher billings from
the prior year.
Our Education segment other intangible asset amortization expense for the year ended December 31, 2019
decreased $1.1 million from 2018, due to our use of accelerated amortization methods.
Our Education segment Adjusted EBITDA for the year ended December 31, 2019 decreased $13.7 million, or
6.5%, from $210.6 million in 2018 to $196.9 million. Our Education segment Adjusted EBITDA excludes
depreciation, amortization, inventory obsolescence related to our strategic transformation plan and gain on sale of
assets. The decrease is due to the identified factors impacting net sales, cost of sales and selling and administrative
expenses after removing those items not included in Education segment Adjusted EBITDA.
HMH Books & Media
Net sales
Costs and expenses:
Cost of sales, excluding publishing
rights and pre-publication
amortization
Publishing rights amortization
Pre-publication amortization
Cost of sales
Selling and administrative
Other intangible asset amortization
Operating (loss) income
Net (loss) income
Adjustments from net (loss) income
to HMH Books & Media
segment Adjusted EBITDA
Depreciation expense
Amortization expense film asset
Amortization expense
HMH Books & Media segment
Adjusted EBITDA
NM = not meaningful
Years Ended December 31,
2019
2018
$ 180,028 $ 199,728 $
2019 vs. 2018
Dollar
change
(19,700)
Percent
change
(9.9)%
121,014
5,946
665
127,625
55,071
5,432
(8,100) $
(8,100) $
130,272
6,654
304
137,230
54,129
5,944
2,425 $
2,425 $
(9,258)
(708)
361
(9,605)
942
(512)
(10,525)
(10,525)
(7.1)%
(10.6)%
NM
(7.0)%
1.7%
(8.6)%
NM
NM
1,131 $
9,835
12,042
558 $
6,057
12,902
573
3,778
(860)
NM
62.4%
(6.7)%
$
$
$
$
14,908 $
21,942 $
(7,034)
(32.1)%
Our HMH Books & Media segment net sales for the year ended December 31, 2019 decreased $19.7 million,
or 9.9%, from $199.7 million in 2018 to $180.0 million. The decrease in net sales was primarily due to 2018
licensing income of $16.0 million, pertaining to our classic backlist titles 1984 and Animal Farm, which did not
repeat in 2019. Further, the prior year benefited from strong net sales of the print titles Instant Pot Miracle and The
Whole 30 series. Partially offsetting the aforementioned was an increase in net sales of the Little Blue Truck series
and strong net sales of the frontlist title Maybe You Should Talk to Someone.
37
Our HMH Books & Media segment cost of sales for the year ended December 31, 2019 decreased
$9.6 million, or 7.0%, from $137.2 million in 2018 to $127.6 million. The majority of the decrease was driven by
our cost of sales, excluding publishing rights and pre-publication amortization, which decreased $9.3 million due
primarily to lower royalties as the prior year had higher royalties associated with the licensing income from 1984
and Animal Farm along with lower net sales volume, partially offset by higher film asset amortization from the
Carmen Sandiego series. Our cost of sales, excluding publishing rights and pre-publication amortization, as a
percentage of net sales, increased to 67.2% from 65.2%.
Our HMH Books & Media segment selling and administrative expense for the year ended December 31, 2019
increased $0.9 million from $54.1 million in 2018, to $55.1 million. The increase was primarily due to higher
marketing and product management costs along with variable expenses.
Our HMH Books & Media segment other intangible asset amortization expense for the year ended
December 31, 2019 slightly decreased from 2018 as certain intangible assets became fully amortized during the
fourth quarter of 2019.
Our HMH Books & Media segment Adjusted EBITDA for the year ended December 31, 2019 changed
unfavorably from $21.9 million in 2018 to $14.9 million due to the identified factors impacting net sales, cost of
sales and selling and administrative expenses after removing those items not included in our HMH Books & Media
segment Adjusted EBITDA. Our HMH Books & Media segment Adjusted EBITDA excludes depreciation and
amortization.
38
Corporate and Other
Net sales
Costs and expenses:
Cost of sales, excluding publishing
rights and pre-publication
amortization
Publishing rights amortization
Pre-publication amortization
Cost of sales
Selling and administrative
Restructuring/severance and other charges
Operating loss
Retirement benefits non-service
income
Interest expense
Interest income
Change in fair value of derivative
instruments
Income from transition services
agreement
Loss on extinguishment of debt
Loss before taxes
Income tax (benefit) expense
Net loss
Adjustments from net loss to
Corporate and Other
Adjusted EBITDA
Interest expense
Interest income
Provision for income
taxes
Depreciation expense
Non-cash chargesloss on
derivative instruments
Non-cash chargesstock-
compensation
Fees, expenses or charges for
equity offerings, debt or
acquisitions/dispositions
Restructuring/severance and other charges
Loss on extinguishment of debt
Corporate and Other Adjusted
EBITDA
NM= not meaningful
Years Ended December 31,
2019
2018
Dollar
change
Percent
change
$
$
$
$
2019 vs. 2018
87,382
21,742
$ (109,124) $
77,152
11,478
(88,630) $
167
(48,778)
3,157
1,280
(45,680)
2,550
10,230
10,264
(20,494)
(1,113)
(3,098)
607
13.3%
89.4%
(23.1)%
(87.0)%
(6.8)%
23.8%
(899)
(1,374)
475
34.6%
4,248
(4,363)
(155,592)
4,201
1,889
(129,965)
5,597
$ (159,793) $ (135,562) $
2,359
(4,363)
(25,627)
(1,396)
(24,231)
$
48,778 $
(3,157)
45,680 $
(2,550)
3,098
(607)
4,201
16,595
5,597
17,434
(1,396)
(839)
NM
NM
(19.7)%
(24.9)%
(17.9)%
6.8%
(23.8)%
(24.9)%
(4.8)%
899
1,374
(475)
(34.6)%
13,968
13,248
720
5.4%
6,327
21,742
4,363
2,883
11,478
3,444
10,264
4,363
NM
89.4%
NM
$
(46,077) $
(40,418) $
(5,659)
(14.0)%
The Corporate and Other category represents certain general overhead costs not fully allocated to the business
segments such as legal, accounting, treasury, human resources, technology and executive functions along with
restructuring, severance and other non-operating costs.
39
Our selling and administrative expense for the Corporate and Other category for the year ended December 31,
2019 increased $10.2 million, or 13.3%, from $77.2 million in 2018 to $87.4 million, primarily attributed to
professional and bank fees associated with the 2019 Refinancing, and to some extent planned merit increases and
higher stock compensation, partially offset by lower depreciation.
Our restructuring/severance and other costs for the year ended December 31, 2019 increased by $10.3 million
primarily due to 2019 Restructuring Plan activity.
Retirement benefits non-service income for the year ended December 31, 2019 changed unfavorably by
$1.1 million due to the lowering of the expected return on plan assets assumption and greater interest costs in the
calculation of net periodic benefit cost in 2019.
Interest expense for the year ended December 31, 2019 increased $3.1 million from $45.7 million in 2018 to
$48.8 million, primarily due to an increase in interest on the term loan facility of $4.2 million due to an increase in
variable interest rates coupled with our 2019 Refinancing. Partially offsetting the aforementioned was a reduction of
$1.2 million of net settlement payments on our interest rate derivative instruments during 2019.
Interest income for the year ended December 31, 2019 increased $0.6 million from $2.6 million in 2018 to
$3.2 million, primarily due to higher cash balances invested in money market funds in 2019.
Change in fair value of derivative instruments for the year ended December 31, 2019 favorably changed by
$0.5 million from a loss of $1.4 million in 2018 to a loss of $0.9 million. The change in fair value of derivative
instruments was related to foreign exchange forward contracts executed on the Euro that were favorably impacted
by the weakening of the U.S. dollar against the Euro versus the prior year.
Income from transition services agreement for the year ended December 31, 2019 increased by $2.4 million
from 2018 as the prior year included one quarter of income and was related to transition service fees under the
transition services agreement with the purchaser of the Riverside Business pursuant to which we performed certain
support functions through September 30, 2019.
Loss on extinguishment of debt for the year ended December 31, 2019 consisted of a $3.4 million write-off
related to unamortized deferred financing fees associated with the portion of our previous term loan facility that was
accounted for as an extinguishment. Further, there was a $1.0 million write off of the remaining balance of the debt
discount associated with the previous term loan facility.
Income tax expense for the year ended December 31, 2019 decreased $1.4 million from an expense of
$5.6 million in 2018 to an expense of $4.2 million in 2019. The 2019 and 2018 income tax expense was primarily
related to movement in the deferred tax liability associated with tax amortization on indefinite-lived intangibles, and
state and foreign taxes. The effective tax rate was (2.0)% and (4.2)% for the years ended December 31, 2019 and
2018, respectively.
Adjusted EBITDA for the Corporate and Other category for the year ended December 31, 2019 unfavorably
changed $5.7 million, or 14.0%, from a loss of $40.4 million in 2018 to a loss of $46.1 million. Our Adjusted
EBITDA for the Corporate and Other category excludes interest, taxes, depreciation, derivative instruments charges,
equity compensation charges, acquisition/disposition-related activity, severance, facility vacant space costs, and loss
on extinguishment of debt. The unfavorable change in our Adjusted EBITDA for the Corporate and Other category
was due to the factors described above after removing those items not included in Adjusted EBITDA for the
Corporate and Other category.
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 businesses may not
be comparable quarter to consecutive quarter and should be considered on the basis of results for the whole year or
by comparing results in a quarter with results in the same quarter for the previous year.
40
Approximately 87% of our net sales for the year ended December 31, 2019 were derived from our Education
segment, which is a markedly seasonal business. Schools conduct the majority of their purchases in the second and
third quarters of the calendar year in preparation for the beginning of the school year. Thus, over the past three
completed fiscal years, approximately 67% 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.
The following table is indicative of the seasonality of our business and the related results:
Quarterly Results of Operations
(in thousands)
Education segment
HMH Books & Media segment
Net sales
Costs and expenses:
Cost of sales, excluding
publishing rights and pre-
publication amortization
Publishing rights amortization
Pre-publication amortization
Cost of sales
Selling and administrative
Other intangible asset
amortization
Restructuring/severance and other
charges
Gain on sale of assets
Operating (loss) income
Other income (expense)
Retirement benefits non-service
income
Interest expense
Interest income
Change in fair value of derivative
instruments
Income from transition services
agreement
Loss on extinguishment of debt
(Loss) income from continuing
operations before taxes
Income tax expense (benefit)
First
Quarter
2018
Second
Quarter
2018
Third
Quarter
2018
Fourth
Quarter
2018
First
Quarter
2019
Second
Quarter
2019
Third
Quarter
2019
Fourth
Quarter
2019
$ 163,023 $321,276 $449,636 $188,754 $ 153,844 $349,801 $517,614 $ 189,387
52,088
241,475
36,089
357,365
40,791
194,635
48,054
565,668
66,619
516,255
36,736
199,759
60,284
249,038
39,095
388,896
99,733
10,090
25,621
135,444
145,527
160,058
8,148
26,332
194,538
169,323
201,748
8,238
28,094
238,080
176,202
119,928
8,237
29,210
157,375
158,243
96,055
7,605
33,082
136,742
151,983
190,831
6,271
35,739
232,841
175,266
246,527
6,341
39,319
292,187
188,957
134,695
6,340
41,375
182,410
146,400
6,866
6,676
6,696
6,695
6,524
6,612
6,383
5,791
3,943
884
(92,905)
2,075
(500)
(14,747)
3,439
91,838
2,021
(585)
(74,711)
1,221
(101,835)
4,430
(30,253)
270
77,871
15,821
(108,947)
320
(10,936)
506
320
(11,472)
117
320
(11,627)
277
320
(11,645)
1,650
42
(11,582)
1,092
42
(11,963)
97
41
(11,597)
509
42
(13,636)
1,459
372
(1,097)
(249)
(400)
(450)
16
(737)
272
1,889
1,826
1,851
571
(4,363)
(102,643)
3,243
(26,879)
2,210
80,559
(3,349)
(82,897)
3,493
(110,907)
6,455
(40,210)
403
66,658
(2,602)
(125,173)
(55)
Net (loss) income from continuing
operations
$(105,886) $ (29,089) $ 83,908 $ (86,390) $(117,362) $ (40,613) $ 69,260 $(125,118)
Earnings from discontinued
operations, net tax
Gain on sale of discontinued
operations, net of tax
Net (loss) income
4,575
5,817
2,441
$(101,311) $ (23,272) $ 86,349 $ (55,921) $(117,362) $ (40,613) $ 69,260 $(125,118)
30,469
41
Liquidity and Capital Resources
(in thousands)
Cash and cash equivalents
Short-term investments
Current portion of long-term debt
Long-term debt, net of discount and issuance costs
Borrowing availability under revolving credit facility
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
2017
2019
December 31,
2018
$ 296,353 $ 253,365 $ 148,979
86,449
8,000
760,194
135,267
49,833
8,000
755,649
167,434
19,000
638,187
161,961
2019
Years ended December 31,
2018
$ 254,975 $ 114,915 $ 135,130
(204,923)
(7,330)
(96,320)
(115,667)
(6,405)
(4,124)
2017
Operating activities
Net cash provided by operating activities was $255.0 million for the year ended December 31, 2019, a
$140.1 million increase from the $114.9 million of net cash provided by operating activities for the year ended
December 31, 2018. Net cash provided by operating activities included $10.8 million of cash flow provided by
discontinued operations in 2018. Net cash provided by operating activities from continuing operations was
$255.0 million for the year ended December 31, 2019 compared to $104.1 million for the year ended December 31,
2018. The $150.9 million increase in cash provided by operating activities from continuing operations was primarily
driven by favorable changes in net operating assets and liabilities of $184.8 million primarily due to an increase in
deferred revenue of $208.2 million attributed to greater billings in 2019, favorability in accounts receivable of $30.2
million due to better collections, an increase in royalties of $11.0 million, and an increase in restructuring/severance
and other charges of $13.5 million due to our strategic transformation plan, favorability in inventories of $4.7
million, and an increase in interest payable of $3.9 million due to our 2019 Refinancing, offset by unfavorable
changes in accounts payable of $28.3 million due to timing of disbursements, operating lease liabilities of $17.3
million due to the recognition of liabilities for leases on the balance sheet in accordance with the new leases
accounting standard in 2019, pension and postretirement benefits of $3.9 million and other assets and liabilities of
$37.2 million. Additionally, operating profit, net of non-cash items, decreased by $33.9 million.
Investing activities
Net cash used in investing activities was $96.3 million for the year ended December 31, 2019, an increase of
$89.9 million from the year ended December 31, 2018. Net cash used in investing activities included $6.8 million of
expenditures from discontinued operations in 2018. Net cash used in investing activities from continuing operations
was $96.3 million for the year ended December 31, 2019 compared to net cash provided by investing activities from
continuing operations of $0.4 million for the year ended December 31, 2018. The increase in cash used in investing
activities from continuing operations of $96.7 million was primarily due to $140.0 million of non-recurring proceeds
from the sale of the Riverside Business in 2018, the acquisition of a business for $5.4 million during 2019 and an
increase in investment in preferred stock of $0.3 million in 2019, offset by lower capital investing expenditures
related to pre-publication costs and property, plant, and equipment of $37.0 million and by higher net proceeds from
sales and maturities of short-term investments of $13.0 million compared to 2018.
Financing activities
Net cash used in financing activities was $115.7 million for the year ended December 31, 2019, an increase of
$111.5 million from the $4.1 million of net cash used in financing activities for the year ended December 31,
2018. The increase in cash used in financing activities was primarily due to an increase in net debt principal
repayments of $99.3 million in connection with the 2019 Refinancing along with payments of financing fees of $8.5
million related to our notes offering, new term loan facility and revolving credit facility amendments, an increase in
tax withholding payments related to net share settlements of restricted stock units of $0.8 million and lower net
collections under the transition services agreement of $2.7 million.
42
Debt
Under the notes, new term loan facility and 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, new term loan facility and 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 Borrower 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 December 31, 2019, we had $306.0 million ($295.9 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.
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 new term loan facility). As of December 31, 2019, we had
$380.0 million ($361.3 million, net of discount and issuance costs) outstanding under the new term loan facility.
The new 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 December 31, 2019, the interest rate on the new term loan facility was 8.0%.
The new term loan facility is required to be repaid in quarterly installments of approximately $4.8 million with
the balance being payable on the maturity date.
The new 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 new term loan facility.
43
The new 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 new 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;
provided, however, that any voluntary prepayment in connection with certain repricing transactions that occur
before the date that is twelve months after the closing of the new term loan facility shall be subject to a prepayment
premium of 1.00% of the principal amount of the amounts prepaid.
The new 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 new 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 new term loan facility which is predicated upon our
leverage ratio and cash flow. The excess cash flow provision did not apply in 2019.
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 December 31, 2019, no loans were drawn on the revolving credit facility.
As of December 31, 2019, we had approximately $23.7 million of outstanding letters of credit and approximately
$162.0 million of borrowing availability under the revolving credit facility. As of February 27, 2020, there were no
amounts drawn on 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 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 December 31, 2019, 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 $296.4 million of cash and cash equivalents and no short-term investments at December 31, 2019. We
had $253.4 million of cash and cash equivalents and $49.8 million of short-term investments at December 31, 2018.
44
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 ability to fund planned operations is based on assumptions, which involve significant judgment and
estimates of future revenues, capital spend and other operating costs.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates,
assumptions and judgments by management that affect the reported amounts of assets, liabilities, net sales, expenses
and related disclosure of contingent assets and liabilities in the amounts reported in the financial statements and
accompanying notes. On an on-going basis, we evaluate our estimates and assumptions, including, but not limited
to, book returns and variable consideration, deferred revenue and related standalone selling price estimates,
allowance for bad debts, recoverability of advances to authors, valuation of inventory, financial instruments
valuation, income taxes, pensions and other postretirement benefits obligations, contingencies, litigation,
depreciation and amortization periods, and the recoverability of long-term assets such as property, plant and
equipment, capitalized pre-publication costs, other identified intangibles, and goodwill. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from those estimates. For a complete description of
our significant accounting policies, see Note 2 to the consolidated financial statements. The following policies and
account descriptions include those identified as critical to our business operations and the understanding of our
results of operations.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that
reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue
recognition for arrangements that we determine are within the scope of the new revenue recognition accounting
standard, we perform the following five steps: (i) identify the contract with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only
apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in
exchange for the goods or services we transfer to the customer. At contract inception, we assess the goods or
services promised within each contract and determine those that are performance obligations and assess whether
each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is
allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring
products or services to a customer. To the extent the transaction price includes variable consideration, which
generally reflects estimated future product returns, we estimate the amount of variable consideration that should be
included in the transaction price utilizing the expected value method to which we expect to be entitled. Variable
consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal
of cumulative revenue under the contract will not occur. Estimates of variable consideration and the determination
of whether to include estimated amounts in the transaction price are based largely on all information (historical,
current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third
parties are excluded from revenue.
We estimate the collectability of contracts upon execution. For contracts with rights of return, the transaction
price is adjusted to reflect the estimated returns for the arrangement on these sales and is made at the time of sale
based on historical experience by product line or customer. The transaction prices allocated are adjusted to reflect
expected returns and are based on historical return rates and sales patterns. Shipping and handling fees charged to
customers are included in net sales.
45
When determining the transaction price of a contract, an adjustment is made if payment from a customer
occurs either significantly before or significantly after performance, resulting in a significant financing component.
We do not assess whether a significant financing component exists if the period between when we perform our
obligations under the contract and when the customer pays is one year or less. Significant financing components
income is included in interest income.
Contracts are often modified to account for changes in contract specifications and requirements. Contract
modifications exist when the modification either creates new, or changes the existing, enforceable rights and
obligations. Generally, contract modifications are for products or services that are not distinct from the existing
contract due to the inability to use, consume or sell the products or services on their own to generate economic
benefits and are accounted for as if they were part of that existing contract. The effect of such a contract
modification on the transaction price and measure of progress for the performance obligation to which it relates is
recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up
basis.
Physical product revenue is recognized when the customer obtains control of our product, which occurs at a
point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract.
Revenues from static digital content commence upon delivery to the customer of the digital entitlement that is
required to access and download the content and is typically recognized at a point in time. Revenues from
subscription software licenses, related hosting services and product support are recognized evenly over the license
term as we believe this best represents the pattern of transfer to the customer. The perpetual software licenses
provide the customer with a functional license to our products and their related revenues are recognized when the
customer receives entitlement to the software. For the technical services provided to customers in connection with
the software license, including hosting services related to perpetual licenses, we recognize revenue upon delivery of
the services. As the invoices are based on each day of service, this is directly linked to the transfer of benefit to the
customer.
If the contract contains a single performance obligation, the entire transaction price is allocated to the single
performance obligation. We enter into certain contracts that have multiple performance obligations, one or more of
which may be delivered subsequent to the delivery of other performance obligations. These performance obligations
may include print and digital media, professional development services, training, software licenses, access to hosted
content, and various services related to the software including but not limited to hosting, maintenance and support,
and implementation. We allocate the transaction price based on the estimated relative standalone selling prices of the
promised products or services underlying each performance obligation. We determine standalone selling prices
based on the price at which the performance obligation is sold separately. If the standalone selling price is not
observable through past transactions, we estimate the standalone selling price taking into account available
information such as market conditions and internally approved standard pricing discounts related to the performance
obligations. Generally, our performance obligations include print and digital textbooks and instructional materials,
trade books, reference materials, formative assessment materials and multimedia instructional programs; licenses to
book rights and content; access to hosted content; and services including professional development, consulting and
training. Our contracts may also contain software performance obligations including perpetual and subscription-
based licenses and software maintenance and support services.
Accounts Receivable
Accounts receivable include amounts billed and currently due from customers and are recorded net of
allowances for doubtful accounts and reserves for returns. In the normal course of business, we extend credit to
customers that satisfy predefined criteria. Allowances for doubtful accounts are established through the evaluation of
accounts receivable aging and prior collection experience to estimate the ultimate collectability of these receivables.
Deferred Commissions
Our incremental direct costs of obtaining a contract, which consist of sales commissions, are deferred and
amortized over the period of contract performance. Applying the practical expedient, we recognize sales
commission expense when incurred if the amortization period of the assets that we otherwise would have recognized
is one year or less. At December 31, 2019 and December 31, 2018, we had $29.3 million and $22.6 million of
deferred commissions, respectively. We had $13.2 million of amortization expense related to deferred commissions
during the year ended December 31, 2019. These costs are included in selling and administrative expenses.
46
Deferred Revenue
Our contract liabilities consist of advance payments and billings in excess of revenue recognized and are
classified as deferred revenue on our consolidated balance sheets. Our contract assets and liabilities are accounted
for and presented on a net basis as either a contract asset or contract liability at the end of each reporting period. We
classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. In
order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the
individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that
balance. If additional advances are received on those contracts in subsequent periods, we assume all revenue
recognized in the reporting period first applies to the beginning contract liability as opposed to a portion applying to
the new advances for the period.
Allowance for Doubtful Accounts and Reserves for Book Returns
Accounts receivable are recorded net of allowances for doubtful accounts and reserves for book returns. In the
normal course of business, we extend credit to customers that satisfy predefined criteria. We estimate the
collectability of our receivables. Allowances for doubtful accounts are established through the evaluation of
accounts receivable aging, prior collection experience and specific facts and circumstances. Reserves for book
returns are based on historical return rates and sales patterns. We determine the required reserves by segregating our
returns into the applicable product or sales channel pools. Returns in the K-12 market have been historically low.
We have experienced higher returns with respect to sales to resellers, international sales and HMH Books & Media
sales, which all result in a greater degree of risk and subjectivity when establishing the appropriate level of reserves
for this customer base. We estimate the amount of returns using the expected value method to reduce transaction
price at the time of the sale. At the time we determine that a receivable balance, or any portion thereof, is deemed to
be permanently uncollectible, the balance is written off. The allowance for doubtful accounts and reserve for returns
are reported as reductions of the accounts receivable balance and amounted to $3.0 million and $16.7 million, and
$2.2 million and $18.6 million as of December 31, 2019 and 2018, respectively.
Inventories
Inventories are substantially stated at the lower of weighted average cost or net realizable value. The level of
obsolete and excess inventory is estimated on a program or title-level basis by comparing the number of units in
stock with the expected future demand. The expected future demand of a program or title is determined by the
copyright year, the previous years sales history, the subsequent years sales forecast, known forward-looking trends
including our development cycle to replace the title or program and competing titles or programs. A change in sales
trends, or strategic direction of our product development, could affect the estimated reserve. The inventory
obsolescence reserve is reported as a reduction of the inventories balance and amounted to $57.4 million and
$46.5 million as of December 31, 2019 and 2018, respectively.
Pre-publication Costs
Pre-publication costs are capitalized and are primarily amortized from the year of sale over five years using
the sum-of-the-years-digits method, which is an accelerated method for calculating an assets amortization. Under
this method, the amortization expense recorded for a pre-publication cost asset is approximately 33% (year 1), 27%
(year 2), 20% (year 3), 13% (year 4) and 7% (year 5). We utilize this policy for all pre-publication costs, except with
respect to our HMH Books & Media young readers and general interest books, for which we expense such costs as
incurred. Additionally, pre-publication costs recorded for most intervention products are amortized over 7 years on a
projected sales pattern. The amortization methods and periods chosen best reflects the pattern of expected sales
generated from individual titles or programs. On a quarterly basis, we evaluate the remaining lives and
recoverability of capitalized pre-publication costs, which are often dependent upon program acceptance by state
adoption authorities.
Amortization expense related to pre-publication costs for the years ended December 31, 2019, 2018 and 2017
were $149.5 million, $109.3 million and $119.9 million, respectively.
47
For the year ended December 31, 2017, the Company recorded an impairment charge of $4.0 million related
to assets that had no future value. For the years ended December 31, 2019 and 2018, no pre-publication costs were
deemed to be impaired.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets (certain tradenames) are not amortized, but are reviewed at
least annually for impairment or earlier, if an indication of impairment exists. Goodwill is allocated entirely to our
Education reporting unit. Determining the fair value of a reporting unit is judgmental in nature and involves the use
of significant estimates and assumptions. These estimates and assumptions may include net sales growth rates and
operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and
market conditions, the determination of appropriate market comparables as well as the fair value of individual assets
and liabilities.
We have the option of first assessing qualitative factors to determine whether it is necessary to perform the
current two-step impairment test for goodwill or we can perform the two-step impairment test without performing
the qualitative assessment. In performing the qualitative (Step 0) assessment, we consider certain events and
circumstances specific to the reporting unit and to the entity as a whole, such as macroeconomic conditions, industry
and market considerations, overall financial performance and cost factors when evaluating whether it is more likely
than not that the fair value of the reporting unit is less than its carrying amount.
Recoverability of goodwill can also be evaluated using a two-step process. In the first step, the fair value of a
reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the
net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the
carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, the second step
of the impairment test is performed in order to determine the implied fair value of a reporting units goodwill.
Determining the implied fair value of goodwill requires valuation of a reporting units tangible and intangible assets
and liabilities in a manner similar to the allocation of purchase price in a business combination. If the carrying value
of a reporting units goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the
extent of the difference. We estimate total fair value of the Education reporting unit by using various valuation
techniques including an evaluation of our market capitalization and peer company multiples. With regard to
indefinite-lived intangible assets, which includes the Houghton Mifflin Harcourt tradename at December 31, 2019
and 2018, the recoverability is evaluated using a one-step process whereby we determine the fair value by asset and
then compare it to its carrying value to determine if the asset is impaired. We estimate the fair value by preparing a
relief-from-royalty discounted cash flow analysis using forward looking revenue projections. The significant
assumptions used in discounted cash flow analysis include: future net sales, a long-term growth rate, a royalty rate
and a discount rate used to present value future cash flows and the terminal value of the Education reporting unit.
The discount rate is based on the weighted-average cost of capital method at the date of the evaluation.
We completed our annual goodwill impairment tests as of October 1, 2019 and 2018. The fair value of the
Education reporting unit was in excess of its carrying value by approximately 18% as of October 1, 2019, and
substantially exceeded its carrying value as of October 1, 2018. Adverse changes in our market capitalization or peer
company multiples by an equivalent amount could give rise to an impairment. There was no goodwill impairment
for the years ended December 31, 2019, 2018 and 2017. We will continue to monitor and evaluate the carrying value
of goodwill. If market and economic conditions or business performance deteriorate, this could increase the
likelihood of us recording an impairment charge.
We completed our annual indefinite-lived asset impairment tests as of October 1, 2019 and 2018. No
indefinite-lived intangible assets were deemed to be impaired for the years ended December 31, 2019, 2018 and
2017.
48
Royalty Advances
Royalty advances to authors are capitalized and represent amounts paid in advance of the sale of an authors
product and are recovered as earned. As advances are recorded, a partial reserve may be recorded immediately based
primarily upon historical sales experience to estimate the likelihood of recovery. Additionally, advances are
evaluated periodically to determine if they are expected to be recovered on a title-by-title basis, with consideration
given to the other titles in the authors portfolio also earning against the outstanding advance. Any portion of a
royalty advance that is not expected to be recovered is fully reserved. The reserve for royalty advances is reported as
a reduction of the royalty advances to authors balance and amounted to $119.7 million and $117.8 million as of
December 31, 2019 and 2018, respectively.
Stock-Based Compensation
The fair value of each restricted stock and restricted stock unit was estimated at the date of the grant based
upon the target value of the award and the current market price. The fair value of each market-based restricted stock
unit was estimated at the date of grant using the Monte Carlo simulation, which requires managements use of
highly subjective estimates and assumptions. The fair value of each stock option grant was estimated on the date of
grant using the Black-Scholes option pricing model, which also requires managements use of highly subjective
estimates and assumptions. The use of different estimates and assumptions in the option pricing model could have a
material impact on the estimated fair value of option grants and the related expense. We estimate our expected
volatility based on the historical volatility of our common stock as we have adequate historical data regarding the
volatility of our traded stock price. The expected life assumption is based on the simplified method for estimating
the expected term for awards. This option has been elected as we do not have sufficient stock option exercise
experience to support a reasonable estimate of the expected term. The risk-free interest rate is the yield currently
available on U.S. Treasury zero-coupon issues with a remaining term approximating the expected term of the option.
The expected dividend yield is based on actual dividends paid or to be paid. We recognize stock-based
compensation expense over the awards requisite service period on a straight-line basis for time-based stock options,
restricted stock and restricted stock units and on a graded basis for restricted stock and restricted stock units that are
contingent on the achievement of performance conditions. We recognize compensation expense for only the portion
of stock-based awards that are expected to vest. Accordingly, we have estimated expected forfeitures of stock-based
awards based on our historical forfeiture rates and used these rates in developing a future forfeiture rate. If our actual
forfeiture rate varies from our historical rates and estimates, additional adjustments to compensation expense may be
required in future periods.
Impact of Inflation and Changing Prices
We believe that inflation has not had a material impact on our results of operations during the years ended
December 31, 2019, 2018 and 2017. 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 December 31, 2019, we were in compliance with all of our debt covenants.
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
49
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.
Contractual Obligations
The following table provides information with respect to our estimated commitments and obligations as of
December 31, 2019 (in thousands):
Contractual Obligations
Term loan due November 22, 2024 (1)
Interest payable on term loan due November 22,
2024 (2)
9.0% senior secured notes due February 15, 2025
Interest payable on 9.0% senior secured notes due
February 15, 2025
Operating leases (3)
Purchase obligations (4)
Total cash contractual obligations
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
$ 380,000 $ 19,000 $ 38,000 $ 323,000 $
125,305
306,000
29,660
51,738
43,907
306,000
141,143
263,250
77,540
3,443
135,458
$1,293,238 $ 150,328 $ 223,590 $ 474,419 $ 444,901
55,080
49,238
29,534
55,080
51,528
904
27,540
27,026
47,102
The term loan facility principal amortizes at a rate of 5.0% per annum of the original $380.0 million amount.
(1)
(2) As of December 31, 2019, the interest rate was 8.0%.
(3) Represents minimum lease payments under non-cancelable operating leases.
(4)
Purchase obligations are agreements to purchase goods or services that are enforceable and legally binding.
These goods and services consist primarily of author advances, subcontractor expenses, information
technology licenses, and outsourcing arrangements.
In addition to the payments described above, we have employee benefit obligations that require future
payments. For example, we expect to make $4.0 million of contributions in 2020 relating to our pension and
postretirement benefit plans. We expect to periodically draw and repay borrowings under the revolving credit
facility. We believe that we will be able to meet our cash interest obligations on our outstanding debt when they are
due and payable.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
50
Item 7A. 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 December 31, 2019, we had $380.0 million ($361.3 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
$3.8 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 December 31, 2019, 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, and for which we had $370.5 million outstanding as
of December 31, 2019. These contracts were effective beginning September 30, 2016 and mature on July 22, 2020.
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 December 31, 2019 and December 31, 2018. We do not enter into derivative transactions or use
other financial instruments for trading or speculative purposes.
51
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Houghton Mifflin Harcourt Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Houghton Mifflin Harcourt Company and its
subsidiaries (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of
operations, comprehensive loss, stockholders equity, and cash flows for each of the three years in the period ended
December 31, 2019, including the related notes (collectively referred to as the consolidated financial statements).
We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it
accounts for leases in 2019 and the manner in which it accounts for revenues from contracts with customers in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in Managements Report on Internal Control over Financial Reporting appearing under Item 9A.
Our responsibility is to express opinions on the Companys consolidated financial statements and on the Company's
internal control over financial reporting based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting
was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.
52
Definition and Limitations of Internal Control over Financial Reporting
A companys internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A companys internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the
consolidated financial statements that were communicated or required to be communicated to the audit committee and
that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in
any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the
critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures
to which they relate.
Indefinite-Lived Intangible Asset Impairment Evaluation - Trademarks and Tradenames
As described in Notes 2 and 6 to the consolidated financial statements, as of December 31, 2019, the Companys
indefinite-lived intangible asset balance was $161.0 million and relates to trademarks and tradenames. Management
reviews its indefinite-lived intangible assets at least annually for impairment or earlier, if an indication of
impairment exists. The recoverability is evaluated using a one-step process whereby management determines the fair
value by asset and then compares it to its carrying value to determine if the asset is impaired. Management estimates
the fair value by preparing a relief-from-royalty discounted cash flow analysis using forward looking revenue
projections. The significant assumptions used in the discounted cash flow analysis include: future net sales, a long-
term growth rate, a royalty rate, and a discount rate.
The principal considerations for our determination that performing procedures relating to the indefinite-lived
intangible asset impairment evaluation for trademarks and tradenames is a critical audit matter are there was
significant judgment by management when developing the fair value measurement of the trademarks and
tradenames. This in turn led to significant auditor judgment, subjectivity, and audit effort in performing procedures
to evaluate managements significant assumptions, including future net sales, the long-term growth rate, the royalty
rate, and the discount rate. Also, the audit effort involved the use of professionals with specialized skill and
knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming
our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of
controls relating to managements trademarks and tradenames impairment evaluation, including controls over the
valuation of the trademarks and tradenames. These procedures also included, among others (i) assessing the
appropriateness of managements relief-from-royalty discounted cash flow analysis for estimating fair value of the
trademarks and tradenames, (ii) testing the completeness and accuracy of the underlying input data used in the
analysis, and (iii) evaluating the significant assumptions used by management, including future net sales, the long-
term growth rate, the royalty rate, and the discount rate. Evaluating managements assumptions related to future net
sales and the long-term growth rate involved evaluating whether the assumptions used by management were
53
reasonable considering the past performance of the business, relevant market data and industry trends, and whether
these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized
skill and knowledge were used to assist in evaluating the Companys discounted cash flow analysis and certain
significant assumptions, including the royalty rate and the discount rate.
Reserve for Royalty Advances to Authors
As described in Notes 2 and 19 to the consolidated financial statements, royalty advances to authors are capitalized
and represent amounts paid in advance of the sale of an authors product and are recovered as earned. As advances
are recorded, a partial reserve may be recorded immediately based primarily upon historical sales experience.
Additionally, advances are evaluated periodically to determine if they are expected to be recovered on a title-by-title
basis, with consideration given to the other titles in the authors portfolio also earning against the outstanding
advance. Any portion of a royalty advance that is not expected to be recovered is fully reserved. The reserve for
royalty advances is reported as a reduction of the royalty advances to authors balance and was $119.7 million as of
December 31, 2019.
The principal considerations for our determination that performing procedures relating to the reserve for royalty
advances to authors is a critical audit matter are there was significant judgment by management to determine the
reserve for royalty advances, which in turn led to significant auditor subjectivity, judgment, and audit effort in
performing procedures and in evaluating audit evidence relating to managements estimate of the reserve for royalty
advances to authors.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming
our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of
controls relating to managements estimate of the reserve for royalty advances to authors. These procedures also
included, among others (i) evaluating the appropriateness of managements process for estimating its reserve for
royalty advances to authors, (ii) assessing the reasonableness of significant assumptions used by management in
developing the estimate, particularly the ability of an authors portfolio to generate future sales, which included
evaluating comparable historical sales volumes and other relevant external data, and (iii) testing the completeness
and accuracy of the underlying input data, primarily relating to historical sales used by management to develop their
estimate. Evaluating the assumptions related to the estimate of the reserve for royalty advances to authors involved
evaluating, on a sample basis, whether the assumptions used were reasonable considering the historical sales
experience and the ability of an authors portfolio to generate future sales.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
February 27, 2020
We have served as the Companys auditor since 2003.
54
Houghton Mifflin Harcourt Company
Consolidated Balance Sheets
(in thousands of dollars, except share information)
Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net of allowances for bad debts and book returns of
$19.7 million and $20.7 million, respectively
Inventories
Prepaid expenses and other assets
Total current assets
Property, plant, and equipment, net
Pre-publication costs, net
Royalty advances to authors, net
Goodwill
Other intangible assets, net
Operating lease assets
Deferred income taxes
Deferred commissions
Other assets
Total assets
Liabilities and Stockholders Equity
Current liabilities
Current portion of long-term debt
Accounts payable
Royalties payable
Salaries, wages, and commissions payable
Deferred revenue
Interest payable
Severance and other charges
Accrued postretirement benefits
Operating lease liabilities
Other liabilities
Total current liabilities
Long-term debt, net of discount and issuance costs
Operating lease liabilities
Long-term deferred revenue
Accrued pension benefits
Accrued postretirement benefits
Deferred income taxes
Other liabilities
Total liabilities
Commitments and contingencies (Note 14)
Stockholders equity
Preferred stock, $0.01 par value: 20,000,000 shares authorized; no shares issued
and outstanding at December 31, 2019 and 2018
Common stock, $0.01 par value: 380,000,000 shares authorized; 148,928,328 and
148,164,854 shares issued at December 31, 2019 and 2018, respectively; 124,351,294
and 123,587,820 shares outstanding at December 31, 2019 and 2018, respectively
Treasury stock, 24,577,034 shares as of December 31, 2019 and 2018, respectively, at cost
Capital in excess of par value
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders equity
Total liabilities and stockholders equity
December 31,
2019
2018
$
$
$
296,353
184,425
213,059
19,257
713,094
100,388
268,197
44,743
716,977
474,225
132,247
2,520
29,291
31,490
2,513,172
19,000
52,128
72,985
54,938
305,285
3,826
12,407
1,571
8,685
24,325
555,150
638,187
134,994
542,821
23,648
15,113
30,871
6,028
1,946,812
253,365
49,833
203,574
184,209
15,297
706,278
125,925
323,641
47,993
716,073
520,892
3,259
22,635
28,428
2,495,124
8,000
76,313
66,893
50,225
251,944
136
6,020
1,512
26,649
487,692
755,649
395,500
29,320
14,300
27,075
17,118
1,726,654
1,489
(518,030 )
4,906,165
(3,775,992 )
(47,272 )
566,360
2,513,172
$
1,481
(518,030 )
4,893,174
(3,562,971 )
(45,184 )
768,470
2,495,124
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
55
Houghton Mifflin Harcourt Company
Consolidated Statements of Operations
(in thousands of dollars, except share and per share data)
Net sales
Costs and expenses
Cost of sales, excluding publishing rights and pre-publication
$
amortization
Publishing rights amortization
Pre-publication amortization
Cost of sales
Selling and administrative
Other intangible asset amortization
Impairment charge for pre-publication costs
Restructuring/severance and other charges
Gain on sale of assets
Operating loss
Other income (expense)
Retirement benefits non-service income
Interest expense
Interest income
Change in fair value of derivative instruments
Income from transition services agreement
Loss on extinguishment of debt
Loss from continuing operations before taxes
Income tax expense (benefit) for continuing operations
Loss from continuing operations
Earnings from discontinued operations, net of tax
Gain on sale of discontinued operations, net of tax
Income from discontinued operations, net of tax
Net loss
Net loss per share attributable to common stockholders
Basic and diluted:
Continuing operations
Discontinued operations
Net loss
Weighted average shares outstanding
Basic and diluted
$
$
$
2019
1,390,674
Years Ended December 31,
2018
1,322,417
$
$
668,108
26,557
149,515
844,180
662,606
25,310
21,742
(163,164)
167
(48,778)
3,157
(899)
4,248
(4,363)
(209,632)
4,201
(213,833)
(213,833) $
581,467
34,713
109,257
725,437
649,295
26,933
11,478
(201)
(90,525)
1,280
(45,680)
2,550
(1,374)
1,889
(131,860)
5,597
(137,457)
12,833
30,469
43,302
(94,155) $
2017
1,327,029
588,518
46,238
119,908
754,664
636,326
29,248
3,980
37,952
(135,141)
3,486
(42,805)
1,338
1,366
(171,756)
(51,419)
(120,337)
17,150
17,150
(103,187)
(1.72) $
(1.72) $
(1.11) $
0.35
(0.76) $
(0.98)
0.14
(0.84)
124,152,984
123,444,943
122,949,064
The accompanying notes are an integral part of these consolidated financial statements.
56
Houghton Mifflin Harcourt Company
Consolidated Statements of Comprehensive Loss
(in thousands of dollars)
Net loss
Other comprehensive (loss) income, net of taxes:
Foreign currency translation adjustments, net of tax
Net change in pension and benefit plan liabilities, net of tax
Unrealized gain (loss) on short-term investments, net of tax
Net change in unrealized gain (loss) on derivative financial
instruments, net of tax
Other comprehensive (loss) income, net of taxes
Comprehensive loss
Years Ended December 31,
2018
(94,155) $
2019
(213,833) $
2017
(103,187)
(511)
1,800
9
(156)
(2,056)
9
109
1,734
(18)
(3,386)
(2,088)
(215,921) $
3,541
1,338
(92,817) $
4,948
6,773
(96,414)
$
$
The accompanying notes are an integral part of these consolidated financial statements.
57
Houghton Mifflin Harcourt Company
Consolidated Statements of Cash Flows
2019
Years Ended December 31,
2018
2017
$
(213,833 )
$
(94,155 )
$
(103,187 )
(in thousands of dollars)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities
Earnings from discontinued operations, net of tax
Gain on sale of discontinued operations, net of tax
Gain on sale of assets
Depreciation and amortization expense
Amortization and impairments of operating lease assets
Amortization of debt discount and deferred financing costs
Deferred income taxes
Stock-based compensation expense
Impairment charge for pre-publication costs
Restructuring charges related to property, plant, and equipment
Loss on extinguishment of debt
Change in fair value of derivative instruments
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable
Inventories
Other assets
Accounts payable and accrued expenses
Royalties payable and author advances, net
Deferred revenue
Interest payable
Severance and other charges
Accrued pension and postretirement benefits
Operating lease liabilities
Other liabilities
Net cash provided by operating activitiescontinuing operations
Net cash provided by operating activitiesdiscontinued operations
Net cash provided by operating activities
Cash flows from investing activities
Proceeds from sales and maturities of short-term investments
Purchases of short-term investments
Additions to pre-publication costs
Additions to property, plant, and equipment
Proceeds from sale of business
Acquisition of intangible asset
Acquisition of business, net of cash acquired
Investment in preferred stock
Proceeds from sale of assets
Net cash (used in) provided by investing activitiescontinuing operations
Net cash used in investing activitiesdiscontinued operations
Net cash used in investing activities
Cash flows from financing activities
Proceeds from term loan, net of discount
Proceeds from senior secured notes, net of discount
Borrowings under revolving credit facility
Payments of revolving credit facility
Payments of long-term debt
Payments of deferred financing fees
Tax withholding payments related to net share settlements of restricted stock units and awards
Proceeds from stock option exercises
Issuance of common stock under employee stock purchase plan
Net collections under transition service agreement
Net cash used in financing activitiescontinuing operations
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
Supplemental disclosure of cash flow information
Interest paid
Income taxes paid
Non-cash investing activities
Pre-publication costs included in accounts payable and accruals
Property, plant, and equipment included in accounts payable and accruals
Property, plant, and equipment acquired under finance leases
$
$
$
272,692
15,949
4,286
4,535
13,968
4,363
899
19,182
(28,850 )
(20,155 )
(12,136 )
9,342
200,473
3,690
10,631
(4,800 )
(17,281 )
(7,980 )
254,975
254,975
50,000
(102,562 )
(37,561 )
(5,447 )
(750 )
(96,320 )
(96,320 )
364,800
299,880
60,000
(60,000 )
(772,000 )
(8,493 )
(2,018 )
1,028
1,136
(115,667 )
42,988
253,365
296,353
41,059
671
5,480
3,039
327
$
$
$
(12,833 )
(30,469 )
(201 )
250,466
4,181
5,140
13,248
1,374
(11,005 )
(33,515 )
3,908
16,144
(1,650 )
(7,692 )
(186 )
(2,823 )
(904 )
5,056
104,084
10,831
114,915
86,539
(49,553 )
(123,403 )
(53,741 )
140,000
(500 )
1,085
427
(6,832 )
(6,405 )
50,000
(50,000 )
(8,000 )
(1,190 )
1,263
3,803
(4,124 )
104,386
148,979
253,365
41,758
430
13,974
1,908
480
$
$
$
(17,150 )
266,443
4,181
(49,247 )
10,728
3,980
9,841
(1,366 )
12,564
8,122
(10,548 )
(5,937 )
(1,449 )
(13,500 )
129
221
(6,932 )
(2,145 )
104,748
30,382
135,130
80,690
(86,211 )
(131,282 )
(55,092 )
(2,000 )
(193,895 )
(11,028 )
(204,923 )
(8,000 )
(1,450 )
512
1,608
(7,330 )
(77,123 )
226,102
148,979
38,295
715
16,681
11,403
The accompanying notes are an integral part of these consolidated financial statements.
58
vesting of restricted stock units
175,555
Houghton Mifflin Harcourt Company
Consolidated Statements of Stockholders Equity
Common Stock
Shares
Issued
Par Value Treasury Stock
Capital
in excess
of Par
Value
Accumulated
Other
Accumulated Comprehensive
Deficit
147,556,804 $ 1,475 $
(518,030) $4,868,230 $(3,418,340) $
2
2
(103,187)
2,130
(2)
512
(1,450)
Total
Loss
(53,295) $ 880,040
(103,187)
6,773
6,773
2,132
512
(1,450)
(36,842)
147,911,466
1,479
10,373
(518,030) 4,879,793
(3,521,527)
(94,155)
(46,522)
10,373
795,193
(94,155)
1,338
1,338
2
3
1,611
(3)
(1,190)
52,711
(268,295)
148,164,854
(3)
1,481
3
12,960
(518,030) 4,893,174
(3,562,971)
(213,833)
1,436
(6)
812
2
6
52,711
1,613
(1,190)
(45,184)
12,960
768,470
(213,833)
(2,088)
(2,088)
812
1,438
(2,018)
13,579
(47,272) $ 566,360
176,749
39,200
175,428
186,114
(in thousands of dollars, except share
information)
Balance at December 31, 2016
Net loss
Other comprehensive income, net of
tax
Issuance of common stock for
employee purchase plan
Issuance of common stock for
Issuance of common stock for
exercise of stock options
Stock withheld to cover tax
withholdings requirements upon
vesting of restricted stock units
Restricted stock forfeitures and
cancellations
Stock-based compensation expense
Balance at December 31, 2017
Net loss
Other comprehensive income, net of
tax
Effects of adoption of new revenue
accounting standard
Issuance of common stock for
employee purchase plan
Issuance of common stock for
Stock withheld to cover tax
withholdings requirements upon
vesting of restricted stock units
Restricted stock forfeitures and
cancellations
Stock-based compensation expense
Balance at December 31, 2018
Net loss
Other comprehensive loss, net of
tax
Effects of adoption of new lease
accounting standard
Issuance of common stock for
employee purchase plan
Issuance of common stock for
Stock withheld to cover tax
withholdings requirements upon
vesting of restricted stock units
Stock-based compensation expense
Balance at December 31, 2019
vesting of restricted stock units
346,255
vesting of restricted stock units
577,360
148,928,328 $ 1,489 $
(2,018)
13,579
(518,030) $4,906,165 $(3,775,992) $
The accompanying notes are an integral part of these consolidated financial statements.
59
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
1.
Basis of Presentation
Houghton Mifflin Harcourt Company (HMH, Houghton Mifflin Harcourt, we, us, our, or the
Company) is a learning company, committed to delivering connected solutions that engage learners, empower
educators and improve student outcomes. As a leading provider of Kindergarten through 12th grade (K-12) core
curriculum, supplemental and intervention solutions and professional learning services, HMH partners with
educators and school districts to uncover solutions that unlock students potential and extend teachers capabilities.
HMH estimates that it serves more than 50 million students and 3 million educators in 150 countries, while its
award-winning childrens books, novels, non-fiction, and reference titles are enjoyed by readers throughout the
world.
We are organized along two business segments: Education and HMH Books & Media. Within our Education
division, 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 districts needs, goals
and technological readiness.
Furthermore, for nearly two centuries, we have published renowned and awarded childrens, fiction, non-
fiction, culinary and reference titles enjoyed by readers throughout the world. Our distinguished author list includes
ten Nobel Prize winners, forty-nine Pulitzer Prize winners, and twenty-six National Book Award winners. We are
home to popular characters and titles such as Curious George, Carmen Sandiego, The Lord of the Rings, The
Whole30, The Best American Series, the Peterson Field Guides, CliffsNotes, and The Polar Express, and published
distinguished authors such as Tim OBrien, Temple Grandin, Tim Ferriss, Kwame Alexander, Lois Lowry, and
Chris Van Allsburg.
The consolidated financial statements of HMH include the accounts of all of our wholly-owned subsidiaries as
of December 31, 2019 and 2018 and for the periods ended December 31, 2019, 2018 and 2017.
The accompanying consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP). Our accompanying consolidated financial
statements include the results of operations of the Company and our wholly-owned subsidiaries. All material
intercompany accounts and transactions are eliminated in consolidation.
We expect our net cash provided by operations combined with our cash and cash equivalents and borrowing
availability under our revolving credit facility to provide sufficient liquidity to fund our current obligations, capital
spending, debt service requirements and working capital requirements over at least the next twelve months.
The ability of the Company to fund planned operations is based on assumptions which involve significant
judgment and estimates of future revenues, capital spend and other operating costs.
60
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Seasonality and Comparability
Our net sales, operating profit or loss and net cash provided by or used in operations are impacted by the
inherent seasonality of the academic calendar, which results in a cash flow usage in the first half of the year and a
cash flow generation in the second half of the year. Consequently, the performance of our businesses may not be
comparable quarter to consecutive quarter and should be considered on the basis of results for the whole year or by
comparing results in a quarter with results in the same quarter for the previous year.
Approximately 87% of our net sales for the year ended December 31, 2019 were derived from our Education
segment, which is a markedly seasonal business. Schools conduct the majority of their purchases in the second and
third quarters of the calendar year in preparation for the beginning of the school year. Thus, for the years ended
December 31, 2019, 2018 and 2017, approximately 67% of our consolidated net sales were realized in the second
and third quarters. Sales of K-12 instructional materials and customized testing products are also cyclical with some
years offering more sales opportunities than others in light of the state adoption calendar. The amount of funding
available at the state level for educational materials also has a significant effect on year-to-year net sales. Although
the loss of a single customer would not have a material adverse effect on our business, schedules of school adoptions
and market acceptance of our products can materially affect year-to-year net sales performance.
2.
Significant Accounting Policies and Recent Accounting Standards
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires the use of estimates, assumptions and judgments by management that affect the
reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities
in the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate our
estimates and assumptions including, but not limited to, book returns, deferred revenue and related standalone
selling price estimates, allowance for bad debts, recoverability of advances to authors, valuation of inventory,
financial instruments valuation, income taxes, pensions and other postretirement benefits obligations, contingencies,
litigation, depreciation and amortization periods, and the recoverability of long-term assets such as property, plant,
and equipment, capitalized pre-publication costs, other identified intangibles and goodwill. We base our estimates
on historical experience and on various other assumptions that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from those estimates.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that
reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue
recognition for arrangements that we determine are within the scope of the new revenue recognition accounting
standard, we perform the following five steps: (i) identify the contract with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only
apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in
exchange for the goods or services we transfer to the customer. At contract inception, we assess the goods or
services promised within each contract and determine those that are performance obligations and assess whether
each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is
allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring
products or services to a customer. To the extent the transaction price includes variable consideration, which
generally reflects estimated future product returns, we estimate the amount of variable consideration that should be
included in the transaction price utilizing the expected value method to which we expect to be entitled. Variable
consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal
of cumulative revenue under the contract will not occur. Estimates of variable consideration and the determination
of whether to include estimated amounts in the transaction price are based largely on all information (historical,
current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third
parties are excluded from revenue.
61
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
We estimate the collectability of contracts upon execution. For contracts with rights of return, the transaction
price is adjusted to reflect the estimated returns for the arrangement on these sales and is made at the time of sale
based on historical experience by product line or customer. The transaction prices allocated are adjusted to reflect
expected returns and are based on historical return rates and sales patterns. Shipping and handling fees charged to
customers are included in net sales.
When determining the transaction price of a contract, an adjustment is made if payment from a customer
occurs either significantly before or significantly after performance, resulting in a significant financing component.
We do not assess whether a significant financing component exists if the period between when we perform our
obligations under the contract and when the customer pays is one year or less. Significant financing components
income is included in interest income.
Contracts are sometimes modified to account for changes in contract specifications and requirements. Contract
modifications exist when the modification either creates new, or changes the existing, enforceable rights and
obligations. Generally, contract modifications are for products or services that are not distinct from the existing
contract due to the inability to use, consume or sell the products or services on their own to generate economic
benefits and are accounted for as if they were part of that existing contract. The effect of such a contract
modification on the transaction price and measure of progress for the performance obligation to which it relates is
recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up
basis.
Physical product revenue is recognized when the customer obtains control of our product, which occurs at a
point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract.
Revenues from static digital content commence upon delivery to the customer of the digital entitlement that is
required to access and download the content and is typically recognized at a point in time. Revenues from
subscription software licenses, related hosting services and product support are recognized evenly over the license
term as we believe this best represents the pattern of transfer to the customer. The perpetual software licenses
provide the customer with a functional license to our products and their related revenues are recognized when the
customer receives entitlement to the software. For the technical services provided to customers in connection with
the software license, including hosting services related to perpetual licenses, we recognize revenue upon delivery of
the services. As the invoices are based on each day of service, this is directly linked to the transfer of benefit to the
customer.
If the contract contains a single performance obligation, the entire transaction price is allocated to the single
performance obligation. We enter into certain contracts that have multiple performance obligations, one or more of
which may be delivered subsequent to the delivery of other performance obligations. These performance obligations
may include print and digital media, professional development services, training, software licenses, access to hosted
content, and various services related to the software including, but not limited to hosting, maintenance and support,
and implementation. We allocate the transaction price based on the estimated relative standalone selling prices of the
promised products or services underlying each performance obligation. We determine standalone selling prices
based on the price at which the performance obligation is sold separately. If the standalone selling price is not
observable through past transactions, we estimate the standalone selling price taking into account available
information such as market conditions and internally approved standard pricing discounts related to the performance
obligations. Generally, our performance obligations include print and digital textbooks and instructional materials,
trade books, reference materials, formative assessment materials and multimedia instructional programs; licenses to
book rights and content; access to hosted content; and services including professional development, consulting and
training. Our contracts may also contain software performance obligations including perpetual and subscription-
based licenses and software maintenance and support services.
Accounts Receivable
Accounts receivable include amounts billed and currently due from customers and are recorded net of
allowances for doubtful accounts and reserves for returns. In the normal course of business, we extend credit to
customers that satisfy predefined criteria. Allowances for doubtful accounts are established through the evaluation of
accounts receivable aging and prior collection experience to estimate the ultimate collectability of these receivables.
62
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Contract Assets
Contract assets include unbilled amounts where revenue is recognized over time as the services are delivered
to the customer based on the extent of progress towards completion and revenue recognized exceeds the amount
billed to the customer, and right of payment is not subject to the passage of time. Amounts may not exceed their net
realizable value. Contract assets are included in prepaid expenses and other assets on our consolidated balance
sheets.
Deferred Commissions
Our incremental direct costs of obtaining a contract, which consist of sales commissions, are deferred and
amortized over the period of contract performance. Applying the practical expedient, we recognize sales
commission expense when incurred if the amortization period of the assets that we otherwise would have recognized
is one year or less. At December 31, 2019 and 2018, we had $29.3 million and $22.6 million of deferred
commissions, respectively. We had $13.2 million and $10.5 million of amortization expense related to deferred
commissions during the years ended December 31, 2019 and 2018, respectively. These costs are included in selling
and administrative expenses.
Deferred Revenue
Our contract liabilities consist of advance payments and billings in excess of revenue recognized and are
classified as deferred revenue on our consolidated balance sheets. Our contract assets and liabilities are accounted
for and presented on a net basis as either a contract asset or contract liability at the end of each reporting period. We
classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. In
order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the
individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that
balance. If additional advances are received on those contracts in subsequent periods, we assume all revenue
recognized in the reporting period first applies to the beginning contract liability as opposed to a portion applying to
the new advances for the period.
Advertising Costs and Sample Expenses
Advertising costs are charged to selling and administrative expenses as incurred. Advertising costs were
$12.6 million, $12.0 million and $12.4 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Sample expenses are charged to selling and administrative expenses when the samples are shipped.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of cash in banks and highly liquid investment securities that have
maturities of three months or less when purchased. The carrying amount of cash equivalents approximates fair value
because of the short-term maturity of these investments.
Short-term Investments
Short-term investments typically consist of marketable securities with maturities between three and twelve
months at the balance sheet date. We have classified all of our short-term investments as available-for-sale at
December 31, 2018. The investments are reported at fair value with any unrealized gains or losses excluded from
earnings and reported as a separate component of stockholders equity as other comprehensive income (loss).
Accounts Receivable
Accounts receivable are recorded net of allowances for doubtful accounts and reserves for returns. In the
normal course of business, we extend credit to customers that satisfy predefined criteria. We estimate the
collectability of our receivables. Allowances for doubtful accounts are established through the evaluation of
accounts receivable aging and prior collection experience to estimate the ultimate collectability of these receivables.
Reserves for returns are based on historical return rates and sales patterns.
63
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Inventories
Inventories are stated at the lower of weighted-average cost or net realizable value. The level of obsolete and
excess inventory is estimated on a program or title level-basis by comparing the number of units in stock with past
usage and the expected future demand. The expected future demand of a program or title is determined by the
copyright year, the previous years usage, the subsequent years sales forecast, and known forward-looking trends
including our development cycle to replace the title or program and competing titles or programs.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost, or in the case of assets acquired in business combinations, at
fair value as of the acquisition date, less accumulated depreciation. Equipment under capital lease is stated at fair
value at inception of the lease, less accumulated depreciation. Maintenance and repair costs are charged to expense
as incurred, and renewals and improvements that extend the useful life of the assets are capitalized. Costs associated
with developing film and episodic series assets are deferred if such amounts are expected to be recovered through
future revenues. Film and episodic series costs are amortized on a pro rata basis of revenue earned and total revenue
expected to be earned from the film or episodic series. Depreciation on property, plant, and equipment is calculated
using the straight-line method over the estimated useful lives of the assets or, in the case of assets acquired in
business combinations, over their remaining lives. Equipment held under capital leases and leasehold improvements
are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset.
Estimated useful lives of property, plant, and equipment are as follows:
Building and building equipment
Machinery and equipment
Capitalized software and internal-use software
Leasehold improvements
Film and media
Estimated Useful Life
10 to 35 years
2 to 15 years
3 to 5 years
Lesser of useful life or lease term
Revenue earned
Capitalized Internal-Use Software and Software Development Costs
Capitalized internal-use software and software is included in property, plant and equipment on the
consolidated balance sheets.
We capitalize certain costs related to obtaining or developing computer software for internal use including
external customer-facing websites. Costs incurred during the application development stage, including external
direct costs of materials and services, and payroll and payroll related costs for employees who are directly associated
with the internal-use software project, are capitalized and amortized on a straight-line basis over the expected useful
life of the related software. The application development stage includes design of chosen path, software
configuration and integration, coding, hardware installation and testing. Costs incurred during the preliminary
project stage, as well as maintenance, training and upgrades that do not result in additional functionality subsequent
to general release are expensed as incurred.
Certain computer software development costs for software that is to be sold or marketed are capitalized in the
consolidated balance sheets. Capitalization of computer software development costs begins upon the establishment
of technological feasibility. We define the establishment of technological feasibility as a working model.
Amortization of capitalized computer software development costs is provided on a product-by-product basis using
the straight-line method, beginning upon commercial release of the product and continuing over the remaining
estimated economic life of the product. The carrying amounts of computer software development costs are annually
compared to net realizable value and impairment charges are recorded, as appropriate, when amounts expected to be
realized are lower.
64
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
We review internal-use software and software development costs for impairment. For the years ended
December 31, 2019, 2018 and 2017, there was no impairment of software developments costs and internal-use
software.
Pre-publication Costs
We capitalize the art, prepress, manuscript and other costs incurred in the creation of the master copy of a
book or other media (the pre-publication costs). Pre-publication costs are primarily amortized from the year of
sale over five years using the sum-of-the-years-digits method, which is an accelerated method for calculating an
assets amortization. Under this method, the amortization expense recorded for a pre-publication cost asset is
approximately 33% (year 1), 27% (year 2), 20% (year 3), 13% (year 4) and 7% (year 5). This policy is used
throughout the Company, except for the HMH Books & Media young readers and general interest books, which
generally expenses such costs as incurred. Additionally, pre-publication costs recorded in connection with the
acquisition of the EdTech business are amortized over 7 years on a projected sales pattern. The amortization
methods and periods chosen best reflects the pattern of expected sales generated from individual titles or programs.
We periodically evaluate the remaining lives and recoverability of capitalized pre-publication costs, which are often
dependent upon program acceptance by state adoption authorities. Amortization expense related to pre-publication
costs for the years ended December 31, 2019, 2018 and 2017 were $149.5 million, $109.3 million and
$119.9 million, respectively.
For the year ended December 31, 2017, an impairment charge for pre-publication costs of $4.0 million was
recorded as certain products will no longer be sold in the marketplace. For the years ended December 31, 2019 and
2018, there was no impairment of pre-publication costs.
Goodwill and Indefinite-lived Intangible Assets
Goodwill is the excess of the purchase price paid over the fair value of the net assets of the business acquired.
Other intangible assets principally consist of branded trademarks and trade names, acquired publishing rights and
customer relationships. Goodwill and indefinite-lived intangible assets (certain tradenames) are not amortized, but
are reviewed at least annually for impairment or earlier, if an indication of impairment exists. Goodwill is allocated
entirely to our Education reporting unit. Determining the fair value of a reporting unit is judgmental in nature and
involves the use of significant estimates and assumptions. These estimates and assumptions include our market
capitalization, selection of a control premium, and the determination of appropriate market comparables as well as
the fair value of individual assets and liabilities.
We have the option of first assessing qualitative factors to determine whether it is necessary to perform the
current two-step impairment test for goodwill or we can perform the two-step impairment test without performing
the qualitative assessment. In performing the qualitative (Step 0) assessment, events and circumstances specific to
the reporting unit and to the entity as a whole, such as macroeconomic conditions, industry and market
considerations, overall financial performance and cost factors are considered when evaluating whether it is more
likely than not that the fair value of the reporting unit is less than its carrying amount.
Recoverability of goodwill can also be evaluated using a two-step process. In the first step, the fair value of a
reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value of the
net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the
carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, the second step
of the impairment test is performed in order to determine the implied fair value of a reporting units goodwill.
Determining the implied fair value of goodwill requires valuation of a reporting units tangible and intangible assets
and liabilities in a manner similar to the allocation of purchase price in a business combination. If the carrying value
of a reporting units goodwill exceeds its implied fair value, goodwill is deemed impaired and is written down to the
extent of the difference. We estimate total fair value of the Education reporting unit by using various valuation
techniques including an evaluation of our market capitalization and peer company multiples. With regard to
indefinite-lived intangible assets, which includes the Houghton Mifflin Harcourt tradename at December 31, 2019
and 2018, the recoverability is evaluated using a one-step process whereby we determine the fair value by asset and
65
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
then compare it to its carrying value to determine if the asset is impaired. We estimate 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 include: future net sales, a long-term growth rate, a royalty rate
and a discount rate used to present value future cash flows and the terminal value of the Education reporting unit.
The discount rate is based on the weighted-average cost of capital method at the date of the evaluation.
We completed our annual goodwill impairment tests as of October 1, 2019 and 2018. The fair value of the
Education reporting unit was in excess of its carrying value by approximately 18% as of October 1, 2019, and
substantially exceeded its carrying value as of October 1, 2018. Adverse changes in our market capitalization or peer
company multiples by an equivalent amount could give rise to an impairment. There was no goodwill impairment
for the years ended December 31, 2019, 2018 and 2017. We will continue to monitor and evaluate the carrying value
of goodwill. If market and economic conditions or business performance deteriorate, this could increase the
likelihood of us recording an impairment charge.
We completed our annual indefinite-lived intangible assets impairment tests as of October 1, 2019 and 2018.
No indefinite-lived intangible assets were deemed to be impaired for the years ended December 31, 2019, 2018 and
2017.
Publishing Rights
A publishing right is an acquired right that allows us to publish and republish existing and future works as
well as create new works based on previously published materials. We determined the fair market value of the
publishing rights arising from business combinations by discounting the after-tax cash flows projected to be derived
from the publishing rights and titles to their net present value using a rate of return that accounts for the time value
of money and the appropriate degree of risk. The useful life of the publishing rights is based on the lives of the
various copyrights involved. We calculate amortization using the percentage of the projected operating income
before taxes derived from the titles in the current year as a percentage of the total estimated operating income before
taxes over the remaining useful life. Acquired publication rights, as well as customer-related intangibles with
definitive lives, are primarily amortized on an accelerated basis over periods ranging from 3 to 20 years. We review
our publishing rights for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable. No publishing rights were deemed to be impaired for the years ended
December 31, 2019, 2018 and 2017.
Impairment of Other Long-lived Assets
We review our other long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable. If the future undiscounted cash flows are less than
their book value, impairment exists. The impairment is measured as the difference between the book value and the
fair value of the underlying asset. Fair value is normally determined using an undiscounted cash flow model.
Severance
We accrue postemployment benefits if the obligation is attributable to services already rendered, rights to
those benefits accumulate, payment of benefits is probable, and amount of benefit is reasonably estimated.
Postemployment benefits include severance benefits.
Subsequent to recording such accrued severance liabilities, changes in market or other conditions may result
in changes to assumptions upon which the original liabilities were recorded that could result in an adjustment to the
liabilities.
66
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Royalty Advances
Royalty advances to authors are capitalized and represent amounts paid in advance of the sale of an authors
product and are recovered as earned. As advances are recorded, a partial reserve may be recorded immediately based
primarily upon historical sales experience. Additionally, advances are evaluated periodically to determine if they are
expected to be recovered on a title-by-title basis, with consideration given to the other titles in the authors portfolio
also earning against the outstanding advance. Any portion of a royalty advance that is not expected to be recovered
is fully reserved. Cash payments for royalty advances are included within cash flows from operating activities, under
the caption Royalties payable and author advances, net, in our consolidated statements of cash flows.
Leases
On January 1, 2019, we adopted the new lease accounting standard using the modified retrospective method.
We applied the guidance to each lease as of January 1, 2019 with a cumulative effect adjustment to the opening
balance of accumulated deficit as of that date. The standard requires lessees to recognize a lease liability and a right
of use asset on the balance sheet for operating leases. Right of use assets represent our right to use an underlying
asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease.
Right of use assets and lease liabilities are recognized at the lease commencement date based on the estimated
present value of lease payments over the lease term. Accounting for finance leases is substantially unchanged. Prior
comparative periods were not adjusted.
We elected the package of practical expedients permitted under the transition guidance within the new
standard, which allowed us to not reassess whether any expired or existing contracts are or contain leases, carry
forward the historical lease classification and to not reassess initial direct costs for any existing leases. We did not
elect the hindsight practical expedient to determine the lease term for existing leases. Upon implementation of the
new guidance, we have elected the practical expedients to combine lease and non-lease components, and to not
recognize right of use assets and lease liabilities for short-term leases. The adoption of this guidance impacted our
consolidated balance sheets due to the recognition of the lease rights and obligations related to our office space,
automobile fleet and office equipment leases as assets and liabilities of approximately $148.0 million and
$161.0 million, respectively. The adjustment to accumulated deficit of approximately $0.8 million related to a
previously recorded deferred gain on the sale leaseback of a warehouse. The impact on our results of operations and
cash flows was not material.
Under the new lease accounting standard, we determine if an arrangement is a lease at inception. Right of use
assets and lease liabilities are recognized at commencement date based on the present value of remaining lease
payments over the lease term. For this purpose, we consider only payments that are fixed and determinable at the
time of commencement. As most of our leases do not provide an implicit rate, we use our incremental borrowing
rate based on the information available at commencement date in determining the present value of lease payments.
Our incremental borrowing rate is a hypothetical rate based on our understanding of what our credit rating would be.
The right of use asset also includes any lease payments made prior to commencement and is recorded net of any
lease incentives received. Our lease terms may include options to extend or terminate the lease when it is reasonably
certain that we will exercise such options. When determining the probability of exercising such options, we consider
contract-based, asset-based, entity-based, and market-based factors. Our lease agreements may contain variable
costs such as common area maintenance, insurance, real estate taxes or other costs. Variable lease costs are
expensed as incurred on our consolidated statements of operations. Our lease agreements generally do not contain
any residual value guarantees or restrictive covenants.
Operating leases are included in operating lease assets and operating lease liabilities on our consolidated
balance sheets. Finance leases are included in property, plant, and equipment, and other liabilities on our
consolidated balance sheets.
67
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Income Taxes
We record income taxes using the asset and liability method. Deferred income tax assets and liabilities are
recognized for future tax consequences attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective income tax basis, and operating loss and tax credit
carryforwards. Our consolidated financial statements contain certain deferred tax assets which have arisen primarily
as a result of interest expense limitations, as well as other temporary differences between financial and tax
accounting. We establish a valuation allowance if the likelihood of realization of the deferred tax assets is reduced
based on an evaluation of objectively verifiable evidence. Significant management judgment is required in
determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance
recorded against those deferred tax assets. We evaluate the weight of all available evidence to determine whether it
is more likely than not that some portion or all of the deferred income tax assets will not be realized.
We also evaluate any uncertain tax positions and only recognize the tax benefit from an uncertain tax position
if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the financial statements from such positions are
then measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon
settlement. We record a liability for unrecognized tax benefits resulting from uncertain tax positions taken or
expected to be taken in a tax return. Any change in judgment related to the expected ultimate resolution of uncertain
tax positions is recognized in earnings in the period in which such change occurs. Interest and penalties, if any,
related to unrecognized tax benefits are recorded in income tax expense.
Stock-Based Compensation
Certain employees and directors have been granted stock options, restricted stock and restricted stock units in
our common stock. Stock-based compensation expense reflects the fair value of stock-based awards measured at the
grant date and recognized over the relevant service period. We estimate the fair value of each stock-based award on
the measurement date using the current market price based on the target value of the award for restricted stock and
restricted stock units, the Monte Carlo simulation for market-based restricted stock units and the Black-Scholes
valuation model for stock options. We recognize stock-based compensation expense over the awards requisite
service period on a straight-line basis for time-based stock options, restricted stock and restricted stock units and on
a graded basis for restricted stock and restricted stock units that are contingent on the achievement of performance
conditions.
Comprehensive Loss
Comprehensive loss is defined as changes in the equity of an enterprise except those resulting from
stockholder transactions. The amounts shown on the consolidated statements of stockholders equity and
comprehensive loss relate to the cumulative effect of changes in pension and postretirement liabilities, foreign
currency translation gain and loss adjustments, unrealized gains and losses on short-term investments and gains and
losses on derivative instruments.
Foreign Currency Translation
The functional currency for each of our subsidiaries is the currency of the primary economic environment in
which the subsidiary operates, generally defined as the currency in which the entity generates and expends cash.
Foreign currency denominated assets and liabilities are translated into United States dollars at current rates as of the
balance sheet date and the revenue, costs and expenses are translated at the average rates established during each
reporting period. Cumulative translation gains or losses are recorded in equity as an element of accumulated other
comprehensive income.
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Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Financial Instruments
Derivative financial instruments are employed to manage risks associated with interest rate exposures and are
not used for trading or speculative purposes. We recognize all derivative instruments in our consolidated balance
sheets at fair value. Changes in the fair value of derivatives are recognized periodically either in earnings or in
stockholders equity as a component of accumulated other comprehensive loss, depending on whether the derivative
financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or a cash
flow hedge. Gains and losses on derivatives designated as hedges, to the extent they are effective, are recorded in
other comprehensive loss, and subsequently reclassified to earnings to offset the impact of the hedged items when
they occur. Changes in the fair value of derivatives not qualifying as hedges are reported in earnings. During 2019,
2018 and 2017, our interest rate swaps were designated as hedges and the majority qualify for hedge accounting.
Accordingly, we recorded an unrealized loss of $3.4 million and unrealized gains of $3.5 million and $4.9 million in
our statements of comprehensive loss to account for the changes in fair value of these derivatives during the periods
ended December 31, 2019, 2018 and 2017, respectively. The corresponding $1.0 million hedge liability is included
within current other liabilities in our consolidated balance sheet as of December 31, 2019. The corresponding
$2.4 million hedge asset is included within long-term other assets in our consolidated balance sheet as of
December 31, 2018. Our foreign exchange forward contracts did not qualify for hedge accounting because we did
not contemporaneously document our hedging strategy upon entering into the hedging arrangements.
Treasury Stock
We account for treasury stock under the cost method. When shares are reissued or retired from treasury stock
they are accounted for at an average price. Upon retirement the excess over par value is charged against capital in
excess of par value.
Net Loss per Share
Basic net loss per share attributable to common stockholders is computed by dividing net loss attributable to
common stockholders by the weighted-average common shares outstanding during the period. Except where the
result would be anti-dilutive, net loss per share is computed using the treasury stock method for the exercise of stock
options. For periods in which the Company has reported net losses, diluted net loss per share attributable to common
stockholders is the same as basic net loss per share attributable to common stockholders, since dilutive common
shares are not assumed to have been issued if their effect is anti-dilutive. Diluted net loss per share attributable to
common stockholders is the same as basic net loss per share attributable to common stockholders for the years
ended December 31, 2019, 2018 and 2017.
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 Issued Accounting Standards
In August 2018, the Financial Accounting Standards Board (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. The new standard will be effective in 2020. We do not
currently expect that the adoption of this standard will 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. The guidance will be effective in 2020, with early adoption
69
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
permitted. We do not expect that the adoption of this guidance will have a material impact on our consolidated
financial statements.
Recently Adopted Accounting Standards
In February 2016, the FASB issued guidance that primarily requires lessees to recognize most leases on their
balance sheets but record expenses on their income statements in a manner similar to current accounting. We
adopted the guidance on January 1, 2019 using the modified retrospective method and did not adjust comparative
periods or modify disclosures in those comparative periods. See Leases above.
In May 2014, the FASB issued new guidance related to revenue recognition. This new accounting standard
replaced most current U.S. GAAP guidance on this topic and eliminated most industry-specific guidance. The new
revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core
principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
services. Entities had the choice of adopting the new standard either retrospectively to all periods presented in the
financial statements (the full retrospective method) or as a cumulative-effect adjustment as of the date of adoption
(modified retrospective method) in the year of adoption without applying to comparative periods financial
statements. We adopted the guidance on January 1, 2018 applying the modified retrospective method.
In March 2017, the FASB issued guidance to improve the presentation of net periodic pension cost and net
periodic post-retirement benefit cost. The changes to the guidance required employers to report the service cost
component in the same line item as other compensation costs arising from services rendered by employees during
the reporting period. The other components of net benefit costs have been presented in the income statement
separately from the service cost and outside of a subtotal of income from operations. The guidance became effective
January 1, 2018 and the adoption of the guidance did not have a material impact on our consolidated financial
statements.
In November 2016, the FASB issued guidance on restricted cash, which required amounts generally described
as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the
total beginning and ending amounts for the periods shown on the statement of cash flows. The guidance became
effective January 1, 2018 using a retrospective transition method to each period presented. The adoption of the
guidance did not have a material impact on our consolidated financial statements.
In August 2016, the FASB issued a guidance update to classifications of certain cash receipts and cash
payments on the Statement of Cash Flows with the objective of reducing the existing diversity in practice. This
updated guidance addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment
costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are
insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after
a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of
corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from
equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and
application of the predominance principle. The guidance became effective January 1, 2018 and the adoption of the
guidance did not have a material impact on our consolidated financial statements.
3.
Acquisitions
On January 14, 2019, we completed the acquisition of certain assets of PV Waggle LLC, which comprised a
web-based adaptive learning solution providing Math and English Language Arts (ELA) instruction for students
in grades 2-8 for a total purchase price of approximately $5.4 million. The transaction was accounted for under the
acquisition method of accounting. Goodwill, other intangible assets and other liabilities recorded as part of the
acquisition totaled approximately $0.9 million, $5.2 million and $0.7 million, respectively. The other intangible
assets represent developed technology and were valued using a replacement cost approach. Measurement period
adjustments were not material.
70
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
4.
Discontinued Operations
On October 1, 2018, we completed the sale of all the assets, including intellectual property, used primarily in
our Riverside clinical and standardized testing business (Riverside Business) for cash consideration received of
$140.0 million and the purchasers assumption of all liabilities relating to the Riverside Business subject to specified
exceptions. Net proceeds from the sale after the payment of transaction costs were approximately $135.0 million
with a post-tax book gain on sale of approximately $30.5 million. The gain was recorded in the fourth quarter of
2018 as the transaction closed on October 1, 2018. The tax gain on the sale was offset by 2018 losses. The results of
the Riverside Business were previously reported in our Education segment. In connection with the sale of the
Riverside Business, we entered into a Transition Services Agreement with the purchaser whereby we performed
certain support functions through September 30, 2019.
Upon the signing of the asset purchase agreement on September 12, 2018, the Riverside Business qualified as
a discontinued operation, and goodwill originally included in the Education reportable segment was transferred to
the Riverside Business. The amount of transferred goodwill was $67.0 million and was determined using the relative
fair value method. The relative fair value was determined based on the purchase price of the Riverside Business
compared to the Education reportable segment fair value. The Education reportable segment fair value was based
primarily on the market value of the overall Company at the date that the Riverside Business qualified as a
discontinued operation. The allocation also required the assessment for impairment for each of the Riverside
Business and Education reportable segments goodwill and indefinite-lived intangible assets carrying values. No
impairment was deemed to exist.
Selected financial information of the Riverside Business included in discontinued operations is as follows:
Net sales
Costs
Amortization
Earnings from discontinued operations before taxes
Income tax expense
Earnings from discontinued operations, net of tax
For the Year
Ended December 31,
2017
2018
$
$
56,562 $
37,714
4,954
13,894
1,061
12,833 $
80,482
54,718
7,630
18,134
984
17,150
5.
Balance Sheet Information
Short-term Investments
The following table shows the gross unrealized losses and market value of our available-for-sale securities
with unrealized losses that are not deemed to be other-than-temporary, aggregated by investment category:
December 31, 2018
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
Short-term investments:
U.S. Government and agency securities
$
49,824 $
31 $
(22) $
49,833
The contractual maturities of our short-term investments are one year or less.
71
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Account Receivable
Accounts receivable at December 31, 2019 and 2018 consisted of the following:
Accounts receivable
Allowance for bad debt
Reserve for book returns
2019
2018
$ 204,119 $ 224,306
(2,173)
(18,559)
$ 184,425 $ 203,574
(3,015)
(16,679)
As of December 31, 2019, one individual customer comprised more than 10% of our accounts receivable, net
balance. As of December 31, 2018, no individual customer comprised approximately 10% of our accounts
receivable, net balance. We believe that our accounts receivable credit risk exposure is limited and we have not
experienced significant write-downs in our accounts receivable balances.
Inventories
Inventories at December 31, 2019 and 2018 consisted of the following:
Finished goods
Raw materials
Inventories
Property, Plant, and Equipment
2019
2018
$ 203,103 $ 162,890
21,319
$ 213,059 $ 184,209
9,956
Balances of major classes of assets and accumulated depreciation and amortization at December 31, 2019 and
2018 were as follows:
2019
2018
Land and land improvements
Building and building equipment
Machinery and equipment
Capitalized software
Leasehold improvements
Film and media
Less: Accumulated depreciation and amortization
Property, plant, and equipment, net
$
4,939 $
10,239
12,970
598,317
22,974
22,055
671,494
(571,106)
4,923
9,415
11,630
563,314
22,171
14,920
626,373
(500,448)
$ 100,388 $ 125,925
For the years ended December 31, 2019, 2018 and 2017, depreciation and amortization expense related to
property, plant, and equipment were $71.3 million, $81.2 million and $71.0 million, respectively.
Property, plant, and equipment at December 31, 2019 and 2018 included approximately $0.3 million and
$0.7 million, respectively, acquired under finance lease agreements, of which the majority is included in machinery
and equipment. The future minimum lease payments required under non-cancelable capital leases as of
December 31, 2019 are $0.2 million in 2020 and $0.1 million in 2021.
Included within property, plant, and equipment on our consolidated balance sheets are film and media assets.
Our film and media assets are comprised of the cost to develop our animated series Carmen Sandiego. These assets
will be amortized proportionally to the revenues recognized relative to the total estimated revenue consistent with
the guidance over episodic television series development. We recorded amortization expense of $9.8 million and
$6.1 million for the years ended December 31, 2019 and 2018, respectively, against this asset upon recognition of
revenue, which is included within cost of sales, excluding publishing rights and pre-publication amortization, in the
statement of operations.
72
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Substantially all property, plant, and equipment are pledged as collateral under our term loan and revolving
credit facility.
Contract Assets, Contract Liabilities and Deferred Commissions
Contract assets consist of unbilled amounts at the reporting date and are transferred to accounts receivable
when the rights become unconditional. Contract assets are included in prepaid expenses and other assets on our
consolidated balance sheets. Contract liabilities consist of deferred revenue (current and long-term). The following
table presents changes in contract assets and contract liabilities during the year ended December 31, 2019:
Contract assets
Contract liabilities (deferred revenue)
December 31, December 31,
2019
2018
$ Change % Change
$
$
109 $
848,106 $
74 $
35
647,444 $ 200,662
47.30%
30.99%
The $200.7 million increase in our net contract liabilities from December 31, 2018 to December 31, 2019 was
primarily due to higher billings in the period attributed to the seasonal and cyclical nature of our business exceeding
the satisfaction of performance obligations related to physical and digital products, and services during the period.
During the years ended December 31, 2019 and 2018, we recognized the following net sales as a result of
changes in the contract assets and contract liabilities balances:
Net sales recognized in the period
from:
Amounts included in contract liabilities
at the beginning of the period
Year Ended
Year Ended
December 31, December 31,
2019
2018
$
229,557 $
220,769
As of December 31, 2019, the aggregate amount of the transaction price allocated to the remaining
performance obligations, which includes deferred revenue and open orders, was $911.5 million, and we will
recognize approximately 73% to net sales over the next 1 to 3 years.
Prior to the adoption of the new revenue standard, we expensed incremental commissions paid to sales
representatives for obtaining product sales as well as service contracts. We expect that the costs are recoverable, and
under the new standard, we capitalize these incremental costs of obtaining customer contracts unless the
capitalization and amortization of such costs are not expected to have a material impact on the financial statements.
Applying the practical expedient, we recognize sales commission expense when incurred if the amortization period
of the assets that we otherwise would have recognized is one year or less. We had deferred commissions in the
amount of $29.3 million and $22.6 million at December 31, 2019 and 2018, respectively, and amortized $13.2
million and $10.5 million during the years ended December 31, 2019 and 2018, respectively. The amortization is
included in selling and administrative expenses.
73
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
6.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets consisted of the following:
Goodwill
Trademarks and tradenames: indefinite-
December 31, 2019
Accumulated
Amortization
Total
Cost
December 31, 2018
Accumulated
Amortization
Total
$716,977 $ 716,073 $
$716,073
Cost
$ 716,977 $
lived
$ 161,000 $
$161,000 $ 161,000 $
$161,000
Trademarks and tradenames: definite-
lived
Publishing rights
Customer related and other
Other intangible assets, net
164,130
(38,948) 125,182
1,180,000 (1,139,426)
(28,087) 136,043
67,131
(287,922) 156,718
$1,954,970 $(1,480,745) $474,225 $1,949,770 $(1,428,878) $520,892
40,574 1,180,000 (1,112,869)
(302,371) 147,469
164,130
444,640
449,840
The change in the carrying amount of goodwill for the year ended December 31, 2019 is as follows:
Balance at December 31, 2018
Acquisitions
Balance at December 31, 2019
$
$
716,073
904
716,977
In accordance with the provisions of the accounting standard for goodwill and other intangible assets,
goodwill and certain indefinite-lived tradenames are not amortized but rather are assessed for impairment on an
annual basis. There was no impairment charge recorded in the years ended December 31, 2019, 2018 and 2017.
During 2019, we acquired certain assets of PV Waggle LLC and recorded an intangible asset of $5.2 million.
Refer to Note 3.
Amortization expense for definite-lived intangible assets, publishing rights and customer related and other
intangibles were $51.9 million, $61.6 million and $75.5 million for the years ended December 31, 2019, 2018 and
2017, respectively.
Estimated aggregate amortization expense expected for each of the next five years related to intangibles
subject to amortization is as follows:
Trademarks
and
Tradenames
$
10,862 $
10,862
10,862
10,862
9,755
71,979
$ 125,182 $
Publishing
Rights
Other
Intangible
Assets
20,056 $
11,642
7,569
1,307
10,629
10,357
10,159
9,979
8,528
97,817
40,574 $ 147,469
2020
2021
2022
2023
2024
Thereafter
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Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
7.
Debt
Our debt consisted of the following:
$380,000 term loan due November 22, 2024 interest
payable quarterly (net of discount and
issuance costs)
$306,000 senior secured notes due February 15, 2025
interest payable semi-annually (net of discount and
issuance costs)
$800,000 term loan due May 29, 2021 interest
payable quarterly (net of discount and
issuance costs)
Less: Current portion of long-term debt
Total long-term debt, net of discount and issuance
costs
Revolving credit facility
December 31, December 31,
2019
2018
$
361,294 $
295,893
657,187
(19,000)
763,649
763,649
(8,000)
$
$
638,187 $
$
755,649
Long-term debt repayments due in each of the next five years and thereafter is as follows:
Year
2020
2021
2022
2023
2024
Thereafter
$
$
19,000
19,000
19,000
19,000
304,000
306,000
686,000
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 will mature on February 15, 2025 and will 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.
The notes were issued at a discount equal to 2.0% of the outstanding borrowing commitment.
The transaction was accounted for under the guidance for debt modifications and extinguishments. We
incurred approximately $5.4 million of third-party fees for the transaction, of which approximately $4.1 million
were capitalized as deferred financing fees and approximately $1.3 million was recorded to expense and included in
the selling and administrative line item in our consolidated statements of operations for the year ended
December 31, 2019.
We may redeem all or a portion of the notes at redemption prices as described in the notes.
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Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
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
additional indebtedness, issuance of certain preferred stock, redeem, purchase or retire subordinated debt, make
certain investments, payment of dividends or other amounts, enter into certain transactions with affiliates, merge or
consolidate with another person, or sell or otherwise dispose of all or substantially all of our assets, sell certain
assets, including capital stock, designate our subsidiaries as unrestricted subsidiaries, pay dividends, 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.
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 new term loan facility). The new term loan facility is required
to be repaid in quarterly installments of approximately $4.8 million with the balance being payable on the maturity
date. The new 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 December 31, 2019, the interest rate on the new term loan facility was 8.0%.
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 new 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 new 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 new term loan facility was issued at a discount equal to 4.0% of the outstanding borrowing commitment.
The transaction was accounted for under the guidance for debt modifications and extinguishments. We
incurred approximately $7.2 million of third-party fees for the transaction, of which approximately $2.9 million
were capitalized as deferred financing fees and approximately $4.3 million was recorded to expense and included in
the selling and administrative line item in our consolidated statements of operations for the year ended
December 31, 2019.
The new 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 new 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;
provided, however, that any voluntary prepayment in connection with certain repricing transactions that occur
before the date that is twelve months after the closing of the new term loan facility shall be subject to a prepayment
premium of 1.00% of the principal amount of the amounts prepaid.
The new 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 new term loan facility.
The new 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
new 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 new term loan facility.
We are subject to an excess cash flow provision under our new term loan facility which is predicated upon our
leverage ratio and cash flow. The excess cash flow provision did not apply in 2019.
76
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
On November 22, 2019, in connection with the notes and new term loan facility described above, we paid off
the remaining outstanding balance of our previous $800.0 million term loan facility. The transaction was accounted
for under the guidance for debt modifications and extinguishments. We incurred a loss on extinguishment of debt of
approximately $4.4 million related to the write off of the portion of the unamortized deferred financing fees and
discount associated with the portion of the previous term loan accounted for as an extinguishment.
We were subject to an excess cash flow provision under our previous term loan facility which was predicated
upon our leverage ratio and cash flow. There was no payment required under the excess cash flow provision in 2019
and 2018.
Interest Rate Hedging
On August 17, 2015, we entered into interest rate derivative contracts with various financial institutions
having an aggregate notional amount of $400.0 million to convert floating rate debt into fixed rate debt. We assessed
at inception, and re-assess on an ongoing basis, whether the interest rate derivative contracts are highly effective in
offsetting changes in the fair value of the hedged variable rate debt.
These interest rate swaps were designated as cash flow hedges and qualify for hedge accounting under the
accounting guidance related to derivatives and hedging. Accordingly, we recorded an unrealized loss of $3.4 million
and unrealized gains of $3.5 million and $4.9 million in our statements of comprehensive loss to account for the
changes in fair value of these derivatives during the periods ended December 31, 2019, 2018 and 2017, respectively.
The corresponding $1.0 million hedge liability is included within current other liabilities and $2.4 million hedge
asset is included within long-term other assets in our consolidated balance sheet as of December 31, 2019 and 2018,
respectively.
In connection with the new term loan facility on November 22, 2019, we incurred a change in the mix of
floating rate debt versus fixed rate debt. As a result, the aggregate notional of our active interest rate derivative
contracts designated as cash flow hedges exceeded the outstanding floating rate debt notional by approximately
$29.5 million. To accommodate for this notional shortfall, we partially de-designated one of our active interest rate
derivative contracts. This involved splitting the notional amount with one portion remaining designated under cash
flow hedge accounting, and the remaining portion, with a $29.5 million notional, left undesignated. There were no
changes made to the interest rate derivative contracts from an economic perspective; the notional split is accounting
in nature only.
Beginning on November 22, 2019, the fair value changes on the undesignated portion of the swap flow
through earnings, as opposed to being deferred as unrealized gains or losses in other comprehensive income (loss).
The impact of this change on the financial statements as of December 31, 2019 was less than $0.1 million and was
recorded in our consolidated statements of operations for the year ended December 31, 2019. We had $370.5
million of interest rate derivative contracts outstanding as of December 31, 2019. The interest rate derivative
contracts mature on July 22, 2020.
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 (as such terms are defined
below) eligible inventory and receivables agreement (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 revolving credit
facility may be prepaid, in whole or in part, at any time, without premium. The transaction was accounted for under
the accounting guidance for modifications to or exchanges of revolving debt arrangements. We incurred
approximately $1.1 million of creditor and third-party fees which were capitalized as deferred financing fees.
77
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The revolving credit facility requires the Company to maintain a minimum fixed charge coverage ratio of 1.0
to 1.0 on a trailing four-quarter basis only during certain periods commencing when excess availability under the
revolving credit facility is less than certain limits prescribed by the terms of the revolving credit facility. The
revolving credit facility is subject to usual and customary conditions, representations, warranties and covenants,
including restrictions on additional indebtedness, liens, investments, mergers, acquisitions, asset dispositions,
dividends to stockholders, repurchase or redemption of our stock, transactions with affiliates and other matters. The
revolving credit facility is subject to customary events of default. As of December 31, 2019, no amounts are
outstanding on the revolving credit facility.
As of December 31, 2019, 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.
On June 28, 2019, we entered into an amendment to the revolving credit facility that extended the maturity
date to July 22, 2021. The amendment became effective on July 1, 2019. The transaction was accounted for under
the accounting guidance for modifications to or exchanges of revolving debt arrangements. We incurred
approximately $0.3 million of creditor and third-party fees which were capitalized as deferred financing fees.
Guarantees
Under the notes, new term loan facility and 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, new term loan facility and 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.
8.
Leases
We lease property and equipment under finance and operating leases. We have operating leases for various
office space and facilities, warehouse equipment, automobile fleet and office equipment that expire at various dates
through 2023 and thereafter. For leases with terms greater than 12 months, we record the related asset and obligation
at the present value of lease payments over the lease term. Many of our leases include rental escalation clauses,
renewal options and/or termination options that are factored into our determination of lease payments when
appropriate. For leases beginning in 2019 and later, we account for lease components (e.g., fixed payments including
rent, real estate taxes and insurance costs) as combined with the non-lease components (e.g., common-area
maintenance costs). Our lease agreements do not contain any material residual value guarantees or material
restrictive covenants. We sublease certain real estate office space to third parties. Our sublease portfolio consists of
operating leases.
When available, we use the rate implicit in the lease to discount lease payments to present value; however,
most of our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental
borrowing rate to discount the lease payments based on information available at lease commencement. We give
consideration to our recent debt issuances as well as publicly available data for instruments with similar
characteristics when calculating our incremental borrowing rates.
78
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Lease Position as of December 31, 2019
The table below presents the lease assets and liabilities recorded on the balance sheet.
Leases
Assets
Operating lease assets
Total leased assets
Liabilities
Current
Operating
Noncurrent
Operating
Total lease liabilities
Weighted average remaining lease term Operating
leases
Weighted average discount rate Operating leases
(1)
Classification
December 31,
2019
Operating lease assets
Operating lease
liabilities
Operating lease
liabilities
$
$
$
$
132,247
132,247
8,685
134,994
143,679
9.6 Years
12.46%
(1) Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1,
2019.
Lease costs
Operating lease cost and sublease income totaled $39.9 million and $2.3 million for the year ended
December 31, 2019, respectively. The net lease cost of $37.6 million for year ended December 31, 2019 is included
in the selling and administrative line item in our consolidated statements of operations. Operating lease cost includes
short term leases and variable lease costs, which are not material.
Undiscounted Cash Flows
The table below reconciles the undiscounted cash flows for each of the first five years and total of the
remaining years to the operating lease liabilities recorded on the balance sheet.
Maturity of Lease Liabilities
2019
2020
2021
2022
2023
Thereafter
Total lease payments
Less: interest
Present value of lease liabilities
Operating
Leases
25,189
25,825
23,413
25,216
26,312
135,458
261,413
(117,734)
143,679
$
$
During the third quarter of 2019, we executed a lease agreement on new office space in Portsmouth, New
Hampshire. We plan to relocate our employees from the existing location in Portsmouth, New Hampshire to this
new office space upon the substantial completion of the building. The lease term specified in the agreement is 10
years with an option to renew for an additional five years. Our estimated fixed lease payments over the 10 year
initial lease term is $9.8 million. We currently expect to relocate to the space in the first quarter of 2021, but this
79
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
timing as well as when we are required to begin making payments and recognize rental and other expenses under the
new lease, is dependent on when the space is available for use.
Other Information
The table below presents supplemental cash flow information related to leases during the year ended
December 31, 2019.
Cash paid for amounts included in the measurement of
lease liabilities
Operating cash flows for operating leases
$
31,245
Additional Lease Information Related to the Application of the Previous Lease Accounting Standard
Future payments under operating lease agreements as of December 31, 2018 are as follows:
2019
2020
2021
2022
2023
Thereafter
Total lease payments
Operating
Leases
$
$
32,694
26,889
26,118
24,549
27,469
171,203
308,922
9.
Restructuring, Severance and Other Charges
2019 Restructuring Plan
On October 15, 2019, our Board of Directors approved changes connected with our ongoing strategic
transformation to simplify our business model and accelerate growth. This includes new product development and
go-to-market capabilities, as well as the streamlining of operations company-wide for greater efficiency. These
actions (the 2019 Restructuring Plan) resulted in the net elimination of approximately 10% of HMHs workforce,
after taking into account new strategy-aligned positions that are expected to be added, and additional operating and
capitalized cost reductions, including an approximately 20% reduction in previously planned content development
expenditures over the next three years. These steps are intended to further simplify our business model while
delivering increased value to customers, teachers and students. The workforce reductions were completed in the first
quarter of 2020.
After considering additional headcount actions, implementation of the planned actions resulted in total charges
of $15.8 million which was recorded in the fourth quarter of 2019. With respect to each major type of cost
associated with such activities, substantially all costs were severance and other termination benefit costs and will
result in cash expenditures.
Further, as part of such strategic transformation plan, we recorded an incremental $9.8 million inventory
obsolescence charge which is recorded in cost of sales in the statement of operations.
80
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The following tables provide a summary of our total costs associated with the 2019 Restructuring Plan,
included in the restructuring line item within our consolidated statements of operations, for the year ended
December 31, 2019, by major type of cost:
Type of Cost
Restructuring charges: (1)
Severance and termination benefits
Year Ended Total Amount
December 31,
2019
Incurred
to Date
$
$
15,820 $
15,820 $
15,820
15,820
(1) All restructuring charges are included within Corporate and Other.
Our restructuring liabilities are primarily comprised of accruals for severance and termination benefits. The
following is a rollforward of our liabilities associated with the 2019 Restructuring Plan:
2019
Severance and termination benefits
$
$
Restructuring
accruals at
December 31,
2018
Charges
$ 15,820 $
$ 15,820 $
Cash
payments
(4,171) $
(4,171) $
Restructuring
accruals at
December 31,
2019
11,649
11,649
2017 Restructuring Plan
On an ongoing basis, we assess opportunities for improved operational effectiveness and efficiency and better
alignment of expenses with net sales, while preserving our ability to make the investments in content and our people
that we believe are important to our long-term success. As a result of these assessments, we undertook a
restructuring initiative in order to enhance our growth potential and better position us for long-term success. This
initiative is described below.
Beginning at the end of 2016, we worked with a third-party consultant to review our operating model and
organizational design in order to improve our operational efficiency, better focus on the needs of our customers and
right-size our cost structure to create long-term shareholder value.
In March 2017, we committed to certain operational efficiency and cost-reduction actions we planned to take
in order to accomplish these objectives (2017 Restructuring Plan). These actions included making organizational
design changes across layers of the Company below the executive team and other right-sizing initiatives expected to
result in reductions in force, consolidating and/or subletting certain office space under real estate leases as well as
other potential operational efficiency and cost-reduction initiatives. We completed the organizational design change
actions in 2017 and the remaining actions in 2018.
The following tables provide a summary of our total costs associated with the 2017 Restructuring Plan,
included in the restructuring line item within our consolidated statements of operations, for the years ended
December 31, 2019, 2018 and 2017, respectively, by major type of cost:
Type of Cost
Restructuring charges: (1)
Severance and termination benefits
Office space consolidation (2)
Implementation and impairment (3)
Year Ended Year Ended Year Ended Total Amount
December 31, December 31, December 31,
2018
Incurred
to Date
2019
2017
$
$
$
4,657
4,657 $
16,206 $
4,979
16,590
37,775 $
16,206
9,636
16,990
42,832
$
$
81
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
(1) All restructuring charges are included within Corporate and Other.
(2) During the year ended December 31, 2017, we recorded a non-cash charge for a write-off of property, plant,
and equipment of approximately $0.7 million and $4.2 million of accruals related to vacating certain office
space in two of our locations.
(3) During the year ended December 31, 2017, we recorded a non-cash impairment charge of approximately
$9.1 million related to a certain long-lived asset included within property, plant, and equipment.
Our restructuring liabilities are primarily comprised of accruals for severance and termination benefits and
office space consolidation. The following is a rollforward of our liabilities associated with the 2017 Restructuring
Plan:
In connection with the adoption of the new leasing standard on January 1, 2019, the restructuring liabilities
related to office space consolidation were reclassed on the balance sheet as a reduction of operating lease assets.
2018
Restructuring
accruals at
December 31,
2017
Charges
Cash
payments
Restructuring
accruals at
December 31,
2018
$
$
4,306 $
3,663
7,969 $
$
4,657
4,657 $
(3,936) $
(1,947)
(5,883) $
370
6,373
6,743
Severance and termination benefits
Office space consolidation
Severance and Other Charges
2019
Exclusive of the 2019 Restructuring Plan and 2017 Restructuring Plan, during the year ended December 31,
2019, $3.2 million of severance payments were made to employees whose employment ended in 2019 and prior
years, and we recorded an expense in the amount of $2.5 million to reflect costs for severance, which we expect to
be paid over the next twelve months. We also recorded an expense in the amount of $3.4 million for real estate
consolidation costs, which is reflected as a reduction in operating lease assets in our consolidated balance sheet as of
December 31, 2019.
2018
Exclusive of the 2017 Restructuring Plan, during the year ended December 31, 2018, $5.7 million of
severance payments were made to employees whose employment ended in 2018 and prior years and $1.0 million of
net payments were made for office space no longer utilized by the Company as a result of prior savings initiatives.
Further, we recorded an expense in the amount of $6.8 million to reflect costs for severance, which have been fully
paid.
2017
Exclusive of the 2017 Restructuring Plan, during the year ended December 31, 2017, $6.4 million of
severance payments were made to employees whose employment ended in 2017 and prior years and $3.1 million of
net payments were made for office space no longer utilized by the Company as a result of prior savings initiatives.
Further, we recorded an expense in the amount of $0.4 million to reflect costs for severance, which have been fully
paid, along with a $0.2 million adjustment for office space no longer occupied.
82
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
A summary of the significant components of the severance/restructuring and other charges, which are not
allocated to our segments and included in Corporate and Other, is as follows:
Severance costs
Other accruals
Severance costs
Other accruals
Severance costs
Other accruals
2019
Severance/
other
accruals at
December 31,
2018
Severance/
other
expense
Cash
payments
Severance/
other
accruals at
December 31,
2019
$
$
1,420 $
270
1,690 $
2,534 $
2,534 $
(3,196) $
(3,196) $
758
758
2018
Severance/
other
accruals at
December 31,
2017
Severance/
other
expense
Cash
payments
Severance/
other
accruals at
December 31,
2018
$
$
341 $
1,299
1,640 $
6,821 $
6,821 $
(5,742) $
(1,029)
(6,771) $
1,420
270
1,690
2017
Severance/
other
accruals at
December 31,
2016
Severance/
other
expense
Cash
payments
Severance/
other
accruals at
December 31,
2017
$
$
6,417 $
4,604
11,021 $
353 $
(176)
177 $
(6,429) $
(3,129)
(9,558) $
341
1,299
1,640
The current portion of the severance and other charges was $12.4 million and $6.0 million (inclusive of the
2017 Restructuring Plan and 2019 Restructuring Plan) as of December 31, 2019 and 2018, respectively.
10.
Income Taxes
The components of loss before taxes by jurisdiction are as follows:
For
the Year
Ended
For
the Year
Ended
For
the Year
Ended
December 31, December 31, December 31,
2018
$ (213,541) $ (134,884) $ (172,199)
443
$ (209,632) $ (131,860) $ (171,756)
3,909
3,024
2017
2019
U.S.
Foreign
Loss before taxes
83
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Total income taxes by jurisdiction are as follows:
For
the Year
Ended
For
the Year
Ended
December 31, December 31, December 31,
2018
For
the Year
Ended
2019
2017
Income tax expense (benefit)
U.S.
Foreign
$
$
4,273 $
(72)
4,201 $
3,701 $
1,896
5,597 $
(51,106)
(313)
(51,419)
Significant components of the (benefit) expense for income taxes attributable to loss from continuing
operations consist of the following:
For the
For the
For the
Year Ended
Year Ended
Year Ended
December 31, December 31, December 31,
2018
2017
2019
Current
Foreign
U.S.Federal
U.S.State and other
Total current
Deferred
Foreign
U.S.Federal
U.S.State and other
Total deferred
Income tax (benefit) expense
$
$
(730) $
396
(334)
658
1,908
1,969
4,535
4,201 $
1,562 $
(63)
(1,042)
457
334
2,329
2,477
5,140
5,597 $
(259)
0
(1,914)
(2,173)
(54)
(54,666)
5,474
(49,246)
(51,419)
84
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The reconciliation of the income tax rate computed at the statutory tax rate to the reported income tax expense
(benefit) attributable to continuing operations is as follows:
Statutory rate
Permanent items
Release of uncertain tax positions
Foreign rate differential
State and local taxes
Cancellation of debt income
Increase in valuation allowance
Change in valuation allowance due to 2017 Tax
Act
Impact of federal rate change on deferred tax
assets and liabilities due to 2017 Tax Act
Tax credits
Adoption of 2016 Accounting Standard
related to accounting changes for
certain aspects of share-based payments
to employees (1)
Effective tax rate
For the
Year Ended
December 31,
2019
For the
Year Ended
December 31,
2018
For the
Year Ended
December 31,
2017
21.0%
(3.6)
(7.9)
(1.3)
(10.0)
(0.2)
21.0%
(2.6)
(0.1)
6.8
(26.6)
(2.7)
35.0%
(3.5)
(0.2)
(0.2)
17.1
(68.5)
(43.9)
85.7
1.2
(2.0)%
(4.2)%
7.2
29.9%
The significant components of the net deferred tax assets and liabilities are shown in the following table:
Tax assets related to
Net operating loss and other carryforwards
Returns reserve/inventory expense
Pension benefits
Postretirement benefits
Deferred interest (2)
Deferred revenue
Stock-based compensation
Deferred compensation
Research and development
Operating lease liabilities
Other, net
Valuation allowance
Tax liabilities related to
Indefinite-lived intangible assets
Definite-lived intangible assets
Depreciation and amortization expense
Operating lease assets
Other, net
Net deferred tax liabilities
85
2019
2018
$ 272,378 $ 228,364
39,113
8,294
4,338
261,647
118,450
5,415
5,830
6,038
9,064
(562,392)
$ 176,611 $ 124,161
41,824
6,624
4,475
259,375
113,029
3,298
6,152
10,302
35,890
6,769
(583,505)
2019
2018
(89,879)
(25,503)
(48,984)
(32,887)
(7,709)
(204,962)
(28,351) $
(76,715)
(30,882)
(34,210)
(6,170)
(147,977)
(23,816)
$
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
(1)
(2)
In March 2016, the FASB issued guidance that changes the accounting for certain aspects of shared-based
payments to employees. The guidance requires the recognition of the income tax effects of awards in the
income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. The
guidance became effective January 1, 2017 which resulted in the recognition of $12.3 million of previously
unrecorded additional paid-in capital net operating losses at that time. The additional net operating losses were
offset by an increase in the valuation allowance, accordingly no net income tax benefit was recognized as a
result of the adoption.
The deferred interest tax asset represents disallowed interest deductions under Section 163(j) (Limitation on
Deduction for interest on Certain Indebtedness) of the Internal Revenue Code of 1986, as amended (IRC)
for the current and prior years. At December 31, 2019 and 2018, we had gross deferred interest deductions
totaling $984.5 million and $975.2 million, respectively. The disallowed interest is able to be carried forward
indefinitely and utilized in future years pursuant to IRC Section 163(j). A full valuation allowance has been
provided against deferred tax assets, excluding $2.5 million of foreign deferred tax assets which are expected
to be realized, net of deferred tax liabilities resulting from indefinite-lived intangibles.
The net deferred tax liability balance is stated at prevailing statutory income tax rates. Deferred tax assets and
liabilities are reflected on our consolidated balance sheets as follows:
Non-current deferred tax assets
Non-current deferred tax liabilities
2019
2,520 $
(30,871)
(28,351) $
2018
3,259
(27,075)
(23,816)
$
$
A reconciliation of the gross amount of unrecognized tax benefits, excluding accrued interest and penalties, is
as follows:
Balance at December 31, 2016
Reductions based on tax positions related to the prior
year
Additions based on tax positions related to the
current year
Balance at December 31, 2017
Reductions based on tax positions related to the prior
year
Additions based on tax positions related to the prior
year
Balance at December 31, 2018
Reductions based on tax positions related to the prior
year
15,508
172
15,680
15,680
Additions based on tax positions related to the prior
year
Balance at December 31, 2019
15,680
$
For the year ended December 31, 2017, the Company recorded $0.2 million of uncertain tax benefits due to its
uncertainty around net operating losses that were generated in tax years ended December 31, 2014 and 2015. We are
currently open for audit under the statute of limitation for Federal, state and foreign jurisdictions for years 2013 to
2018. However, carryforward attributes from prior years may still be adjusted upon examination by tax authorities if
they are used in a future period.
86
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
We report penalties and tax-related interest expense on unrecognized tax benefits as a component of the
provision for income taxes in the accompanying consolidated statement of operations. At December 31, 2019 and
2018, accrued interest and penalties in the accompanying consolidated balance sheet and interest and penalties
included in the provision for income taxes for the years ended December 31, 2019, 2018 and 2017 were immaterial.
As of December 31, 2019, we have approximately $858.7 million of Federal tax loss carryforwards, of which
$609.7 million will expire between 2034 and 2037. The Company has approximately $1,174.3 million of state tax
loss carryforwards, which will expire between 2020 and 2039. In addition, we have foreign tax credit carryforwards
of $8.0 million and research and development credit carryforwards of $4.2 million, which will expire between 2020
and 2036. The Companys Irish net operating losses of $17.7 million are not subject to expiration. The Canadian
losses ($1.6 million federal and $0.3 million provincial) will expire between 2033 and 2037. The Puerto Rico
alternative minimum tax credit carryforwards of $2.8 million are not subject to expiration.
Under Section 382 of the IRC, substantial changes in the Companys ownership may limit the amount of net
operating loss and Section 163(j) carryforwards that could be utilized annually in the future to offset taxable income.
Specifically, this limitation may arise in the event of a cumulative change in ownership of the Company of more
than 50% within a three-year period. Any such annual limitation may significantly reduce the utilization of net
operating loss carryforwards before they expire. The Company performed an analysis through December 31, 2019,
and determined any potential ownership change under Section 382 during the year would not have a material impact
on the future utilization of U.S. net operating losses and tax credits. However, future transactions in the Companys
common stock could trigger an ownership change for purposes of Section 382, which could limit the amount of net
operating loss carryforwards and other attributes that could be utilized annually in the future to offset taxable
income, if any. Any such limitation, whether as the result of sales of common stock by our existing stockholders or
sales of common stock by the Company, could have a material adverse effect on results of operations in future years.
U.S. income taxes on the undistributed earnings of the Companys non-U.S. subsidiaries have not been
provided for as the Company currently plans to indefinitely reinvest these amounts and has the ability to do so.
There are no cumulative undistributed and untaxed foreign earnings at December 31, 2019 and 2018.
Based on our assessment of historical pre-tax losses and the fact that we did not anticipate sufficient future
taxable income in the near term to assure utilization of certain deferred tax assets, the Company recorded a valuation
allowance at December 31, 2019 and 2018 of $583.5 million and $562.4 million, respectively. We have increased
our valuation allowance by $21.1 million in 2019 with $21.0 million as a component of continuing operations and
$0.1 million as a component of other comprehensive income.
11. Retirement and Postretirement Benefit Plans
Retirement Plan
We have a noncontributory, qualified defined benefit pension plan (the Retirement Plan), which covers
certain employees. The Retirement Plan is a cash balance plan, which accrues benefits based on pay, length of
service, and interest. The funding policy is to contribute amounts subject to minimum funding standards set forth by
the Employee Retirement Income Security Act of 1974 and the IRC. The Retirement Plans assets consist
principally of common stocks, fixed income securities, investments in registered investment companies, and cash
and cash equivalents. We also have a nonqualified defined benefit plan, or nonqualified plan, that previously
covered employees who earned over the qualified pay limit as determined by the Internal Revenue Service. The
nonqualified plan accrues benefits for the participants based on the cash balance plan calculation. The nonqualified
plan is not funded. We use a December 31 date to measure the pension and postretirement liabilities. In 2007, both
the qualified and nonqualified pension plans eliminated participation in the plans for new employees hired after
October 31, 2007.
87
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
We recognize the funded status of defined benefit pension and other postretirement plans as an asset or
liability in the balance sheet and are required to recognize actuarial gains and losses and prior service costs and
credits in other comprehensive income and subsequently amortize those items in the statement of operations.
The following table summarizes the Accumulated Benefit Obligations (ABO), the change in Projected
Benefit Obligation (PBO), and the funded status of our plans as of and for the financial statement period ended
December 31, 2019 and 2018:
ABO at end of period
Change in PBO
PBO at beginning of period
Interest cost on PBO
Actuarial loss (gain)
Benefits paid
PBO at end of period
Change in plan assets
Fair market value at beginning of period
Actual return
Company contribution
Benefits paid
Fair market value at end of period
Unfunded status
2019
2018
$ 169,364 $ 162,096
$ 162,096 $ 176,444
5,300
(9,061)
(10,587)
$ 169,364 $ 162,096
6,045
12,507
(11,284)
22,955
1,269
(11,284)
$ 132,776 $ 152,311
(9,052)
104
(10,587)
$ 145,716 $ 132,776
(29,320)
$
(23,648) $
Amounts recognized in the consolidated balance sheets at December 31, 2019 and 2018 consist of:
Noncurrent liabilities
2019
(23,648) $
2018
(29,320)
$
Additional year-end information for pension plans with ABO in excess of plan assets at December 31, 2019
and 2018 consist of:
PBO
ABO
Fair value of plan assets
2019
2018
$ 169,364 $ 162,096
162,096
132,776
169,364
145,716
Weighted average assumptions used to determine the benefit obligations (both PBO and ABO) at
December 31, 2019 and 2018 are:
Discount rate
Increase in future compensation
2019
2018
3.1%
N/A
4.2%
N/A
88
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Net periodic pension (income) cost includes the following components:
For the
For the
For the
Year Ended
Year Ended
Year Ended
December 31, December 31, December 31,
2018
2019
2017
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of net loss
Net pension (income) expense recognized for
the period
$
$
6,045 $
(7,659)
1,028
5,300 $
(7,985)
1,420
5,528
(9,263)
804
(586) $
(1,265) $
(2,931)
Significant actuarial assumptions used to determine net periodic pension cost at December 31, 2019, 2018 and
2017 are:
Discount rate
Increase in future compensation
Expected long-term rate of return on assets
2019
2018
2017
4.2%
N/A
5.5%
3.6%
N/A
5.5%
4.0%
N/A
6.3%
Assumptions on Expected Long-Term Rate of Return as Investment Strategies
We employ a building block approach in determining the long-term rate of return for plan assets. Historical
markets are studied and long-term relationships between equities and fixed income are preserved congruent with the
widely accepted capital market principle that assets with higher volatility generate a greater return over the long run.
Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions
are determined. The long-term portfolio return is established via a building block approach and proper consideration
of diversification and rebalancing. Peer data and historical returns are reviewed for reasonability and
appropriateness. We regularly review the actual asset allocation and periodically rebalances investments to a
targeted allocation when appropriate. The current targeted asset allocation is 34% with equity managers, 56% with
fixed income managers, 6% with real-estate investment trust managers and 4% with hedge fund managers. For 2020,
we will use a 5.50% long-term rate of return for the Retirement Plan. We will continue to evaluate the expected rate
of return assumption, at least annually, and will adjust as necessary.
Plan Assets
Plan assets for the U.S. tax qualified plans consist of a diversified portfolio of fixed income securities, equity
securities, real estate, and cash equivalents. Plan assets do not include any of our securities. The U.S. pension plan
assets are invested in a variety of funds within a Collective Trust (Trust). The Trust is a group trust designed to
permit qualified trusts to comingle their assets for investment purposes on a tax-exempt basis.
Investment Policy and Investment Targets
The tax qualified plans consist of the U.S. pension plan and the U.K. pension scheme (prior to May 28, 2014).
We fund amounts for our qualified pension plans at least sufficient to meet minimum requirements of local benefit
and tax laws. The investment objectives of our pension plan asset investments are to provide long-term total growth
and return, which includes capital appreciation and current income. The nonqualified noncontributory defined
benefit pension plan is generally not funded. Assets were invested among several asset classes.
89
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The percentage of assets invested in each asset class at December 31, 2019 and 2018 is shown below.
Asset Class
Equity
Fixed income
Real estate investment trust
Other
2019
Percentage
in Each
Asset Class
2018
Percentage
in Each
Asset Class
32.6%
54.5
8.0
4.9
100.0%
30.2%
57.6
7.1
5.1
100.0%
Fair Value Measurements
The fair value of our pension plan assets by asset category at December 31 were as follows:
Cash and cash equivalents
Equity securities
U.S. equity
Non-US equity
Emerging markets equity
Fixed income
Government bonds
Corporate bonds
Mortgage-backed securities
Asset-backed securities
Commercial mortgage-backed securities
International fixed income
Alternatives
Real estate
Hedge funds
Other
December 31,
2019
$
1,413 $
Not subject
to leveling (1)
1,413
28,993
12,474
5,537
20,316
37,925
7,943
3,255
1,930
5,741
28,993
12,474
5,537
20,316
37,925
7,943
3,255
1,930
5,741
11,609
7,043
1,537
145,716 $
11,609
7,043
1,537
145,716
$
(1)
Investments that are valued using the net asset value per share (or its equivalent) practical expedient have not
been classified in the fair value hierarchy.
90
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
December 31,
2018
Cash and cash equivalents
Equity securities
U.S. equity
Non-US equity
Emerging markets equity
Fixed income
Government bonds
Corporate bonds
Mortgage-backed securities
Asset-backed securities
Commercial mortgage-backed securities
International fixed income
Alternatives
Real estate
Hedge funds
Not subject
to leveling (1)
85
85 $
$
23,909
11,497
4,666
19,903
40,524
7,248
2,773
1,900
4,161
23,909
11,497
4,666
19,903
40,524
7,248
2,773
1,900
4,161
9,448
6,662
132,776 $
9,448
6,662
132,776
$
We recognize that risk and volatility are present to some degree with all types of investments. However, high
levels of risk are minimized through diversification by asset class, and by style of each fund.
Estimated Future Benefit Payments
The following benefit payments are expected to be paid.
Fiscal Year Ended
2020
2021
2022
2023
2024
20252029
$
Pension
12,590
14,573
12,924
13,151
13,125
63,291
Expected Contributions
We expect to contribute $2.4 million in 2020, however, the actual funding decision will be made after the
2019 valuation is completed.
Postretirement Benefit Plan
We also provide postretirement medical benefits to retired full-time, nonunion employees hired before April 1,
1992, who have provided a minimum of five years of service and attained age 55.
91
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The following table summarizes the Accumulated Postretirement Benefit Obligation (APBO), the changes
in plan assets, and the funded status of our plan as of and for the financial statement periods ended December 31,
2019 and 2018.
Change in APBO
APBO at beginning of period
Service cost (benefits earned during the period)
Interest cost on APBO
Employee contributions
Actuarial loss (gain)
Benefits paid
APBO at end of period
Change in plan assets
Fair market value at beginning of period
Company contributions
Employee contributions
Benefits paid
Fair market value at end of period
Unfunded status
2019
2018
15,812 $
58
582
66
1,878
(1,712)
16,684 $
21,903
128
672
139
(5,184)
(1,846)
15,812
$
1,646
66
(1,712)
$
(16,684) $
1,707
139
(1,846)
(15,812)
$
$
$
$
$
Amounts for postretirement benefits accrued in the consolidated balance sheets at December 31, 2019 and
2018 consist of:
Current liabilities
Noncurrent liabilities
Net amount recognized
2019
(1,571) $
(15,113)
(16,684) $
2018
(1,512)
(14,300)
(15,812)
$
$
Amounts not yet reflected in net periodic benefit cost and recognized in accumulated other comprehensive
income at December 31, 2019 and 2018 consist of:
Net gain
Prior service cost
Accumulated other comprehensive income
2019
2018
$
$
1,771 $
(426)
1,345 $
3,856
(467)
3,389
Weighted average actuarial assumptions used to determine APBO at year-end December 31, 2019 and 2018
are:
Discount rate
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to
decline (ultimate trend rate)
Year that the rate reaches the ultimate trend rate
2019
2018
3.1%
5.8%
4.5%
2038
4.2%
6.1%
4.5%
2038
92
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Net periodic postretirement benefit cost (income) included the following components:
Service cost
Interest cost on APBO
Amortization of unrecognized prior service
cost
Amortization of net (gain) loss
Net periodic postretirement benefit
expense (income)
2019
2018
2017
$
58 $
582
128 $
672
134
771
42
(164)
(690)
(1,339)
13
$
518 $
110 $
(421)
Significant actuarial assumptions used to determine postretirement benefit cost at December 31, 2019, 2018
and 2017 are:
Discount rate
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to
decline (ultimate trend rate)
Year that the rate reaches the ultimate trend rate
2019
2018
2017
4.2%
6.1%
3.6%
6.3%
4.1%
6.6%
4.5%
2038
4.5%
2038
4.5%
2038
Assumed health care trend rates have a significant effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend rates would have the following effects on the
expense recorded in 2019 and 2018 for the postretirement medical plan:
One-percentage-point increase
Effect on total of service and interest cost
components
Effect on postretirement benefit obligation
One-percentage-point decrease
Effect on total of service and interest cost
components
Effect on postretirement benefit obligation
2019
2018
$
8 $
85
4
238
(7)
(76)
(4)
(208)
The following table presents the change in other comprehensive income for the year ended December 31,
2019 related to our pension and postretirement obligations.
Sources of change in accumulated other
comprehensive loss
Net (gain) loss arising during the period
Amortization of prior service credit
Amortization of net (gain) loss
Total accumulated other comprehensive
income recognized during the period
Pension
Plans
Postretirement
Benefit Plan
Total
$
(2,820) $
(1,207)
2,105 $
(42)
164
(715)
(42)
(1,043)
$
(4,027) $
2,227 $
(1,800)
93
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Estimated amounts that will be amortized from accumulated other comprehensive income (loss) over the next
fiscal year.
Prior service credit (cost)
Net gain (loss)
Pension
Plans
Postretirement
Benefit Plan
$
$
$
(2,325)
(2,325) $
(42)
7
(35)
Amounts not yet reflected in net periodic benefit cost for pension plans and postretirement plan and
recognized in accumulated other comprehensive income at December 31, 2019 and 2018 consist of:
Net actuarial loss
Accumulated other comprehensive loss
2019
(35,010) $
(35,010) $
2018
(36,779)
(36,779)
$
$
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, are expected to be paid:
Fiscal Year Ended
2020
2021
2022
2023
2024
2025-2029
Postretirement
Benefit Plan
$
1,571
1,485
1,409
1,352
1,298
5,620
Expected Contribution
We expect to contribute approximately $1.6 million in 2020.
Defined Contribution Retirement Plan
We maintain a defined contribution retirement plan, the Houghton Mifflin 401(k) Savings Plan, which
conforms to Section 401(k) of the IRC and covers substantially all of our eligible employees. Participants may elect
to contribute up to 50.0% of their compensation subject to an annual limit. We provide a matching contribution in
amounts up to 3.0% of employee contributions. The 401(k) contribution expense amounted to $7.4 million,
$7.6 million and $8.0 million for the years ended December 31, 2019, 2018 and 2017, respectively. We did not
make any additional discretionary contributions in 2019, 2018 and 2017.
12.
Stock-Based Compensation
Total compensation expense related to grants of stock options, restricted stock, restricted stock units, and
purchases under the employee stock purchase plan recorded in the years ended December 31, 2019, 2018 and 2017
was approximately $14.0 million, $13.3 million and $10.7 million, respectively, and is included in selling and
administrative expense.
94
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
2015 Omnibus Incentive Plan
Our Board of Directors adopted the 2015 Omnibus Incentive Plan (Plan) in February 2015, which became
effective on May 19, 2015 following stockholder approval. The Plan provides to grant up to an aggregate of
4,000,000 shares of our common stock plus 2,615,476 shares of our common stock that were reserved for issuance
under the 2012 Management Incentive Plan (2012 MIP) as of May 19, 2015 but were not issuable pursuant to any
outstanding awards. There were 10,604,071 additional shares underlying outstanding awards under the 2012 MIP as
of May 19, 2015 that could have otherwise become available again for grants under the 2012 MIP in the future (by
potential forfeiture, withholding or otherwise) which will instead become reserved for issuance under the Plan in the
event such shares become available for future grants. On December 13, 2019, our Board of Directors approved an
amendment to the Plan to allow employees to have the share withholding increased from the minimum statutory rate
to a higher rate, not to exceed the maximum statutory rate.
Our Compensation Committee may grant awards of nonqualified stock options, incentive (qualified) stock
options or cash, stock appreciation rights, restricted stock awards, restricted stock units, performance compensation
awards, other stock-based awards or any combination of the foregoing. Certain employees, directors, officers,
consultants or advisors who have been selected by the Compensation Committee and who enter into an award
agreement with respect to an award granted to them under the Plan are eligible for awards under the 2015 Omnibus
Incentive Plan. The stock option awards will be granted at a strike price equal to or greater than the fair value per
share of common stock as of the date of grant. The stock related to award forfeitures and stock withheld to cover tax
withholding requirements upon vesting of restricted stock units remains outstanding and may be reallocated to new
recipients. The purpose of the Plan is to help us attract and retain key personnel by providing them the opportunity
to acquire an equity interest in our Company.
As of May 19, 2015, there were 6,615,476 shares authorized and available for issuance under the Plan plus
any amount that could have otherwise become available again for grants under the 2012 MIP in the future by
forfeiture, withholding or otherwise. As of December 31, 2019, there were 5,484,956 shares authorized and
available for future issuance under the Plan. The vesting terms for equity awards generally range from 1 to 4 years
over equal annual installments and generally expire seven years after the date of grant.
Stock Options
The following table summarizes option activity for certain employees in our stock options:
Balance at December 31, 2018
Forfeited
Balance at December 31, 2019
Vested and expected to vest at December 31, 2019
Exercisable at December 31, 2019
Number of
Shares
3,488,212 $
(722,386)
2,765,826 $
2,712,541 $
1,930,833 $
Weighted
Average
Exercise Price
12.98
12.54
13.10
13.13
13.77
As of December 31, 2019, the range of exercise prices is $5.25 to $22.80 with a weighted average remaining
contractual life of 3.0 years for options outstanding. The weighted average remaining contractual life for options
vested and expected to vest and exercisable was 3.0 years and 2.4 years, respectively. The intrinsic value of a stock
option is the amount by which the current market value of the underlying stock exceeds the exercise price of the
option as of the balance sheet date. The intrinsic value of options outstanding, and vested and expected to vest, was
$0.1 million and $0.5 million at December 31, 2019 and 2018, respectively. The intrinsic value of options
exercisable was zero at December 31, 2019 and 2018.
We estimate the fair value of stock options using the Black-Scholes valuation model. Key input assumptions
used to estimate the fair value of stock options include the exercise price of the award, the expected volatility of our
stock over the options expected term, the risk-free interest rate over the options expected term, and our expected
annual dividend yield.
95
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The fair value of each option granted was estimated on the grant date using the Black-Scholes valuation model
with the following assumptions:
Expected term (years) (a)
Expected dividend yield
Expected volatility (b)
Risk-free interest rate (c)
For the
Year Ended
December 31,
2018
For the
Year Ended
December 31,
2017
4.75
0.00%
35.30%
2.84%
4.75
0.00%
25.22%-25.50%
1.94%-1.99%
(a)
The expected term is the number of years that we estimate that options will be outstanding prior to exercise.
We have used the simplified method for estimating the expected term as we do not have sufficient stock
option exercise experience to support a reasonable estimate of the expected term. The simplified method
represents the best estimate of the expected term.
(b) Historically, we have estimated volatility for options granted based on the historical volatility for a group of
companies (including our own) believed to be a representative peer group and were selected based on industry
and market capitalization. During 2018, we estimated volatility based on our historical volatility.
(c)
The risk-free interest rate is based on the U.S. Treasury yield for a period commensurate with the expected life
of the option.
We estimate forfeitures at the time of grant and periodically revise those estimates in subsequent periods if
actual forfeitures differ from those estimates. Stock-based compensation expense is recorded only for those awards
expected to vest using estimated forfeiture rates based on historical forfeiture data.
As of December 31, 2019, there remained approximately $1.6 million of unearned compensation expense
related to unvested stock options to be recognized over a weighted average term of 1.6 years.
The weighted average grant date fair value was $1.82 and $2.85 for options granted in 2018 and 2017,
respectively.
Restricted Stock Units
The following table summarizes restricted stock activity for grants to certain employees and independent
members of the board of directors in our restricted stock units:
Balance at December 31, 2018
Granted
Vested
Forfeited
Balance at December 31, 2019
Restricted Stock Units
Numbers of
Units
3,369,776
2,124,253
(837,656)
(809,765)
3,846,608
$
$
Weighted
Average
Grant Date
Fair Value
9.16
7.71
9.84
10.02
8.03
96
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
During 2019 and 2018, we granted market-based restricted stock units to certain members of our senior
management team. The number of shares ultimately issued to the recipient is based on the total shareholder return
(TSR) of our common stock as compared to the TSR of the common stock of a peer group comprised of each
member of the Russell 2000 Small Cap Market Index over a three-year performance measurement period. In
addition, award recipients must remain employed by us throughout the three-year performance measurement period
to attain the full amount of the market-based units that satisfy the market performance criteria. We determined the
fair value of the 2019 and 2018 market-based restricted stock units to be approximately $3.1 million and
$3.0 million, respectively. We determined the fair value based on a Monte Carlo simulation as of the date of grant,
utilizing the following assumptions: the stock price on the date of grant of $7.75, $6.71 and $6.53 for 2019, and
$7.00 and $5.25 for 2018, a three-year performance measurement period, and a risk-free rate of 2.51% and 2.39%
for 2019 and 2018, respectively. We recognize the expense on these awards on a straight-line basis over the three-
year performance measurement period.
As of December 31, 2019, there remained approximately $13.0 million of unearned compensation expense
related to unvested restricted stock units to be recognized over a weighted average term of 1.5 years. The restricted
stock units include a combination of time-based and performance-based vesting.
Employee Stock Purchase Plan
Our Board of Directors adopted an Employee Stock Purchase Plan (ESPP) in February 2015, which became
effective on May 19, 2015 following stockholder approval. The ESPP provides for up to an aggregate of 1.3 million
shares of our common stock may be made available for sale under the plan to eligible employees. At the beginning
of each six-month offering period under the ESPP each participant is deemed to have been granted an option to
purchase shares of our common stock equal to the amount of their payroll deductions during the period, but in any
event not more than five percent of the employees eligible compensation, subject to certain limitations. Such
options may be exercised only to the extent of accumulated payroll deductions at the end of the offering period, at a
purchase price per share equal to 85% of the fair market value of our common stock at the beginning or end of each
offering period, whichever is less. As of December 31, 2019, there were approximately 0.6 million shares available
for future issuance under the ESPP.
Information related to shares issued or to be issued in connection with the ESPP based on employee
contributions and the range of purchase prices is as follows:
Shares issued or to be issued
Range of purchase prices
December 31,
2019
212,476
$4.73 - $4.90 $
December 31,
2018
167,991
6.50
We record stock-based compensation expense related to the discount provided to participants. Also, we use
the Black-Scholes option-pricing model to calculate the grant-date fair value of shares issued under the employee
stock purchase plan. We recognize expense related to shares purchased through the employee stock purchase plan
ratably over the offering period. We recognized $0.4 million and $0.3 million in expense associated with our ESPP
for the years ended December 31, 2019 and 2018, respectively.
Warrants
Following our emergence from Chapter 11 on June 22, 2012 and in accordance with the plan of
reorganization, after giving effect of the 2-for-1 stock split, there were 7,368,422 shares of common stock reserved
for issuance upon exercise of warrants under the 2012 MIP. Each existing common stockholder prior to bankruptcy
received its pro rata share of warrants to purchase 5% of the common stock of the Company, subject to dilution for
equity awards issued in connection with the 2012 MIP. The warrants had a term of seven years and expired on June
22, 2019.
97
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
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).
On a recurring basis, we measure certain financial assets and liabilities at fair value, including our money
market funds, short-term investments which consist of U.S. treasury securities and U.S. agency securities, foreign
exchange forward contracts, and interest rate derivatives contracts. The accounting standard for fair value
measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. As such, fair value is a market-based
measurement that should be determined based on assumptions that market participants would use in pricing an asset
or liability. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and
minimize the use of unobservable inputs to the extent possible as well as consider counterparty and its credit risk in
its assessment of fair value.
Financial Assets and Liabilities
The following tables present our financial assets and liabilities measured at fair value on a recurring basis at
December 31, 2019 and 2018:
Financial assets
Money market funds
Financial liabilities
Interest rate derivatives
Foreign exchange derivatives
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
2019
Valuation
Technique
$ 276,654 $
$ 276,654 $
276,654 $
276,654 $
$
$
986 $
127
1,113 $
$
$
986
127
1,113
(a)
(a)
98
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Financial assets
Money market funds
U.S. treasury securities
U.S. agency securities
Interest rate derivatives
Financial liabilities
Foreign exchange derivatives
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
2018
Valuation
Technique
$ 228,587 $
24,939
24,894
2,382
$ 280,802 $
228,587 $
24,939
24,894
2,382
253,526 $ 27,276
$
$
534 $
534 $
$
$
534
534
(a)
(a)
(a)
(a)
(a)
Our money market funds and U.S. treasury securities are classified within Level 1 of the fair value hierarchy
because they are valued using quoted prices in active markets for identical instruments. Our U.S. agency securities
are classified within Level 2 of the fair value hierarchy because they are valued using other than quoted prices in
active markets. In addition to $276.7 million and $228.6 million invested in money market funds as of December 31,
2019 and 2018, respectively, we had $19.7 million and $24.8 million of cash invested in bank accounts as of
December 31, 2019 and 2018, respectively.
Our foreign exchange derivatives consist of forward contracts and are classified within Level 2 of the fair
value hierarchy because they are valued based on observable inputs and are available for substantially the full term
of our derivative instruments. We use foreign exchange forward contracts to fix the functional currency value of
forecasted commitments, payments and receipts. The aggregate notional amount of the outstanding foreign exchange
forward contracts was $15.2 million and $15.7 million at December 31, 2019 and 2018, respectively. Our foreign
exchange forward contracts contain netting provisions to mitigate credit risk in the event of counterparty default,
including payment default and cross default. At December 31, 2019 and 2018, the fair value of our counterparty
default exposure was less than $1.0 million and spread across several highly rated counterparties.
Our interest rate derivatives are classified within Level 2 of the fair value hierarchy because they are valued
based on observable inputs and are available for substantially the full term of our derivative instruments. Our
interest rate risk relates primarily to U.S. dollar borrowings, partially offset by U.S. dollar cash investments. We
have historically used interest rate derivative instruments to manage our earnings and cash flow exposure to changes
in interest rates by converting floating-rate debt into fixed-rate debt. The aggregate notional amount of the
outstanding interest rate derivative instruments was $370.5 million as of December 31, 2019. We designate these
derivative instruments either as fair value or cash flow hedges under the accounting guidance related to derivatives
and hedging. We record changes in the value of fair value hedges in interest expense, which is generally offset by
changes in the fair value of the hedged debt obligation. Interest payments made or received related to our interest
rate derivative instruments are included in interest expense. We record the effective portion of any change in the fair
value of derivative instruments designated as cash flow hedges as unrealized gains or losses in other comprehensive
income (loss), net of tax, until the hedged cash flow occurs, at which point the effective portion of any gain or loss is
reclassified to earnings. In the event the hedged cash flow does not occur, or it becomes no longer probable that it
will occur, we reclassify the amount of any gain or loss on the related cash flow hedge to interest expense at that
time.
We believe we do not have significant concentrations of credit risk arising from our interest rate derivative
instruments, whether from an individual counterparty or a related group of counterparties. We manage the
concentration of counterparty credit risk on our interest rate derivatives instruments by limiting acceptable
counterparties to a diversified group of major financial institutions with investment grade credit ratings, limiting the
amount of credit exposure to each counterparty, and actively monitoring their credit ratings and outstanding fair
values on an ongoing basis. Furthermore, none of our derivative transactions contain provisions that are dependent
on our credit ratings from any credit rating agency.
99
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
We also employ master netting arrangements that reduce our counterparty payment settlement risk on any
given maturity date to the net amount of any receipts or payments due between us and the counterparty financial
institution. Thus, the maximum loss due to counterparty credit risk is limited to the unrealized gains in such
contracts net of any unrealized losses should any of these counterparties fail to perform as contracted. Although
these protections do not eliminate concentrations of credit risk, as a result of the above considerations, we do not
consider the risk of counterparty default to be significant.
Non-Financial Assets and Liabilities
Our non-financial assets, which include goodwill, other intangible assets, property, plant, and equipment, and
pre-publication costs, are not required to be measured at fair value on a recurring basis. However, if certain trigger
events occur, or if an annual impairment test is required, we evaluate the non-financial assets for impairment. If an
impairment did occur, the asset is required to be recorded at the estimated fair value. There were no non-financial
liabilities that were required to be measured at fair value on a nonrecurring basis during 2019 and 2018.
The following table presents our nonfinancial assets and liabilities measured at fair value on a nonrecurring
basis during 2017:
Nonfinancial assets
Property, plant and equipment
Pre-publication costs
Significant
Unobservable
Inputs
(Level 3)
$
$
2017
$
$
Total
Impairment
Valuation
Technique
$ 9,119
3,980
$ 13,099
(c)
(c)
The carrying amounts of software development costs, included within property, plant, and equipment, are
periodically compared to net realizable value and impairment charges are recorded, as appropriate, when amounts
expected to be realized are lower. During the year ended December 31, 2017 in connection with our 2017
Restructuring Plan, we recorded an impairment charge of approximately $9.1 million related to a certain long-lived
asset included within property, plant, and equipment as the carrying amount of the asset is no longer recoverable
based on projected cash flows, which was classified as Level 3 due to significant unobservable inputs. The
impairment charge is included in the Restructuring/severance and other charges line item in the consolidated
statements of operations. There was no impairment of property, plant, and equipment for the years ended
December 31, 2019 and 2018.
Pre-publication costs recorded on the balance sheet are periodically reviewed for impairment by comparing
the unamortized capitalized costs of the assets to the fair value of those assets. For the year ended December 31,
2017, we recorded an impairment charge of $4.0 million as the products will no longer be sold in the marketplace.
There was no impairment of pre-publication costs for the year ended December 31, 2019 and 2018.
In evaluating goodwill for impairment, we first compare our reporting units fair value to its carrying value.
We estimate the fair values of our reporting units by considering market multiple and recent transaction values of
peer companies, where available, and projected discounted cash flows, if reasonably estimable. There was no
impairment recorded for goodwill for the years ended December 31, 2019, 2018 and 2017.
We perform an impairment test for our other intangible assets by comparing the assets fair value to its
carrying value. Fair value is estimated based on recent market transactions, where available, and projected
discounted cash flows, if reasonably estimable. There was no impairment of other intangible assets for the years
ended December 31, 2019, 2018 and 2017.
100
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Fair Value of Debt
The following table presents the carrying amounts and estimated fair market values of our debt at
December 31, 2019 and 2018. The fair value of debt is deemed to be the amount at which the instrument could be
exchanged in an orderly transaction between market participants at the measurement date.
December 31, 2019
December 31, 2018
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
$380,000 Term loan
$306,000 Senior secured notes
$800,000 Term loan
$
$
361,294
295,893
$
360,391
301,441
$
763,649
691,102
The fair market values of our debt were estimated based on quoted market prices on a private exchange for
those instruments that are traded and are classified as Level 2 within the fair value hierarchy at December 31, 2019
and 2018. 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.
14. Commitments and Contingencies
We are involved in ordinary and routine litigation and matters incidental to our business, including claims
alleging breach of contract and seeking royalty payments. Litigation alleging infringement of copyrights and other
intellectual property rights is also common in the educational publishing industry. For example, there have been
various settled, pending and threatened litigation that allege we exceeded the print run limitation or other restrictions
in licenses granted to us to reproduce photographs in our textbooks. During 2016, we settled all such pending or
actively threatened litigations alleging infringement of copyrights and made total settlement payments of
$10.0 million, collectively. We received approximately $4.5 million of insurance recovery proceeds during the first
quarter of 2017.
While we may incur a loss associated with certain pending or threatened litigation, we are not able to estimate
such amount, if any, but we do not expect any of these matters to have a material adverse effect on our results of
operations, financial position or cash flows. We have insurance over such amounts and with coverage and
deductibles as management believes is reasonable. There can be no assurance that our liability insurance will cover
all events or that the limits of coverage will be sufficient to fully cover all liabilities.
In April 2019, we were notified of an unasserted claim by the Commonwealth of Puerto Rico with regards to
payments in the amount of approximately $33.0 million 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
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 Riversides damages that exceeds $1.4 million, and in an amount
that shall not exceed $1.4 million, which we believe would be the maximum exposure. For damages above $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.
101
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
In January 2018, Vanderbilt University (Vanderbilt) filed a complaint against the Company and others in
connection with a license agreement originally entered into between Vanderbilt and Scholastic Inc. in 1997 and
subsequently assigned to the Company as part of our acquisition of Scholastics Educational Technology and
Services business pursuant to the stock and asset purchase agreement dated April 23, 2015. Vanderbilt alleges
entitlement to additional royalties in connection with READ 180 and other products acquired from Scholastic and
alleges trademark infringement in the marketing of these products. The Company is vigorously defending this
matter.
In connection with an agreement with a development content provider, we agreed to act as guarantor to that
partys loan to finance such development. Such guarantee is expected to remain until 2020. Under the guarantee, we
believe the maximum future payments to approximate $18.5 million. In the unlikely event that we are required to
make payments on behalf of the development content provider, we would have recourse against the development
content provider.
We were contingently liable for $2.5 million and $4.4 million of performance-related surety bonds for our
operating activities as of December 31, 2019 and 2018, respectively. An aggregate of $23.7 million and $24.3
million of letters of credit existed each year at December 31, 2019 and 2018, respectively, of which $0.7 million and
$0.1 million backed the aforementioned performance-related surety bonds each year in 2019 and 2018, respectively.
We routinely enter into standard indemnification provisions as part of license agreements involving use of our
intellectual property. These provisions typically require us to indemnify and hold harmless licensees in connection
with any infringement claim by a third-party relating to the intellectual property covered by the license agreement.
Although the term of these provisions and the maximum potential amounts of future payments we could be required
to make is not limited, we have never incurred any costs to defend or settle claims related to these types of
indemnification provisions. We therefore believe the estimated fair value of these provisions is inconsequential and
have no liabilities recorded for them as of December 31, 2019 and 2018.
15.
Stockholders Equity
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of the following at December 31, 2019, 2018 and 2017:
Net change in pension and benefit plan liabilities
Foreign currency translation adjustments
Unrealized loss on short-term investments
Net change in unrealized loss on derivative
instruments
2019
2018
$ (39,757) $ (41,557) $ (39,501)
(5,753)
(108)
(5,909)
(99)
(6,420)
(90)
2017
(1,005)
(1,160)
$ (47,272) $ (45,184) $ (46,522)
2,381
Amounts reclassified from accumulated other comprehensive loss for the years ended December 31, 2019,
2018 and 2017 relating to the amortization of defined benefit pension and postretirement benefit plans totaled
approximately $(0.9) million, $(0.9) million and $(0.7) million, respectively, and affected the selling and
administrative line item in the consolidated statement of operations. These accumulated other comprehensive loss
components are included in the computation of net periodic benefit cost.
16. Related Party Transactions
In November 2019, Anchorage Capital Group, L.L.C. (Anchorage), a significant stockholder in the
Company and a former partner of which serves on the Companys board of directors, participated as a lender in the
refinancing of the Companys debt, acquiring $20.0 million out of the $306.0 million in aggregate principal amount
of 9.000% Senior Secured Notes due 2025 (the Notes) issued by the Company and becoming a lender under the
Companys second amended and restated term loan credit agreement (the Term Loan Credit Agreement) with a
commitment of $15.0 million out of the $380.0 million in initial principal amount of the term loan. Anchorages
participation in the refinancing was on the same terms as all the other lenders. Refer to note 7 for additional
information about the Notes and the Term Loan Credit Agreement.
102
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
There were no related party transactions during 2018 and 2017.
17. Net Loss Per Share
The following table sets forth the computation of basic and diluted earnings per share (EPS):
For the Year
Ended
December 31,
2019
For the Year
Ended
December 31,
2018
For the Year
Ended
December 31,
2017
Numerator
Loss from continuing operations
$
(213,833) $
(137,457) $
(120,337)
Earnings from discontinued operations,
net of tax
Gain on sale of discontinued operations,
net of tax
Income from discontinued operations, net
of tax
Net loss attributable to common stockholders $
Denominator
Weighted average shares outstanding
(213,833) $
12,833
17,150
30,469
43,302
(94,155) $
17,150
(103,187)
Basic and diluted
124,152,984
123,444,943
122,949,064
Net loss per share attributable to common
stockholders
Basic and diluted:
Continuing operations
Discontinued operations
Net loss
$
$
(1.72) $
(1.72) $
(1.11) $
0.35
(0.76) $
(0.98)
0.14
(0.84)
As we incurred a net loss in each of the periods presented above, all outstanding stock options and restricted
stock units for those periods have an anti-dilutive effect and therefore are excluded from the computation of diluted
weighted average shares outstanding. Accordingly, basic and diluted weighted average shares outstanding are equal
for such periods.
The following table summarizes our weighted average outstanding common stock equivalents that were anti-
dilutive attributable to common stockholders during the periods, and therefore excluded from the computation of
diluted EPS:
Stock options
Restricted stock units
18.
Segment Reporting
Ended
For the Year For the Year For the Year
Ended
December 31, December 31, December 31,
2018
3,406,171
2,793,680
2019
2,765,826
3,342,923
2017
2,977,550
1,429,816
Ended
As of December 31, 2019, we had two reportable segments (Education and HMH Books & Media). Our
Education segment provides educational products, technology platforms and services to meet the diverse needs of
todays classrooms. These products and services include print and digital content in the form of textbooks, digital
courseware, instructional aids, educational assessment and intervention solutions, which are aimed at improving
achievement and supporting learning for students who are not keeping pace with peers, professional development
and school reform services. Our HMH Books & Media segment primarily develops, markets and sells consumer
books in print and digital formats and licenses book rights to other publishers and electronic businesses in the United
States and abroad. The principal distribution channels for HMH Books & Media products are retail stores, both
physical and online, and wholesalers.
103
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
We measure and evaluate our reportable segments based on net sales and segment Adjusted EBITDA from
continuing operations. We exclude from our segments certain corporate-related expenses, as our corporate functions
do not meet the definition of a segment, as defined in the accounting guidance relating to segment reporting. In
addition, certain transactions or adjustments that our Chief Operating Decision Maker considers to be non-
operational, such as amounts related to goodwill and other intangible asset impairment charges, derivative
instruments charges, acquisition/disposition-related activity, restructuring/integration costs, severance, separation
costs and facility closures, equity compensation charges, legal settlement charges, gains or losses from divestitures,
amortization and depreciation expenses, as well as interest and taxes, are excluded from segment Adjusted EBITDA
from continuing operations. Although we exclude these amounts from segment Adjusted EBITDA from continuing
operations, they are included in reported consolidated net loss and are included in the reconciliation below.
As a result of the sale of the Riverside Business, the results of the Riverside Business are no longer presented
within continuing operations. Accordingly, the segment disclosures for the Education reportable segment has been
recast for all periods to exclude the results of the Riverside Business. These changes had no impact on the
previously reported financial results for the HMH Books & Media reportable segment.
(in thousands)
2019
Net sales
Segment Adjusted EBITDA
2018
Net sales
Segment Adjusted EBITDA
2017
Net sales
Segment Adjusted EBITDA
Year Ended December 31,
HMH
Books &
Media
Other
Corporate/
Education
$1,210,646 $ 180,028 $
196,907
14,908
$1,122,689 $ 199,728 $
210,604
21,942
$1,146,453 $ 180,576 $
223,941
12,096
(46,077)
(40,418)
(50,758)
The following table disaggregates our net sales by major source:
Year Ended December 31, 2019
HMH
Books &
Media
Education
$ 578,675 $
631,971
Consolidated
$ 578,675
631,971
180,028
180,028
$1,210,646 $ 180,028 $1,390,674
Year Ended December 31, 2018
HMH
Books &
Media
Education
$ 538,166 $
584,523
Consolidated
$ 538,166
584,523
199,728
199,728
$1,122,689 $ 199,728 $1,322,417
(in thousands)
Core solutions (1)
Extensions businesses (2)
Trade products
Net sales
(in thousands)
Core solutions (1)
Extensions businesses (2)
Trade products
Net sales
104
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
(in thousands)
Core solutions (1)
Extensions businesses (2)
Trade products
Net sales
Year Ended December 31, 2017
HMH
Books &
Media
Education
$ 595,097 $
551,356
Consolidated
$ 595,097
551,356
180,576
180,576
$1,146,453 $ 180,576 $1,327,029
(1) Comprehensive solutions primarily for reading, literature, math, science and social studies programs.
(2)
Primarily consists of our Heinemann brand, intervention, supplemental and professional services.
Reconciliation of Segment Adjusted EBITDA to the consolidated statements of operations is as follows:
(in thousands)
Total Segment Adjusted EBITDA
Interest expense
Interest income
Depreciation expense
Amortization expensefilm asset
Amortization expense
Non-cash chargesstock compensation
Non-cash chargesloss on derivative instruments
Non-cash chargesasset impairment charges
Inventory obsolescence related to strategic
transformation plan
Fees, expenses or charges for equity offerings, debt
or acquisitions/dispositions
Restructuring/severance and other charges
Legal reimbursement (settlement)
Gain on sale of assets
Loss on extinguishment of debt
Loss before taxes
(Provision) benefit for income taxes
Net loss from continuing operations
2019
2017
Years Ended December 31,
2018
$ 165,738 $ 192,128 $ 185,279
(42,805)
1,338
(71,049)
(195,394)
(10,728)
1,366
(3,980)
(48,778)
3,157
(61,475)
(9,835)
(201,382)
(13,968)
(899)
(45,680)
2,550
(75,116)
(6,057)
(170,903)
(13,248)
(1,374)
(9,758)
(6,327)
(21,742)
(4,363)
(209,632)
(4,201)
(1,464)
(37,952)
3,633
(171,756)
51,419
$ (213,833) $ (137,457) $ (120,337)
(2,883)
(11,478)
201
(131,860)
(5,597)
Segment information as of December 31, 2019 and 2018 is as follows:
(in thousands)
Total assetsEducation segment
Total assetsHMH Books & Media segment
Total assetsCorporate and Other
Total consolidated assets
2019
2018
$ 1,971,553 $ 1,999,481
167,510
328,133
$ 2,513,172 $ 2,495,124
186,318
355,301
The following represents long-lived assets (property, plant, and equipment) outside of the United States,
which are substantially in Ireland. All other long-lived assets are located in the United States.
(in thousands)
Long-lived assetsInternational
2019
2018
$
113 $
64
105
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The following is a schedule of net sales by geographic region:
(in thousands)
Year Ended December 31, 2019
Net salesU.S.
Net salesInternational
Total net sales
Year Ended December 31, 2018
Net salesU.S.
Net salesInternational
Total net sales
Year Ended December 31, 2017
Net salesU.S.
Net salesInternational
Total net sales
$ 1,327,833
62,841
$ 1,390,674
$ 1,249,568
72,849
$ 1,322,417
$ 1,254,956
72,073
$ 1,327,029
19. Valuation and Qualifying Accounts
2019
Allowance for doubtful accounts
Reserve for returns
Reserve for royalty advances
Deferred tax valuation allowance
2018
Allowance for doubtful accounts
Reserve for returns
Reserve for royalty advances
Deferred tax valuation allowance
2017
Allowance for doubtful accounts
Reserve for returns
Reserve for royalty advances
Deferred tax valuation allowance
Balance at
Beginning
of Year
Net Charges
Utilization of
Allowances
Balance at
End
of Year
$
$
$
2,173 $
18,559
117,797
562,392
1,909 $
41,654
16,500
23,707
(1,067) $
(43,534)
(14,602)
(2,594)
3,015
16,679
119,695
583,505
2,508 $
20,580
103,606
571,653
128 $
(463) $
36,395
17,301
(7,667)
(38,416)
(3,110)
(1,594)
2,173
18,559
117,797
562,392
3,463 $
18,671
85,526
759,887
400 $
43,682
17,861
(187,480)
(1,355) $
(41,773)
219
(754)
2,508
20,580
103,606
571,653
106
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
20. Quarterly Results of Operations (Unaudited)
March 31,
June 30,
September 30, December 31,
Three Months Ended
2019:
Net sales
Gross profit
Operating income (loss)
Income (loss) from continuing operations, net of
tax
Net income (loss)
Net income (loss) per share attributable to
common stockholders
$ 194,635 $ 388,896 $
57,893
(101,835)
156,055
(30,253)
565,668 $
273,481
77,871
241,475
59,065
(108,947)
(117,362)
(117,362)
(40,613)
(40,613)
69,260
69,260
(125,118)
(125,118)
(117,362)
(40,613)
69,260
(125,118)
Basic:
Net loss
Diluted:
Net loss
2018:
Net sales
Gross profit
Operating income (loss)
Income (loss) from continuing operations, net of
tax
Income from discontinued operations, net of tax
Net income (loss)
Net income (loss) per share attributable to
common stockholders
Basic:
Continuing operations
Discontinued operations
Net loss
Diluted:
Continuing operations
Discontinued operations
Net loss
$
$
(0.95) $
(0.33) $
0.56 $
(1.01)
(0.95) $
(0.33) $
0.55 $
(1.01)
$ 199,759 $ 357,365 $
64,315
(92,905)
162,827
(14,747)
516,255 $
278,175
91,838
249,038
91,663
(74,711)
(105,886)
4,575
(101,311)
(29,089)
5,817
(23,272)
83,908
2,441
86,349
(86,390)
30,469
(55,921)
$
$
$
$
(0.86) $
0.04
(0.82) $
(0.86) $
0.04
(0.82) $
(0.24) $
0.05
(0.19) $
(0.24) $
0.05
(0.19) $
0.68 $
0.02
0.70 $
0.68 $
0.02
0.70 $
(0.70)
0.25
(0.45)
(0.70)
0.25
(0.45)
Our net sales, operating profit or loss and net cash provided by or used in operations are impacted by the
inherent seasonality of the academic calendar. Consequently, the performance of our businesses may not be
comparable quarter to consecutive quarter and should be considered on the basis of results for the whole year or by
comparing results in a quarter with results in the same quarter for the previous year.
During the three months ended September 30, 2018, we recorded out-of-period corrections of approximately
$2.8 million increasing net sales and reducing deferred revenue that should have been recognized during the three
months ended March 31, 2018. Management believes these out-of-period corrections are not material to the current
period financial statements or any previously issued financial statements.
107
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure 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 December 31, 2019 pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (as
amended, the Exchange Act). Based on that evaluation, our CEO and CFO have concluded that our disclosure
controls and procedures as of December 31, 2019 were effective to provide reasonable assurance that information
required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms and the information
required to be disclosed by us is accumulated and communicated to our management, including our CEO and CFO,
to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that
there are resource constraints and that management is required to apply judgment in evaluating the benefits of
possible controls and procedures relative to their costs.
Managements Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of
1934. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and disposition of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management
and directors of the Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or dispositions of the Companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
The Companys management assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2019. In making this assessment, the Companys management used the criteria
established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
Based on our assessment and the aforementioned criteria, management concluded that, as of December 31,
2019, the Companys internal control over financial reporting was effective.
108
The effectiveness of the Companys internal control over financial reporting as of December 31, 2019 has
been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their
report which appears herein in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting in the quarter ended December 31, 2019
that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
Except to the extent provided below, the information required by this Item shall be set forth in the sections
titled Corporate Governance and Executive Officers in our Proxy Statement for our 2020 Annual Meeting of
Stockholders, to be filed with the SEC within 120 days of December 31, 2019, and is incorporated into this Annual
Report on Form 10-K by reference.
We have adopted a Code of Conduct that applies to our principal executive officer, principal financial officer
and principal accounting officer or any person performing similar functions, which we post on our website in the
Corporate Governance link located at: ir.hmhco.com. We intend to publish any amendment to, or waiver from, the
Code of Conduct on our website. We will provide any person, without charge, a copy of such Code of Conduct upon
written request, which may be mailed to 125 High Street, Boston, MA 02110, Attn: Corporate Secretary.
Item 11. Executive Compensation
The information required by this Item shall be set forth in the sections titled Executive Compensation and
Director Compensation in our Proxy Statement for our 2020 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of December 31, 2019, and is incorporated into this Annual Report on Form 10-K by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders
Matters
The information required by this Item shall be set forth in the section titled Security Ownership and Other
Matters in our Proxy Statement for our 2020 Annual Meeting of Stockholders to be filed with the SEC within
120 days of December 31, 2019, and is incorporated into this Annual Report on Form 10-K by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item shall be set forth in the section titled Corporate Governance Review
and Approval of Transactions with Related Persons in our Proxy Statement for our 2020 Annual Meeting of
Stockholders to be filed with the SEC within 120 days of December 31, 2019, and is incorporated into this Annual
Report on Form 10-K by reference.
Item 14. Principal Accounting Fees and Services
The information required by this Item shall be set forth in the section titled Ratification of the Appointment
of the Companys Independent Registered Public Accounting Firm in our Proxy Statement for our 2020 Annual
Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2019, and is incorporated into
this Annual Report on Form 10-K by reference.
109
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of the report.
(1) Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders Equity for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
Schedule IIValuation and Qualifying Accounts is included herein as Note 19 in the Notes to
Consolidated Financial Statements.
(3) Exhibits.
See the Exhibit Index.
52
55
56
57
58
59
60
111
110
EXHIBIT INDEX
Exhibit No.
2.1
2.2
2.3
2.4
3.1
3.2
3.3
4.1
4.2
Description
Prepackaged Joint Plan of Reorganization of the Debtors Under Chapter 11 of the Bankruptcy Code
by and among Houghton Mifflin Harcourt Publishing Company, Houghton Mifflin Harcourt
Publishers Inc., HMH Publishers, LLC, Houghton Mifflin Holding Company, Inc., Houghton
Mifflin, LLC, Houghton Mifflin Finance, Inc., Houghton Mifflin Holdings, Inc., HM Publishing
Corp., Riverdeep Inc., A Limited Liability Company, Broderbund LLC, RVDP, Inc.,
HRW Distributors, Inc., Greenwood Publishing Group, Inc., Classroom Connect, Inc., Achieve! Data
Solutions, LLC, Steck-Vaughn Publishing LLC, HMH Supplemental Publishers Inc., HMH Holdings
(Delaware), Inc., Sentry Realty Corporation, Houghton Mifflin Company International, Inc., The
Riverside Publishing Company, Classwell Learning Group Inc., Cognitive Concepts, Inc., Edusoft
And Advanced Learning Centers, Inc. (incorporated herein by reference to Exhibit No. 2.1 to
Amendment No. 1 to the Companys Registration Statement on Form S-1, filed September 13, 2013
(File No. 333-190356)).
Stock and Asset Purchase Agreement dated as of April 23, 2015, by and among Houghton Mifflin
Harcourt Publishing Company, as Purchaser, Scholastic Corporation, as Parent Seller, and Scholastic
Inc., as Seller (incorporated herein by reference to Exhibit 2.1 to the Companys Current Report on
Form 8-K, filed April 24, 2015 (File No. 001-36166)).
Asset Purchase Agreement, by and among Houghton Mifflin Harcourt Publishing Company,
Houghton Mifflin Harcourt Company (solely for purposes of Section 8.2 and 8.3) and Riverside
Assessment, LLC, dated as of September 12, 2018 (incorporated herein by reference to Exhibit 2.1 to
the Companys Current Report on Form 8-K, filed September 12, 2018 (File No. 001-36166)).
Amendment No. 1 to Asset Purchase Agreement, by and among Houghton Mifflin Harcourt
Publishing Company, Houghton Mifflin Harcourt Company (solely for purposes of Section 8.2 and
8.3) and Riverside Assessment, LLC, dated as of October 1, 2018 (incorporated herein by reference
to Exhibit 2.1b to the Companys Current Report on Form 8-K, filed October 5, 2018 (File No. 001-
36166)).
Amended and Restated Certificate of Incorporation (incorporated herein by reference to
Exhibit No. 3.1 to Amendment No. 4 to the Companys Registration Statement on Form S-1, filed
October 25, 2013 (File No. 333-190356)).
Certificate of Amendment to Amended and Restated Certificate of Incorporation (incorporated herein
by reference to Exhibit No. 3.2 to Amendment No. 4 to the Companys Registration Statement on
Form S-1, filed October 25, 2013 (File No. 333-190356)).
Amended and Restated By-laws of the Registrant, as amended, effective September 24, 2019
(incorporated herein by reference to Exhibit No. 3.1 to the Companys Current Report on Form 8-K,
filed September 30, 2019 (File No. 001-36166)).
Investor Rights Agreement, dated as of June 22, 2012, by and among HMH Holdings (Delaware),
Inc. and the stockholders party thereto (incorporated herein by reference to Exhibit No. 4.1 to
Amendment No. 1 to the Companys Registration Statement on Form S-1, filed September 13, 2013
(File No. 333-190356)).
Specimen Common Stock Certificate (incorporated herein by reference to Exhibit No. 4.3 to
Amendment No. 4 to the Companys Registration Statement on Form S-1, filed October 25, 2013
(File No. 333-190356)).
111
Exhibit No.
Description
4.3
4.4
4.5
4.6
4.7
10.1
10.2
10.3
10.4
10.5
10.6
Form of Warrant Certificate (incorporated herein by reference to Exhibit No. 4.4 to Amendment
No. 2 to the Companys Registration Statement on Form S-1, filed October 4, 2013 (File No. 333-
190356)).
Warrant Agreement, dated as of June 22, 2012, among HMH Holdings (Delaware), Inc.,
Computershare Inc. and Computershare Trust Company, N.A. (incorporated herein by reference to
Exhibit No. 4.5 to Amendment No. 2 to the Companys Registration Statement on Form S-1, filed
October 4, 2013 (File No. 333-190356)).
Indenture, dated as of November 22, 2019, among Houghton Mifflin Harcourt Company, Inc.,
Houghton Mifflin Harcourt Publishers Inc., Houghton Mifflin Harcourt Publishing Company and
HMH Publishers LLC, the subsidiary guarantors party thereto, U.S. Bank National Association, as
trustee, and Citibank N.A., as collateral agent (incorporated herein by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K, filed November 25, 2019 (File No. 001-36166)).
Form of 9.000% Senior Secured Notes due 2025 (incorporated herein by reference to Exhibit A to
Exhibit 4.1 to the Companys Current Report on Form 8-K, filed November 25, 2019) (File No. 001-
36166)).
Description of Registrants Common Stock.
Nomination Agreement, effective December 21, 2016, by and among Houghton Mifflin Harcourt
Company and certain affiliates of Anchorage Capital Group, L.L.C. (incorporated herein by reference
to Exhibit 10.1 to the Companys Current Report on Form 8-K, filed December 22, 2016 (File
No. 001-36166)).
Form of Indemnification Agreement (incorporated herein by reference to Exhibit No. 10.12 to
Amendment No. 1 to the Companys Registration Statement on Form S-1, filed September 13, 2013
(File No. 333-190356)).
Amended and Restated Term Loan Credit Agreement, dated as of May 29, 2015, by and among
Houghton Mifflin Harcourt Company, Houghton Mifflin Harcourt Publishers Inc., HMH Publishers
LLC, Houghton Mifflin Harcourt Publishing Company, certain other subsidiaries of Houghton
Mifflin Harcourt Company, as subsidiary guarantors, the lenders party thereto and Citibank, N.A., as
administrative agent and collateral agent (incorporated herein by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K, filed May 29, 2015 (File No. 001-36166)).
Amended and Restated Term Facility Guarantee and Collateral Agreement, dated as of May 29,
2015, by and among Houghton Mifflin Harcourt Company, Houghton Mifflin Harcourt Publishers
Inc., HMH Publishers LLC, Houghton Mifflin Harcourt Publishing Company, the subsidiaries of
Houghton Mifflin Harcourt Company from time to time party thereto and Citibank, N.A., as
collateral agent (incorporated herein by reference to Exhibit 10.2 to the Companys Current Report
on Form 8-K, filed May 29, 2015 (File No. 001-36166)).
Amended and Restated Revolving Credit Agreement, dated as of July 22, 2015, by and among
Houghton Mifflin Harcourt Company, Houghton Mifflin Harcourt Publishers Inc., HMH Publishers
LLC, Houghton Mifflin Harcourt Publishing Company, certain other subsidiaries of Houghton
Mifflin Harcourt Company, as subsidiary guarantors, the lenders party thereto and Citibank, N.A., as
administrative agent and collateral agent (incorporated herein by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K, filed July 23, 2015 (File No. 001-36166)).
Amended and Restated Revolving Facility Guarantee and Collateral Agreement, dated as of July 23,
2015, by and among Houghton Mifflin Harcourt Company, Houghton Mifflin Harcourt Publishers
Inc., HMH Publishers LLC, Houghton Mifflin Harcourt Publishing Company, the subsidiaries of
Houghton Mifflin Harcourt Company from time to time party thereto and Citibank, N.A., as
collateral agent (incorporated herein by reference to Exhibit 10.2 to the Companys Current Report
on Form 8-K, filed July 22, 2015 (File No. 001-36166)).
112
Exhibit No.
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Description
First Amendment to Credit Agreement, First Amendment to Guarantee and Collateral Agreement and
Consent to Release of Mortgages, dated as of June 28, 2019 and effective as of July 1, 2019, by and
among Houghton Mifflin Harcourt Company, Houghton Mifflin Harcourt Publishers Inc., HMH
Publishers LLC, Houghton Mifflin Harcourt Publishing Company, certain other subsidiaries of
Houghton Mifflin Harcourt Company, as subsidiary guarantors, the lenders party thereto and
Citibank, N.A., as administrative agent and collateral agent (incorporated herein by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K, filed July 1, 2019 (File No. 001-
36166)).
Second Amended and Restated Term Loan Credit Agreement, dated as of November 22, 2019,
among Houghton Mifflin Harcourt Company, Inc., Houghton Mifflin Harcourt Publishers Inc.,
Houghton Mifflin Harcourt Publishing Company and HMH Publishers LLC, the subsidiary
guarantors party thereto, Citibank N.A., as administrative agent and collateral agent, Citigroup
Global Market Inc., Morgan Stanley Senior Funding, Inc., BofA Securities, Inc. and Wells Fargo
Securities, LLC, as joint lead arrangers and joint bookrunners, and Citizens Bank, N.A., as co-
manager (incorporated herein by reference to Exhibit 10.1 to the Companys Current Report on Form
8-K, filed November 25, 2019 (File No. 001-36166)).
Second Amended and Restated Revolving Credit Agreement, dated as of November 22, 2019, among
Houghton Mifflin Harcourt Company, Inc., Houghton Mifflin Harcourt Publishers Inc., Houghton
Mifflin Harcourt Publishing Company and HMH Publishers LLC, the subsidiary guarantors party
thereto, Citibank N.A., as administrative agent and collateral agent, Citigroup Global Market Inc.,
Morgan Stanley Senior Funding, Inc., BofA Securities, Inc. and Wells Fargo Securities, LLC, as joint
lead arrangers and joint bookrunners, and Citizens Bank, N.A., as co-manager (incorporated herein
by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K, filed November 25,
2019 (File No. 001-36166)).
HMH Holdings (Delaware), Inc. Change in Control Severance Plan (incorporated herein by reference
to Exhibit No. 10.5 to Amendment No. 1 to the Companys Registration Statement on Form S-1,
filed September 13, 2013 (File No. 333-190356)).
Houghton Mifflin Harcourt Publishing Company ELT Severance Plan (incorporated herein by
reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q, filed November 5, 2015
(File No. 001-36166)).
Houghton Mifflin Harcourt Severance Plan, amended and restated as of March 31, 2016
(incorporated herein by reference to Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q,
filed May 4, 2016 (File No. 001-36166)).
Form of Director Compensation Letter (incorporated herein by reference to Exhibit No. 10.11 to
Amendment No. 1 to the Companys Registration Statement on Form S-1, filed September 13, 2013
(File No. 333-190356)).
Houghton Mifflin Harcourt Company Non-Employee Director Deferred Compensation Plan
(incorporated herein by reference to Exhibit No. 10.50 to the Companys Annual Report on
Form 10-K, filed February 25, 2016 (File No. 001-36166)).
Houghton Mifflin Harcourt Company Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 10.1 to the Companys Registration Statement on Form S-8, filed May 29, 2015
(File No. 333-204519)).
HMH Holdings (Delaware), Inc. 2012 Management Incentive Plan (incorporated herein by reference
to Exhibit No. 10.1 to Amendment No. 1 to the Companys Registration Statement on Form S-1,
filed September 13, 2013 (File No. 333-190356)).
HMH Holdings (Delaware), Inc. 2012 Management Incentive Plan Form of Stock Option Award
Notice (incorporated herein by reference to Exhibit No. 10.2 to Amendment No. 1 to the Companys
Registration Statement on Form S-1, filed September 13, 2013 (File No. 333-190356)).
10.18
HMH Holdings (Delaware), Inc. 2012 Management Incentive Plan Time-Based Restricted Stock Unit
Award Notice (incorporated herein by reference to Exhibit No. 10.32 to the Companys Annual
113
Exhibit No.
Description
Report on Form 10-K, filed February 26, 2015 (File No. 001-36166)).
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
HMH Holdings (Delaware), Inc. 2012 Management Incentive Plan Performance-Based Restricted
Stock Award Notice (incorporated herein by reference to Exhibit No. 10.33 to the Companys Annual
Report on Form 10-K, filed February 26, 2015 (File No. 001-36166)).
HMH Holdings (Delaware), Inc. 2012 Management Incentive Plan Performance-Based Restricted
Stock Unit Award Notice (incorporated herein by reference to Exhibit No. 10.34 to the Companys
Annual Report on Form 10-K, filed February 26, 2015 (File No. 001-36166)).
HMH Holdings (Delaware), Inc. 2012 Management Incentive Plan Time-Based Restricted Stock
Award Notice (incorporated herein by reference to Exhibit No. 10.35 to the Companys Annual
Report on Form 10-K, filed February 26, 2015 (File No. 001-36166)).
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan (incorporated herein by
reference to Exhibit 10.2 to the Companys Registration Statement on Form S-8, filed May 29, 2015
(File No. 333-204519)).
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan Form of Time-Based Restricted
Stock Unit Award Notice (Employees) (incorporated herein by reference to Exhibit 10.3 to the
Companys Registration Statement on Form S-8, filed May 29, 2015 (File No. 333-204519)).
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan Form of Performance-Based
Restricted Stock Unit Award Notice (Employees) (incorporated herein by reference to Exhibit 10.4 to
the Companys Registration Statement on Form S-8, filed May 29, 2015 (File No. 333-204519)).
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan Form of Time-Based Restricted
Stock Unit Award Notice (Directors) (incorporated herein by reference to Exhibit 10.9 to the
Companys Quarterly Report on Form 10-Q, filed August 6, 2015 (File No. 001-36166)).
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan Form of Stock Option Award
Notice (incorporated by reference to Exhibit 10.10 to the Companys Quarterly Report on Form 10-
Q, filed August 6, 2015 (File No. 001-36166)).
Houghton Mifflin Harcourt Company Form of Restricted Stock Unit Award Notice (with Deferral
FeatureDirectors) (incorporated herein by reference to Exhibit No. 10.51 to the Companys
Annual Report on Form 10-K, filed February 25, 2016 (File No. 001-36166)).
Houghton Mifflin Harcourt Company Form of Performance-Based Restricted Stock Unit Award
Notice (TSR/BillingsEmployees) (incorporated herein by reference to Exhibit No. 10.1 to the
Companys Current Report on Form 8-K, filed May 4, 2016 (File No. 001-36166)).
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan New Hire Stock Option Award
Notice dated May 9, 2017 by and between Houghton Mifflin Harcourt Company and John J. Lynch,
Jr. (incorporated herein by reference to Exhibit No. 10.27 to the Companys Annual Report on Form
10-K, filed February 22, 2018) (File No. 001-36166)).
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan New Hire Time-Based
Restricted Stock Unit Award Notice dated May 9, 2017 by and between Houghton Mifflin Harcourt
Company and John J. Lynch, Jr. (incorporated herein by reference to Exhibit No. 10.28 to the
Companys Annual Report on Form 10-K, filed February 22, 2018) (File No. 001-36166)).
10.31 William Bayers Offer Letter dated April 10, 2007, as amended on May 14, 2009 (incorporated
herein by reference to Exhibit No. 10.9 to Amendment No. 1 to the Companys Registration
Statement on Form S-1, filed September 13, 2013 (File No. 333-190356)).
10.32
Lee R. Ramsayer Offer Letter dated January 25, 2012 (incorporated herein by reference to
Exhibit No. 10.29 to the Companys Annual Report on Form 10-K, filed March 27, 2014
(File No. 001-36166)).
10.33* Lee R. Ramsayer Letter Agreement dated December 16, 2019.
10.34
Joseph Abbott Offer Letter dated as of March 10, 2016 (incorporated herein by reference to
Exhibit No. 201-5 10.3 to the Companys Current Report on Form 8-K, filed March 10, 2016
114
Exhibit No.
(File No. 001-36166)).
Description
10.35
10.36
10.37
10.38
10.39
10.40
Letter Agreement, effective September 22, 2016, by and between Houghton Mifflin Harcourt
Company and L. Gordon Crovitz (incorporated herein by reference to Exhibit No. 10.1 to the
Companys Quarterly Report on Form 10-Q, filed November 3, 2016 (File No. 001-36166)).
John J. Lynch Offer Letter dated February 10, 2017 (incorporated herein by reference to Exhibit 10.1
to the Current Report on Form 8-K filed on February 15, 2017 (File No. 001-36166)).
Rosamund Else-Mitchell Offer Letter dated April 22, 2015 (incorporated herein by reference to
Exhibit No. 10.34 to the Companys Annual Report on Form 10-K, filed February 22, 2018)
(File No. 001-36166)).
Rosamund Else-Mitchell Promotion Letter dated August 27, 2015 (incorporated herein by reference
to Exhibit No. 10.35 to the Companys Annual Report on Form 10-K, filed February 22, 2018)
(File No. 001-36166)).
Rosamund Else-Mitchell Promotion Letter dated August 3, 2017 (incorporated herein by reference to
Exhibit No. 10.36 to the Companys Annual Report on Form 10-K, filed February 22, 2018)
(File No. 001-36166)).
Separation Agreement and General Release dated June 10, 2019, by and between Houghton Mifflin
Harcourt Company and Rosamund Else-Mitchell (incorporated herein by reference to Exhibit No.
10.2 to the Companys Quarterly Report on Form 10-Q, filed August 8, 2019 (File No. 001-36166)).
10.41*
Amendment No. 1 to the Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan dated
December 13, 2019
21.1*
List of Subsidiaries of the Registrant.
23.1*
Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
31.1*
31.2*
32.1**
32.2**
Certification of CEO Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of CFO Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.INS
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101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
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Inline XBRL Taxonomy Extension Presentation Linkbase Document.
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
**
Identifies a management contract or compensatory plan or arrangement.
Filed herewith.
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.
115
Item 16. Form 10-K Summary
None.
116
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Houghton Mifflin Harcourt Company
(Registrant)
By:/s/ John J. Lynch, Jr.
John J. Lynch, Jr.
President, Chief Executive Officer
(On behalf of the registrant)
February 27, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ John J. Lynch, Jr.
John J. Lynch, Jr.
/s/ Joseph P. Abbott, Jr.
Joseph P. Abbott, Jr.
/s/ Michael J. Dolan
Michael J. Dolan
/s/ Lawrence K. Fish
Lawrence K. Fish
/s/ Daniel M. Allen
Daniel M. Allen
/s/ L. Gordon Crovitz
L. Gordon Crovitz
/s/ Jean S. Desravines
Jean S. Desravines
/s/ Jill A. Greenthal
Jill A. Greenthal
/s/ John F. Killian
John F. Killian
/s/ John R. McKernan, Jr.
John R. McKernan, Jr.
/s/ E. Rogers Novak, Jr.
E. Rogers Novak, Jr.
/s/ Tracey D. Weber
Tracey D. Weber
President, Chief Executive Officer
(Principal Executive Officer) and Director
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
February 27, 2020
February 27, 2020
Senior Vice President and Corporate Controller
(Principal Accounting Officer)
February 27, 2020
Chairman of the Board of Directors
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
Director
Director
Director
Director
Director
Director
Director
Director
117
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BOARD OF DIRECTORS
HMH EXECUTIVE OFFICERS
ABOUT HMH
John J. Lynch, Jr.
President and Chief Executive Officer
Joseph P. Abbott, Jr.
Executive Vice President and
Chief Financial Officer
William F. Bayers
Executive Vice President,
Secretary, and General Counsel
Ellen Archer
President, HMH Books & Media
Amy L. Dunkin
Executive Vice President and
General Manager, Professional Services
Michael Evans
Executive Vice President,
Chief Revenue Officer
Matthew Mugo Fields
Executive Vice President,
General Manager, Supplemental
and Intervention Solutions
James P. O’Neill
Executive Vice President and
General Manager, Core Solutions
Alejandro Reyes
Senior Vice President, and
Chief People Officer
CHAIRMAN
Lawrence K. Fish
Retired Chairman and Chief Executive
Officer, Citizens Financial Group, Inc.
DIRECTORS
Daniel Allen
Senior Advisor, Anchorage Capital Group,
L.L.C.
L. Gordon Crovitz
Co-Founder and Co-Chief Executive
Officer of Newsguard Technologies Inc.
and retired Publisher of he Wall
Street ournal
h
Jean S. Desravines
Chief Executive Officer of
New Leaders, Inc.
Jill A. Greenthal
Senior Advisor, Blackstone Group
John F. Killian
Retired Executive Vice President and
Chief Financial Officer, Verizon
Communications, Inc.
John J. Lynch, Jr.
President, Chief Executive Officer, and
Director, Houghton Mifflin Harcourt
John R. McKernan, Jr.
Chief Executive Officer of
McKernan Enterprises, Inc. and
former Governor of Maine
E. Rogers Novak, Jr.
Founder and Managing Member of
Novak Biddle Venture Partners
Tracey D. Weber
General Manager, Digital
Commerce & SaaS for IBM
Corporate Headquarters
Houghton Mifflin Harcourt
125 High Street
Boston, MA 02110
Phone: 617.351.5000
Website
hmhco.com
Transfer Agent
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
Phone: 781.575.2000
Independent Registered
Public Accounting Firm
PriceWaterhouseCoopers LLP
101 Seaport Boulevard, Ste. 500
Boston, MA 02210
Phone: 617.530.5000
Outside Legal Counsel
WilmerHale
60 State Street
Boston, MA 02109
Phone: 617.526.6000
Annual Meeting
Date: May 19, 2020
Time: 8:00 a.m.
Location: Virtual Stockholders Meeting
www.proxydocs.com/HMHC
p
/
y
Ticker Symbol
NASDAQ:HMHC
Investor Relations
Brian Shipman
Senior Vice President,
Investor Relations
Phone: 212.592.1177
Form 10-K
A copy of the Company’s Form 10-K
filed with the Securities and Exchange
Commission is available on the
Company’s website hmhco.com and also
available without charge upon written
request to: Houghton Mifflin Harcourt,
Investor Relations, 125 High Street,
Boston, MA 02110; by calling 212.592.1177;
or by emailing Brian Shipman at
brian.shipman@hmhco.com.
This Annual Report contains forward-looking statements that involve risks and uncertainties that could cause results to differ materially from those projected. These
forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believe,” “estimate,” “project,” “anticipate,” “expect,”
“could,” “intend,” “may,” “will” or “should,” “forecast,” “plan,” “potential,” “project,” “target” or, in each case, their negative, or other variations or comparable terminology.
Factors that may cause actual results to differ materially from those contemplated by the statements in this Annual Report can be found in our Annual Report on Form
10-K for the year ended December 31, 2019, under the heading “Special Note Regarding Forward-Looking Statements.” Accordingly, you are cautioned not to place undue
reliance on any of our forward-looking statements. We disclaim any intention or obligation to publicly update or revise any forward-looking statements. This cautionary
statement is applicable to all forward-looking statements contained in this document.
We are
The Learning
Company.™
Lexile® is a trademark of MetaMetrics, Inc., and is registered in the United States and abroad. READ 180®, GO Math!®, Houghton Mifflin Harcourt®, Into Learning™, HMH®,
and The Learning Company™ are trademarks or registered trademarks of Houghton Mifflin Harcourt. © Houghton Mifflin Harcourt. All rights reserved. 02/20 WF1112245
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