2020
Annual Report
2 | Houghton Mifflin Harcourt 2020 Annual Report
Dear Shareholders
2020 was an extraordinary year for the world, for our industry, and for HMH. As our customers
faced what was likely the most significant disruption to teaching and learning of their lifetime, our
employees moved into action and embraced our values – continuing to provide vital resources
and support to educators and students when they needed us most. I couldn’t be prouder of our
HMH team in 2020.
We are on the cusp of a new era in teaching and learning.
Before the COVID-19 pandemic, online teaching was a “nice-to-have” companion in a print-digital
“blended” environment, where technology was used to help personalize instruction or save time.
Now, digital learning has become essential and nondiscretionary. After lockdowns and school
closures – and now today, with the pace of the COVID-19 vaccination rollout still unknown – even
the most technologically hesitant teachers have had to quickly embrace a variety of online tools to
teach lessons, share assignments, and conduct video-enabled classes. And while this acceleration
of edtech usage was largely out of necessity, it has unlocked opportunities and opened previously
hidden doors, recharting the course for how we help students learn, and, in the long term, achieve
better outcomes.
The pandemic was the driving force in this shift – not only because teachers had to become fluent
in online teaching, but because the pandemic drew attention to a major social injustice. Students
in high-need neighborhoods were sent to “isolate” in homes bereft of internet connectivity –
making “disconnected” the cruelest and most unjust form of social isolation.
Houghton Mifflin Harcourt 2020 Annual Report | 3
The Future
of Teaching
and Learning
The COVID-19 pandemic has shifted the ground
beneath policy makers and administrators and
elevated a central K-12 priority: to bridge the
digital divide and supply all students with a
computing device and access to the internet.
No longer could print be the only instructional
default to compensate for inequitable access to
online learning. The entire teaching and learning
community simply had to be connected.
What do I mean by “connected”? At HMH,
we believe a connected experience is one
that enables teaching and learning across
a single platform, empowering educators
and students with the right tools and access,
and connecting instruction to meaningful
assessment – enabling teachers to support
learners across the achievement spectrum.
While the ratio of students to devices will be 1:1
in the new era, the ratio of teachers to students
will likely remain close to 1:25. This means that
teachers – who were already craving simplicity –
will still need support. They will need accessible,
easy-to-use tools on a seamless platform that
enables effortless connection to students, to
parents, and to school district staff. They’ll need
artificial intelligence and technologies that
empower them to focus on the high-impact
activities for which there is no substitute for
human connection.
What is now abundantly clear is that “connected”
teaching and learning is here to stay and has
eclipsed the notion that we’ve always known of
“blended” teaching and learning.
Teachers will need a partner in learning willing
to lean into the need for a connected experience
underpinned by smart technology that puts the
educator at the center. A partner that can help
them navigate and thrive in this new connected
era, and leverage the full power and promise of
technology as they strive to fully meet the learning
and social-emotional needs of each child.
While the ratio of students
to devices will be 1:1 in
the new era, the ratio of
teachers to students will
likely remain close to 1:25.
4 | Houghton Mifflin Harcourt 2020 Annual Report
4 | Houghton Mifflin Harcourt 2020 Annual Report
We are on the
cusp of a new
era in teaching
and learning.
HMH: A
Trusted Partner
in Education
HMH is that trusted partner in education. Our
community is united by our commitment to
delivering connected learning solutions that
g
g
are effective, engaging, and equitable.
free daily activities and learning tasks for
Our commitment has remained constant.
From the onset of the COVID-19 pandemic,
HMH quickly mobilized into action to provide
schools, educators, and students with a
multi-tiered response. We swiftly established
a wide-ranging collection of flexible learning
opportunities and offerings to enable
continued access to high-quality materials.
continued at-home learning; expert, targeted
support for superintendents; book donations
to our nonprofit partners; and more.
Our comprehensive support reflected a
simple, important objective: enabling teaching
and learning anytime, anywhere. Through
a combination of empathy, creativity, and
diligence in exploring the problem space of
This included expanded access for districts
our customers, we innovated this year in ways
to our programs and services; use of our
AI-driven personalized learning platforms;
that provided value to those we serve – and
propelled us forward as a company.
Houghton Mifflin Harcourt 2020 Annual Report | 5
2020 Review
I am very proud of the progress we made
in 2020. We built the foundation for growth
momentum in 2021 – growth in digital
sales, recurring revenue, and profitability –
transforming our business and keeping our
customers’ needs front and center.
In 2020, we sharpened our focus on learning
This year also sparked a national reckoning
technology, providing innovative connected
around racial justice. It underscored our
solutions for our customers that deliver more
collective responsibility to examine and
impact and more successful outcomes. We
grew our connected sales nationwide, which
disrupt the pervasive systems of inequity and
dehumanizing effects of racism across our
made up 50% of our education billings in 2020,
society. As a company that reaches nearly
while also growing our SaaS business by 142%
every student and teacher in America, as well
and digital platform usage by over 300%.
as countless readers around the world, we
We launched HMH Anywhere, a SaaS-based
solution designed to support all subjects, all
students, and all teachers – whether they
are in-person, remote, or in a hybrid model.
We brought to market new products and
innovations that were acclaimed by the
industry, including the Webby, CODiE, EdTech
Breakthrough Award, EdTech Digest Cool Tools
Award, and Tech & Learning Award.
knew we had to focus even more deeply and
urgently on how to be a part of the solution.
We built upon a number of key initiatives
already rooted in this critical work, including our
continued sponsorship of Innovation for Equity
and the formalization of our company-wide
Diversity, Equity and Inclusion (DEI) program.
Our team also contributed more than 3,700
hours of service to our communities, including
working hard to do our part in the pursuit of
social justice.
We grew our connected sales
nationwide, which made up 50% of our
education billings in 2020, while also
growing our SaaS business by 142% and
digital platform usage by over 300%.
6 | Houghton Mifflin Harcourt 2020 Annual Report
In 2020, we announced our intention to
explore a potential sale of the HMH Books
& Media business. As we further advance
our learning technology strategy, we believe
this is the right time to focus our portfolio
and look to maximize shareholder value. We
remain proud of our trade publishing heritage
recurring subscription revenue base, simplify
and legacy as well as the strength and
and legacy, as well as the strength and
and strengthen o r b siness model red ce
and strengthen our business model, reduce
innovation HMH Books & Media demonstrated
costs, and generate sustained and positive
in 2020, continuing to deliver award-winning
free cash flow.
multimedia content against all odds. When
bookstores closed due to the COVID-19
pandemic, our Books & Media team quickly
developed a new process for creating digital
advanced reader copies in various formats,
and pivoted to new digital publicity and
marketing practices.
In 2020, we also announced and implemented
a strategic restructuring of our business to
accelerate our digital transformation – to
To achieve these cost reductions, we
eliminated activities and roles that were
print-centric across the business, and focused
instead on building roles and activities to
support our digital first, connected strategy.
We also increased the number of inside sales
representatives, transitioned our professional
services team to virtual-first, and began
establishing digital-first pricing, key metrics,
and other best practices to enable HMH to
drive billings growth, position us to build our
build and retain recurring revenue.
Houghton Mifflin Harcourt 2020 Annual Report | 7
We have confidence and
renewed optimism as we
look to 2021 and feel we
have a strong foundation
for our future.
8888888 | Houghton Mifflin Harcourt 2020 Annual Report
8 | Houghton Mifflin Harcourt 2020 Annual Report
Throughout the year, we took decisive steps to strengthen our financial position in light of
the COVID-19 pandemic – enabling us to weather the crisis and emerge even stronger. Our
business demonstrated resiliency as we achieved our guidance provided in November 2020 and
delivered positive free cash flow for the year. On a consolidated basis, the company generated
$1.031 billion in net sales and $1.089 billion of billings for 2020.
In our Education Segment, billings were adversely impacted by the smaller adoption opportunity
as well the global pandemic. We delivered Core Solutions billings of $453 million. Our Extensions
business generated billings of $445 million in 2020. HMH Books & Media delivered billings of $192
million in 2020, which represents 7% growth over 2020.
Our performance in 2020 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)
Year Ended December 31
Net sales
Change in deferred revenue
Billings1
Impairment charge for goodwill
Net loss
Adjusted EBITDA2
Pre-publication or content development costs
Net cash provided by operating activities
Free cash flow2
2020
$1,031
58
1,089
279
(480)
132
(61)
115
3
2019
Change
$1,391
(25.8)%
201
1,591
—
(214)
166
(103)
255
115
(71.0)%
(31.5)%
Not
meaningful
Not
meaningful
(20.5)%
40.2%
(54.8)%
(97.4)%
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 2020, our solutions-oriented team delivered significant strategic progress and execution in the
face of unprecedented challenges. We have confidence and renewed optimism as we look to 2021
and feel we have a strong foundation for our future.
Houghton Mifflin Harcourt 2020 Annual Report | 9
Achievements
Through HMH
Strategy: A Strong
Foundation For
Our Future
Three years ago, we unveiled a transformational
disciplines, along with a portfolio of best-in-
strategy for success. It was our roadmap to
2020, with three key pillars: enhance and extend
the core, develop integrated solutions and
achieve operational excellence. I’m incredibly
proud of our team for what we’ve accomplished
together through this strategy.
We’ve built one connected platform for all our
products and services to support all subjects,
all students and all teachers anywhere, whether
class supplemental and intervention offerings.
In addition, we’ve begun to transition to
a subscription-based business model
that provides continuous updates and
improvements to our customers, generates
recurring revenue and is a powerful value
proposition to our shareholders. We’ve
established an entirely new operating model
and a new way of working. This is a very strong
instruction is provided in-person, remote, or
foundation for HMH that benefits both our
in a hybrid model. This includes new, next
customers and our shareholders.
generation programs in all four major core
10 | Houghton Mifflin Harcourt 2020 Annual Report
Now, as we look to enhance that strong foundation over the next three years, we have to answer
one essential question: how do we create customer success? More specifically, what “experience”
do we want our teachers to have with our products and services to help them produce the
“outcomes” they aim to achieve for their students?
Our strategy to do that is Digital First, Connected. This strategy to 2023 has three pillars:
1
2
3
Grow Our Digital First,
Connected Business
Deepen Customer
Engagement & Increase
Customer Outcomes
Optimize Our Digital
Transformation
Through this strategy, we will create digital, connected, coherent, and compelling solutions
that will enable us to become the largest instructional materials EdTech company in K-12. We’ll
continue to optimize the end-to-end customer journey by creating deep user engagement that
leads to successful student outcomes. We’ll create a digitally mature organization and business
and install the next generation of connected digital operations and infrastructure internally. And,
we’ll develop rich talent, execution capacity, culture, and leadership – to support and drive our
digital first, connected strategy.
We will continue to share our progress with new key reporting metrics on a go-forward basis,
including the percentage of our Education billings that are digital and connected, our Annual
Recurring Revenue, and our Net Retention Rate to offer deeper insight about our subscription
growth. As we deliver more and more of our product digitally, we expect our adjusted variable
costs to decrease. And as our internal operations continue to mature digitally, we expect to be
more responsive to our customers and to support them more efficiently.
Houghton Mifflin Harcourt 2020 Annual Report | 11
Looking Ahead
2020 was a year that underscored our mission, and reminded us of the difference HMH has made
in bringing about change in our world – a world where learning is the instrument for transforming
individual lives, restoring communities, and making our society a more tolerant, more just, and
more inclusive place for all.
We are proud of what we accomplished this year. Booker T. Washington once said, “Success is
to be measured not so much by the position that one has reached in life as by the obstacles
which [they] have overcome.” Our HMH team faced all of the challenges the pandemic brought
us, and together we overcame them and became a stronger company as a result.
This extraordinary year highlighted what we already knew – we at HMH are a force for good
and a force for change. That’s Our Stand.
Jack Lynch
President and Chief Executive Officer
12 | Houghton Mifflin Harcourt 2020 Annual Report
Reconciliations of Billings and Non-
GAAP Financial Measures to GAAP
Financial Measures
To supplement our financial statements
makes decisions based on it. In addition,
presented in accordance with Generally
targets in adjusted EBITDA (further adjusted
Accepted Accounting Principles (GAAP)
to include the change in deferred revenue)
and to provide additional insights into our
are used as performance measures to
performance (for a completed period and/
determine certain incentive compensation
or on a forward-looking basis), we have
of management. Management also believes
presented adjusted EBITDA and free cash
that the presentation of free cash flow
flow. These measures are not prepared in
provides useful information to our investors
accordance with GAAP. This information
because management regularly reviews these
should be considered as supplemental in
metrics as an important indicator of how
nature and should not be considered in
much cash is generated by general business
isolation or as a substitute for the related
operations, excluding capital expenditures,
financial information prepared in accordance
and makes decisions based on it.
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.
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
Management believes that the presentation
do not include certain items not included and/or
of adjusted EBITDA provides useful information
to our investors and management as an
indicator of our performance that is not
affected by debt restructurings, fluctuations
in interest rates or effective tax rates, gain or
losses on investments, non-cash charges and
impairment charges, or levels of depreciation
or amortization along with costs such as
severance, separation and facility closure
costs, acquisition/disposition-related activity
costs, restructuring costs and integration
included in the most directly comparable GAAP
measure. Adjusted EBITDA should be considered
in addition to, and not as a substitute for, net
income or loss prepared in accordance with
GAAP as a measure of performance; and free
cash flow should be considered in addition
to, and not as a substitute for, net cash from
operating activities prepared in accordance
with GAAP. Adjusted EBITDA is not intended to
be a measure of liquidity nor is free cash flow
intended to be a measure of residual cash
costs. Accordingly, management believes
flow available for discretionary use. You are
that this measure is useful for comparing
cautioned not to place undue reliance on
our performance from period to period and
these non-GAAP measures.
Houghton Mifflin Harcourt 2020 Annual Report | 13
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, 2020 filed with the SEC:
($ in millions)
Net sales
Change in deferred revenue
Billings
20201
$1,031
58
$1,089
20191
$1,391
201
$1,591
The following is a reconciliation of our net loss prepared in accordance with GAAP to Adjusted
EBITDA as disclosed by the Company in our Annual Report on Form 10-K for the year ended
December 31, 2020, filed with the SEC:
($ in millions)
Net loss
Interest expense
Interest income
Provision (benefit) for income taxes
Depreciation expense
Amortization expense film asset
Amortization expense
Non-cash charges – goodwill impairment
Non-cash charges – stock compensation
Non-cash charges – loss (gain) on derivative instruments
Inventory obsolescence related to strategic transformation plan
Fees, expenses or charges for equity offerings, debt or Acquisitions
Restructuring/severance and other charges
Gain on investments
Loss on extinguishment of debt
Adjusted EBITDA
20201
$(480)
20191
$(214)
66
(1)
(12)
51
14
172
279
12
(1)
-
1
34
(2)
-
49
(3)
4
61
10
201
-
14
1
10
6
22
-
4
$132
$166
The following is a reconciliation of cash flows from operating and investing activities to free cash
flow as disclosed by the Company in our Exhibit 99.1 to current report on form 8-K for the year
ended December 31, 2020 filed with the SEC:
($ in millions)
Cash flows from operating activities
Net cash provided by operating activities
Cash flows from investing activities
Additions to pre-publication costs
Additions to property, plant, and equipment
Free Cash Flow
1 Details may not sum to total due to rounding.
14 | Houghton Mifflin Harcourt 2020 Annual Report
20201
20191
$115
(61)
(51)
$3
$255
(103)
(38)
$115
HMH Leadership
John J. Lynch, Jr.*
President and Chief
Executive Officer
Joseph P. Abbott, Jr.*
Executive Vice President,
Chief Financial Officer
William F. Bayers*
Executive Vice President,
Secretary, and General
Counsel
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
Alejandro Reyes*
Senior Vice President
and Chief People Officer
Ed Spade
Interim President, HMH
Books & Media
*Executive officers as defined under Rule 3b-7 promulgated under
the Securities Exchange Act of 1934, as amended.
Houghton Mifflin Harcourt 2020 Annual Report | 15
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, 2020
☐ 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 registrant’s 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
g
The Nasdaq Stock Market LLC
Title of each class
Common Stock, $0.01 par value
g
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
d
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
ff
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report. ☒
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, 2020, was approximately $161.3 million.
The number of shares of common stock, par value $0.01 per share, outstanding as of February 1, 2021 was 126,121,144.
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 Registrant’s 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,
2020.
Table of Contents
Special Note Regarding Forward-Looking Statements .................................................................................
PART I
Item 1.
Business........................................................................................................................................
Item 1A. Risk Factors ..................................................................................................................................
Item 1B. Unresolved Staff Comments.........................................................................................................
Properties......................................................................................................................................
Item 2.
Legal Proceedings ........................................................................................................................
Item 3.
Mine Safety Disclosures...............................................................................................................
Item 4.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities ......................................................................................................................
Selected Financial Data ................................................................................................................
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ......
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .....................................................
Financial Statements and Supplementary Data ............................................................................
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......
Item 9A. Controls and Procedures...............................................................................................................
Item 9B. Other Information.........................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance ...........................................................
Executive Compensation ..............................................................................................................
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Item 12.
Matters..........................................................................................................................................
Certain Relationships and Related Transactions, and Director Independence.............................
Principal Accounting Fees and Services ......................................................................................
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Exhibits, Financial Statement Schedules......................................................................................
Form 10-K Summary....................................................................................................................
SIGNATURES.......................................................................................................................
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124
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained herein include forward-looking statements, which involve risks and uncertainties.
These forward-looking statements can be identified by the use of forward-looking terminology, including the terms
“believes,” “estimates,” “projects,” “anticipates,” “expects,” “could,” “intends,” “may,” “will,” “should,” “forecast,”
“intend,” “plan,” “potential,” “project,” “target” or, in each case, their negative, or other variations or comparable
terminology. Forward-looking statements include all statements that are not statements of historical facts. They
include statements regarding our intentions, beliefs or current expectations concerning, among other things, our
results of operations; financial condition; liquidity; prospects, growth and strategies; the expected impact of the
COVID-19 pandemic; our competitive strengths; the industry in which we operate; the impact of new accounting
guidance and tax laws; expenses; effective tax rates; future liabilities; the outcome and impact of pending or
threatened litigation; decisions of our customers; education expenditures; population growth; state curriculum
adoptions and purchasing cycles; the impact of dispositions, acquisitions and other investments; the timing, structure
and expected impact of our operational efficiency and cost-reduction initiatives and the estimated savings and
amounts expected to be incurred in connection therewith; and potential business decisions. We derive many of our
forward-looking statements from our operating budgets and forecasts, which are based upon many detailed
assumptions. We caution that it is very difficult to predict the impact of known factors, and, of course, it is
impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are
based upon information available to us on the date of this report.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and
depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements
are not guarantees of future performance and that actual results may differ materially from those made in or
suggested by the forward-looking statements contained herein. In addition, even if actual results are consistent with
the forward-looking statements contained herein, those results or developments may not be indicative of results or
developments in subsequent periods.
Important factors that could cause actual results to vary materially from expectations include, but are not
limited to, those described in the “Risk Factors” section of this Annual Report on Form 10-K (this “Annual
Report”).
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 technology company committed to delivering connected solutions that engage learners,
empower educators and improve student outcomes. As a leading provider of Elementary and Secondary School (K–
12) core curriculum, supplemental and intervention solutions, and professional learning services, we partner with
educators and school districts to uncover solutions that unlock students’ potential and extend teachers’ capabilities.
We estimate that we serve more than 50 million students and three million educators in 150 countries, while our
award-winning children’s 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 district’s needs, goals
and technological readiness.
For nearly two centuries, our HMH Books & Media segment has brought renowned and awarded children’s,
fiction, non-fiction, culinary and reference titles to 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
Whole 30, The Best American Series, the Peterson Field Guides, CliffsNotes, and The Polar Express, and published
distinguished authors such as Tim O’Brien, Temple Grandin, Tim Ferriss, Kwame Alexander, Lois Lowry, and
Chris Van Allsburg. In November 2020, we announced that we were beginning to explore a potential sale of the
HMH Books & Media segment. Such a sale would be intended to build on the Company’s other strategic
restructuring efforts and further align its cost structure to its digital-first strategy.
Market Overview
We operate predominantly within the U.S. K-12 education market, which represents over $740 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, over 3.7 million teachers and 56.4 million total student enrollment across public, private and charter
schools. From Fall 2020 to Fall 2029, total elementary and secondary school enrollment, an important driver of
long-term growth in the K-12 Education market, is projected to increase by 0.8% to 56.8 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 8% 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. The COVID-19 pandemic has had an adverse impact on tax revenues and other financial
resources in some states, which could adversely affect state and local spending on public schools, although it is
expected that federal pandemic relief funding will help to mitigate those impacts. The Coronavirus Aid, Relief, and
Economic Security (“CARES”) Act and the Coronavirus Response and Relief Supplemental Appropriations Act of
2021 collectively provide $112.7 billion one-time emergency support for education through an Education
Stabilization Fund, including $67.8 billion exclusively designated for public K-12 education. Public K-12 education
has been, and remains, a high priority for political leaders, historically 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 (“ESEA”), 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.
Title I, the largest program within ESEA, and other ESEA programs 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. Generally, school
districts are permitted to spend ESEA funds on instructional materials, including 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. Content standards in English language arts and reading in many
states are modeled to varying degrees after Common Core State Standards (“CCSS”) and in science after the Next
Generation Science Standards (“NGSS”). Both the CCSS and NGSS are products of state-led collaborations. The
promulgation of these model standards has led to greater consistency among states’ content standards 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 teacher’s 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 National Center for Education Statistics estimated the student population in adoption states
represented approximately half of the U.S. public school elementary and secondary school-age population in 2020.
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
approximately $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 2019, more than 60 percent of public
school students tested below proficiency in most grade levels 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 Title I and other
federal funding allocations pursuant to the ESEA 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.
One important source of funding for professional learning in the K-12 market is Title II, Part A of ESEA,
Supporting Effective Instruction. Title II, Part A focuses on the role of the profession in improving student
achievement and requires that funds be used to support professional development that is sustained, job-embedded,
data-driven, and personalized. There are also significant funding opportunities for professional learning as part of
state programs, especially in states that 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 approximately $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 340,000
new teachers hired every year and approximately 44% of teachers leaving within their first five years in the
profession, a trend that may accelerate as a result of the COVID-19 pandemic.
Consumer Book Publishing
The consumer book publishing market includes children’s, 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 2018 and 2019, the consumer book publishing market grew 0.4% to $16.2 billion, according to the
Association of American Publishers (the “AAP”). Since 2015, the same market has increased by 2.6%, or
approximately $410 million, according to the AAP.
Print remains the primary format in which consumer books are produced and distributed and accounts for
74.7% of revenue. Hardback units account for 36.0% of total consumer book revenue despite representing only
24.2% of total consumer book units sold in 2019, per the AAP.
Digital formats show mixed results as downloaded audio sales grew 15.9% from 2018 to 2019 and 143.8%
from 2015 to 2019; however, ebook revenue fell 4.9% from 2018 to 2019 and declined 30.8% from 2015 to 2019,
according to the AAP.
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 81%, 87% and 85% of our total net sales for the years ended December 31, 2020, 2019 and 2018,
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 $839.6 million and $145.9 million,
$1,210.6 million and $196.9 million, and $1,122.7 million and $210.6 million for the years ended December 31,
2020, 2019 and 2018, respectively, with our 2020 financial results being adversely impacted by the COVID-19
pandemic. 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 50% and 54% of our Education segment billings for the years ended
December 31, 2020 and 2019, 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. 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.
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 50% and 46% of our
Education segment billings for the years ended December 31, 2020 and 2019, 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.
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•
•
•
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Through our Heinemann brand, we provide professional books, supplemental and intervention
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 also 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.
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.
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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
The Whole30.
including the How to Cook Everything series and
g
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, 2020, 2019 and 2018, HMH Books & Media net sales and Adjusted
EBITDA were approximately $191.7 million and $26.6 million, $180.0 million and $14.9 million, and
$199.7 million and $21.9 million, respectively.
In November 2020, we announced that we were exploring a potential sale of the HMH Books & Media
segment. Such a sale would be intended to build on the Company’s other strategic restructuring efforts and further
align its cost structure to its digital-first strategy.
Seasonality
Approximately 81% of our net sales for the year ended December 31, 2020 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 66% 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.
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
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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, Stride Inc. (formerly K-12 Inc.), 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 49% of our printing requirements
handled by a small group of suppliers. We have procurement agreements that provide volume and scheduling
flexibility and price predictability. We have a longstanding relationship with these parties. Approximately 22% of
our printed materials (consisting primarily of teacher’s editions and other ancillary components) are printed outside
of the U.S. and approximately 78% 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 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.
Human Capital
As of December 31, 2020, we had approximately 2,600 full-time, part-time and temporary employees, none of
whom were covered by collective bargaining agreements. We consider our relationship with our employees
generally to be good.
Health and Safety: The health and safety of our employees is one of our highest priorities, and this is
consistent with our operating philosophy. Following Occupational Safety and Health Administration best practices
in our distribution centers, we measure, document and post incident rates for safety transparency; host local
employee safety committees at each distribution center; and hold quarterly distribution center safety committee
meetings for cross-location collaboration. In response to the COVID-19 pandemic, we have implemented and
continue to implement additional safety measures in all our offices and facilities including: adding work from home
flexibility; adjusting attendance policies to encourage those who are sick to stay home; increasing cleaning protocols
across all locations; initiating regular communication regarding impacts of the COVID-19 pandemic, including
health and safety protocols and procedures; implementing temperature screening of employees at our distribution
facilities and offices; establishing new physical distancing procedures for employees who need to be onsite;
providing additional personal protective equipment and cleaning supplies; modifying work spaces with plexiglass
dividers and touchless faucets; implementing protocols to address actual and suspected COVID-19 cases and
potential exposure; prohibiting all domestic and international non-essential travel for all employees; and requiring
masks to be worn in all locations where permitted by local law.
Talent and Development: Successful execution of our strategy is dependent on attracting, developing and
retaining key employees and members of our management team. The skills, experience and industry knowledge of
our employees significantly benefit our operations and performance. We continuously evaluate, modify, and
enhance our internal processes and technologies to increase employee engagement, productivity, and efficiency. In
2020, we provided a company-wide employee engagement survey to all regular employees. We outperformed
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benchmarked peer companies with engagement among our employees in the 86th percentile. Frequent employee
pulse surveys were conducted during 2020 in light of the COVID-19 pandemic, allowing us to quickly collect and
respond to feedback – including with more activities and initiatives to support our employees. We additionally
continue to provide all of our employees with a variety of training and development opportunities. All regular
employees have access to Knowledge Network, HMH’s online learning management system offering over 6,000 on
demand training courses and programs, live webinars and in-person training opportunities. More than 2,900
employees participated in training programs in 2020, including Unconscious Bias, Cybersecurity, Sales, Product and
Compliance Training as well as Leadership and Management Development Workshops, with more than 15,000
corporate training hours logged.
Diversity and Inclusion: We embrace the diversity of our employees, customers and stakeholders, including
their unique backgrounds, experiences, thoughts and talents. Everyone is valued and appreciated for their distinct
contributions to the growth and sustainability of our business. We strive to cultivate a culture and vision that
supports and enhances our ability to recruit, develop and retain diverse talent at every level. We take direct actions
to attract, hire, and retain more diverse talent, nurture an inclusive workplace, and create opportunities for
meaningful conversations about diversity. We aim to increase the diversity of our employee base by growing our
diverse talent pipeline, including partnerships with organizations like Resilient Coders, Girls Write Now, Hacker X,
and Editors of Color. We have a goal to build a highly engaged team by increasing retention year over year. As of
December 31, 2020, our domestic workforce was approximately 67% female and approximately 77% white,
approximately 9% Hispanic or Latino, approximately 8% Black or African American, approximately 5% Asian
American, and approximately 1% two or more races or other. Additionally, as of December 31, 2020, approximately
38% of executive management roles were held by women and our executive management team was approximately
77% white, approximately 15% Black or African American, and approximately 8% Hispanic or Latino.
As a learning technology company, we are committed to ongoing opportunities for education and growth. This
includes formal and informal opportunities for meaningful conversations—from roundtable discussions to company-
wide unconscious bias training. Learning and unlearning are lifelong practices that we must actively foster—in our
schools, communities, and workplaces. Our cross-functional DEI (“Diversity, Equity and Inclusion”) Council’s
work centers around four pillars—leadership, talent, culture, and business—and promotes social justice through
Employee Resource Groups (“ERGs”), DEI trainings, and discussions on how to build an anti-racist community. We
have ERGs to support Black and African American, Latinx and Hispanic, LGBTQ+, Asian, disabled and
neurodiverse, and female employees, in addition to ERGs focused on mental health and wellness. The ERGs hosted
virtual activities throughout 2020.
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 author’s 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 author’s 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.
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
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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 2020 progress highlights
were: 99% of HMH purchased paper for education products was manufactured with no less than 10% recycled
fiber; 87% 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 2020, HMH estimates that it saved 332,000 pounds
of CO2 emissions by managing our carbon footprint by consolidating shipments and shipping directly from
vendors to end recipients when possible.
HMH participates in the Environmental Protection Agency’s (“EPA”) SmartWay program. The EPA’s
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 2020, HMH estimates that it saved 130,000 pounds of CO2 emissions 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.
•
Donation is HMH’s preferred method of disposal for excess books and materials (rather than
destruction) and HMH donated more than one million books to 228 organizations during 2020.
96% of the waste generated at HMH’s 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
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We continue to strive to reduce energy consumption at our HMH Warehouses and related offices
through:
•
•
•
•
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 HMH’s 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.
Human Rights & Conduct
Our values guide every aspect of our work. We believe that respecting and protecting human rights is
fundamental to our work as a responsible company. We align with the United Nations Universal Declaration
of Human Rights and other international human rights laws and standards and strive to embody these values in
our culture. We seek to embed respect for human rights across our business and with vendors and suppliers
with whom we do business as set forth in our Supplier Code of Conduct.
Diversity, Equity and Inclusion
At HMH, we believe in social justice. The critical work to improve diversity, equity and inclusion is an
inward and outward process—we are constantly seeking new ways to better our own culture as we strive to
better our world. We aim to create and cultivate an employee community, company culture and business
strategy that reflects the diverse demographics and perspectives of our customers. Further, we embrace the
diversity of our employees, customers and stakeholders, including their unique backgrounds, experiences,
thoughts and talents. We strive to cultivate a culture and vision that supports and enhances our ability to
recruit, develop and retain diverse talent at every level. We take direct actions to nurture an inclusive
workplace.
In 2020, we established a DEI Council made up of a cross-functional, diverse group of employees. The
DEI Council supports our company-wide DEI efforts and takes actionable steps toward reaching our DEI
goals. The council supports HMH’s Employee Resource Groups, DEI trainings, and discussions on how to
build HMH as a model antiracist community. In 2020, we also named a Director of Diversity, Equity and
Inclusion to guide our DEI work, engaging critical stakeholders company-wide in our DEI goals and areas of
focus. Last year, we provided opportunities for education and growth, including formal and informal
opportunities for meaningful conversations — namely, antiracism roundtable discussions and company-wide
unconscious bias training for managers.
As a learning technology company focused on empowering students and teachers, it is our responsibility
to build content and provide services and resources that foster a holistic understanding of our world and honor
the diverse communities we serve. As an organization, we too are always learning and growing, and we will
continue to be intentional about improvements we make as part of our continuous evolution. To that end, we
established a Content Review Panel – a cross-disciplinary internal advisory board that focuses on equity,
inclusion, and diversity in our solutions. The panel reviews our content, striving for equitable, nonbiased, and
sensitive treatment and representation for all individuals, communities, and experiences across all HMH
programs, services, and platforms. In 2020, the Content Review Panel reviewed over 4,000 pages of content,
including a full, proactive review of Math180 and Confronting Racism curriculum.
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As outlined in our Content, Equity, Inclusion and Diversity pledge available on our website at
https://www.hmhco.com/diversity-equity-inclusion/our-world, we are committed to producing curriculum in
which all students can see themselves and the possibilities for their future success. Our programs are strongest
when they resonate with learners, inspire connections and spark dialogue, and honor the unique qualities and
experiences of every learner.
In 2020, a cross-functional Supplier Diversity Council was formed to drive HMH’s Supplier Diversity
Program forward. The council is focused on fostering meaningful partnerships with diverse suppliers in all
areas of HMH’s business – aiming to establish new partnerships with small and diverse suppliers while also
deepening relationships with diverse suppliers that HMH already works with. As part of our commitment to
supplier diversity, HMH is a member of the National Minority Supplier Development Council and the
Women’s Business Enterprise National Council.
COVID-19 Safety Initiatives
At HMH, employee safety and welfare is one of our highest priorities. The COVID-19 pandemic has
required additional healthy and safety measures be implemented company-wide. Upon daily arrival at our
Distribution Centers, all employees, vendors and visitors are screened by medical personnel for COVID-19
symptoms or exposures. HMH staff and visitors wear masks to help prevent community spread. Breaks and
lunches are staggered to maintain CDC-guided social distancing. Workstations are sanitized daily and shared
equipment is sanitized after each use. In the event an employee is sick or under quarantine with COVID-19,
they will receive full COVID-pay. If an employee has been in a facility and has tested positive for COVID-
19, the entire facility is closed for 24-48 hours and is sanitized before anyone can return.
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
Risks Related to the COVID-19 Pandemic
The ongoing COVID-19 pandemic has had, and are likely to continue to have, material adverse effects on our
business, financial position, results of operations and cash flows.
Our business and financial results has been negatively impacted by the current COVID-19 pandemic which
has had, and is likely to continue to have, negative impacts on our business, including causing significant volatility
in demand for our products, our ability to service our customers, changes in consumer behavior and preference,
disruptions in our supply chain operations and warehousing operations, limitations on our employees’ ability to
work and travel, adverse impacts on third parties upon which we rely, our ability to satisfy our debt and other
obligations, our liquidity, declines in state revenues and related impacts on educational budgets, and significant
changes in the economic or political conditions in markets in which we operate, both near-term and potentially long-
term. Moreover, significant uncertainties exist regarding the format and other safety procedures schools may follow
at various points during the school year. The decisions various schools make with regards to in-person and/or remote
learning and whether to deviate from a chosen format due to outbreaks will impact demand for our products and
services in ways that we cannot predict and may be challenging for us to respond to. Despite our efforts to manage
these risks, their ultimate impact will depend on factors beyond our knowledge or control, including the duration and
severity of the current pandemic and actions taken to contain its spread and mitigate its public health effects.
state revenues and related impacts on educational budgets,
Risks Related to Our Industry and Operations
p
y
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. The economic slowdown resulting from the COVID-19 pandemic has had a
negative impact on tax revenues and other financial resources in some states and localities, which could adversely
affect public school finances and spending in those places, including for instructional materials and professional
learning services.
Some states, including most 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 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,
supplemental and professional learning products and services.
Federal and state legislative and policy changes can also affect our business. At the federal level, ESEA
governs to a significant degree how states approach assessment and accountability, support and improvement of low
performing schools, and take into account evidence of effectiveness in adopting strategies and selecting educational
products and services paid for with federal funds. Changes in ESEA and/or state legislation and administrative
policy decisions on matters such as assessment and accountability, curriculum and intervention could affect demand
for our products.
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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 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. 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.
State adoptions can be delayed, postponed or cancelled—sometimes with little or no warning and after we
have made significant investments in anticipation of the adoption—due 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 state’s adoption schedule. A substantial delay, postponement or cancellation of a large 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 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.
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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, Stride Inc. (formerly K-12 Inc.),
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 source
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.
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, Tennessee, and Texas, are
funding development of OER or have done so in the past. In addition, not-for-profit organizations such as the Gates
Foundation and the Hewlett Foundation have supported the development of open source educational content that can
be made available to educational institutions for free or at 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.
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.
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
18
sales and other key personnel at economically reasonable compensation levels could materially and adversely affect
our ability to operate profitably and grow our business.
We have announced our intent to explore a sale of our HMH Books & Media business, and such proposed
divestiture may introduce significant risks and uncertainties.
In order to position our business to move forward with our digital first, connected K-12 strategy, we have
announced our intent to explore a sale of our HMH Books & Media business. We have also divested and may in the
future divest certain assets or businesses that no longer fit with our strategic direction or growth targets. Divestitures
involve significant risks and uncertainties that could adversely affect our business, results of operations and financial
condition. These include, among others, the inability to find potential buyers on favorable terms, disruption to our
business and/or diversion of management attention from other business concerns, difficulties in separating the
operations of the divested business and retention of certain liabilities related to the divested business.
Risks Related to Operations and Strategic Plans
p
g
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 management’s attention from existing operations, all of which
could materially and adversely affect our business, results of operations and financial condition.
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.
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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 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 a small group of vendors that
handle approximately 49% 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.
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, 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.
y
Risks Related to Information Technology Systems and Cybersecurity
gy y
y
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)
20
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.
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.
y
Risks Related to Financial Condition, Credit Facilities and Liquidity
q
,
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 81% of our net sales for the year ended December 31, 2020 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 into 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.
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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, 2020, 2019 and 2018, we generated operating losses of $429.1 million,
$163.2 million, and $90.5 million, respectively, and net losses of $479.8 million, $213.8 million, and $94.2 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 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.
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.
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, 2020, our contingent liability for all letters of credit
was approximately $18.8 million, of which $1.1 million were issued to backstop $1.4 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.
22
Our substantial level of indebtedness could adversely affect our financial condition and results of operations.
As of December 31, 2020, we had approximately $667.0 million ($643.7 million, net of discount and issuance
costs) of total indebtedness outstanding, comprised of $361.0 million of term loans and $306.0 million of senior
secured notes. Our substantial outstanding indebtedness could have important consequences, including the
following:
•
•
•
•
•
•
•
•
•
•
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;
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
$3.6 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
23
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. We had goodwill and
indefinite-lived intangible assets of approximately $438.0 million and $161.0 million and $717.0 million and $161.0
million as of December 31, 2020 and 2019, respectively. There was a goodwill impairment charge of $279.0 million
for the year ended December 31, 2020. There were no goodwill impairment charges for the years ended December
31, 2019 and 2018. There were also no impairment charges for indefinite-lived intangible assets for the years ended
December 31, 2020, 2019 and 2018.
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.
Risks Related to Laws and Regulations
g
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.
24
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 Children’s 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.
Changes in U.S. federal, state and local or foreign tax law, interpretations of existing tax law, or adverse
determinations by tax authorities, could increase our tax burden or otherwise adversely affect our financial
condition or results of operations.
We are subject to taxation at the federal, state or provincial and local levels in the U.S. and various other
countries and jurisdictions. The change in administration in the United States may lead to new tax legislative
initiatives. As any tax reform may result in further changes in tax laws and related regulations, our financial results
could be materially impacted. Given the unpredictability of these possible changes and their potential
interdependency, it is very difficult to assess whether the overall effect of such potential tax changes would be
cumulatively positive or negative for our earnings and cash flow, but such changes could adversely impact our
financial results.
Other Risks Related to Our Business
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,
25
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 management’s 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.
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.
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.
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 management’s time and attention. In addition, investigations may adversely impact our reputation, or lead
to litigation and financial impacts.
Item 1B. Unresolved Staff Comments
None.
26
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, 2020. 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)
NNew 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
Warehouse
Warehouse
Both segments
Education
2033
2029
2027
2022
2021
2027
2028
2025
2025
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. Refer to Note 15 of the Consolidated Financial Statements
included in Item 8. for a discussion of such matters.
Item 4. Mine Safety Disclosures
Not applicable.
27
Item 5. Market for Registrant’s 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 February 1, 2021, there were approximately six 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 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Liquidity and Capital Resources.”
28
Performance Graph. The graph below matches the cumulative return of holders of the Company’s 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, Stride Inc.
(formerly K-12 Inc.), and John Wiley & Sons, Inc. The graph assumes that the value of the investment in the
Company’s common stock, in each index (including reinvestment of dividends) was $100 on December 31, 2015
and tracks it through February 1, 2021. 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.
260
240
220
200
180
160
140
120
100
80
60
40
20
0
HMHC
NASDAQ Composite
Russell 2000
Peer Group
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
12/31/2020
2/1/2021
HMHC
NASDAQ Composite
Russell 2000
Peer Group
100
100
100
100
50
108
119
129
43
138
135
133
41
133
119
129
29
179
147
122
15
257
174
109
24
268
187
119
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, 2020.
Issuer Purchases of Equity Securities
There were no purchases of equity securities in the fourth quarter of 2020 and for the year ended
December 31, 2020.
29
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, 2020 and 2019 and for the years
ended December 31, 2020, 2019, and 2018 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,
2018, 2017 and 2016 and for the years ended December 31, 2017 and 2016 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 “Management’s 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 goodwill, 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 (expense) income
Interest expense
Interest income
Change in fair value of derivative instruments
Gain on investments
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
NNet 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:
NNet 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
2020 (1)
Years Ended December 31,
2018 (1)
2019 (1)
2017
2016
$
1,031,292
$
1,390,674
$
1,322,417
$
1,327,029
$
1,291,978
497,816
20,056
126,180
644,052
478,101
25,585
279,000
33,643
—
(429,089 )
(856 )
(65,959 )
899
672
2,091
—
—
(492,242 )
(12,404 )
(479,838 )
—
—
—
(479,838 )
(3.82 )
—
(3.82 )
125,455,487
281,200
69,105
2,021,126
643,692
90,463
$
$
$
$
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
$
$
$
$
115,248
(112,271 )
(18,130 )
254,975
(96,320 )
(115,667 )
61,331
50,940
110,309
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
$
$
$
$
104,748
(193,895 )
(7,330 )
111,785
(106,117 )
(37,960 )
131,282
55,092
146,535
118,603
103,152
162,193
Depreciation and intangible asset amortization
(1)
(2)
The 2018 amounts and all following years have been impacted by the January 1, 2018 adoption of the new revenue standard.
The 2020 and 2019 amounts have been impacted by the January 1, 2019 adoption of the new leases standard. Please refer to Note 9
included in Item 8. for further details.
30
Item 7. Management’s 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, 2019 compared to the year ended December 31, 2018
is included under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on
February 27, 2020.
Overview
We are a learning technology company committed to delivering connected solutions that engage learners,
empower educators and improve student outcomes. As a leading provider of K–12 core curriculum, supplemental
and intervention solutions, and professional learning services, we partner with educators and school districts to
uncover solutions that unlock students’ potential and extend teachers’ capabilities. We estimate that we serve more
than 50 million students and three million educators in 150 countries, while our award-winning children’s books,
novels, non-fiction, and reference titles are enjoyed by readers throughout the world.
For nearly two centuries, our HMH Books & Media segment has brought renowned and awarded children’s,
fiction, non-fiction, culinary and reference titles to 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
Whole 30, The Best American Series, the Peterson Field Guides, CliffsNotes, and The Polar Express, and published
distinguished authors such as Tim O’Brien, Temple Grandin, Tim Ferriss, Kwame Alexander, Lois Lowry, and
Chris Van Allsburg.
Recent Developments
COVID-19
Prior to the spread of COVID-19 in the United States, we experienced net sales results consistent with our
historical first quarters. As we proceeded through the first quarter of 2020 and the impact of the COVID-19
pandemic progressed, schools began to close in response to federal, state and local social distancing directives
resulting in a decline in net sales and sales orders in the second half of March 2020. We implemented a number of
measures intended to help protect our shareholders, employees, and customers amid the COVID-19 outbreak. We
also have taken actions to help mitigate some of the adverse impact of COVID-19 to our profitability and cash flow
in 2020, while working proactively with schools to support them through this period of disruption with virtual
learning resources.
Actions taken to mitigate the impact of COVID-19 on our business included: (1) director, executive and senior
leadership salary reductions, and for the majority of employees, a four-day work week with associated labor cost
reductions, in each case beginning in April 2020 and ceasing near the end of July 2020; (2) a freeze on spending not
directly tied to near-term billings, including a reduction in all discretionary spending such as marketing, advertising,
travel, and office supplies; (3) reduced inventory purchasing; (4) deferral of long-term capital projects not directly
contributing to billings in 2020; and (5) borrowing $150 million from our asset-backed credit facility as a pre-
emptive measure to mitigate against capital market disruptions. Further, we elected to defer the payment of our
employer payroll taxes allowed under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.
31
The majority of the HMH workforce has continued to work remotely subsequent to March 2020. The four-day
work week furlough program along with director, executive, and senior leadership salary reductions that we
announced in March 2020 ended by the end of July. The costs associated with ending the furlough program and the
salary reductions were subsequently mitigated by the 2020 Restructuring Plan discussed below. We also repaid
$50.0 million of our asset-backed credit facility at the end of June and repaid the remaining outstanding $100.0
million during July and currently have no drawn balance on our asset-backed credit facility. Further, the deferral of
the payment of our employer payroll taxes allowed under the CARES Act during 2020 was repaid in full in
December 2020.
Given the ongoing COVID-19 situation, our Education business will continue to be impacted during 2021,
and significant uncertainty is likely to persist in the marketplace. Additionally, our HMH Books & Media business
may continue to be impacted.
2020 Restructuring Plan
We are continuing to assess our cost structure amid the COVID-19 pandemic and in line with our Strategic
Transformation Plan announced in the fourth quarter of 2019, discussed below, to ensure our cost structure is
aligned to our net sales and long-term strategy. As part of this effort, on September 4, 2020, we finalized a voluntary
retirement incentive program, which was offered to all U.S. based employees at least 55 years of age with at
least five years of service. Of the eligible employees, 165 elected to participate representing approximately 5% of
our workforce. The majority of the employees voluntarily retired as of September 4, 2020 with select employees
leaving later in the year. Each of the employees received or will receive separation payments in accordance with our
severance policy.
On September 30, 2020, our Board of Directors committed to a restructuring program, including a reduction in
force, as part of the ongoing assessment of our cost structure amid the COVID-19 pandemic and in line with our
previously disclosed Strategic Transformation Plan. The reduction in force resulted in a 22% reduction in our
workforce, including positions eliminated as part of the voluntary retirement incentive program mentioned above,
and net of newly created positions to support our digital-first operations. The reduction in force resulted in the
departure of approximately 525 employees and was completed in October 2020. Each of the employees received or
will receive separation payments in accordance with our severance policy. The total one-time, non-recurring cost
incurred in connection with the 2020 restructuring program, inclusive of the voluntary retirement incentive program
(collectively the “2020 Restructuring Plan”), all of which represents cash expenditures, is approximately $33.6
million. These actions are aligned with our Strategic Transformation Plan launched in the fourth quarter of 2019 to
streamline the cost structure of the Company.
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 the 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.
32
Other Events
In November 2020, the Company announced that it will explore a potential sale of the HMH Books and Media
segment. Such a sale would be intended to build on the Company’s other strategic restructuring efforts and further
align its cost structure to its digital-first strategy.
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 81%, 87% and
85% of our total net sales for the years ended December 31, 2020, 2019 and 2018, respectively. Our HMH Books &
Media segment represented approximately 19%, 13% and 15% of our total net sales for the years ended
December 31, 2020, 2019 and 2018, 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 teacher’s
editions, formative assessments, supplemental materials, whole group instruction materials, practice aids,
educational games and professional services. The process through which materials and curricula are selected and
procured for classroom use varies throughout the United States. Currently, 19 states, known as adoption states,
review and approve new programs usually every six to eight years on a state-wide basis. School districts in those
states typically select and purchase materials from the state-approved list. The remaining states are known as open
states or open territory states. In those states, materials are not reviewed at the state level, and each individual school
or school district is free to procure materials at any time, although most follow a five-to-ten year replacement cycle.
The student population in adoption states represents approximately 50% of the U.S. elementary and secondary
school-age population. Some adoption states provide “categorical funding” for instructional materials, which means
that those state funds cannot be used for any other purpose. Our core curriculum programs typically have higher
deferred sales than other parts of the business. The higher deferred sales are primarily due to the length of time that
our programs are being delivered, along with greater component and digital product offerings. A significant portion
of our Education segment net sales is dependent upon our ability to maintain residual sales, which are subsequent
33
sales after the year of the original adoption, and our ability to continue to generate new business by developing new
programs that meet our customers’ evolving needs. In addition, our market is affected by changes in state curriculum
standards, which drive instruction, assessment and accountability in each state. Changes in state curriculum
standards require that instructional materials be revised or replaced to align to the new standards, which historically
has driven demand for core curriculum programs.
We also derive 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
Reader’s 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 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
•
•
•
•
•
•
•
•
•
general economic conditions at the federal or state level;
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.
34
We monitor the purchasing cycles for specific disciplines in the adoption states in order to manage our product
development and to plan sales campaigns. Our sales may be materially impacted during the years that major
adoption states, such as Florida, California and Texas, are or are not scheduled to make significant purchases. For
example, Texas adopted Reading/English Language Arts materials in 2018 for purchase in 2019 and 2020.
California adopted history and social science materials in 2017 for purchase in 2018 and continuing through 2020
and adopted Science materials in 2018 for purchase in 2019 and continuing through 2021. Florida called for K-12
English Language Arts materials in 2020 for purchase beginning in 2021 and has called for K-12 Mathematics for
review in 2021 and purchase beginning in 2022. Both Florida and Texas, along with several other adoption states,
provide dedicated state funding for instructional materials and classroom technology, with funding typically
appropriated by the legislature in the first half of the year in which materials are to be purchased. Texas has a two-
year budget cycle, and in the 2019 legislative session appropriated funds for purchases in 2019 and 2020. 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.
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 Handmaid’s Tale, The Polar Express, and
The Giver have benefited in popularity due to movie or series releases and have subsequently resulted in increased
r
trade sales.
We employ different pricing models to serve various customer segments, including institutions, government
agencies, consumers and other third parties. In addition to traditional pricing models where a customer receives a
product in return for a payment at the time of product receipt, we currently use the following pricing models:
•
•
Pay-up-front: Customer makes a fixed payment at time of purchase and we provide a specific
product/service in return; and
Pre-pay Subscription: Customer makes a one-time payment at time of purchase, but receives a stream of
goods/services over a defined time horizon; for example, we currently provide customers the option to
purchase a multi-year subscription to textbooks where for a one-time charge, a new copy of the work
text is delivered to the customer each year for a defined time period. Pre-pay subscriptions to online
textbooks are another example where the customer receives access to an online book for a specific
period of time.
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
35
content and platform development group. The expenses within cost of sales include variable costs such as paper,
printing and binding costs of our print materials, royalty expenses paid to our authors, gratis costs or products
provided at no charge as part of the sales transaction, and inventory obsolescence. Also included in cost of sales are
labor costs related to professional services and the non-capitalized costs associated with our content and platform
development group. We also include amortization expense associated with our customer-facing software platforms.
Certain products 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 asset’s
amortization. Under this method, the amortization expense recorded for a pre-publication cost asset is approximately
33% (year 1), 27% (year 2), 20% (year 3), 13% (year 4) and 7% (year 5). We utilize this policy for all pre-
publication costs, except with respect to our HMH Books & Media segment’s 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
$25.6 million for the year ended December 31, 2020) 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, 2020 was $25.6 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 (“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, 2020 was $66.0 million.
36
Results of Operations
Consolidated Operating Results for the Years Ended December 31, 2020 and 2019
Year Ended
Year Ended
December 31, December 31,
(dollars in thousands)
Net sales
Costs and expenses:
pre-publication amortization
Publishing rights amortization
Pre-publication amortization
Cost of sales
Selling and administrative
Other intangible asset amortization
Impairment charge for goodwill
Restructuring/severance and other charges
Operating loss
Other income (expense):
Interest expense
Interest income
Change in fair value of derivative instruments
Gain on investments
Income from transition services agreement
Loss on extinguishment of debt
Loss before taxes
Income tax (benefit) expense
Net loss
NM = not meaningful
2020
2019
$ 1,031,292 $ 1,390,674 $ (359,382)
Dollar
change
497,816
20,056
126,180
644,052
478,101
25,585
279,000
33,643
(429,089)
668,108
26,557
149,515
844,180
662,606
25,310
(170,292)
(6,501)
(23,335)
(200,128)
(184,505)
275
— 279,000
11,901
(265,925)
21,742
(163,164)
(856)
(65,959)
899
672
2,091
—
—
(492,242)
(12,404)
(1,023)
(17,181)
(2,258)
1,571
2,091
(4,248)
4,363
(282,610)
(16,605)
$ (479,838) $ (213,833) $ (266,005)
167
(48,778)
3,157
(899)
—
4,248
(4,363)
(209,632)
4,201
Percent
Change
(25.8)%
(25.5)%
(24.5)%
(15.6)%
(23.7)%
(27.8)%
1.1%
NM
54.7%
NM
NM
(35.2)%
(71.5)%
NM
NM
NM
NM
NM
NM
NM
Net sales for the year ended December 31, 2020 decreased $359.4 million, or 25.8%, from $1,390.7 million in
2019 to $1,031.3 million. The net sales decrease was driven by a $371.1 million decrease in our Education segment,
offset by a $11.7 million increase in our HMH Books & Media segment. Within our Education segment, the
decrease was primarily due to lower net sales in Extensions, which primarily consist of our Heinemann brand,
intervention and supplemental products as well as professional services, which decreased by $252.0 million from
$632.0 million in 2019 to $380.0 million. Within Extensions, net sales decreased due to lower sales of the
Heinemann’s Fountas & Pinnell Classroom, Calkins and LLI Leveled Literacy
products due to a difficult
comparison to prior year Texas K-6 sales coupled with the impact of the COVID-19 pandemic in 2020. Also,
contributing to the decrease was lower professional services with the decline of the in-person learning environment
as a result of the COVID-19 pandemic. Further, there were lower net sales from Core Solutions which decreased by
$119.0 million from $578.0 million in 2019 to $459.0 million, primarily due to the smaller new adoption market
opportunity in Texas ELA, along with impacts of the COVID-19 pandemic. Within our HMH Books & Media
segment, the increase in net sales was primarily due to $9.6 million of licensing revenue from a new production
series, a $3.4 million increase in licensing revenue attributed to the Carmen Sandiego series on Netflix, and strong
net sales of the frontlist titles The 99% Invisible City, Compromised and
d
aforementioned, was lower net sales of both Adult and Young Reader’s categories due to the closure of bookstores
during the COVID-19 pandemic and the corresponding delay in releases of new frontlist titles.
. Offsetting the
Defined Dish
d
d
37
Operating loss for the year ended December 31, 2020 unfavorably changed from a loss of $163.2 million in
2019 to a loss of $429.1 million, due primarily to the following:
• A $359.4 million decrease in net sales;
• An impairment charge for goodwill in 2020 of $279.0 million. This non-cash impairment is a direct
result of the adverse impact that the COVID-19 pandemic has had on the Company;
• A $11.9 million increase in costs associated with our restructuring/severance and other charges due to
$33.6 million of severance costs associated with the 2020 Restructuring Plan;
Partially offset by:
• A $184.5 million decrease in selling and administrative expenses, primarily due to lower labor costs
of $77.0 million, resulting from cost savings associated with our employee furlough initiative, which
began in April and ceased at the end of July, in response to COVID-19, our 2020 Restructuring Plan
and a freeze on hiring. Also, there was a decrease of $52.0 million of variable expenses such as
commissions and transportation due to lower billings. Further, there were lower discretionary costs of
$44.0 million primarily related to travel and expense reduction measures and marketing along with
lower depreciation expense of $11.0 million;
• A $170.3 million decrease in our cost of sales, excluding publishing rights and pre-publication
amortization, from $668.1 million in 2019 to $497.8 million, primarily due to lower billings. Our cost
of sales, excluding publishing rights and pre-publication amortization, as a percentage of sales, was
essentially flat year over year; and
• A $29.6 million decrease in net amortization expense related to publishing rights, pre-publication and
other intangible assets, primarily due to a decrease in pre-publication amortization attributed to the
timing and large amount of 2019 major product releases and, to a lesser extent, our use of accelerated
amortization methods for publishing rights amortization.
Retirement benefits non-service (expense) income for the year ended December 31, 2020 changed
unfavorably by $1.0 million due to the recognition of a $1.1 million settlement charge related to the pension plan
during 2020.
Interest expense for the year ended December 31, 2020 increased $17.2 million from $48.8 million in 2019 to
$66.0 million, primarily due to our 2019 Refinancing during the fourth quarter of 2019. Further, there was an
increase of $2.4 million of net settlement payments on our interest rate derivative instruments during 2020.
Interest income for the year ended December 31, 2020 decreased $2.3 million from $3.2 million in 2019 to
$0.9 million, primarily due to lower interest rates on our money market funds in 2020.
Change in fair value of derivative instruments for the year ended December 31, 2020 favorably changed by
$1.6 million due to foreign exchange forward contracts executed on the Euro that were favorably impacted by the
weakening of the U.S. dollar against the Euro.
Gain on investments for the year ended December 31, 2020 was $2.1 million and was related to the fair value
change in our equity interests in educational technology private partnerships.
Income from transition services agreement for the year ended December 31, 2019 was $4.2 million and was
related to transition service fees under the transition services agreement with the purchaser of our Riverside
Business pursuant to which we performed certain support functions through September 30, 2019. We had no income
from transition services agreement for the year ended December 31, 2020.
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. We had no loss on extinguishment of debt for the year
ended December 31, 2020.
38
Income tax (benefit) expense for the year ended December 31, 2020 decreased $16.6 million, from an
expense of $4.2 million in 2019, to a benefit of $12.4 million. The change was due to an income tax benefit
primarily due to the impairment charge on goodwill, which reduced related deferred tax liabilities. The effective tax
rate was 2.5% and (2.0%) for the years ended December 31, 2020 and 2019, respectively.
Adjusted EBITDA
To supplement our financial statements presented in accordance with GAAP, we have presented Adjusted
EBITDA, 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, gain or losses on investments, non-cash charges and impairment 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 to Adjusted EBITDA for the years ended December 31, 2020 and
2019:
NNet loss
Interest expense
Interest income
Provision (benefit) for income taxes
Depreciation expense
Amortization expense—film asset
Amortization expense
NNon-cash charges—goodwill impairment
NNon-cash charges—stock-compensation
NNon-cash charges— (gain) loss on derivative
instruments
Inventory obsolescence related to strategic transformation
pplan
Fees, expenses or charges for equity offerings,
debt or acquisitions/dispositions
Restructuring/severance and other charges
Gain on investments
Loss on extinguishment of debt
Adjusted EBITDA
Years Ended December 31,
2020
(479,838) $
65,959
(899)
(12,404)
50,715
13,953
171,821
279,000
11,573
2019
(213,833)
48,778
(3,157)
4,201
61,475
9,835
201,382
—
13,968
(672)
—
1,080
33,643
(2,091)
—
131,840 $
899
9,758
6,327
21,742
—
4,363
165,738
$
$
39
Segment Operating Results
Results of Operations—Comparing Years Ended December 31, 2020 and 2019
Education
NNet sales
Costs and expenses:
pre-publication amortization
Publishing rights amortization
Pre-publication amortization
Cost of sales
Selling and administrative
Impairment charge for goodwill
Other intangible asset amortization
Operating loss
Net loss
Adjustments from net loss to Education segment
Adjusted EBITDA
Amortization expense
Inventory obsolescence related to strategic
transformation plan
Impairment charge for goodwill
Education segment
Adjusted EBITDA
NM = not meaningful
Years Ended December 31,
2020
2019
$ 1,210,646
839,553
Dollar
change
(371,093)
$
$
Percent
change
(30.7)%
2020 vs. 2019
368,876
14,800
125,966
509,642
360,755
279,000
22,948
(332,792)
(332,792)
35,940
163,714
—
279,000
$
$
$
$
$
$
547,094
20,611
148,850
716,555
520,153
—
19,878
(45,940) $
(45,940) $
(178,218)
(5,811)
(22,884)
(206,913)
(159,398)
279,000
3,070
(286,852)
(286,852)
(32.6)%
(28.2)%
(15.4)%
(28.9)%
(30.6)%
NM
15.4%
NM
NM
43,749
189,340
$
(7,809)
(25,626)
(17.8)%
(13.5)%
9,758
—
(9,758)
279,000
NM
NM
$
145,862
$
196,907
$
(51,045)
(25.9)%
Our Education segment net sales for the year ended December 31, 2020 decreased $371.1 million, or 30.7%,
from $1,210.6 million in 2019 to $839.6 million. The net sales decrease was primarily due to lower net sales in
Extensions, which primarily consist of our Heinemann brand, intervention and supplemental products as well as
professional services, which decreased by $252.0 million from $632.0 million in 2019 to $380.0 million. Within
Extensions, net sales decreased due to lower sales of the Heinemann’s Fountas & Pinnell Classroom, Calkins and
LLI Leveled Literacy products due to a difficult comparison to prior year Texas K-6 sales coupled with the impact of
the COVID-19 pandemic in 2020. Also, contributing to the decrease was lower professional services with the
decline of the in-person learning environment as a result of the COVID-19 pandemic. Further, there were lower net
sales from Core Solutions which decreased by $119.0 million from $578.0 million in 2019 to $459.0 million,
primarily due to the smaller new adoption market opportunity in Texas ELA, along with the COVID-19 pandemic.
Our Education segment cost of sales for the year ended December 31, 2020 decreased $206.9 million, or
28.9%, from $716.6 million in 2019 to $509.6 million. Our cost of sales, excluding publishing rights and pre-
publication amortization, decreased $178.2 million from $547.1 million in 2019 to $368.9 million, largely due to the
decline in net sales. Our cost of sales, excluding publishing rights and pre-publication amortization, as a percentage
of sales, decreased year over year from 45.2% to 43.9%. Pre-publication amortization decreased by $22.9 million
from 2019 primarily due to the timing and large amount of 2019 major product releases, and publishing rights
amortization decreased $5.8 million attributed to our use of accelerated amortization methods.
Our Education segment selling and administrative expense for the year ended December 31, 2020 decreased
$159.4 million, or 30.6%, from $520.2 million in 2019 to $360.8 million. The decrease was driven by lower labor
costs primarily attributed to cost savings associated with our employee furlough initiative in response to the
COVID-19 pandemic and our 2020 Restructuring Plan and a freeze on hiring. Further, lower variable expenses such
40
as commissions, samples, transportation, and depository fees attributed to lower billings from the prior year and
lower discretionary spending due to travel reductions and cost reductions throughout the Company.
Our Education segment other intangible asset amortization expense for the year ended December 31, 2020
increased $3.1 million from 2019, due to accelerated amortization of certain intangible assets.
Our Education segment Adjusted EBITDA for the year ended December 31, 2020 decreased $51.0 million, or
25.9%, from $196.9 million in 2019 to $145.9 million. Our Education segment Adjusted EBITDA excludes
depreciation, amortization, inventory obsolescence related to our strategic transformation plan and goodwill
impairment charges. 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
NNet sales
Costs and expenses:
rights and pre-publication
amortization
Publishing rights amortization
Pre-publication amortization
Cost of sales
Selling and administrative
Other intangible asset amortization
Operating income (loss)
NNet income (loss)
Adjustments from net income (loss) to HMH Books
& Media segment Adjusted EBITDA
Amortization expense film asset
Amortization expense
HMH Books & Media segment
Adjusted EBITDA
NM = not meaningful
Years Ended December 31,
2020
2019
Dollar
change
Percent
change
$ 191,739 $ 180,028 $
11,711
6.5%
2020 vs. 2019
128,940
5,256
214
134,410
50,507
2,637
4,185 $
4,185 $
121,014
5,946
665
127,625
55,071
5,432
(8,100) $
(8,100) $
7,926
(690)
(451)
6,785
(4,564)
(2,795)
12,285
12,285
382 $
13,953
8,107
1,131 $
9,835
12,042
(749)
4,118
(3,935)
$
$
$
6.5%
(11.6)%
(67.8)%
5.3%
(8.3)%
(51.5)%
NM
NM
(66.2)%
41.9%
(32.7)%
$
26,627 $
14,908 $
11,719
78.6%
Our HMH Books & Media segment net sales for the year ended December 31, 2020 increased $11.7 million,
or 6.5%, from $180.0 million in 2019 to $191.7 million. The increase in net sales was primarily due to $9.6 million
of licensing revenue from a new production series, a $3.4 million increase in licensing revenue attributed to the
Carmen Sandiego series on Netflix, and strong net sales of the frontlist titles The 99% Invisible City, Compromised
. Offsetting the aforementioned, was lower net sales of both Adult and Young Reader’s categories
and Defined Dish
due to the closure of bookstores during the COVID-19 pandemic and the corresponding delay in releases of certain
new frontlist titles.
d
Our HMH Books & Media segment cost of sales for the year ended December 31, 2020 increased
$6.8 million, or 5.3%, from $127.6 million in 2019 to $134.4 million. The majority of the increase was driven by our
cost of sales, excluding publishing rights and pre-publication amortization, which increased $7.9 million due to
higher net sales. Our cost of sales, excluding publishing rights and pre-publication amortization, as a percentage of
net sales, remained essentially flat.
Our HMH Books & Media segment selling and administrative expense for the year ended December 31, 2020
decreased $4.6 million from $55.1 million in 2019, to $50.5 million. The decrease was due to labor savings
41
associated with our employee furlough initiative in response to the COVID-19 pandemic, and our 2020
Restructuring Plan and a freeze on hiring.
Our HMH Books & Media segment other intangible asset amortization expense for the year ended
December 31, 2020, decreased $2.8 million from 2019, due to certain definite-lived intangible assets being fully
amortized in 2019.
Our HMH Books & Media segment Adjusted EBITDA for the year ended December 31, 2020 changed
favorably from $14.9 million in 2019 to $26.6 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.
42
Corporate and Other
NNet sales
Costs and expenses:
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 (expense) income
Interest expense
Interest income
Change in fair value of derivative instruments
Gain on investments
Income from transition services agreement
Loss on extinguishment of debt
Loss before taxes
Income tax (benefit) expense
NNet loss
Adjustments from net loss to Corporate and Other
Adjusted EBITDA
Interest income
Provision for income taxes
Depreciation expense
Non-cash charges—loss on derivative instruments
Non-cash charges—stock compensation
Fees, expenses or charges for equity offerings, debt or
acquisitions/dispositions
Severance, separation costs and facility closures
Loss on extinguishment of debt
Gain on investments
Corporate and Other Adjusted
EBITDA
NM= not meaningful
Years Ended December 31,
2020
2019
Dollar
change
Percent
change
$
— $
— $
— $
—
2020 vs. 2019
—
—
—
—
66,839
33,643
—
—
—
—
87,382
21,742
$ (100,482) $ (109,124) $
(856)
(65,959)
899
672
2,091
—
—
(163,635)
(12,404)
167
(48,778)
3,157
(899)
—
4,248
(4,363)
(155,592)
4,201
$ (151,231) $ (159,793) $
$
65,959 $
(899)
(12,404)
14,393
(672)
11,573
48,778 $
(3,157)
4,201
16,595
899
13,968
1,080
33,643
—
(2,091)
6,327
21,742
4,363
—
—
—
—
—
(20,543)
11,901
8,642
(1,023)
(17,181)
(2,258)
1,571
2,091
(4,248)
4,363
(8,043)
(16,605)
8,562
17,181
2,258
(16,605)
(2,202)
(1,571)
(2,395)
(5,247)
11,901
(4,363)
(2,091)
—
—
—
—
(23.5)%
54.7%
7.9%
NM
(35.2)%
(71.5)%
NM
NM
NM
NM
(5.2)%
NM
5.4%
35.2%
71.5%
NM
(13.3)%
NM
(17.1)%
(82.9)%
54.7%
NM
NM
$
(40,649) $
(46,077) $
5,428
11.8%
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.
Our selling and administrative expense for the Corporate and Other category for the year ended December 31,
2020 decreased $20.5 million from $87.4 million in 2019 to $66.8 million, primarily attributed to labor savings
associated with our employee furlough initiative in response to the COVID-19 pandemic and our 2020 Restructuring
Plan and a freeze on hiring. Additionally, selling and administrative expenses were lower due to lower stock
compensation charges and depreciation.
43
Our restructuring/severance and other charges for the year ended December 31, 2020 increased by
$11.9 million primarily due to $33.6 million of severance costs associated with the 2020 Restructuring Plan.
Retirement benefits non-service (expense) income for the year ended December 31, 2020 changed
unfavorably by $1.0 million due to the recognition of a $1.1 million settlement charge related to the pension plan
during 2020.
Interest expense for the year ended December 31, 2020 increased $17.2 million from $48.8 million in 2019 to
$66.0 million, primarily due to our 2019 Refinancing during the fourth quarter of 2019. Further, there was an
increase of $2.4 million of net settlement payments on our interest rate derivative instruments during 2020.
Interest income for the year ended December 31, 2020 decreased $2.3 million from $3.2 million in 2019 to
$0.9 million, primarily due to lower interest rates on our money market funds in 2020.
Change in fair value of derivative instruments for the year ended December 31, 2020 favorably changed by
$1.6 million due to foreign exchange forward contracts executed on the Euro that were favorably impacted by the
weakening of the U.S. dollar against the Euro.
Gain on investments for the year ended December 31, 2020 was $2.1 million and was related to the fair value
change in our equity interests in educational technology private partnerships.
Income from transition services agreement for the year ended December 31, 2019 was $4.2 million and was
related to transition service fees under the transition services agreement with the purchaser of our Riverside
Business pursuant to which we performed certain support functions through September 30, 2019. We had no income
from transition services agreement for the year ended December 31, 2020.
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. We had no loss on extinguishment of debt for the year
ended December 31, 2020.
Income tax (benefit) expense for the year ended December 31, 2020 decreased $16.6 million, from an expense
of $4.2 million in 2019, to a benefit of $12.4 million. The change was due to an income tax benefit primarily due to
the impairment charge on goodwill, which reduced related deferred tax liabilities. The effective tax rate was 2.5%
and (2.0%) for the years ended December 31, 2020 and 2019, respectively.
Adjusted EBITDA for the Corporate and Other category for the year ended December 31, 2020 favorably
changed $5.4 million, or 11.8%, from a loss of $46.1 million in 2019 to a loss of $40.6 million. Our Adjusted
EBITDA for the Corporate and Other category excludes interest, taxes, depreciation, derivative instruments charges,
equity compensation charges, acquisition/disposition-related activity, gains or losses on investments, restructuring
costs, and loss on extinguishment of debt. The favorable 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. Moreover, uncertainty
resulting from the COVID-19 pandemic may result in not following this historic pattern.
44
Approximately 81% of our net sales for the year ended December 31, 2020 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 66% 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
NNet sales
Costs and expenses:
Cost of sales, excluding
ppublishing rights and pre-
publication amortization
Publishing rights
amortization
Pre-publication
amortization
Cost of sales
Selling and administrative
Impairment charge for
goodwill
Other intangible asset
amortization
Restructuring/severance
and other charges
Operating (loss)
income
Other income (expense)
Retirement benefits non-
service (expense) income
Interest expense
Interest income
Change in fair value of
derivative instruments
Gain on investments
Income from transition
services agreement
Loss on extinguishment
of debt
(Loss) income before
taxes
Income tax expense
(benefit)
Net (loss) income
First
Quarter
2019
$ 153,844
Second
Quarter
2019
$ 349,801
Third
Quarter
2019
$ 517,614
Fourth
Quarter
2019
$ 189,387
First
Quarter
2020
$ 151,585
Second
Quarter
2020
$ 216,063
Third
Quarter
2020
$ 330,926
Fourth
Quarter
2020
$ 140,979
40,791
194,635
39,095
388,896
48,054
565,668
52,088
241,475
38,340
189,925
35,153
251,216
55,664
386,590
62,582
203,561
96,055
190,831
246,527
134,695
90,012
124,360
182,767
100,677
7,605
6,271
6,341
6,340
5,825
4,709
4,761
4,761
33,082
136,742
151,983
35,739
232,841
175,266
39,319
292,187
188,957
41,375
182,410
146,400
30,638
126,475
133,353
31,758
160,827
106,329
31,647
219,175
127,324
32,137
137,575
111,095
—
—
—
— 262,000
—
—
17,000
6,524
6,612
6,383
5,791
6,273
6,272
6,274
6,766
1,221
4,430
270
15,821
—
—
33,545
98
(101,835)
(30,253)
77,871
(108,947)
(338,176)
(22,212)
272
(68,973)
42
(11,582)
1,092
42
(11,963)
97
41
(11,597)
509
42
(13,636)
1,459
61
(16,783)
766
61
(17,482)
75
61
(16,168)
32
(1,039)
(15,526)
26
(450)
—
16
—
1,826
1,851
—
—
(737)
—
571
—
272
—
—
(4,363)
(380)
—
—
—
120
—
—
—
432
1,738
—
—
500
353
—
—
(110,907)
(40,210)
66,658
(125,173)
(354,512)
(39,438)
(13,633)
(84,659)
6,455
(2,602)
$(117,362) $ (40,613) $ 69,260
403
(55)
(1,514)
$(125,118) $(345,973) $ (38,168) $ (12,552) $ (83,145)
(8,539)
(1,270)
(1,081)
45
During the fourth quarter of 2020, we recorded an adjustment of $17.0 million and $1.0 million to increase
both the goodwill impairment charge and income tax benefit recorded, respectively, to correct an error of the
previously recorded goodwill impairment of $262.0 million and related income tax benefit in the first quarter of
2020. Management believes these adjustments are not material to the current period financial statements or any prior
periods.
Liquidity and Capital Resources
(in thousands)
Cash and cash equivalents
Current portion of long-term debt
Long-term debt, net of discount and issuance costs
Revolving credit facility
Borrowing availability under revolving credit facility
NNet cash provided by operating activities
NNet cash used in investing activities
NNet cash used in financing activities
Operating activities
$
$
December 31,
2020
2019
$
281,200
19,000
624,692
—
104,806
296,353
19,000
638,187
—
161,961
Years ended December 31,
2020
2019
$
115,248
(112,271)
(18,130)
254,975
(96,320)
(115,667)
Net cash provided by operating activities was $115.2 million for the year ended December 31, 2020, a
$139.7 million decrease from the $255.0 million of net cash provided by operating activities for the year ended
December 31, 2019. The decrease in cash provided by operating activities was primarily driven by unfavorable
changes in net operating assets and liabilities of $78.4 million primarily due to changes in deferred revenue of
$143.3 million and $29.3 million of royalties related to greater billings in 2019, accounts payable of $22.8 million
related to timing of disbursements and severance and other charges of $3.4 million due to the 2020 Restructuring
Plan, offset by favorable period over period inventory changes of $74.9 million, favorable period over period
changes in accounts receivable of $12.4 million, an increase in operating lease liabilities of $15.3 million, pension
and postretirement benefits of $8.2 million, interest payable of $3.5 million due to the timing of our 2019
refinancing and other assets and liabilities of $6.1 million. Additionally, operating profit, net of non-cash items,
decreased by $61.4 million.
Investing activities
Net cash used in investing activities was $112.3 million for the year ended December 31, 2020, an increase of
$16.0 million from the year ended December 31, 2019. The increase in cash used in investing activities was
primarily due to lower net proceeds from sales and maturities of short-term investments of $50.0 million compared
to 2019, offset by lower capital investing expenditures related to pre-publication costs and property, plant, and
equipment of $27.8 million in connection with previously planned reductions in content development, and by the
acquisition of a business for $5.4 million along with an investment in preferred stock of $0.8 million in 2019.
Financing activities
Net cash used in financing activities was $18.1 million for the year ended December 31, 2020, a decrease of
$97.6 million from the year ended December 31, 2019. The decrease in cash used in financing activities was
primarily due to a reduction in net debt principal repayments of $88.3 million in connection with the 2019
Refinancing along with payments of financing fees of $8.5 million related to our notes offering, term loan facility
and revolving credit facility amendments in 2019. Additionally, there was a decrease in tax withholding payments
related to net share settlements of restricted stock units of $2.0 million partially offset by lower net collections under
the transition services agreement of $1.1 million.
46
Debt
Under each of the notes, the term loan facility and the revolving credit facility, Houghton Mifflin Harcourt
Publishers Inc., Houghton Mifflin Harcourt Publishing Company and HMH Publishers LLC are the borrowers
(collectively, the “Borrowers”), and Citibank, N.A. acts as both the administrative agent and the collateral agent.
The obligations under the senior secured notes, the term loan facility and the revolving credit facility are
guaranteed by the Company and each of its direct and indirect for-profit domestic subsidiaries (other than the
Borrowers) (collectively, the “Guarantors”) and are secured by all capital stock and other equity interests of the
Borrowers and the Guarantors and substantially all of the other tangible and intangible assets of the Borrowers and
the Guarantors, including, without limitation, receivables, inventory, equipment, contract rights, securities, patents,
trademarks, other intellectual property, cash, bank accounts and securities accounts and owned real estate. The
revolving credit facility is secured by first priority liens on receivables, inventory, deposit accounts, securities
accounts, instruments, chattel paper and other assets related to the foregoing (the “Revolving First Lien Collateral”),
and second priority liens on the collateral which secures the term loan facility on a first priority basis. The term loan
facility is secured by first priority liens on the capital stock and other equity interests of the Borrowers and the
Guarantors, equipment, owned real estate, trademarks and other intellectual property, general intangibles that are not
Revolving First Lien Collateral and other assets related to the foregoing, and second priority liens on the Revolving
First Lien Collateral.
Senior Secured Notes
On November 22, 2019, we completed the sale of $306.0 million in aggregate principal amount of 9.0%
Senior Secured Notes due 2025 (the “notes”) in a private placement to qualified institutional buyers under Rule
144A under the Securities Act of 1933, as amended (the “Securities Act”), and to persons outside the United States
pursuant to Regulation S under the Securities Act. The notes mature on February 15, 2025 and bear interest at a rate
of 9.0% per annum. Interest is payable semi-annually in arrears on February 15 and August 15 of each year,
beginning on February 15, 2020. As of December 31, 2020, we had $306.0 million ($297.6 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 “term loan facility”). As of December 31, 2020, we had $361.0
million ($346.1 million, net of discount and issuance costs) outstanding under the term loan facility.
The term loan facility matures on November 22, 2024 and the interest rate per annum is equal to, at the option
of the Company, either (a) LIBOR plus a margin of 6.25% or (b) an alternate base rate plus a margin of 5.25%. As
of December 31, 2020, the interest rate on the term loan facility was 7.25%.
The 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 term loan facility does not require us to comply with financial maintenance covenants. We are currently
required to meet certain incurrence based financial covenants as defined under our term loan facility.
47
The term loan facility contains customary mandatory prepayment requirements, including with respect to
excess cash flow, proceeds from certain asset sales or dispositions of property, and proceeds from certain
incurrences of indebtedness. To the extent that we are successful in the divestiture of our Books & Media business,
we plan to utilize a portion of the proceeds to reduce our outstanding indebtedness, which will increase recurring
free cash flow resulting from reduced interest expense. The term loan facility permits the Company to voluntarily
prepay outstanding amounts at any time without premium or penalty, other than customary breakage costs with
respect to LIBOR loans; 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 term loan facility shall be subject
to a prepayment premium of 1.00% of the principal amount of the amounts prepaid.
The term loan facility is subject to usual and customary conditions, representations, warranties and covenants,
including restrictions on additional indebtedness, liens, investments, mergers, acquisitions, asset dispositions,
dividends to stockholders, repurchase or redemption of our stock, transactions with affiliates and other matters. The
term loan facility is subject to customary events of default. If an event of default occurs and is continuing, the
administrative agent may, or at the request of certain required lenders shall, accelerate the obligations outstanding
under the term loan facility.
We are subject to an excess cash flow provision under our term loan facility which is predicated upon our
leverage ratio and cash flow. We were not required to make a payment under the excess cash flow provision in 2020
and 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, 2020, there were no amounts outstanding on the revolving
credit facility. As of December 31, 2020, we had approximately $18.8 million of outstanding letters of credit and
approximately $104.8 million of borrowing availability under the revolving credit facility. As of February 25, 2021,
there were no amounts outstanding under the revolving credit facility.
The revolving credit facility has a five-year term and matures on November 22, 2024. The interest rate
applicable to borrowings under the facility is based, at our election, on LIBOR plus a margin between 1.50% and
2.00% or an alternative base rate plus a margin between 0.50% and 1.00%, which margins are based on average
daily availability. The revolving credit facility may be prepaid, in whole or in part, at any time, without premium.
The revolving credit facility requires us to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 on a
trailing four-quarter basis for periods in which excess availability under the revolving credit facility is less than the
greater of $25.0 million and 12.5% of the lesser of the total commitment and the borrowing base then in effect, or
less than $20.0 million if certain conditions are met. The minimum fixed charge coverage ratio was not applicable
under the facility as of December 31, 2020, 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.
48
General
We had $281.2 million of cash and cash equivalents and no short-term investments at December 31, 2020. We
had $296.4 million of cash and cash equivalents and no short-term investments at December 31, 2019.
Our business is impacted by the inherent seasonality of the academic calendar, which typically results in a
cash flow usage in the first half of the year and a cash flow generation in the second half of the year. We expect our
net cash provided by operations combined with our cash and cash equivalents and borrowing availability under our
revolving credit facility to provide sufficient liquidity to fund our current obligations, capital spending, debt service
requirements and working capital requirements over at least the next twelve months. Our primary credit facilities do
not require us to comply with financial maintenance covenants.
Our p
The ability of the Company to fund planned operations is based on assumptions which involve significant
judgment and estimates of future revenues, capital spend and other operating costs. Our current assumptions are that
our industry will begin to recover as school districts become, or continue being, fully operational, either in-person,
fully remote or hybrid, and we have performed a sensitivity analysis on these assumptions to forecast the impact of a
slower-than-anticipated recovery. Based on the actions enacted in 2020, we have concluded we have sufficient
liquidity to fund our current obligations, capital spending, debt service requirements and working capital
requirements over at least the next twelve months.
Critical Accounting Policies and Estimates
g
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.
The critical accounting estimates used in the preparation of the Company’s consolidated financial statements
may change as new events occur, as more experience is acquired, as additional information is obtained and as the
Company’s operating environment changes. Actual results may differ from these estimates due to the uncertainty
around the magnitude and duration of the COVID-19 pandemic, as well as other factors.
Revenue Recognition
g
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.
49
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.
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. Revenue associated with the digital content hosting services related to
perpetual licenses is recognized evenly over the contract term. The delivery/start date is the date access to the hosted
content is granted. For the technical services provided to customers in connection with the software license, 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.
50
Deferred Revenue
f
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
f
f
f
Accounts receivable include amounts billed and currently due from customers and 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 and develop those
estimates to reflect the risk of credit loss. Allowances for doubtful accounts are established through the evaluation of
accounts receivable aging, prior collection experience, current conditions and reasonable and supportable forecasts
of the economic conditions that will exist through the contractual life of the financial asset. We monitor our ongoing
credit exposure through an active review of collection trends and specific facts and circumstances. Our activities
include monitoring the timeliness of payment collection and performing timely account reconciliations. At the time
we determine that a receivable balance, or any portion thereof, is deemed to be permanently uncollectible, the
balance is written off. 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. The allowance for doubtful accounts and
reserve for returns are reported as reductions of the accounts receivable balance and amounted to $4.0 million and
$14.6 million, and $3.0 million and $16.7 million as of December 31, 2020 and 2019, 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 year’s 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 $64.8 million and
$57.4 million as of December 31, 2020 and 2019, respectively.
Pre-publication Costs
p
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 asset’s amortization. Under
this method, the amortization expense recorded for a pre-publication cost asset is approximately 33% (year 1), 27%
(year 2), 20% (year 3), 13% (year 4) and 7% (year 5). We utilize this policy for all pre-publication costs, except 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.
51
Amortization expense related to pre-publication costs for the years ended December 31, 2020, 2019 and 2018
were $126.2 million, $149.5 million and $109.3 million, respectively.
For the years ended December 31, 2020, 2019 and 2018, no pre-publication costs were deemed to be
impaired.
Goodwill and Indefinite-Lived Intangible Assets
g
f
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, risk-adjusted discount rates, future economic and market conditions, the determination of
appropriate market comparables as well as the fair value of certain individual assets and liabilities.
We have the option of first assessing qualitative factors to determine whether it is necessary to perform a
quantitative impairment test for goodwill or we can perform the quantitative impairment test without performing the
qualitative assessment. In performing the qualitative 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.
If the results of the quantitative test indicate 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, goodwill is
deemed impaired and is written down to the extent of the difference between the fair value of the reporting unit and
the carrying value.
We estimate the total fair value of the Education reporting unit by using one or more various valuation
techniques including an evaluation of our market capitalization and peer company multiples depending on the best
approximation of fair value of the Education reporting unit in the current social and economic environment. With
regard to indefinite-lived intangible assets, which includes the Houghton Mifflin Harcourt tradename at
December 31, 2020 and 2019, 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. Adverse changes in our market capitalization or peer company multiples by an equivalent amount could
give rise to an impairment.
We recorded a goodwill impairment charge of $279.0 million for the year ended December 31, 2020. Refer to
Note 2 of the consolidated financial statements for a discussion of the factors and circumstances leading to the
goodwill impairment.
We completed our annual goodwill impairment tests as of October 1, 2020 and 2019. The fair value of the
Education reporting unit was in excess of its carrying value by approximately 18% as of October 1, 2020 and 2019.
There was no goodwill impairment for the years ended December 31, 2019 and 2018. 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, 2020 and 2019. No
indefinite-lived intangible assets were deemed to be impaired for the years ended December 31, 2020, 2019 and
2018.
52
Royalty Advances
y
y
Royalty advances to authors are capitalized and represent amounts paid in advance of the sale of an author’s
product and are recovered as earned. As advances are recorded, a partial reserve may be recorded immediately based
primarily upon historical sales experience 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 author’s 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 $96.7 million and $119.7 million as of
December 31, 2020 and 2019, respectively.
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, 2020, 2019 and 2018. 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, 2020, we were in compliance with all of our debt covenants and we expect to be in
compliance over the next twelve months.
We are currently required to meet certain incurrence-based financial covenants as defined under our term loan
facility, notes and revolving credit facility. We have incurrence based financial covenants primarily pertaining to a
maximum leverage ratio and fixed charge coverage ratio. A breach of any of these covenants, ratios, tests or
restrictions, as applicable, for which a waiver is not obtained could result in an event of default, in which case our
lenders could elect to declare all amounts outstanding to be immediately due and payable and result in a cross-
default under other arrangements containing such provisions. A default would permit lenders to accelerate the
maturity for the debt under these agreements and to foreclose upon any collateral securing the debt owed to these
lenders and to terminate any commitments of these lenders to lend to us. If the lenders accelerate the payment of the
indebtedness, our assets may not be sufficient to repay in full the indebtedness and any other indebtedness that
would become due as a result of any acceleration. Further, in such an event, the lenders would not be required to
make further loans to us, and assuming similar facilities were not established and we are unable to obtain
replacement financing, it would materially affect our liquidity and results of operations.
Contractual Obligations
The following table provides information with respect to our estimated commitments and obligations as of
December 31, 2020 (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
Revolver commitment fees
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
$ 361,000 $ 19,000 $ 38,000 $ 304,000 $
92,177
306,000
25,540
—
46,950
19,687
— 306,000
—
—
—
123,701
11,033
295,393
39,317
—
—
131,236
—
$1,228,621 $ 130,352 $ 223,153 $ 743,880 $ 131,236
27,464
2,794
30,955
24,599
54,927
5,642
64,385
13,249
41,310
2,597
68,817
1,469
53
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, 2020, the interest rate was 7.25%.
(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 $4.8 million of contributions in 2021 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.
54
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, 2020, we had $361.0 million ($346.1 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
$3.6 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, 2020, there were no amounts outstanding on the revolving credit facility.
Assuming that the revolving credit facility is fully drawn, an increase or decrease of 1% in the interest rate will
change our interest expense associated with the revolving credit facility by $2.5 million on an annual basis.
Our interest rate risk relates primarily to U.S. dollar borrowings partially offset by U.S. dollar cash
investments. We have historically used interest rate derivative instruments to manage our earnings and cash flow
exposure to changes in interest rates. On August 17, 2015, we entered into interest rate derivative contracts with
various financial institutions having an aggregate notional amount of $400.0 million to convert floating rate debt
into fixed rate debt, which we designated as cash flow hedges. These contracts were effective beginning
September 30, 2016 and matured on July 22, 2020. We have no outstanding interest rate derivative contracts as of
December 31, 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, 2020 and 2019. We do not enter into derivative transactions or use other financial
instruments for trading or speculative purposes.
55
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, 2020 and 2019, 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, 2020, 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, 2020, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
k
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, 2020 and 2019, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2020 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, 2020, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the COSO.
k
Changes in Accounting Principles
As discussed in Note 3 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 Management’s Report on Internal Control over Financial Reporting appearing under Item 9A.
Our responsibility is to express opinions on the Company’s 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.
56
Definition and Limitations of Internal Control over Financial Reporting
A company’s 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 company’s 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 company’s
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.
Goodwill Impairment Assessments – Education Reporting Unit
As described in Notes 2, 3, and 7 to the consolidated financial statements, the Company’s goodwill balance was
$438.0 million as of December 31, 2020. Management performs an impairment test to assess the carrying value of
goodwill on an annual basis (as of October 1) and, if certain events or circumstances indicate that an impairment
loss may have been incurred, on an interim basis. During the three months ended March 31, 2020, the Company’s
stock price declined to historical lows since its 2013 initial public offering. Management determined that the
significant decline in the market capitalization and broader economic downturn arising from the COVID-19
pandemic was a triggering event. Based on the interim impairment assessment as of March 31, 2020, management
concluded that the goodwill, which is wholly attributed to the Education reporting unit, was impaired and,
accordingly, recorded a goodwill impairment charge of $279.0 million. Additionally, as of September 30, 2020, with
the continuation of the COVID-19 pandemic and the associated downward pressure on the Company’s billings,
management concluded that impairment triggering events existed. Management estimated the fair value of the
Education reporting unit as of September 30, 2020 and concluded that no impairment existed. Management
completed their annual goodwill impairment test as of October 1, 2020 and did not identify an impairment.
Management utilized an implied market value method under the market approach to calculate the fair value of the
Education reporting unit for each impairment assessment. This method included the determination of the Company's
overall enterprise value, from which the fair value of the HMH Books & Media reporting unit was deducted to
derive the fair value of the Education reporting unit. The relevant inputs and assumptions used in the valuation of
the Education reporting unit for each impairment assessment include the Company’s market capitalization as of the
date of each assessment, selection of a control premium, and determination of an appropriate market multiple to
value the HMH Books & Media reporting unit.
The principal considerations for our determination that performing procedures relating to the goodwill impairment
assessments of the Education reporting unit is a critical audit matter are the significant judgment by management in
the selection of the control premium and the determination of the fair value of the HMH Books & Media reporting
unit, which in turn led to significant auditor judgment, subjectivity, and effort in performing procedures to evaluate
management’s significant assumptions relating to the selection of the control premium and the determination of the
57
market multiple utilized to value the HMH Books & Media reporting unit. Also, the audit effort involved the use of
professionals with specialized skill and knowledge.
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 management’s goodwill impairment assessments, including controls over the valuation of the
reporting units. These procedures also included, among others, testing management’s process to determine the fair
value of the reporting units by (i) assessing the appropriateness of the method utilized to calculate the fair value of
the Education reporting unit, (ii) testing the completeness and accuracy of the underlying data used in the method,
and (iii) evaluating the significant assumptions used by management related to the selection of the control premium
and the determination of the market multiple utilized to value the HMH Books & Media reporting unit. Evaluating
management’s assumptions related to the control premium and the determination of the market multiple utilized to
value the HMH Books & Media reporting unit involved evaluating whether the assumptions used by management
were reasonable considering relevant market data 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 Company’s implied market value method and the significant assumptions related to the control
premium and the determination of the market multiple utilized to value the HMH Books & Media reporting unit.
Indefinite-Lived Intangible Asset Impairment Analyses - Trademarks and Tradenames
As described in Notes 2 and 7 to the consolidated financial statements, as of December 31, 2020, the Company’s
indefinite-lived intangible asset balance was $161.0 million and relates to trademarks and tradenames. Management
performs an impairment test to assess the carrying value of indefinite-lived intangible assets on an annual basis (as
of October 1) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an
interim basis. As a result of the triggering events identified in the first and third quarters described in the critical
audit matter above, management performed quantitative impairment analyses over the indefinite-lived intangible
assets. The recoverability was evaluated using a one-step process whereby management determined the fair value by
asset and then compared it to its carrying value to determine if the asset was impaired. Management estimated 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 included: 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 analyses for trademarks and tradenames is a critical audit matter are the significant
judgment by management when developing the fair value estimates of the trademarks and tradenames, which in turn
led to significant auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s
significant assumptions related to 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.
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 management’s trademarks and tradenames impairment analyses, including controls over the
valuation of the trademarks and tradenames. These procedures also included, among others, testing management’s
process to develop the fair value of trademarks and tradenames by (i) assessing the appropriateness of
management’s relief-from-royalty discounted cash flow analyses for estimating fair value of the trademarks and
tradenames, (ii) testing the completeness and accuracy of the underlying data used in the analyses, and (iii)
evaluating the significant assumptions used by management related to future net sales, the long-term growth rate, the
royalty rate, and the discount rate. Evaluating management’s assumptions related to future net sales and the long-
term growth rate involved evaluating whether the assumptions used by management were reasonable considering the
past performance of the business, relevant market data, 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 Company’s discounted cash flow analyses and significant assumptions related to the royalty rate
and the discount rate.
58
Reserve for Royalty Advances to Authors
As described in Notes 3 and 20 to the consolidated financial statements, royalty advances to authors are capitalized
and represent amounts paid in advance of the sale of an author’s product and are recovered as earned. As advances
are recorded, a partial reserve may be recorded immediately based primarily upon historical sales experience.
Additionally, advances are evaluated periodically to determine if they are expected to be recovered on a title-by-title
basis, with consideration given to the other titles in the author’s 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 $96.7 million as of
December 31, 2020.
The principal considerations for our determination that performing procedures relating to the reserve for royalty
advances to authors is a critical audit matter are the significant judgment by management to determine the reserve
for royalty advances, which in turn led to significant auditor judgment, subjectivity and effort in performing
procedures and in evaluating audit evidence relating to management’s 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 management’s estimate of the reserve for royalty advances to authors. These procedures also
included, among others, testing management’s process to determine the reserve for royalty advances by (i)
evaluating the appropriateness of management’s process for estimating its reserve for royalty advances to authors,
(ii) assessing the reasonableness of significant assumptions used by management in developing the estimate related
to the ability of an author’s 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 data
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 author’s portfolio
to generate future sales.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 25, 2021
We have served as the Company’s auditor since 2003.
59
Houghton Mifflin Harcourt Company
Consolidated Balance Sheets
(in thousands of dollars, except share information)
Assets
Current assets
Cash and cash equivalents
Accounts receivable, net of allowances for bad debts and book returns of
$18.6 million and $19.7 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 pension benefits
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 15)
Stockholders’ equity
Preferred stock, $0.01 par value: 20,000,000 shares authorized; no shares issued
and outstanding at December 31, 2020 and 2019
Common stock, $0.01 par value: 380,000,000 shares authorized; 150,459,034 and
148,928,328 shares issued at December 31, 2020 and 2019, respectively; 125,882,000
and 124,351,294 shares outstanding at December 31, 2020 and 2019, respectively
Treasury stock, 24,577,034 shares as of December 31, 2020 and 2019, 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,
2020
2019
$
281,200
$
$
$
152,832
166,963
19,931
620,926
93,202
203,149
42,485
437,977
428,584
126,850
2,415
30,659
34,879
2,021,126
19,000
49,104
50,771
21,944
342,605
11,017
19,590
1,593
1,555
9,669
24,973
551,821
624,692
132,014
562,679
24,061
16,566
16,411
2,419
1,930,663
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
—
—
1,505
(518,030 )
4,918,542
(4,255,830 )
(55,724 )
90,463
2,021,126
$
1,489
(518,030 )
4,906,165
(3,775,992 )
(47,272 )
566,360
2,513,172
The accompanying notes are an integral part of these consolidated financial statements.
60
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 goodwill
Restructuring/severance and other charges
Gain on sale of assets
Operating loss
Other income (expense)
Retirement benefits non-service (expense) income
Interest expense
Interest income
Change in fair value of derivative instruments
Gain on investments
Income from transition services agreement
Loss on extinguishment of debt
Loss from continuing operations before taxes
Income tax (benefit) expense 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
NNet loss per share attributable to common stockholders
Basic and diluted:
Continuing operations
Discontinued operations
Net loss
Weighted average shares outstanding
Basic and diluted
$
$
$
$
2020
1,031,292
Years Ended December 31,
2019
1,390,674
$
$
497,816
20,056
126,180
644,052
478,101
25,585
279,000
33,643
—
(429,089)
(856)
(65,959)
899
672
2,091
—
—
(492,242)
(12,404)
(479,838)
—
—
—
(479,838) $
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) $
2018
1,322,417
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)
(3.82) $
—
(3.82) $
(1.72) $
—
(1.72) $
(1.11)
0.35
(0.76)
125,455,487
124,152,984
123,444,943
The accompanying notes are an integral part of these consolidated financial statements.
61
Houghton Mifflin Harcourt Company
Consolidated Statements of Comprehensive Loss
(in thousands of dollars)
NNet 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 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,
2019
(213,833) $
2020
(479,838) $
2018
(94,155)
(230)
(9,209)
—
(511)
1,800
9
987
(8,452)
(488,290) $
(3,386)
(2,088)
(215,921) $
(156)
(2,056)
9
3,541
1,338
(92,817)
$
$
The accompanying notes are an integral part of these consolidated financial statements.
62
Houghton Mifflin Harcourt Company
Consolidated Statements of Cash Flows
(in thousands of dollars)
Cash flows from operating activities
NNet loss
Adjustments to reconcile net loss to net cash provided by operating activities
2020
Years Ended December 31,
2019
2018
$
(479,838 )
$
(213,833 )
$
(94,155 )
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
Operating lease assets, amortization and impairments
Amortization of debt discount and deferred financing costs
Gain on investments
Deferred income taxes
Stock-based compensation expense
Impairment charge for goodwill
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 activities—continuing operations
Net cash provided by operating activities—discontinued 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 business, net of cash acquired
Investment in preferred stock
Proceeds from sale of assets
Net cash (used in) provided by investing activities—continuing operations
Net cash used in investing activities—discontinued 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
Issuance of common stock under employee stock purchase plan
NNet collections under transition service agreement
Net cash used in financing activities—continuing operations
Net (decrease) increase 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
$
$
$
—
—
—
236,489
5,397
6,004
(2,091 )
(14,355 )
11,573
279,000
—
(672 )
—
31,593
46,096
(11,425 )
(34,941 )
(19,956 )
57,178
7,191
7,183
3,443
(1,996 )
(10,625 )
115,248
—
115,248
—
—
(61,331 )
(50,940 )
—
—
—
—
(112,271 )
—
(112,271 )
—
—
150,000
(150,000 )
(19,000 )
—
(48 )
918
—
(18,130 )
(15,153 )
296,353
281,200
52,942
1,883
5,282
2,002
164
$
$
$
—
—
—
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
The accompanying notes are an integral part of these consolidated financial statements.
63
Accumulated
Other
Accumulated Comprehensive
Deficit
(3,521,527)
(94,155)
Loss
(46,522)
Total
795,193
— (94,155)
—
1,338
1,338
Houghton Mifflin Harcourt Company
Consolidated Statements of Stockholders’ Equity
Common Stock
Par Value Treasury Stock
Capital
in excess
of Par
Value
Shares
Issued
147,911,466
—
—
—
175,428
346,255
—
1,479
—
(518,030) 4,879,793
—
—
—
—
2
3
—
—
—
—
—
—
—
—
1,611
(3)
(1,190)
52,711
—
—
—
—
—
3
12,960
(518,030) 4,893,174
—
—
(3,562,971)
— (213,833)
(268,295)
—
148,164,854
—
(3)
—
1,481
—
—
—
186,114
577,360
—
—
2
6
—
—
148,928,328
—
—
—
1,489
—
—
380,757
1,149,949
—
—
—
4
12
—
—
150,459,034 $ 1,505 $
—
—
—
—
—
—
—
—
—
—
—
1,436
(6)
—
812
—
—
—
—
(2,018)
13,579
(518,030) 4,906,165
—
—
(3,775,992)
— (479,838)
—
1,243
(12)
—
—
—
—
—
(48)
11,194
(518,030) $4,918,542 $(4,255,830) $
—
—
(in thousands of dollars, except share
information)
Balance at December 31, 2017
NNet 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
vesting of restricted stock units
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
NNet 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
vesting of restricted stock units
Stock withheld to cover tax
withholdings requirements upon
vesting of restricted stock units
Stock-based compensation expense
Balance at December 31, 2019
NNet loss
Other comprehensive loss, net of
tax
Issuance of common stock for
employee purchase plan
Issuance of common stock for
vesting of restricted stock units
Stock withheld to cover tax
withholdings requirements upon
vesting of restricted stock units
Stock-based compensation expense
Balance at December 31, 2020
—
—
—
52,711
1,613
—
—
(1,190)
—
—
(45,184)
—
12,960
768,470
— (213,833)
(2,088)
(2,088)
—
—
—
812
1,438
—
—
—
(47,272)
(2,018)
13,579
566,360
— (479,838)
(8,452)
(8,452)
—
—
1,247
—
—
—
(48)
11,194
(55,724) $ 90,463
The accompanying notes are an integral part of these consolidated financial statements.
64
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 technology company, committed to delivering connected solutions that engage learners,
empower educators and improve student outcomes. As a leading provider of Kindergarten through 12th grade (“K-
12”) core curriculum, supplemental and intervention solutions and professional learning services, HMH partners
with educators and school districts to uncover solutions that unlock students’ potential and extend teachers’
capabilities. HMH estimates that it serves more than 50 million students and three million educators in 150
countries, while its award-winning children’s books, novels, non-fiction, and reference titles are enjoyed by readers
throughout the world.
We are organized along two business segments: Education and HMH Books & Media. Within our Education
segment, we focus on the K-12 market and, in the United States, we are a market leader. We specialize in
comprehensive core curriculum, supplemental and intervention solutions, and we provide ongoing support in
professional learning and coaching for educators and administrators. Our offerings are rooted in learning science,
and we work with research partners, universities and third-party organizations as we design, build, implement and
iterate our offerings to maximize their effectiveness. We are purposeful about innovation, leveraging technology to
create engaging and immersive experiences designed to deepen learning experiences for students and to extend
teachers’ capabilities so that they can focus on making meaningful connections with their students.
Our diverse portfolio enables us to help ensure that every student and teacher has the tools needed for success.
We are able to build deep partnerships with school districts and leverage the scope of our offerings to provide
holistic solutions at scale with the support of our far-reaching sales force and talented field-based specialists and
consultants. We provide print, digital, and blended print/digital solutions that are tailored to a district’s needs, goals
and technological readiness.
Furthermore, for nearly two centuries, our HMH Books & Media segment has brought renowned and awarded
children’s, fiction, non-fiction, culinary and reference titles to 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 O’Brien, 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, 2020 and 2019 and for the periods ended December 31, 2020, 2019 and 2018.
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.
65
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 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. Moreover, uncertainty
resulting from the COVID-19 pandemic may result in not following this historic pattern.
Approximately 81% of our net sales for the year ended December 31, 2020 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, 2020, 2019 and 2018, approximately 66% 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.
Impact of the COVID-19 Pandemic
The unprecedented and rapid spread of COVID-19 and the resulting social distancing measures, including
business and school closures implemented by federal, state and local authorities, significantly reduced customer
business and school closures implemented by federal, state and local authorities, significantly reduced customer
demand for our solutions and services, disrupted portions of our supply chain and warehousing operations and also
disrupted our ability to deliver our educational solutions and services. We continue to monitor indicators of demand,
including our sales pipeline, customer orders and product shipments, as well as observe the impact to state revenues
and related educational budgets to ascertain an estimate of the impact; however, the length and severity of the
reduction in demand due to the pandemic remains uncertain. Accordingly, our full year results for 2020 were
adversely impacted compared to prior years.
While we are planning for a demand recovery, the exact timing and pace of recovery is uncertain given the
significant disruption caused by the pandemic on the operations of our customers. Our expense management and
d
liquidity measures may be modified as we obtain additional clarity on the timing of customer demand recovery.
In response to these developments, we have implemented measures to help mitigate the impact on our
r
financial position and operations. These measures include, but are not limited to, the following:
EExpense Management. With the reduction in net sales, we have, and will continue to implement cost saving
initiatives, including:
•
•
•
•
director, executive and senior leadership salary reductions, and for the majority of employees, a four-
day work week with associated labor cost reductions, in each case beginning in April 2020 and ceasing
near the end of July 2020. The costs associated with ending the furlough program and the salary
reductions were subsequently mitigated by the 2020 Restructuring Plan discussed below;
a freeze on spending not directly tied to near-term billings, including a reduction in all discretionary
spending such as marketing, advertising, travel, and office supplies;
executing a voluntary early retirement incentive program in September 2020, as discussed below; and
commencing a restructuring program in September 2020 including a reduction in force, as discussed
below.
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Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
BBalance Sheet, Cash Flow and Liquidity. In addition to the expense management actions noted above, we have
taken the following actions to increase liquidity and strengthen our financial position, including:
•
•
•
reduced inventory purchasing;
deferred long-term capital projects not directly contributing to billings in 2020; and
deferred the payment of our employer payroll taxes allowed under the Coronavirus Aid, Relief, and
Economic Security (“CARES”) Act. The deferred amounts under the CARES Act were repaid in full in
December 2020 as a result of the success of the cash and expense mitigation efforts.
2020 Restructuring Plan.
On September 4, 2020, we completed a voluntary retirement incentive program, which was offered to all U.S.
based employees at least 55 years of age with at least five years of service. Of the eligible employees, 165 elected to
participate representing approximately 5% of our workforce. The majority of the employees voluntarily retired as of
September 4, 2020 with select employees leaving later in the year. Each of the employees received or will receive
separation payments in accordance with our severance policy.
On September 30, 2020, we undertook a restructuring program, including a reduction in force, as part of the
ongoing assessment of our cost structure amid the COVID-19 pandemic and in line with our strategic transformation
plan. The reduction in force resulted in a 22% reduction in our workforce, including positions eliminated as part of
the voluntary retirement incentive program mentioned above, and net of newly created positions to support our
digital first operations. The reduction in force resulted in the departure of approximately 525 employees and was
completed in October 2020. Each of the employees received or will receive separation payments in accordance with
our severance policy. The total one-time, non-recurring cost incurred in connection with the restructuring program,
inclusive of the voluntary retirement incentive program (collectively the “2020 Restructuring Plan”), all of which
represents cash expenditures, is approximately $33.6 million.
Forward-looking
Forward-looking
After reviewing our ability to meet future financial obligations over the next twelve months, including
consideration of our recent actions described above, we have concluded our net cash from operations combined with
our cash and cash equivalents and borrowing availability under our revolving credit facility provide sufficient
liquidity to fund our current obligations, capital spending, debt service requirements and working capital
requirements over at least the next twelve months. Our primary credit facilities do not require us to comply with
financial maintenance covenants.
Our p
The ability of the Company to fund planned operations is based on assumptions which involve significant
judgment and estimates of future revenues, capital spend and other operating costs. Our current assumptions are that
our industry will begin to recover as school districts become, or continue being, fully operational, either in-person,
fully remote or hybrid, and we have performed a sensitivity analysis on these assumptions to forecast the impact of a
slower-than-anticipated recovery. Based on the actions enacted in 2020 described earlier, we have concluded we
have sufficient liquidity to fund our current obligations, capital spending, debt service requirements and working
capital requirements over at least the next twelve months.
Valuation of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets
We perform an impairment test to assess the carrying value of goodwill and indefinite-lived intangible assets
on an annual basis (as of October 1) and, if certain events or circumstances indicate that an impairment loss may
have been incurred, on an interim basis. Our fourth quarter 2020 impairment tests of goodwill and indefinite-lived
intangible assets did not indicate an impairment existed as the fair value exceeded our carrying values.
During the three months ended March 31, 2020, our stock price declined to historical lows since our 2013
initial public offering. We determined that the significant decline in our market capitalization and broader economic
downturn arising from the COVID-19 pandemic
were required to be performed due to the triggering event occurring during the first quarter of 2020.
We concluded that quantitative analyses
was a triggering event. We concluded that quantitative analyses
67
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
G
oodwill is allocated entirely to our Education reporting unit.
We utilized an implied market value method
under the market approach to calculate the fair value of the Education reporting unit as of March 31, 2020, which we
determined was the best approximation of fair value of the Education reporting unit in the current social and
economic environment. This method included the determination of the Company's overall enterprise value, from
which the fair value of the HMH Books & Media reporting unit was deducted to derive the fair value of the
Education reporting unit. We have previously used a combination of the implied market value method and guideline
public company method approach. The relevant inputs and assumptions used in the valuation of the Education
reporting unit include our market capitalization, selection of a control premium, and the determination of an
appropriate market multiple to value the HMH Books & Media reporting unit, as well as the fair value of individual
assets and liabilities. Based on our interim impairment assessment, we concluded that our goodwill, which is wholly
attributed to the Education reporting unit, was impaired and, accordingly, recorded a goodwill impairment charge of
$279.0 million.
With the continuation of the COVID-19 pandemic and the associated downward pressure on our billings, we
concluded that impairment triggering events existed as of September 30, 2020. Accordingly, we estimated the fair
value of the Education reporting unit as of September 30, 2020 utilizing the implied market value method. Using
consistent relative inputs and assumptions as described above with respect to the first quarter 2020 testing, we
concluded that no impairment existed as of September 30, 2020. The fair value of the Education reporting unit as of
September 30, 2020 exceeded its carrying value by approximately 18%. During the fourth quarter of 2020, we
recorded an adjustment of $17.0 million and $1.0 million to increase both the goodwill impairment charge and
income tax benefit recorded, respectively, to correct an error of the previously recorded goodwill impairment of
$262.0 million and related income tax benefit in the first quarter of 2020. Management believes these adjustments
are not material to the current period financial statements or any prior periods.
Additionally, as a result of the triggering events identified in the first and third quarters, we performed
quantitative impairment analyses over our indefinite-lived intangible assets and long-lived assets. With regards to
indefinite-lived intangible assets, which includes the Houghton Mifflin Harcourt tradename, the recoverability was
evaluated using a one-step process whereby we determined the fair value by asset and then compared it to its
carrying value to determine if the asset was impaired. We estimated the fair value by preparing a relief-from-royalty
discounted cash flow analysis using forward looking revenue projections. The significant assumptions used in
discounted cash flow analysis included: future net sales, a long-term growth rate, a royalty rate and a discount rate
used to present value future cash flows. The discount rate was based on the weighted-average cost of capital method
at the date of the evaluation. The fair value of the indefinite-lived intangible assets was in excess of its carrying
value by approximately 12% as of March 31, 2020 and 18% as of September 30, 2020, respectively, and
substantially exceeded its carrying value as of October 1, 2019. We also performed an impairment test on our long-
lived assets using an undiscounted cash flow model in determining the fair value, which was then compared to book
value of the asset groups evaluated. The long-lived impairment analysis was performed over the Education reporting
unit and the HMH Books & Media reporting unit. Estimates and significant assumptions included in the long-lived
asset impairment analysis included identification of the primary asset in each asset group and undiscounted cash
flow projections. We concluded that our indefinite-lived intangible assets and long-lived assets were not impaired
based on the results of the quantitative analyses performed.
Depending on how long the economic and social conditions resulting from the COVID-19 pandemic exist and
d
their future impact on state and local budgets with regards to educational spending, as well as discretionary
consumer spending, we may be subject to further impairments in the future.
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Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
3.
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, liabilities and equity
and the amount of revenues and expenses. The full extent to which the COVID-19 pandemic will directly or
indirectly impact our business, results of operations and financial condition will depend on future developments that
are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the
actions taken to contain it or treat it, as well as the economic impact on local, regional, national and international
customers and markets. 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.
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
69
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
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. We estimate the collectability of our receivables and develop those
estimates to reflect the risk of credit loss. Allowances for doubtful accounts are established through the evaluation of
accounts receivable aging, prior collection experience, current conditions and reasonable and supportable forecasts
of the economic conditions that will exist through the contractual life of the financial asset. We monitor our ongoing
credit exposure through an active review of collection trends and specific facts and circumstances. Our activities
include monitoring the timeliness of payment collection and performing timely account reconciliations.
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.
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Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
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. Amortization expense is 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
$12.1 million, $12.6 million and $12.0 million for the years ended December 31, 2020, 2019 and 2018, 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.
Accounts Receivable
Accounts receivable are recorded net of allowances for doubtful accounts and reserves for returns. In the
normal course of business, we extend credit to customers that satisfy predefined criteria. We estimate the
collectability of our receivables. Allowances for doubtful accounts are established through the evaluation of
accounts receivable aging and prior collection experience to estimate the ultimate collectability of these receivables.
Reserves for returns are based on historical return rates and sales patterns.
Inventories
Inventories are stated at the lower of weighted-average cost or net realizable value. The level of obsolete and
excess inventory is estimated on a program or title level-basis by comparing the number of units in stock with past
usage and the expected future demand. The expected future demand of a program or title is determined by the
copyright year, the previous year’s 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.
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Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
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.
We review internal-use software and software development costs for impairment. For the years ended
December 31, 2020, 2019 and 2018, there was no impairment of internal-use software and software developments
costs.
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Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
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
asset’s amortization. Under this method, the amortization expense recorded for a pre-publication cost asset is
approximately 33% (year 1), 27% (year 2), 20% (year 3), 13% (year 4) and 7% (year 5). 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, 2020, 2019 and 2018 were $126.2 million, $149.5 million and
$109.3 million, respectively.
We review pre-publication costs for impairment. For the years ended December 31, 2020, 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 certain individual assets and liabilities.
We have the option of first assessing qualitative factors to determine whether it is necessary to perform a
quantitative impairment test for goodwill or we can perform the quantitative impairment test without performing the
qualitative assessment. In performing the qualitative 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.
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, goodwill is deemed impaired and is written down to the
extent of the difference between the fair value of the reporting unit and the carrying value.
We estimate the total fair value of the Education reporting unit by using one or more of various valuation
techniques including an evaluation of our market capitalization and peer company multiples depending on the best
approximation of fair value of the Education reporting unit in the current social and economic environment. With
regard to indefinite-lived intangible assets, which includes the Houghton Mifflin Harcourt tradename at
December 31, 2020 and 2019, 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. Adverse changes in our market capitalization or peer company multiples by an equivalent amount could
give rise to an impairment.
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Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
We completed our annual goodwill impairment test as of October 1, 2020 using consistent methodologies and
assumptions with those described during our event-driven tests and did not identify an impairment. The fair value of
the Education reporting unit was in excess of its carrying value by approximately 18% as of October 1, 2020 and
2019. We recorded a goodwill impairment charge of $279.0 million for the year ended December 31, 2020. Refer to
Note 2 for a discussion of the factors and circumstances leading to the goodwill impairment. There was no goodwill
impairment for the years ended December 31, 2019 and 2018. 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, 2020 and 2019. No
indefinite-lived intangible assets were deemed to be impaired for the years ended December 31, 2020, 2019 and
2018.
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, 2020, 2019 and 2018.
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.
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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 author’s
product and are recovered as earned. As advances are recorded, a partial reserve may be recorded immediately based
primarily upon historical sales experience. Additionally, advances are evaluated periodically to determine if they are
expected to be recovered on a title-by-title basis, with consideration given to the other titles in the author’s portfolio
also earning against the outstanding advance. Any portion of a royalty advance that is not expected to be recovered
is fully reserved.
bbalance. 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.
The reserve for royalty advances is reported as a reduction of the royalty advances to authors
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.
75
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 2020,
2019 and 2018, our interest rate swaps were designated as hedges and the majority qualified for hedge accounting.
The interest rate derivative contracts matured on July 22, 2020. We recorded an unrealized loss of $3.4 million and
an unrealized gain of $3.5 million in our statements of comprehensive loss to account for the changes in fair value of
these derivatives during the periods ended December 31, 2019 and 2018, respectively. The corresponding
$1.0 million hedge liability was included within current other liabilities in our consolidated balance sheet as of
December 31, 2019. 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, 2020, 2019 and 2018.
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 December 2019, the Financial Accounting Standards Board (“FASB”) issued new guidance to simplify the
accounting for income taxes by removing certain exceptions to the general principles, including simplification of
areas such as franchise taxes, step-up in tax basis of goodwill, intraperiod allocations, separate entity financial
statements and interim recognition of enactment of tax laws or rate changes. The standard will be effective in 2021,
with early adoption permitted. We do not expect it to have a material impact on our consolidated financial
statements.
Recently Adopted Accounting Standards
In August 2018, the FASB issued new guidance on a customer's accounting for implementation, set-up, and
other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor (i.e., a service contract).
Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would
for an arrangement to develop or obtain internal use software. Accordingly, the guidance requires a customer to
determine the stage of a project that the implementation activity relates to and the nature of the associated costs in
77
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
order to determine whether those costs should be expensed as incurred or capitalized. The guidance also requires the
customer to amortize the capitalized implementation costs as an expense over the term of the hosting arrangement.
We adopted the guidance on January 1, 2020. The adoption of this guidance did not have a material impact on our
consolidated financial statements.
In January 2017, the FASB issued updated guidance to simplify the test for goodwill impairment by the
elimination of Step 2 in the determination on whether goodwill should be considered impaired. The annual
assessments are still required to be completed. We adopted the guidance on January 1, 2020.
In June 2016, the FASB issued new guidance that requires credit losses on financial assets measured at
amortized cost basis to be presented at the net amount expected to be collected, not based on incurred losses, as well
as additional disclosures. The estimate of expected credit losses should consider historical information, current
information, as well as reasonable and supportable forecasts, including estimates of prepayments. We adopted the
guidance on January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated
financial statements.
We are exposed to credit losses primarily through our accounts receivable. We develop estimates to reflect the
risk of credit loss which are based on an evaluation of accounts receivable aging, prior collection experience, current
conditions and reasonable and supportable forecasts of the economic conditions that will exist through the
contractual life of the financial asset. We write off the asset when it is no longer deemed collectible. We monitor our
ongoing credit exposure through an active review of collection trends. Our activities include monitoring the
timeliness of payment collection and performing timely account reconciliations. At December 31, 2020, we reported
allowances for doubtful accounts of $4.0 million, compared to $3.0 million at December 31, 2019, reflecting an
increase of $1.6 million, prior to write-offs of $0.6 million for the year ended December 31, 2020.
We are also exposed to losses on our royalty advances. Royalty advances to authors are capitalized and
represent amounts paid in advance of the sale of an author’s product and are recovered as earned. As advances are
recorded, a partial reserve may be recorded immediately based primarily upon historical sales experience.
Additionally, advances are evaluated periodically to determine if they are expected to be recovered on a title-by-title
basis. Any portion of a royalty advance that is not expected to be recovered is fully reserved. At December 31, 2020,
we reported a reserve for royalty advances of $96.7 million, compared to $119.7 million at December 31, 2019,
reflecting a decrease of $23.0 million for the year ended December 31, 2020.
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.
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. We
adopted the guidance on January 1, 2018 applying the modified retrospective method.
4.
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. Pro forma financial
information and measurement period adjustments were not material.
78
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
5.
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 purchaser’s 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 segment’s 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:
NNet sales
Costs
Amortization
Earnings from discontinued operations before taxes
Income tax expense
Earnings from discontinued operations, net of tax
6.
Balance Sheet Information
Account Receivable
For the Year
Ended December 31,
2018
$
$
56,562
37,714
4,954
13,894
1,061
12,833
Accounts receivable at December 31, 2020 and 2019 consisted of the following:
Accounts receivable
Allowance for bad debt
Reserve for book returns
2020
2019
$ 171,395 $ 204,119
(3,015)
(16,679)
$ 152,832 $ 184,425
(3,989)
(14,574)
As of December 31, 2020 and 2019, one individual customer comprised more than 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.
79
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Inventories
Inventories at December 31, 2020 and 2019 consisted of the following:
Finished goods
Raw materials
Inventories
Property, Plant, and Equipment
2020
2019
$ 155,759 $ 203,103
9,956
$ 166,963 $ 213,059
11,204
Balances of major classes of assets and accumulated depreciation and amortization at December 31, 2020 and
2019 were as follows:
Land and land improvements
Building and building equipment
Machinery and equipment
Capitalized software and internal-use software
Leasehold improvements
Film and media
Less: Accumulated depreciation and amortization
Property, plant, and equipment, net
2020
2019
4,939 $
11,160
14,985
641,027
24,266
29,845
726,222
(633,020)
4,939
10,239
12,970
598,317
22,974
22,055
671,494
(571,106)
93,202 $ 100,388
$
$
For the years ended December 31, 2020, 2019 and 2018, depreciation and amortization expense related to
property, plant, and equipment were $64.7 million, $71.3 million and $81.2 million, respectively.
Property, plant, and equipment at December 31, 2020 and 2019 included approximately $0.1 million and $0.3
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,
2020 are $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 and other
production series. 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 $14.0 million, $9.8 million and $6.1 million for the years ended December 31, 2020, 2019
and 2018, respectively, against this asset, which is included within cost of sales, excluding publishing rights and pre-
publication amortization, in the statement of operations.
Substantially all property, plant, and equipment are pledged as collateral under our term loan and revolving
credit facility.
80
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Contract Assets, Contract Liabilities and Contract Costs
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, 2020:
December 31,
2020
December
31,
2019
$ Change % Change
Contract assets
Contract liabilities (deferred revenue)
$
$
580 $
471
905,284 $ 848,106 $ 57,178
109 $
432.11%
6.74%
The $56.7 million increase in our net contract liabilities from December 31, 2019 to December 31, 2020 was
primarily due to the non-satisfaction of performance obligations related to physical and digital products, and
services during the period in excess of recognition from deferred revenue.
During the years ended December 31, 2020, 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
pperiod
Year
Ended
December
31,
2020
Year
Ended
December
31,
2019
Year
Ended
December
31,
2018
$295,675 $229,557 $220,769
As of December 31, 2020, the aggregate amount of the transaction price allocated to the remaining
performance obligations, which includes deferred revenue and open orders, was $970.3 million, and we will
recognize approximately 73% to net sales over the next 1 to 3 years.
We capitalize incremental commissions paid to sales representatives for obtaining product sales as well as
service contracts unless the capitalization and amortization of such costs are not expected to have a material impact
on the financial statements. Applying the practical expedient within the accounting guidance, we recognize sales
commission expense when incurred if the amortization period of the assets that we otherwise would have recognized
is one year or less. We had deferred commissions in the amount of $30.7 million and $29.3 million at December 31,
2020 and 2019, respectively, and amortized $12.9 million, $13.2 million and $10.5 million during the years ended
December 31, 2020, 2019 and 2018, respectively. The amortization is included in selling and administrative
expenses.
Costs to fulfill a contract are directly related to a contract that will be used to satisfy a performance obligation
in the future and are expected to be recovered. These costs are amortized on a systematic basis that is consistent with
the transfer to the customer of the goods or services to which the asset relates. Our assets associated with
incremental costs to fulfill a contract were $14.7 million and $5.6 million at December 31, 2020 and 2019,
respectively, and are included within prepaid expenses and other assets (current) and other assets (long term) on our
consolidated balance sheet. We recorded amortization of $3.8 million and $4.6 million during the years ended
December 31, 2020 and 2019, respectively. The amortization is included in cost of sales, excluding publishing rights
and pre-publication amortization.
81
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
7.
Goodwill and Other Intangible Assets
The change in the carrying amount of goodwill, which all relates to the Education segment, for the year ended
December 31, 2020 is as follows:
Balance at December 31, 2019
Impairment
Balance at December 31, 2020
$
$
716,977
(279,000)
437,977
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. Accumulated impairment losses on goodwill as of December 31, 2020 was $279.0 million. Refer to
Note 2 for a discussion of the valuation of goodwill, indefinite-lived intangible assets and long-lived assets along
with the triggering event which resulted in a goodwill impairment of $279.0 million during the year ended
December 31, 2020. There was no impairment charge recorded in the years ended December 31, 2019 and 2018.
Other intangible assets consisted of the following:
Trademarks and tradenames: indefinite-
Lived
Trademarks and tradenames: definite-
Lived
Publishing rights
Customer related and other
Other intangible assets, net
December 31, 2020
Accumulated
Amortization
Cost
Total
Cost
December 31, 2019
Accumulated
Amortization
Total
$ 161,000 $
— $161,000 $ 161,000 $
— $161,000
164,130
(53,610) 110,520
1,180,000 (1,159,482)
(38,948) 125,182
40,574
(302,371) 147,469
$1,954,970 $(1,526,386) $428,584 $1,954,970 $(1,480,745) $474,225
20,518 1,180,000 (1,139,426)
(313,294) 136,546
449,840
449,840
164,130
During 2019, we acquired certain assets of PV Waggle LLC and recorded an intangible asset of
$5.2 million. Refer to Note 4.
Amortization expense for definite-lived intangible assets, publishing rights and customer related and other
intangibles were $45.6 million, $51.9 million and $61.6 million for the years ended December 31, 2020, 2019 and
2018, 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
14,408
10,608
6,808
6,715
6,437
65,544
$ 110,520 $
Publishing
Rights
Other
Intangible
Assets
11,642
7,569
1,307
—
10,333
10,134
9,954
8,503
8,315
89,307
20,518 $ 136,546
—
2021
2022
2023
2024
2025
Thereafter
82
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
8.
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)
Less: Current portion of long-term debt
Total long-term debt, net of discount and issuance
Costs
Revolving credit facility
December 31, December 31,
2020
2019
$
346,091 $
361,294
297,601
643,692
(19,000)
295,893
657,187
(19,000)
$
$
624,692 $
— $
638,187
—
Long-term debt repayments due in each of the next five years and thereafter is as follows:
Year
2021
2022
2023
2024
2025
19,000
19,000
19,000
304,000
306,000
667,000
$
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 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.
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.
The notes do not require us to comply with financial maintenance covenants. We are currently required to
meet certain incurrence based financial covenants as defined under our notes. The notes are subject to restrictions on
our ability to incur additional indebtedness, issue certain preferred stock, redeem, purchase or retire subordinated
debt, make certain investments, pay dividends or other amounts, enter into certain transactions with affiliates, merge
or consolidate with another person, sell or otherwise dispose of all or substantially all of our assets, sell certain
assets, including capital stock, designate our subsidiaries as unrestricted subsidiaries, redeem or repurchase capital
stock or make other restricted payments, and incur certain liens. The notes are subject to customary events of
83
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
default. If an event of default occurs and is continuing, the administrative agent may, or at the request of certain
required lenders shall, accelerate the obligations outstanding under the notes.
Term Loan Facility
On November 22, 2019, we entered into a second amended and restated term loan credit agreement for an
aggregate principal amount of $380.0 million (the “term loan facility”). The 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 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, 2020, the interest rate on the term loan facility was 7.25%.
On July 27, 2017, the U.K. Financial Conduct Authority (the “FCA”) announced that it will no longer require
banks to submit rates for the calculation of LIBOR after 2021. Our term loan facility provides that the administrative
agent may determine that (i) adequate and reasonable means do not exist for ascertaining the LIBOR rate or (ii) the
FCA or the government authority having jurisdiction over the administrative agent has made a public statement
identifying a specific date after which the LIBOR rate shall no longer be used for determining interest rates for
loans. If the administrative agent determines that (i) or (ii) above is unlikely to be temporary then the administrative
agent and the Company will agree to transition to an alternate base rate or amend the term loan facility to establish
an alternate rate of interest to LIBOR that gives due consideration to the then-prevailing market convention for
determining a rate of interest for syndicated loans in the United States at such time.
The term loan facility was issued at a discount equal to 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 term loan facility contains customary mandatory prepayment requirements, including with respect to
excess cash flow, proceeds from certain asset sales or dispositions of property, and proceeds from certain
incurrences of indebtedness. The term loan facility permits the Company to voluntarily prepay outstanding amounts
at any time without premium or penalty, other than customary breakage costs with respect to LIBOR loans;
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 term loan facility shall be subject to a prepayment
premium of 1.00% of the principal amount of the amounts prepaid.
The term loan facility does not require us to comply with financial maintenance covenants. We are currently
required to meet certain incurrence based financial covenants as defined under our term loan facility. The term loan
facility is subject to usual and customary conditions, representations, warranties and covenants, including
restrictions on additional indebtedness, liens, investments, mergers, acquisitions, asset dispositions, dividends to
stockholders, repurchase or redemption of our stock, transactions with affiliates and other matters. The term loan
facility is subject to customary events of default. If an event of default occurs and is continuing, the administrative
agent may, or at the request of certain required lenders shall, accelerate the obligations outstanding under the term
loan facility.
We are subject to an excess cash flow provision under our term loan facility which is predicated upon our
leverage ratio and cash flow. We were not required to make a payment under the excess cash flow provision in 2020
and 2019.
On November 22, 2019, in connection with the notes and 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
84
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
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. The interest rate derivative contracts matured on
July 22, 2020.
These interest rate swaps were designated as cash flow hedges and qualified for hedge accounting under the
accounting guidance related to derivatives and hedging. Accordingly, we recorded an unrealized loss of $3.4 million
and an unrealized gain of $3.5 million in our statements of comprehensive loss to account for the changes in fair
value of these derivatives during the periods ended December 31, 2019 and 2018, respectively. The corresponding
$1.0 million hedge liability is included within current other liabilities in our consolidated balance sheet as of
December 31, 2019. We reclassified $1.9 million from other comprehensive loss to earnings during the year ended
December 31, 2020.
In connection with the 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 amount, 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 was less than $0.1 million and was recorded in our consolidated statements of operations
for each year ended December 31, 2020 and 2019. We had no interest rate derivative contracts outstanding as of
December 31, 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 (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.
85
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. If an event of default occurs and is continuing, the
administrative agent may, or at the request of certain required lenders shall, accelerate the obligations outstanding
under the revolving credit facility. As of December 31, 2020, no amounts are outstanding under the revolving credit
facility.
As of December 31, 2020, the minimum fixed charge coverage ratio covenant under our revolving credit
facility was not applicable, due to our level of borrowing availability. The minimum fixed charge coverage ratio,
which is only tested in limited situations, is 1.0 to 1.0 through the end of the facility.
Guarantees
Under each of the notes, the term loan facility and the revolving credit facility, Houghton Mifflin Harcourt
Publishers Inc., Houghton Mifflin Harcourt Publishing Company and HMH Publishers LLC are the borrowers
(collectively, the “Borrowers”), and Citibank, N.A. acts as both the administrative agent and the collateral agent.
The obligations under the notes, the term loan facility and the revolving credit facility are guaranteed by the
Company and each of its direct and indirect for-profit domestic subsidiaries (other than the Borrowers) (collectively,
the “Guarantors”) and are secured by all capital stock and other equity interests of the Borrowers and the Guarantors
and substantially all of the other tangible and intangible assets of the Borrowers and the Guarantors, including,
without limitation, receivables, inventory, equipment, contract rights, securities, patents, trademarks, other
intellectual property, cash, bank accounts and securities accounts and owned real estate. The revolving credit facility
is secured by first priority liens on receivables, inventory, deposit accounts, securities accounts, instruments, chattel
paper and other assets related to the foregoing (the “Revolving First Lien Collateral”), and second priority liens on
the collateral which secures the term loan facility on a first priority basis. The term loan facility is secured by first
priority liens on the capital stock and other equity interests of the Borrowers and the Guarantors, equipment, owned
real estate, trademarks and other intellectual property, general intangibles that are not Revolving First Lien
Collateral and other assets related to the foregoing, and second priority liens on the Revolving First Lien Collateral.
9.
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 2033. 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.
86
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, 2020
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
NNoncurrent
Operating
Total lease liabilities
Weighted average remaining lease term
Operating leases
Weighted average discount rate Operating
leases (1)
Classification
December 31, 2020
December 31, 2019
Operating lease assets
Operating lease
liabilities
Operating lease
liabilities
$
$
$
$
126,850
126,850
9,669
132,014
141,683
8.2 Years
$
$
$
$
132,247
132,247
8,685
134,994
143,679
9.6 Years
12.56 %
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 $34.9 million and $2.1 million and $39.9 million and
$2.3 million for the years ended December 31, 2020 and 2019, respectively. The net lease cost of $32.8 million and
$37.6 million for years ended December 31, 2020 and 2019, respectively, 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
Operating
Leases
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less: interest
Present value of lease liabilities
$
$
24,143
25,395
27,838
29,034
28,370
110,993
245,773
(104,090 )
141,683
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 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
87
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
is $9.8 million. We currently expect to relocate to the space in the second quarter of 2021, but this 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 years ended
December 31, 2020 and 2019.
Cash paid for amounts included in the measurement of
lease liabilities
Operating cash flows for operating leases – 2020
Operating cash flows for operating leases – 2019
10. Restructuring, Severance and Other Charges
2020 Restructuring Plan
$
$
28,639
31,245
On September 4, 2020, we finalized a voluntary retirement incentive program, which was offered to all U.S.
based employees at least 55 years of age with at least five years of service. Of the eligible employees, 165 elected to
participate representing approximately 5% of our workforce. The majority of the employees voluntarily retired as of
September 4, 2020 with select employees leaving later in the year. Each of the employees received or will receive
separation payments in accordance with our severance policy.
On September 30, 2020, we undertook a restructuring program, including a reduction in force, as part of the
ongoing assessment of our cost structure amid the COVID-19 pandemic and in line with our strategic transformation
plan. The reduction in force resulted in a 22% reduction in our workforce, including positions eliminated as part of
the voluntary retirement incentive program mentioned above, and net of newly created positions to support our
digital first operations. The reduction in force will result in the departure of approximately 525 employees and was
completed in October 2020. Each of the employees received or will receive separation payments in accordance with
our severance policy. The total one-time, non-recurring cost incurred in connection with the restructuring program,
inclusive of the voluntary retirement incentive program, (collectively the “2020 Restructuring Plan”) all of which
represents cash expenditures, is approximately $33.6 million.
The following table provides a summary of our total costs associated with the 2020 Restructuring Plan,
included in the restructuring/severance and other charges line item within our consolidated statements of operations,
for the year ended December 31, 2020, by major type of cost:
Type of Cost
Restructuring charges: (1)
Severance and termination benefits
Year Ended Total Amount
December 31,
2020
Incurred
to Date
$
$
33,643 $
33,643 $
33,643
33,643
(1) All restructuring charges are included within Corporate and Other.
88
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Our restructuring liabilities are comprised of accruals for severance and termination benefits. The following is
a rollforward of our liabilities associated with the 2020 Restructuring Plan:
2020
Restructuring
accruals at
December 31,
2019
Charges
Cash
payments
Restructuring
accruals at
December 31,
2020
$
$
— $ 33,643 $ (14,332) $
— $ 33,643 $ (14,332) $
19,311
19,311
Severance and termination benefits
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 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 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.
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:
2020
Severance and termination benefits
Restructuring
accruals at
December 31,
2019
11,649 $
11,649 $
$
$
89
Charges
Cash
payments
— $ (11,370) $
— $ (11,370) $
Restructuring
accruals at
December 31,
2020
279
279
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
2019
Restructuring
accruals at
December 31,
2018
Charges
Cash
payments
Severance and termination benefits
$
$
— $
— $
15,820 $
15,820 $
Severance and Other Charges
2020
Restructuring
accruals at
December 31,
2019
11,649
11,649
(4,171) $
(4,171) $
Exclusive of the 2020 Restructuring Plan and the 2019 Restructuring Plan, during the year ended December
31, 2020, $0.8 million of severance payments were made to employees whose employment ended in 2019 and prior
years.
A summary of the significant components of the severance costs, which are not allocated to our segments and
instead are included in the Corporate and Other category, is as follows:
Severance costs
2020
Severance/
other
accruals at
December 31,
2019
Severance/
other
expense
Cash
payments
Severance/
other
accruals at
December 31,
2020
$
$
758
758
$
$
— $
— $
(758) $
(758) $
—
—
90
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
2019
Exclusive of the 2019 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. 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.
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)
1,690
$
$
2,534 $
—
2,534 $
(3,196) $
—
(3,196) $
758
—
758
(1)
related to office space consolidation were reclassed on the balance sheet as a reduction of operating lease assets.
In connection with the adoption of the new leasing standard on January 1, 2019, the restructuring liabilities
2018
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.
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
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
The current portion of the severance and other charges was $19.6 million and $12.4 million (inclusive of the
2019 Restructuring Plan and 2020 Restructuring Plan) as of December 31, 2020 and 2019, respectively.
91
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
11.
Income Taxes
The components of loss before taxes by jurisdiction are as follows:
U.S.
Foreign
Loss before taxes
Total income taxes by jurisdiction are as follows:
For
the Year
Ended
For
the Year
Ended
For
the Year
Ended
December 31, December 31, December 31,
2019
$ (494,456) $ (213,541) $ (134,884)
3,024
$ (492,242) $ (209,632) $ (131,860)
3,909
2,214
2020
2018
For
the Year
Ended
For
the Year
Ended
December 31, December 31, December 31,
2019
For
the Year
Ended
2018
2020
Income tax expense (benefit)
U.S.
Foreign
$
$
(12,691) $
287
(12,404) $
4,273 $
(72)
4,201 $
3,701
1,896
5,597
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,
2019
2020
2018
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
$
$
182 $
—
1,769
1,951
105
(5,505)
(8,955)
(14,355)
(12,404) $
(730) $
0
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
92
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
Foreign rate differential
State and local taxes
Cancellation of debt income
Increase in valuation allowance
Tax credits
Goodwill impairment
Effective tax rate
For the
For the
Year Ended
Year Ended
December 31, December 31,
2020
2019
For the
Year Ended
December 31,
2018
21.0%
(0.9)
—
2.0
—
(15.5)
(0.2)
(3.9)
2.5%
21.0%
(3.6)
—
(7.9)
(1.3)
(10.0)
(0.2)
—
(2.0)%
21.0%
(2.6)
(0.1)
6.8
—
(26.6)
(2.7)
—
(4.2)%
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 (1)
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
2020
2019
$ 326,504 $ 272,378
41,824
6,624
4,475
259,375
113,029
3,298
6,152
10,302
35,890
6,769
(583,505)
$ 146,383 $ 176,611
39,095
6,879
4,480
226,227
141,775
2,806
6,525
12,435
33,963
8,263
(662,569)
2020
2019
(53,400)
(21,578)
(45,279)
(30,245)
(9,877)
(160,379)
(13,996) $
(89,879)
(25,503)
(48,984)
(32,887)
(7,709)
(204,962)
(28,351)
$
(1)
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, 2020 and 2019, we had gross deferred interest deductions
totaling $900.2 million and $984.5 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 $2.4 million of foreign deferred tax assets which are expected
to be realized, net of deferred tax liabilities resulting from indefinite-lived intangibles.
93
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
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:
NNon-current deferred tax assets
NNon-current deferred tax liabilities
2020
2,415 $
(16,411)
(13,996) $
2019
2,520
(30,871)
(28,351)
$
$
A reconciliation of the gross amount of unrecognized tax benefits, excluding accrued interest and penalties, is
as follows:
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
Additions based on tax positions related to the prior
year
Balance at December 31, 2019
Reductions based on tax positions related to the prior
year
Additions based on tax positions related to the prior
year
Balance at December 31, 2020
$
15,680
—
—
15,680
—
—
15,680
—
—
15,680
$
We are currently open for audit under the statute of limitation for Federal, state and foreign jurisdictions for
years 2017 to 2020. However, carryforward attributes from prior years may still be adjusted upon examination by
tax authorities if they are used in a future period.
We report penalties and tax-related interest expense on unrecognized tax benefits as a component of the
provision for income taxes in the accompanying consolidated statement of operations. At December 31, 2020 and
2019, 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, 2020, 2019 and 2018 were immaterial.
As of December 31, 2020, we have approximately $1,058.8 million of Federal tax loss carryforwards, of
which $612.5 million will expire between 2034 and 2037. The Company has approximately $446.3 million of post-
tax reform Federal tax loss carryforwards which have an indefinite life, though are limited in their use by 80% of
taxable income. The Company has approximately $1,419.5 million of state tax loss carryforwards, which will expire
between 2021 and 2040. In addition, we have foreign tax credit carryforwards of $7.3 million and research and
development credit carryforwards of $4.2 million, which will expire between 2021 and 2036. The Company’s Irish
net operating losses of $142.6 million, which are reduced by a reserve for uncertain tax positions of $123.6 million,
are not subject to expiration. The Canadian Federal losses of $0.7 million 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 Company’s 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, 2020,
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 Company’s
94
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
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 Company’s 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, 2020 and 2019.
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, 2020 and 2019 of $662.6 million and $583.5 million, respectively. We have increased
our valuation allowance by $79.1 million in 2020 with $76.7 million as a component of operations and $2.4 million
as a component of other comprehensive income.
12. 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 Plan’s assets consist
principally of common stocks, fixed income securities, investments in registered investment companies, and cash
and cash equivalents. We also have a nonqualified defined benefit plan, or nonqualified plan, that previously
covered employees who earned over the qualified pay limit as determined by the Internal Revenue Service. The
nonqualified plan accrues benefits for the participants based on the cash balance plan calculation. The nonqualified
plan is not funded. We use a December 31 date to measure the pension and postretirement liabilities. In 2007, both
the qualified and nonqualified pension plans eliminated participation in the plans for new employees hired after
October 31, 2007.
We recognize the funded status of defined benefit pension and other postretirement plans as an asset or
liability in the balance sheet and are required to recognize actuarial gains and losses and prior service costs and
credits in other comprehensive income and subsequently amortize those items in the statement of operations.
95
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The following table summarizes the Accumulated Benefit Obligations (“ABO”), the change in Projected
Benefit Obligation (“PBO”), and the funded status of our plans as of and for the financial statement period ended
December 31, 2020 and 2019:
ABO at end of period
Change in PBO
PBO at beginning of period
Interest cost on PBO
Plan settlements
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
Plan settlements
Benefits paid
Fair market value at end of period
Unfunded status
2020
2019
$ 179,408 $ 169,364
$ 169,364 $ 162,096
6,045
—
12,507
(11,284)
$ 179,408 $ 169,364
4,388
(4,990)
18,447
(7,801)
16,060
4,769
(4,990)
(7,801)
$ 145,716 $ 132,776
22,955
1,269
—
(11,284)
$ 153,754 $ 145,716
(23,648)
$
(25,654) $
Amounts recognized in the consolidated balance sheets at December 31, 2020 and 2019 consist of:
Current liabilities
NNoncurrent liabilities
Net amount recognized
2020
2019
(1,593) $
(24,061)
(25,654) $
—
(23,648)
(23,648)
$
$
Additional year-end information for pension plans with ABO in excess of plan assets at December 31, 2020
and 2019 consist of:
PBO
ABO
Fair value of plan assets
2020
2019
$ 179,408 $ 169,364
169,364
145,716
179,408
153,754
Weighted average assumptions used to determine the benefit obligations (both PBO and ABO) at
December 31, 2020 and 2019 are:
Discount rate
Increase in future compensation
2020
2019
2.2%
N/A
3.1%
N/A
96
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Net periodic pension (income) cost includes the following components:
For the
For the
For the
Year Ended
Year Ended
Year Ended
December 31, December 31, December 31,
2019
2018
2020
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of net loss
Settlement loss recognized
Net pension (income) expense recognized for
the period
$
$
4,388 $
(7,419)
2,325
1,100
6,045 $
(7,659)
1,028
—
5,300
(7,985)
1,420
—
394 $
(586) $
(1,265)
Significant actuarial assumptions used to determine net periodic pension cost at December 31, 2020, 2019 and
2018 are:
Discount rate
Increase in future compensation
Expected long-term rate of return on assets
2020
2019
2018
3.1%
N/A
5.5%
4.2%
N/A
5.5%
3.6%
N/A
5.5%
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, 5% with real-estate investment trust managers and 5% with hedge fund managers. For 2021,
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.
97
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, 2020 and 2019 is shown below.
Asset Class
Equity
Fixed income
Real estate investment trust
Other
2020
Percentage
in Each
Asset Class
2019
Percentage
in Each
Asset Class
33.5%
52.7
7.0
6.8
100.0%
32.6%
54.5
8.0
4.9
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,
2020
$
1,914 $
Not subject
to leveling (1)
1,914
27,765
15,544
8,259
28,855
46,228
9
810
604
4,485
27,765
15,544
8,259
28,855
46,228
9
810
604
4,485
10,689
8,228
364
153,754 $
10,689
8,228
364
153,754
$
(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.
98
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
December 31,
2019
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
Not subject
to leveling (1)
1,413
$
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
$
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
2021
2022
2023
2024
2025
2026–2030
$
Pension
14,030
12,817
12,581
12,789
13,356
61,944
Expected Contributions
We expect to contribute $3.3 million in 2021.
Postretirement Benefit Plan
We also provide postretirement medical benefits to retired full-time, nonunion employees hired before April 1,
1992, who have provided a minimum of five years of service and attained age 55.
99
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The following table summarizes the Accumulated Postretirement Benefit Obligation (“APBO”), the changes
in plan assets, and the funded status of our plan as of and for the financial statement periods ended December 31,
2020 and 2019.
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
2020
2019
16,684 $
67
426
184
2,857
(2,097)
18,121 $
15,812
58
582
66
1,878
(1,712)
16,684
— $
1,913
184
(2,097)
— $
(18,121) $
—
1,646
66
(1,712)
—
(16,684)
$
$
$
$
$
Amounts for postretirement benefits accrued in the consolidated balance sheets at December 31, 2020 and
2019 consist of:
Current liabilities
NNoncurrent liabilities
Net amount recognized
2020
(1,555) $
(16,566)
(18,121) $
2019
(1,571)
(15,113)
(16,684)
$
$
Amounts not yet reflected in net periodic benefit cost and recognized in accumulated other comprehensive
(loss) income at December 31, 2020 and 2019 consist of:
NNet (loss) gain
Prior service cost
Accumulated other comprehensive (loss) income
2020
2019
$
$
(1,050) $
(384)
(1,434) $
1,771
(426)
1,345
Weighted average actuarial assumptions used to determine APBO at year-end December 31, 2020 and 2019
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
2020
2019
2.2%
5.5%
4.5%
2038
3.1%
5.8%
4.5%
2038
100
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Net periodic postretirement benefit cost 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
2020
2019
2018
67 $
426
42
(7)
528 $
58 $
582
42
(164)
518 $
128
672
(690)
—
110
$
$
Significant actuarial assumptions used to determine postretirement benefit cost at December 31, 2020, 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
2020
2019
2018
3.1%
5.8%
4.2%
6.1%
3.6%
6.3%
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 2020 and 2019 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
2020
2019
$
2 $
87
(2)
(77)
8
85
(7)
(76)
The following table presents the change in other comprehensive loss for the year ended December 31, 2020
related to our pension and postretirement obligations.
Sources of change in accumulated other
comprehensive loss
NNet loss arising during the period
Amortization of prior service credit
Amortization of net gain (loss)
Total accumulated other comprehensive
loss recognized during the period
Pension
Plans
Postretirement
Benefit Plan
Total
$
(9,807) $
—
3,377
(2,814) $ (12,621)
42
3,370
42
(7)
$
(6,430) $
(2,779) $
(9,209)
101
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Estimated amounts that will be amortized from accumulated other comprehensive income (loss) over the next
fiscal year.
Prior service credit (cost)
NNet gain (loss)
Pension
Plans
Postretirement
Benefit Plan
$
$
— $
(3,389)
(3,389) $
(42)
—
(42)
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, 2020 and 2019 consist of:
NNet actuarial loss
Accumulated other comprehensive loss
2020
(44,219) $
(44,219) $
2019
(35,010)
(35,010)
$
$
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, are expected to be paid:
Fiscal Year Ended
2021
2022
2023
2024
2025
2026-2030
Postretirement
Benefit Plan
$
1,555
1,488
1,437
1,389
1,320
5,686
Expected Contribution
We expect to contribute approximately $1.6 million in 2021.
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 $6.8 million,
$7.4 million and $7.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. We did not
make any additional discretionary contributions in 2020, 2019 and 2018.
13.
Stock-Based Compensation
Total compensation expense related to grants of stock options, restricted stock units, and purchases under the
employee stock purchase plan recorded in the years ended December 31, 2020, 2019 and 2018 was approximately
$11.6 million, $14.0 million and $13.3 million, respectively, and is included in selling and administrative expense.
102
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
2015 Omnibus Incentive Plan
Our Board of Directors adopted the 2015 Omnibus Incentive Plan (“Plan”) in February 2015, which became
effective on May 19, 2015 following stockholder approval. The Plan initially provided 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. On May 19, 2020, our shareholders approved an
amended and restated Plan which increased the authorization of the number of shares available for grant under the
Plan by 3,630,000 shares of our common stock.
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, 2020, there were 6,996,290 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, 2019
Forfeited
Balance at December 31, 2020
Vested and expected to vest at December 31, 2020
Exercisable at December 31, 2020
Number of
Shares
2,765,826 $
(868,614)
1,897,212 $
1,883,100 $
1,521,524 $
Weighted
Average
Exercise Price
13.10
13.40
12.95
12.97
13.65
As of December 31, 2020, the range of exercise prices is $5.25 to $22.80 with a weighted average remaining
contractual life of 3.3 years for options outstanding. The weighted average remaining contractual life for options
vested and expected to vest and exercisable was 3.3 years and 3.1 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, options vested and expected to vest,
and options exercisable was zero at December 31, 2020. The intrinsic value of options outstanding, options vested
and expected to vest, and options exercisable was $0.1 million, $0.1 million and zero at December 31, 2019,
respectively.
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
103
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and our expected
annual dividend yield.
The fair value of each option granted was estimated on the grant date using the Black-Scholes valuation model
with the following assumptions:
Expected term (years) (a)
Expected dividend yield
Expected volatility (b)
Risk-free interest rate (c)
For the
Year Ended
December 31,
2018
4.75
0.00%
35.30%
2.84%
(a)
The expected term is the number of years that we estimate that options will be outstanding prior to exercise.
During 2018, 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) During 2018, we estimated volatility for options granted 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, 2020, there remained approximately $0.6 million of unearned compensation expense
related to unvested stock options to be recognized over a weighted average term of 0.8 years.
The weighted average grant date fair value was $1.82 for options granted in 2018.
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, 2019
Granted
Vested
Forfeited
Balance at December 31, 2020
Restricted Stock Units
Numbers of
Units
3,846,608
3,716,974
(1,149,957)
(723,816)
5,689,809
$
$
Weighted
Average
Grant Date
Fair Value
8.03
3.94
8.50
7.41
5.34
104
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
During 2020 and 2019, 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 2020 and 2019 market-based restricted stock units to be approximately $2.9 million and $3.1
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 $4.21 for 2020, and $7.75, $6.71 and
$6.53 for 2019, a three-year performance measurement period, and a risk-free rate of 0.40% and 2.51% for 2020 and
2019, respectively. We recognize the expense on these awards on a straight-line basis over the three-year
performance measurement period.
As of December 31, 2020, there remained approximately $11.9 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 employee’s 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. On December 10, 2020, the Compensation Committee of the Board of Directors
determined we would not start a new offering period for the ESPP until we have an opportunity to seek shareholder
approval of an amended and restated ESPP. As of December 31, 2020, there were a de minimis number of 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,
2020
516,563
$1.54 - $1.56
December 31,
2019
212,476
$4.73 - $4.90
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 in expense associated with our ESPP for each of the
years ended December 31, 2020 and 2019, respectively.
105
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
14. 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, 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, 2020 and 2019:
Financial assets
Money market funds
Foreign exchange derivatives
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
2020
Valuation
Technique
$ 262,135 $
262,135 $
466
—
$ 262,601 $
262,135 $
—
466
466
(a)
(a)
106
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
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)
(a)
Our money market funds are classified within Level 1 of the fair value hierarchy because they are valued
using quoted prices in active markets for identical instruments. In addition to $262.1 million and $276.7 million
invested in money market funds as of December 31, 2020 and 2019, respectively, we had $19.1 million and
$19.7 million of cash invested in bank accounts as of December 31, 2020 and 2019, 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 $14.9 million and $15.2 million at December 31, 2020 and 2019, 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, 2020 and 2019, 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. There were no aggregate notional amounts
outstanding of the interest rate derivative instruments as of December 31, 2020. 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
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.
107
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. An impairment analysis was
performed for the preparation of the first quarter report, as there were triggering events for the three months ended
March 31, 2020 related to the decline in our stock price attributed to the market environment, which resulted in a
goodwill impairment. There were no non-financial liabilities that were required to be measured at fair value on a
nonrecurring basis during 2020, 2019 and 2018.
The following table presents our nonfinancial assets measured at fair value on a nonrecurring basis during
2020:
NNonfinancial assets
Goodwill
Significant
Unobservable
Inputs
Total
Valuation
December 31,
2020
(Level 3)
Impairment
Technique
$
$
437,977
437,977
$
$
437,977
437,977
$
$
279,000
279,000
(c)
In evaluating goodwill for impairment, we first compare our reporting unit’s fair value to its carrying value.
We estimate the fair values of our reporting units by considering our market capitalization and other judgements.
Impairment recorded for goodwill for the year ended December 31, 2020 was $279.0 million. There was no
impairment recorded for goodwill for the years ended December 31, 2019 and 2018.
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, 2020, 2019 and 2018.
Non-Marketable Investments
At December 31, 2020 and 2019, the carrying value of our non-marketable investments, which were
comprised of equity interests in educational technology private partnerships, was $4.4 million and $2.3 million,
respectively. The amounts are included in other assets in our consolidated balance sheets. Our non-marketable
investments are accounted for using the cost method and are adjusted for observable transactions as appropriate.
Gains from non-marketable investments were $2.1 million for the year ended December 31, 2020 and are included
in gain on investments in our consolidated statements of operations.
108
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, 2020 and 2019. 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, 2020
December 31, 2019
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
$380,000 Term loan
$306,000 Senior secured notes
$
346,091
297,601
$
$
331,382
304,297
$
361,294
295,893
$
360,391
301,441
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, 2020
and 2019. 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.
15. 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. There have been various settled,
pending and threatened litigation that allege we exceeded the print run limitation or other restrictions in licenses
granted to us to reproduce photographs in our textbooks.
While we may incur a loss associated with certain pending or threatened litigation, we are not able to estimate
such amount, if any, but we do not expect any of these matters to have a material adverse effect on our results of
operations, financial position or cash flows. We have insurance over such amounts and with coverage and
deductibles as management believes is reasonable. There can be no assurance that our liability insurance will cover
all events or that the limits of coverage will be sufficient to fully cover all liabilities.
In April 2019, we were notified of an unasserted claim by the Commonwealth of Puerto Rico with regards to
payments 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 Riverside’s 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.
109
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 Scholastic’s 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. The case is scheduled for trial in August 2021.
In connection with an agreement with a development content provider, we agreed to act as guarantor to that
party’s loan to finance such development. Such guarantee is expected to remain until 2022. Under the guarantee, we
believe the maximum future payments to approximate $10.1 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 $1.4 million and $2.5 million of performance-related surety bonds for our
operating activities as of December 31, 2020 and 2019, respectively. An aggregate of $18.8 million and $23.7
million of letters of credit existed each year at December 31, 2020 and 2019, respectively, of which $1.1 million and
$0.7 million backed the aforementioned performance-related surety bonds each year in 2020 and 2019, 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, 2020 and 2019.
16.
Stockholders’ Equity
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of the following at December 31, 2020, 2019 and 2018:
NNet change in pension and benefit plan liabilities
Foreign currency translation adjustments
Unrealized loss on short-term investments
NNet change in unrealized loss on derivative
instruments
2020
2019
$ (48,966) $ (39,757) $ (41,557)
(5,909)
(99)
(6,650)
(90)
(6,420)
(90)
2018
(18)
2,381
$ (55,724) $ (47,272) $ (45,184)
(1,005)
Amounts reclassified from accumulated other comprehensive loss for the years ended December 31, 2020,
2019 and 2018 relating to the amortization of defined benefit pension and postretirement benefit plans totaled
approximately $(2.4) million, $(0.9) million and $(0.9) 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.
17. Related Party Transactions
There were no related party transactions during 2020 and 2018.
In November 2019, Anchorage Capital Group, L.L.C. (“Anchorage”), a significant stockholder in the
Company at the time and a former partner of which was serving on the Company’s board of directors, participated
as a lender in the refinancing of the Company’s 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 Company’s 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
110
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
loan. As of December 10, 2020, Anchorage no longer had an ownership interest in the Company. Anchorage’s
participation in the refinancing was on the same terms as all the other lenders. Refer to note 8 for additional
information about the Notes and the Term Loan Credit Agreement.
18. 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,
2020
For the Year
Ended
December 31,
2019
For the Year
Ended
December 31,
2018
Numerator
Loss from continuing operations
$
(479,838) $
(213,833) $
(137,457)
Earnings from discontinued operations,
net of tax
Gain on sale of discontinued operations,
net of tax
Income from discontinued operations, net
of tax
NNet loss attributable to common stockholders $
Denominator
Weighted average shares outstanding
—
—
—
—
—
—
(479,838) $
(213,833) $
12,833
30,469
43,302
(94,155)
Basic and diluted
125,455,487
124,152,984
123,444,943
NNet loss per share attributable to common
Stockholders
Basic and diluted:
Continuing operations
Discontinued operations
Net loss
$
$
(3.82) $
—
(3.82) $
(1.72) $
—
(1.72) $
(1.11)
0.35
(0.76)
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
19.
Segment Reporting
Ended
For the Year For the Year For the Year
Ended
December 31, December 31, December 31,
2019
2,765,826
3,342,923
2020
1,897,212
4,133,531
2018
3,406,171
2,793,680
Ended
As of December 31, 2020, 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
today’s 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
111
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
States and abroad. The principal distribution channels for HMH Books & Media products are retail stores, both
physical and online, and wholesalers.
We measure and evaluate our reportable segments based on net sales and segment Adjusted EBITDA from
continuing operations. We exclude from our segments certain corporate-related expenses, as our corporate functions
do not meet the definition of a segment, as defined in the accounting guidance relating to segment reporting. In
addition, certain transactions or adjustments that our Chief Operating Decision Maker considers to be non-
operational, such as amounts related to goodwill and other intangible asset impairment charges, derivative
instruments charges, acquisition/disposition-related activity, restructuring, severance costs, equity compensation
charges, gains or losses from investments, 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.
(in thousands)
2020
NNet sales
Segment Adjusted EBITDA
2019
NNet sales
Segment Adjusted EBITDA
2018
NNet sales
Segment Adjusted EBITDA
Year Ended December 31,
HMH
Books &
Media
Other
Corporate/
Education
$ 839,553 $ 191,739 $
145,862
26,627
$1,210,646 $ 180,028 $
196,907
14,908
$1,122,689 $ 199,728 $
210,604
21,942
—
(40,649)
—
(46,077)
—
(40,418)
The following table disaggregates our net sales by major source:
Year Ended December 31, 2020
HMH
Books &
Media
Education
$ 459,350 $
380,203
—
Consolidated
— $ 459,350
380,203
—
191,739
191,739
$ 839,553 $ 191,739 $1,031,292
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
(in thousands)
Core solutions (1)
Extensions businesses (2)
Books & Media
Net sales
(in thousands)
Core solutions (1)
Extensions businesses (2)
Books & Media
Net sales
112
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)
Books & Media
Net sales
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
(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)
Education Adjusted EBITDA
HMH Books & Media Adjusted EBITDA
Total Segment Adjusted EBITDA
Corporate/Other Adjusted EBITDA
Interest expense
Interest income
Depreciation expense
Amortization expense—film asset
Amortization expense
NNon-cash charges—stock compensation
NNon-cash charges—loss on derivative instruments
NNon-cash charges—asset 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
Gain on investments
Gain on sale of assets
Loss on extinguishment of debt
Loss before taxes
(Provision) benefit for income taxes
NNet loss from continuing operations
2018
2020
Years Ended December 31,
2019
$ 145,862 $ 196,907 $ 210,604
21,942
232,546
(40,418)
(45,680)
2,550
(75,116)
(6,057)
(170,903)
(13,248)
(1,374)
—
26,627
172,489
(40,649)
(65,959)
899
(50,715)
(13,953)
(171,821)
(11,573)
672
(279,000)
14,908
211,815
(46,077)
(48,778)
3,157
(61,475)
(9,835)
(201,382)
(13,968)
(899)
—
—
(9,758)
—
(1,080)
(33,643)
2,091
—
—
(492,242)
12,404
(2,883)
(11,478)
—
201
—
(131,860)
(5,597)
$ (479,838) $ (213,833) $ (137,457)
(6,327)
(21,742)
—
—
(4,363)
(209,632)
(4,201)
Segment information as of December 31, 2020 and 2019 is as follows:
(in thousands)
Total assets—Education segment
Total assets—HMH Books & Media segment
Total assets—Corporate and Other
Total consolidated assets
2020
2019
$ 1,520,504 $ 1,971,553
186,318
355,301
$ 2,021,126 $ 2,513,172
175,710
324,912
113
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
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 assets—International
2020
2019
$
228 $
113
The following is a schedule of net sales by geographic region:
(in thousands)
Year Ended December 31, 2020
NNet sales—U.S.
NNet sales—International
Total net sales
Year Ended December 31, 2019
NNet sales—U.S.
NNet sales—International
Total net sales
Year Ended December 31, 2018
NNet sales—U.S.
NNet sales—International
Total net sales
$
997,178
34,114
$ 1,031,292
$ 1,327,833
62,841
$ 1,390,674
$ 1,249,568
72,849
$ 1,322,417
20. Valuation and Qualifying Accounts
2020
Reserve for returns
Reserve for royalty advances
Deferred tax valuation allowance
2019
Reserve for returns
Reserve for royalty advances
Deferred tax valuation allowance
2018
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
$
$
$
3,015 $
16,679
119,695
583,505
1,589 $
33,847
16,552
81,475
(615) $
(35,952)
(39,592)
(2,412)
3,989
14,574
96,655
662,568
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
114
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
21. Quarterly Results of Operations (Unaudited)
2020:
Gross profit
Operating (loss) income
Net loss
Net loss per share attributable to
common stockholders
Diluted:
2019:
Gross profit
Operating (loss) income
Net (loss) income
Net (loss) income per share
attributable to
common stockholders
Diluted:
$
$
$
$
$
$
March 31,
June 30,
September 30,
December 31,
Three Months Ended
$
189,925
63,450
(338,176)
(345,973)
$
251,216
90,389
(22,212)
(38,168)
$
386,590
167,415
272
(12,552)
203,561
65,986
(68,973)
(83,145)
(2.77) $
(0.30) $
(0.10) $
(0.66)
(2.77) $
(0.30) $
(0.10) $
(0.66)
$
194,635
57,893
(101,835)
(117,362)
$
388,896
156,055
(30,253)
(40,613)
$
565,668
273,481
77,871
69,260
241,475
59,065
(108,947)
(125,118)
(0.95) $
(0.33) $
(0.95) $
(0.33) $
0.56
0.55
$
$
(1.01)
(1.01)
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 fourth quarter of 2020, we recorded an adjustment of $17.0 million and $1.0 million to increase
both the goodwill impairment charge and income tax benefit recorded, respectively, to correct an error of the
previously recorded goodwill impairment of $262.0 million and related income tax benefit in the first quarter of
2020. Management believes these adjustments are not material to the current period financial statements or any prior
periods.
115
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, 2020 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, 2020 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 SEC’s 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.
Management’s 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 Company’s 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 Company’s management assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2020. In making this assessment, the Company’s 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,
2020, the Company’s internal control over financial reporting was effective.
116
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 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, 2020
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 2021 Annual Meeting of
Stockholders, to be filed with the SEC within 120 days of December 31, 2020, 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 2021 Annual Meeting of Stockholders to be filed with the
SEC within 120 days of December 31, 2020, 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 2021 Annual Meeting of Stockholders to be filed with the SEC within
120 days of December 31, 2020, 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 2021 Annual Meeting of
Stockholders to be filed with the SEC within 120 days of December 31, 2020, 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 Company’s Independent Registered Public Accounting Firm” in our Proxy Statement for our 2021 Annual
Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2020, and is incorporated into
this Annual Report on Form 10-K by reference.
117
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, 2020 and 2019..................................................................
Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018.................
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2020, 2019
and 2018......................................................................................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018................
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020, 2019
and 2018......................................................................................................................................................
Notes to Consolidated Financial Statements ...................................................................................................
56
60
61
62
63
64
65
(2) Financial Statement Schedules.
Schedule II—“Valuation and Qualifying Accounts” is included herein as Note 20 in the Notes to
Consolidated Financial Statements.
(3) Exhibits. ............................................................................................................................................................ 119
See the Exhibit Index.
118
EXHIBIT INDEX
Exhibit No.
2.1
2.2
2.3
2.4
3.1
3.2
3.3
4.1
4.2
4.3
4.4
p
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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 20, 2020
(incorporated herein by reference to Exhibit No. 3.1 to the Company’s Current Report on Form 8-K,
filed October 6, 2020 (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 Company’s 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 Company’s Registration Statement on Form S-1, filed October 25, 2013
(File No. 333-190356)).
Form of Warrant Certificate (incorporated herein by reference to Exhibit No. 4.4 to Amendment
No. 2 to the Company’s 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 Company’s Registration Statement on Form S-1, filed
October 4, 2013 (File No. 333-190356)).
119
Exhibit No.
4.5
4.6
4.7
10.1
10.2†
10.3
10.4
10.5
10.6
10.7
Description
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
Company’s 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 Company’s Current Report on Form 8-K, filed November 25, 2019) (File No. 001-
36166)).
Description of Registrant’s Common Stock (incorporated herein by reference to Exhibit 4.7 to the
Company’s Annual Report on Form 10-K, filed February 27, 2020 (File No. 36166)).
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 Company’s 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 Company’s 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
Company’s 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 Company’s 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
Company’s 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 Company’s Current Report
on Form 8-K, filed July 22, 2015 (File No. 001-36166)).
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 Company’s Current Report on Form 8-K, filed July 1, 2019 (File No. 001-
36166)).
120
Exhibit No.
10.8
10.9
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17†
10.18†
10.19†
10.20†
Description
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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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. 10.2a to Amendment No. 1 to the Company’s
Registration Statement on Form S-1, filed September 13, 2013 (File No. 333-190356)).
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 Company’s 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 Award Notice (incorporated herein by reference to Exhibit No. 10.33 to the Company’s 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 Company’s
Annual Report on Form 10-K, filed February 26, 2015 (File No. 001-36166)).
121
Exhibit No.
10.21†
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 Company’s Annual
Report on Form 10-K, filed February 26, 2015 (File No. 001-36166)).
Description
10.22†
10.23†
10.24†
10.25†
10.26†
10.27†
10.28†
10.29†
10.30†
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan (incorporated herein by
reference to Exhibit 10.2 to the Company’s 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
) (incorporated herein by reference to Exhibit 10.3 to the
Stock Unit Award Notice (Employees
Company’s 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 Company’s 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
Company’s Quarterly Report on Form 10-Q, filed August 6, 2015 (File No. 001-36166)).
) (incorporated herein by reference to Exhibit 10.9 to the
((
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan Form of Stock Option Award
Notice (incorporated by reference to Exhibit 10.10 to the Company’s 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
Feature—Directors) (incorporated herein by reference to Exhibit No. 10.51 to the Company’s
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/Billings—Employees) (incorporated herein by reference to Exhibit No. 10.1 to the
Company’s 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 Company’s 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
Company’s 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 Company’s Registration
Statement on Form S-1, filed September 13, 2013 (File No. 333-190356)).
10.34†
10.35†
10.36†
10.41
Joseph Abbott Offer Letter dated as of March 10, 2016 (incorporated herein by reference to
Exhibit No. 201-5 10.3 to the Company’s Current Report on Form 8-K, filed March 10, 2016
(File No. 001-36166)).
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
Company’s 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)).
Amendment No. 1 to the Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan dated
December 13, 2019 (incorporated herein by reference to Exhibit 10.41 to the Company’s Annual
Report on Form 10-K filed on February 27, 2020 (File No. 001-36166))
21.1*
List of Subsidiaries of the Registrant.
122
Exhibit No.
23.1*
31.1*
31.2*
32.1**
32.2**
101.INS
Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
Description
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.
The instance document does not appear in the interactive file because its XBRL tags are embedded
within the inline XBRL document.
101.SCH Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
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.
Item 16. Form 10-K Summary
None.
123
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)
y
By:/s/ John J. Lynch, Jr.
John J. Lynch, Jr.
President, Chief Executive Officer
(On behalf of the registrant)
February 25, 2021
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/ 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 25, 2021
February 25, 2021
Senior Vice President and Corporate Controller
(Principal Accounting Officer)
February 25, 2021
Chairman of the Board of Directors
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
February 25, 2021
Director
Director
Director
Director
Director
Director
Director
124
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
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
Founder, May River Advisors, LLC
Jean-Claude Brizard
President and Chief Executive Officer
of Digital Promise
L. Gordon Crovitz
Co-Founder and Co-Chief Executive
Officer of Newsguard Technologies
Inc. and retired Publisher of The Wall
Street Journal
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
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 14, 2021
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, 2020,
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.
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