The McGraw-Hill Companies, Inc. Annual Report 2019

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FY2019 Annual Report · The McGraw-Hill Companies, Inc.

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McGraw-Hill Education, Inc.

Annual Report

As of December 31, 2019

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS OF MCGRAW-HILL EDUCATION, INC.
AND SUBSIDIARIES

Page Number

Special Note Regarding Forward-Looking Statements

Presentation of Financial Information

Use of Non-GAAP Financial Information

Trademarks

PART I

Item 1.

Business

Item 1A.

Risk Factors

Item 1B.

Unresolved Staff Comments

Item 2.

Properties

Item 3.

Legal Proceedings

Item 4.

Mine Safety Disclosures

PART II

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities

Item 6.

Selected Financial Data

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Item 8.

Financial Statements and Supplementary Data

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9B.

Other Information

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Item 14.

Principal Accountant Fees and Services

iii

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118

122

123

Special Note Regarding Forward-Looking Statements

This report includes statements that are, or may be deemed to be, “forward-looking statements.” These

forward-looking statements can be identified by the use of forward-looking terminology, including the terms
“believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will” or “should” or, in each case, their
negative or other variations or comparable terminology. These forward-looking statements include all matters that
are not historical facts. They appear in a number of places throughout this report and include statements regarding
our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial
condition, liquidity, prospects, growth, strategies and the industry in which we operate.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events

and depend on circumstances that may or may not occur in the future. We caution you that forward-looking
statements are not guarantees of future performance and that our actual results of operations, financial condition and
liquidity, and the developments in the industry in which we operate, may differ materially from those made in or
suggested by the forward-looking statements contained in this report. In addition, even if our results of operations,
financial condition and liquidity, and the developments in the industry in which we operate are consistent with the
forward-looking statements contained in this report, those results of operations, financial condition and liquidity or
developments may not be indicative of results or developments in subsequent periods.

Any forward-looking statements we make in this report speak only as of the date of such statement, and we

undertake no obligation to update such statements. Comparisons of results for current and any prior periods are not
intended to express any future trends or indications of future performance, unless expressed as such, and should only
be viewed as historical data.

Presentation of Financial Information

This annual report contains financial statements of McGraw-Hill Education, Inc. (formerly known as
Georgia Holdings, Inc.). On March 22, 2013, MHE Acquisition, LLC, acquired all of the outstanding equity interests
of certain subsidiaries of The McGraw-Hill Companies, Inc. (“MHC”) pursuant to the Purchase and Sale
Agreement, dated as of November 26, 2012 and as amended on March 4, 2013 (collectively, the “Acquired
Business”). As a result of this transaction, investment funds affiliated with Apollo Global Management, LLC
acquired 100% of MHE Acquisition, LLC. We refer to the purchase of the Acquired Business and the related
financing transactions as the “Founding Acquisition.” MHC is now known as S&P Global Inc.

Use of Non-GAAP Financial Information

We have provided Billings, EBITDA and Adjusted EBITDA in this annual report because we believe they

provide investors with additional information to measure our performance and evaluate our ability to service our
indebtedness.

Management reviews these measures on a regular basis and uses them to evaluate and manage the

performance of our business, make resource allocation decisions and compensate key management personnel as
these measures provide comparability from period-to-period as sales of digital solutions represent an increasing
percentage of our total sales during this time of transition. We believe that, for the reasons outlined herein, these
non-GAAP financial measures provide useful information to investors and provide increased transparency and a
better understanding of our business performance trends as a supplement to reported revenue, net income (loss) from
continuing operations and operating cash flows. However, these measures should be evaluated only in conjunction
with the comparable GAAP financial measures and should not be viewed as alternative or superior measures of
GAAP results.

Billings is a non-GAAP sales performance measure that we believe provides useful information in

sale or shortly thereafter, but recognize revenue from digital solutions and multi-year deliverables ratably over the
term of our customer contracts. As sales of our digital learning solutions have increased, so has the amount of
revenue that is deferred in accordance with U.S. GAAP. Billings is a key metric we use to manage our business as it
reflects the sales activity in a given period, provides comparability from period-to-period during this time of digital
transition and is the basis for all sales incentive compensation. In the K-12 market where customers typically pay for
five to eight year contracts upfront and the ongoing costs to service any contractual obligation are limited, the
impact of the change in deferred revenue is most significant. Billings is U.S. GAAP revenue plus the net change in
deferred revenue.

We believe that the presentation of Adjusted EBITDA which is defined in accordance with our debt

agreements is appropriate to provide additional information to investors about certain material non-cash items and
about unusual items that we do not expect to continue at the same level in the future as well as other items to assess
our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in
accordance with our debt agreements.

Billings, EBITDA and Adjusted EBITDA are not presentations made in accordance with U.S. GAAP, and

our use of these terms varies from others in our industry. Billings, EBITDA and Adjusted EBITDA should not be
considered as alternatives to revenue, net income from continuing operations, operating cash flows, or any other
performance measures derived in accordance with U.S. GAAP as measures of operating performance, debt covenant
compliance or cash flows as measures of liquidity. Billings, EBITDA and Adjusted EBITDA have important
limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our
results as reported under U.S. GAAP. Further, EBITDA:

•

excludes certain tax payments that may represent a reduction in cash available to us;

does not reflect any cash capital expenditure requirements for assets being depreciated and
amortized that may have to be replaced in the future;

does not reflect changes in, or cash requirements for, our working capital needs; and

does not reflect the significant interest expense, or the cash requirements necessary to service
interest or principal payments, on our indebtedness.

In addition, Adjusted EBITDA, as defined in accordance with our debt agreements:

•

includes estimated cost savings and operating synergies, including some adjustments not permitted
under Article 11 of Regulation S-X;

does not include one-time expenditures, including costs required to realize the synergies referred
to above;

reflects the net effect of converting deferred revenues, deferred royalties, and deferred
commissions to a cash basis assuming the collection of all receivable balances and payment of all
amounts owed;

does not include management fees paid to entities and investment funds affiliated with Apollo
Global Management, LLC, which will discontinue upon completion of this offering; and

does not reflect the impact of earnings or charges resulting from matters that we and the lenders
under our senior secured credit facilities may consider not to be indicative of our ongoing
operations.

Our definition of Adjusted EBITDA allows for the add back of certain non-cash and other charges or costs
that are deducted in calculating net income from continuing operations. However, these are expenses that may recur,
vary greatly and can be difficult to predict. They can represent the effect of long-term strategies as opposed to short-
term results. In addition, certain of these expenses can represent the reduction of cash that could be used for other
corporate purposes. Because of these limitations, we rely primarily on our U.S. GAAP results and use Billings,
EBITDA and Adjusted EBITDA only supplementally.

Trademarks

This annual report contains references to our trademarks and service marks. Solely for convenience,
trademarks and trade names referred to in this annual report may appear without the ® or TM symbols, but such
references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law,
our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or
display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement
or sponsorship of us by, any other companies.

iii

PART I

Item 1. BUSINESS

The Science of Learning

We help unlock the potential of each learner by accelerating learning through intuitive, engaging, efficient

and effective experiences. We define the Science of Learning as the understanding of how individuals learn and
apply that understanding, grounded in research, to our content, technology and user experience to produce learning
solutions that directly and positively impact individual student outcomes. As a learning science company, our goal is
to empower educators and learners with information and intuitive learning environments in which to engage more
personally with each other and with critical concepts in order to promote more effective and efficient learning.

Company Overview

We are a leading provider of outcome-focused learning solutions, delivering both curated content and

digital learning tools and platforms to the students in the classrooms of approximately 250,000 higher education
instructors, approximately 13,000 pre-kindergarten through 12th grade (“K-12”) school districts and a wide variety of
academic institutions, professionals and companies in more than 100 countries. We have evolved our business from
a print-centric producer of textbooks and instructional materials to a leader in the development of digital content and
technology-enabled adaptive learning solutions that are delivered anywhere, anytime. We believe we have
established a reputation as an industry leader in the delivery of innovative educational content and methodologies.
For example, in the higher education market, we were the first in our industry to introduce digital custom publishing,
which permits instructors to tailor content to their specific needs. We also created LearnSmart, one of the first digital
adaptive learning solutions in the higher education market, which leverages our proprietary content and technology
to provide a truly personalized learning experience for students. Since 2009, all of our major K-12 programs have
also been created in an entirely digital format.

We believe our brand, content, relationships, and distribution network provide us with a distinct
competitive advantage. Over our 125 year history, the “McGraw-Hill” name has grown into a globally recognized
brand associated with trust, quality and innovation. We partner with more than 14,000 authors and educators in
various fields of study who contribute to our large and growing collection of proprietary content. Our collection
includes well-known titles and programs across each of our principal markets. For example, in the United States
higher education market, Economics: Principles, Problems, and Policies (McConnell/Brue/Flynn) is a leading
Economics program. According to the Association of American Publishers (“AAP”), our programs and learning
solutions in the U.S. K-12 market achieved a 19% market share overall. Additionally, Harrison’s Principles of
Internal Medicine is one of the most widely-sold global medical reference solutions to the professional market, with
our complementary digital offering AccessMedicine available in almost every medical school in the United States.
We sell our products and solutions across multiple platforms and distribution channels, including our large network
of nearly 1,400 sales professionals.

As learners and educators have become increasingly outcome-focused in their search for more effective
learning solutions, we have embraced adaptive learning tools as a central feature of our digital learning solutions.
Adaptive learning is based on educational theory and cognitive science that emphasizes personalized delivery of
concepts, continuous assessment of gained and retained knowledge and skills, and design of targeted and
personalized study paths that help students improve in their areas of weakness while retaining competencies. We
have developed a unique set of digital solutions by combining innovative adaptive learning methods with our
proprietary content and digital delivery platforms. These solutions provide immediate feedback, and we believe they
are more effective than traditional print textbooks in driving positive student outcomes. Students’ year-over-year
performance can be impacted by many factors outside the instructional materials used in class. We believe that even
taking into account these factors, our learning solutions can contribute to significant improvements in students’
classroom performance as well as improved student retention. For the instructor, time spent on active learning
experiences increases significantly as a result of a reduction in time spent on administrative tasks and the availability
of critical data to help better focus in class instruction.

We have conducted numerous case studies for several of our learning solutions for colleges that used

Connect/LearnSmart, SmartBook and ALEKS, and in each case where our solutions have been implemented, our
case studies have yielded positive findings when compared to class performance in periods immediately prior to
implementation, many of which have been considerable. For example, according to a 2013 study by the Department
of Chemistry, University of California, Riverside, it was found that general chemistry students who completed a pre-
course assignment on ALEKS, an adaptive-responsive homework system could expect their average final exam score
to increase by over 13 points when compared to nonparticipating students. Students who completed a precourse
assignment on a traditional responsive homework system saw an average increase in their final exam score by 8
points versus those who did not participate. Students who worked on the online homework for the entire quarter saw
even greater gains in their final exam scores compared to non-participants.

In the United States higher education market, where the pace of digital adoption is the most rapid of all of

our end markets, the success of our sales of adaptive offerings has led to more than a 300 basis point increase in
higher education market share from 2013 to 2019 according to Management Practice, Inc. (“MPI”), an independent
education research firm.

Our four operating segments are:

Higher Education (39% of total revenue in 2019): We are a top-three provider in the United States higher

education market with a 24% market share for the year ended December 31, 2019 according to MPI. We provide
students, instructors and institutions with adaptive digital learning tools, digital platforms, custom publishing
solutions and traditional printed textbook products. The primary users of our solutions are students enrolled in two-
and four-year non-profit colleges and universities, and to a lesser extent, for-profit institutions. We sell our Higher
Education solutions to well-known online retailers, distribution partners and college bookstores, who subsequently
sell to students. We also increasingly sell via our proprietary e-commerce platform, primarily directly to students,
which currently represents the largest distribution channel in this segment, with revenue having grown from $172
million for the year ended December 31, 2016 to $199 million for the year ended December 31, 2019. For the year
ended December 31, 2019, 72% of Higher Education revenue was derived from digital learning solutions.

K-12 (37% of total revenue in 2019): We are a top-three provider in the United States K-12 curriculum and
learning solutions market with a 19% market share for the year ended December 31, 2019, according to the AAP. We
sell our learning solutions directly to K-12 school districts across the United States. While we offer all of our major
curriculum and learning solutions in digital format, given the varying degrees of availability and maturity of our
customers’ technological infrastructure, a majority of our sales are derived from selling blended print and digital
solutions. The product sales mix in any period can impact the percentage of total digital sales, with our math and
social studies programs being more heavily weighted in digital as compared to our reading and literacy programs,
for example. We believe that the quality of our blended offerings has been driving significant growth in both print
and digital revenue. For the year ended December 31, 2019, 39% of K-12 revenue was derived from digital learning
solutions.

International (16% of total revenue in 2019): We leverage our global scale, including approximately a 415
person sales force, brand recognition and extensive product portfolio to serve students in the higher education, K-12
and professional markets in more than 100 countries outside of the United States. Our products and solutions for the
International segment are produced in more than 75 languages and primarily originate from our offerings produced
for the United States market and that are later adapted to different international markets. Sales of digital products are
growing significantly in this market, and we continue to increase our inventory of digital solutions. For the year
ended December 31, 2019, 23% of International revenue was derived from digital learning solutions.

Professional (8% of total revenue in 2019): We are a leading provider of medical, technical, engineering

and business content for the professional, education and test preparation communities. Our digital subscription
products had a 95% annual retention rate in 2019 and are sold to more than 2,200 customers, including corporations,
academic institutions, libraries and hospitals. For the year ended December 31, 2019, 59% of Professional revenue
was derived from digital learning solutions, including digital subscription sales.

Our Industry

We compete in the market for educational services in the United States and abroad. It is one of the largest

sectors in the United States economy and, according to GSV Advisors, spending on education in 2015 was
$1.6 trillion and is forecast to increase to $2.0 trillion in 2020. Global educational expenditures in 2015 were $4.9
trillion and are forecast to increase to $6.3 trillion in 2020, according to GSV Advisors.

Higher Education

We are a leading provider in the market for new instructional solutions in the United States higher
education segment, which was estimated to be approximately $2.8 billion in 2019, according to MPI. This market
includes digital learning solutions as well as traditional and custom print textbooks, but excludes used and rental
print textbooks. Used and rental materials are commonly purchased by students as a substitute for new materials.
Based on estimates for used and rental substitutes, the overall market for textbooks is significantly larger than the
market for new instructional materials. We believe the increased use of digital products will drive significant growth
in our addressable market given digital products are not provided in a used or rental form.

The importance of higher education in the United States is clear. 65% of all jobs in the United States will

require some form of postsecondary education or training by 2020, up from 28% in 1973 and 59% in 2010,
according to Georgetown University Public Policy Institute. We expect another key long-term driver of growth in
the higher education market to be student enrollment. Enrollment at degree-granting institutions in the United States
is nearly 20 million.

Over the past three decades, the level of educational attainment has increased in the U.S. labor force,
according to University of Virginia Weldon Cooper Centers for Public Service. Between 1992 and 2016, the share of
the people with a bachelor’s degree has increased from 18 percent to 25 percent, and those with an advanced degree-
including master’s, professional, and doctoral degrees-has increased from 9 to 14 percent. In 2016, two-thirds of the
labor force had at least some college experience.

Public and political scrutiny of the disparity between funding and student outcomes has increased demand
for greater transparency and accountability for spending on education. With educational institutions under pressure
to increase their student retention and graduation rates, new and more effective methods of teaching and learning are
in demand.

Despite the significant government expenditures in education, low college graduation rates and insufficient
job placement in the United States have resulted in additional social and economic costs including rising aggregate
and per capita student loan debt and increasing incidents of default. In addition, American students are not learning
the skills and knowledge they need to succeed in an increasingly competitive global marketplace.

According to NCES, in 2017 approximately 60% of full-time students who graduated from four-year
institutions graduated within six years. For two-year institutions, approximately 32% of full-time students who
graduated completed their studies within three years.

In a recent study by the Foundation for Excellence in Education, two-thirds of college professors report that

what is taught in high school does not prepare students for college and, according to ACT, nearly 1.8 million 2019
graduates around the U.S.(52 percent of the graduating class) took the ACT test during high school. According to
ACT, only 37 percent of ACT-tested graduates in the class of 2019 met at least three of the four ACT College
Readiness Benchmarks (English, reading, math and science). This is down slightly from 38 percent last year and 39
percent in 2017.

Public policy initiatives aimed at improving student outcomes and accountability within higher education in

the United States extend to college and career readiness standards in the K-12 market. An important aspect of
postsecondary student success is adequate preparation via primary and secondary education. In the United States,

improved college readiness has been a focal point for lawmakers, which has led to an increased focus on the linkage
between K-12 funding and higher student achievement of educational standards.

K-12

Our addressable K-12 market in the United States, which includes new instructional materials, courseware

and formative assessment was approximately $6.6 billion for the 2019-2020 school year, including adoption and
open territory states, according to Simba Information. According to NCES, K-12 enrollment in the United States as
of Fall 2019 was over 56 million, and enrollment is projected to grow to over 57 million in 2028. We define our
K-12 market as divided among basal (core or alternative required grade-level taught subjects that are delivered in a
specific order with increasing difficulty), supplemental (academic instruction provided outside the required
programs) and intervention products (targeted instruction to students lacking proficiency in a subject matter, or those
who have special learning or behavioral needs). Eighteen states, known as adoption states, approve and procure new
basal programs, usually every five to eight years on a state-wide basis for each major area of study, before individual
schools or school districts are permitted to schedule the purchase of materials. In all remaining states, known as
open territories, each individual school or school district can procure materials at any time, though they usually do
so on a five to eight year cycle.

Growth in the K-12 market is driven by demand for new materials to address college and career readiness
standards, increasing state and local budgets for educational materials, and rising student enrollment. Property tax
revenue, the primary source for state and local funds for purchases of instructional materials, has been increasing in
the United States along with a rise in property values.

Professional

As the United States economy continues to expand, we expect the market for professional education

resources to grow, particularly among industry sectors that are experiencing more rapid growth in jobs. The
Professional and Business Services and Healthcare and Social Assistance industry sectors are expected to add nearly
6 million jobs between 2016 and 2026, more than all other United States industries combined, according to BLS. We
derive a substantial portion of our Professional revenue from these two markets.

International

The global e-Learning market, including higher education, K-12 and professional training, is expected to

continue to grow. This large international education market is increasingly focused on digital content due to the
growing penetration of the smartphone. Individuals in developing countries are nearly twice as likely to use
connected devices (i.e. mobile phones or tablets) for educational purposes on a regular basis as those in developed
markets, according to Juniper Networks. Today, through our significant investment in digital solutions and Digital
Platform Group ("DPG"), we plan to increasingly capitalize on these strong market trends.

The accelerating shift toward a knowledge-based economy is fueling demand for higher levels of education

around the world. The importance of higher education in the United States is clear. 65% of all jobs in the United
States will require some form of postsecondary education or training by 2020, up from 28% in 1973 and 59% in
2010, according to Georgetown University Public Policy Institute. As higher education becomes more important to
the success of the global economy, governments have increased their emphasis on student preparation and
postsecondary readiness through funding requirements of primary and secondary education programs.

The trend towards increased globalization has generated demand for higher levels of educational attainment

in international markets as well. McGraw-Hill International sells English language product into 108 countries, in
which English is either the official or the primary language, or as in many developing countries, educational agendas
emphasize the use of English as a universal language for commerce and other sectors of the economy. We believe
this trend will increase the readily addressable market for our educational solutions, which are often initially created
for English-speaking students before being adapted for international markets.

We expect the investment in education to continue to grow as student enrollment rises around the world.

According to UNESCO, global higher education enrollment was approximately 220 million students in 2016, more
than doubling since 2000 and is expected to grow to approximately 594 million by 2040.

Our Competitive Strengths

We believe the following to be our most important competitive strengths:

Widely recognized brand with global reach and expansive scale.

We believe our brand recognition is driven by our long-standing history of over 125 years in the industry

and our ownership of globally well-known titles such as Harrison’s Principles of Internal Medicine and Samuelson’s
Economics, which have been cornerstones of education around the world for decades. We distribute our products in
more than 100 countries across Asia-Pacific, Europe, India, Latin America and the Middle East, and approximately
25% of our approximately 4,134 employees are based in nearly 40 offices in 26 countries outside of the United
States. We believe that our brand, global reach and scale provide us with a defensible market position and present
significant barriers to entry. We expect to leverage our market position and internal infrastructure and operational
resources to further grow revenues and gain market share by increasing distribution of learning solutions through
our network.

In the United States, our products are sold in over 5,000 higher education institutions and approximately

13,000 K-12 school districts across all 50 states. Our nearly 1,100 person sales force, which includes approximately
350 sales people in the United States higher education and approximately 300 sales people in the United States K-12
markets, maintains close relationships with the individual instructors that represent the primary decision makers in
the higher education market and the states, school districts, and individual schools that primarily make purchase
decisions in the K-12 market. In addition, our growing suite of digital products allows us to develop direct
relationships with an even larger group of customers, including over 4 million higher education students and
instructors who were users of our Connect platform in 2019.

Proprietary and unique content, developed over many years, leveraged in digital adaptive learning.

Our portfolio of proprietary content developed over 125 years and built around market leading titles has
been the foundation of our transformation into a large and growing digital learning solutions provider. Our top 10
product categories represented over 50% of industry net sales as reported by the AAP in 2018. This market
leadership has uniquely positioned us to extend our portfolio of traditional print products by offering digital
alternatives and new digital solutions that incorporate our existing content and curriculum.

In addition to leveraging digital formats to extend the reach of existing print content, we create all new
content in a digital format and optimize it for use in an adaptive environment. This has reduced our development
costs and enhanced our ability to use new content for the future development of additional products. We believe that
our repositories of over nine petabytes of digital content, which is over nine million gigabytes, provide us with an
opportunity to more quickly and effectively bring future products to market. Our centralized DPG team ensures that
all of our digital solutions are immediately available to customers running a wide range of different technology
architectures.

Diversified portfolio of education businesses and unified approach to digital.

We have a unique presence across the learning continuum, including higher education, K-12 and

professional, with additional operations in international markets. The higher education segment of our business,
which represented approximately 39% of our revenue in 2019, has historically proven to be countercyclical,
balancing out cycles experienced by the K-12 business. During and immediately following recent economic
downturns, postsecondary enrollment rates have tended to rise while postsecondary attrition rates have tended to
decline. We believe this is driven by the lower opportunity cost for enrolling or staying in college during times of

relative economic weakness and higher unemployment. In the current economic environment, characterized by a
slow recovery, the K-12 market is benefiting from increased state and local government spending while higher
education enrollment has begun to slow.

In addition to making our product development more innovative and faster to market, our DPG
organization has allowed us to spread significant R&D spend across our entire revenue base and leverage
investments in products developed for one segment across our entire product suite. This centralized approach
provides superior capital efficiency to a siloed development model. DPG, along with the acquisitions of ALEKS,
LearnSmart and Engrade, enables us to own and control all of the key technologies necessary to implement our
digital strategy.

First mover in digital adaptive learning solutions and strong capabilities in digital technology.

We believe the significant investment we have made in our digital capabilities has made us a longstanding

leader in digital adaptive learning. Today, our annualized spend in our DPG, including operating and capital
expenditures, has grown from less than $90 million in 2012 to approximately $170 million in 2019. While we are
committed to continuing our significant digital investment, growth rates of spending have declined as we have
achieved scale. In addition to our organic investments, we have committed in excess of $200 million for the
acquisitions of ALEKS, LearnSmart, and Engrade which have significantly strengthened our platform and adaptive
digital offerings. Our LearnSmart solution has been one of the most widely used adaptive platforms in higher
education since its launch in 2009, and ALEKS, our digital adaptive learning solution originally developed for K-12
math, originated in 1992 with a National Science Foundation grant. Our long history of offering adaptive learning
solutions has allowed us to develop a growing and robust database of student interactions relating to achievement of
learning objectives, which we use to continuously improve the effectiveness of our platforms. For example,
LearnSmart has generated more than 15.0 billion interactions with students since inception in 2009, recently
growing at an average of more than 200 million interactions per month. Since 2010, ALEKS has seen nearly 10.7
billion interactions through December 31, 2019. In addition to using this information to enhance the effectiveness of
our adaptive tools, we share data on interactions with instructors to help them more effectively integrate our
solutions into their lessons, focusing on content that students are having difficulty learning, reinforcing our
relationships and making our solutions more difficult to displace.

Our interactions data are also leveraged on an ongoing basis to create new adaptive technology solutions.

For Higher Education, our SmartBook adaptive offering, introduced in 2013, is among the first adaptive reading
experiences for higher education that utilizes data analytics combined with a deep repository of proprietary content
to improve learning outcomes.

Highly attractive business model

We enjoy a business model that is highly cash generative. Since 2014 through the end of 2019, we have

generated cash flows from operating activities of approximately $1.6 billion. Our strong cash flow has enabled
significant investment in our digital capabilities, several key strategic acquisitions, return of capital to our
shareholders and continued deleveraging. Since the Founding Acquisition in 2013, our strong cash flow has funded
four acquisitions, including ALEKS, LearnSmart, Engrade and Redbird, that included cash components totaling
$150 million. We also completed a minority interest buy-out of Ryerson Canada (our Canadian business) for $27
million. In addition, we have made significant investments in the staffing of DPG, which supports ongoing
innovation, development and maintenance of our technology platforms, reducing our pre-publication and capital
expenditure requirements and our dependence on third parties.

In addition to our ongoing shift towards a more digitally-enabled model, another important driver of
increasing free cash flow generation has been our demonstrated success in implementing various cost saving
measures. These opportunities, largely developed and implemented in the first few years following our sale to
Apollo in March 2013, improved our operating margins over time and allowed us to fund additional investment in
our digital capabilities. Since our sale to Apollo, we have identified and actioned more than $250 million of
annualized cost savings.

Our Growth Strategies

The key elements of our growth strategies are described below.

Further our leadership in digital solutions and digital technology.

We intend to capitalize on the increasing market demand for digital learning solutions by expanding our

portfolio of technology-enabled adaptive tools and learning solutions. By leveraging a common software
architecture and platform, we will be able to quickly design, develop and test innovative products. Our next
generation products, several of which have been recently deployed or are currently in development, will also benefit
from the experience we have gained from our existing product suite. These products will have enhanced flexibility,
provide greater ability for our users to create custom solutions, and better analyze learning data. We believe these
next generation products will further our leadership in our key markets and allow us to grow our revenues at a faster
rate than the overall market.

In order to better leverage technology across all of our businesses, drive product innovations and create a

more efficient product development process, we are consolidating technologies to eliminate duplicative capabilities.
We expect this effort will reduce maintenance costs and unlock creative synergies across our engineering teams. We
will also streamline our tools and platforms for efficient and effective delivery with open application program
interfaces. This rationalization and simplification of our delivery platforms will reduce costs, freeing up capital for
investment in new products.

Introduce new enterprise solutions aimed at education effectiveness and student retention.

We believe our learning science focus, highly talented DPG team and the large amount of data we collect

via our adaptive learning solutions uniquely position us to offer enterprise services that help our institutional
customers improve educational outcomes and accountability. We intend to sell a number of new products and
services that offer enterprise-wide course development and design services, analytical tools focused on optimizing
student performance and retention, and college and career readiness programs and services.

In 2019, we introduced SmartBook 2.0, an adaptive learning solution that provides personalized learning

for each and every student and is available as part of the Connect platform, which builds on our market-leading
technology with enhanced capabilities that deliver a more personalized, productive, and accessible learning
experience for students and instructors. SmartBook 2.0 spans over 90 disciplines, with 10 billion questions answered
and over 200 million+ interactions per month.

Leverage our learning solutions in International and Professional markets.

We intend to leverage our large global sales presence, our DPG team, deep local knowledge and numerous
strategic partnerships to adapt our leading portfolio of English language content and digital solutions to meet local
market needs, such as culture, language and curricula. We believe that this will allow us to rapidly scale our
presence in international markets, with particular focus on emerging markets in Latin America, the Middle East,
Africa and Asia Pacific.

We also believe we can achieve significant growth by utilizing our adaptive learning competencies to enter

and disrupt attractive education segments. These include the high stakes test preparation markets in selected
geographies, vocational and skills-based training markets, and the corporate training market where personalized
adaptive learning has significant value to the enterprise.

Continue to evolve our digital first business model to generate significant free cash flow.

We will continue to drive towards a digital first business model which will allow us to continue to generate

significant free cash flow over time as we derive an increasing proportion of our sales from digital learning

solutions. We expect our digital first model to continue to result in higher margins and lower capital intensity as we
drive efficiencies in our business from reduced operating expenditures, reduced print inventory and more efficient
pre-publication investment relative to revenue. We expect to use our free cash flow to fund our growth, deliver our
balance sheet and, potentially, return capital to shareholders over time.

Selectively pursue acquisitions.

We will consider acquisitions that expand our product offerings, accelerate our digital product development

and add important content. We believe our brand and scale allow us to derive significant benefit from emerging
education technology companies, which would be challenged to attain a significant market position as standalone
companies.

Our Products

Higher Education Products

Higher Education provides adaptive digital learning tools, digital platforms, custom publishing solutions

and traditional printed textbook products with capabilities in adaptive learning, homework tools, lecture capture and
LMS integration for post-secondary markets. We have invested significantly in a suite of digital and custom learning
solutions, and our instructional materials include digital and printed texts, lab manuals, interactive study guides,
testing materials, software and other multimedia products covering the full spectrum of subjects. Although we cover
all major academic disciplines, our content portfolio is organized into three key disciplines: (i) Business, Economics
and Career; (ii) Science, Engineering and Math; and (iii) Humanities, Social Science and Languages. Substantially
all of Higher Education’s revenue is generated from approximately 2,000 individual titles, including print and digital
formats, with no single title accounting for more than 2% of revenue. We have longstanding and exclusive
relationships with many authors and nearly all of our products are covered by copyright in major markets, providing
us the exclusive right to produce and distribute such content in those markets during the applicable copyright term.
Higher Education’s products consist of the following:

I. Digital Learning Solutions

Higher Education’s digital learning solutions include, among other features, adaptive digital learning tools,
online assessment software, course management software, cloud-based classroom activity capture and replay, online
access to eBooks and social network and community tools. These solutions form a seamless, fully-digital ecosystem
that enhances the value and results of higher education over the entire learning lifecycle. For the years ended
December 31, 2019, 2018 and 2017, Higher Education digital revenue represented 72% ($439 million), 63% ($416
million), and 62% ($442 million) of total Higher Education revenue, respectively.

For the years ended December 31, 2019, 2018 and 2017, Higher Education digital Billings (including the

change in deferred revenue) represents 74% ($474 million), 67% ($454 million) and 62% ($447 million) of total
Higher Education Billings, respectively.

Our core digital learning platforms include:

• McGraw-Hill Connect: a homework and learning management solution that applies learning science and

award-winning adaptive tools to improve student results and course delivery efficiency. With McGraw-Hill
Connect, instructors can integrate digital content into their course and create a customized learning
environment, accessible by students via desk top and mobile devices. Students can learn interactively
through homework and practice questions, embedded video, simulations, virtual laboratories, audio
programs and online games. McGraw-Hill Connect contains a suite of tools, including integrated eBooks,
course and assignment set-up tools, automated assessment, adaptive learning systems, grading and
reporting tools. McGraw-Hill Connect is offered for most core freshman and sophomore level courses in
the United States with 4.2 million paid activations across campuses nationwide during the year ended
December 31, 2019, an increase of 8% over the prior year.

• LearnSmart: an adaptive learning program that personalizes learning and designs targeted study paths for
students through specific courses. LearnSmart is an interactive product that determines which concepts the
student does not know or understand and teaches those concepts using a personalized plan designed for
each student’s success. All LearnSmart questions are tied to clear learning objectives. When students
answer questions, they also rank how confident they are in their answers. Based on each student’s response
and level of certainty, LearnSmart continuously adapts the content and probes presented to each student, so
the material is always relevant and geared towards mastering the learning objectives. Once a concept is
mastered, LearnSmart then identifies the concepts students are most likely to forget throughout the term
and encourages periodic review to ensure that concepts are truly retained. LearnSmart has generated more
than 15.0 billion interactions with students since inception in 2009. According to studies, LearnSmart has
consistently improved student outcomes.

•

SmartBook: an adaptive reading product introduced in Higher Education in 2013 designed to help students
understand and retain course material by guiding each student through a highly personal study experience.
Each SmartBook helps make studying more efficient and effective by offering features not present in
traditional print products, including adaptive content, search/index functionality, note taking capabilities,
embedded video and interactive elements. The SmartBook product also makes use of our LearnSmart
adaptive technology. When a student reads the chapters in SmartBook, they are prompted by LearnSmart
questions to identify recommended areas of focus for the student. Our SmartBook are primarily sold in the
higher education market across a variety of courses and are designed to be compatible with a broad range
of devices, including the Kindle and Nook eReaders, the iPad and other tablets and standard desktop and
laptop computers. We believe that SmartBook will continue to increase in popularity as the prevalence of
these digital reading devices also increases.

Our SmartBook contain rights management features that are designed to prevent copying or resale. Students
pay for them based on usage for one school term. The amount paid is designed to be comparable to the cost
of a one-term rental of a print textbook. Therefore, our SmartBook are priced lower than print textbooks but
cost us less to distribute and manufacture, leading to a comparable gross margin. Moreover, our bundling of
digital solutions with SmartBook augments the economics of a digital sale and further improves the
economics relative to the traditional all-print model.

In 2019, we introduced SmartBook 2.0, an adaptive learning solution that provides personalized learning
for each and every student and is available as part of the Connect platform, which builds on our market-
leading technology with enhanced capabilities that deliver a more personalized, productive, and accessible
learning experience for students and instructors. SmartBook 2.0 spans over 90+ disciplines, with 10 billion
+ questions answered and over 200 million+ interactions per month.

• Connect Master: an adaptive learning solution that allows students to demonstrate what they know and

apply their learning to real-world challenges. The Individualized Study Tool creates a personalized learning
experience for students and provides the opportunity to practice and enhance understanding of core
concepts. The Practical Assessments allow students to progress from understanding basic concepts to using
their knowledge to analyze realistic scenarios and solve problems. Connect Master’s ability to customize
content at the learning-objective level provides instructors the opportunity to specifically tailor student
course materials to how the course is implemented.

• ALEKS: an adaptive learning product for the higher education market initially developed in 1992 with a
National Foundation grant. ALEKS uses research-based artificial intelligence to rapidly and precisely
determine each student’s knowledge state, pinpointing exactly what a student knows. ALEKS then instructs
the student on the topics he or she is most ready to learn, constantly updating each student’s knowledge
state and adapting to the student’s individualized learning needs. Rooted in 20+ years of research and
analytics, ALEKS ensures improved student outcomes by fostering better preparation, increased motivation
and knowledge retention. ALEKS has an average learning rate of 94% across all disciplines - math, science,
business. With ALEKS, instructors control the student experience and pacing of content. Instructors can

choose more structure by holding the entire class accountable with due dates or less structure by allowing
students to work at their own pace. ALEKS had 2.0 million unique users in Higher Education during the
year ended December 31, 2019, an increase of 5% over the prior year.

• ALEKS Placement, Preparation and Learning: an adaptive learning that assesses and accurately measures

the student’s math foundation to create a personalized learning module to review and refresh lost
knowledge. This allows the student to be placed and successful in the right course, expediting the student’s
path to completing their degree.

•

SIMnet: an easy-to-use online training and assessment solution for Microsoft Office. It provides students
with life-long access and unlimited practice on Microsoft Word, Excel, Access and PowerPoint in addition
to file management, and operating systems content. With effective training modules as part of SIMnet,
students can apply learning to course assignments and career opportunities.

• McGraw-Hill Create: a self-service website that enables instructors to discover, review, select and arrange
content into personalized print or electronic course materials. Instructors can curate customized course
materials from a content portfolio consisting of over 8,400 textbooks, 19,400 articles, 56,200 cases, 8,900
readings, 2,000 digital offers, 100 videos, and 500 images/cartoons. Instructors can further supplement the
materials with their own custom content. McGraw-Hill Create allows the creation of customized products
across most disciplines and study areas, including accounting, business law, economics, finance,
management, marketing, philosophy, political science, sociology, world languages, anatomy and
physiology, chemistry, engineering, biology, psychology, English and mathematics.

•

StudyWise: a series of mobile apps which support students in adaptive practice on smartphones. StudyWise
extends the reach of McGraw-Hill Connect by providing an intimate and efficient learning tool, meeting
students in their natural environment.

• Open Learning Solutions: our next generation open learning environment that provides access to

customizable courses and assessments for higher education users. The platform provides a robust digital
experience for teachers and students accessing McGraw-Hill programs in order to enhance learning.

II. Custom Publishing

Higher Education’s custom publishing solutions provide educators the ability to weave together various

elements including digital text, digital solutions, print, videos, charts and their own materials into a seamless,
tailored learning solution, replacing traditional print textbooks and printed class materials. Custom materials, by
their nature, have a higher sell-through rate and are more likely to have their content frequently updated by the
instructor, resulting in frequent new publications, forced obsolescence of old editions and more limited re-
distribution potential into used or rental markets. Custom products create strong loyalty from educators, as they
typically invest significant time and effort into creating unique learning solutions tailored to their teaching styles.
Our custom publishing solutions are often bundled arrangements that require us to attribute value to the digital
component separately. For the years ended December 31, 2019, 2018 and 2017, Higher Education custom publishing
revenue, excluding the digital component, represented 6% ($41 million), 8% ($54 million) and 11% ($78 million) of
total Higher Education revenue, respectively.

III. Traditional Print

Higher Education continues to provide students with traditional print textbooks, including a library of titles

covering the full spectrum of subjects, written by some of the top authors and experts in their respective fields. For
the years ended December 31, 2019, 2018 and 2017, Higher Education traditional print represented 21% ($129
million), 29% ($191 million) and 27% ($194 million) of total Higher Education revenue, respectively.

K-12 Products

Our K-12 product portfolio includes thousands of instructional resources across hundreds of programs,
covering nearly all courses offered in K-12. We also provide the ability to tie instruction and assessment together
into a robust platform for school district support and data-driven instruction. This includes strong curriculum
resources plus adaptive and formative assessment engines. While the McGraw-Hill name has been a respected
source for printed textbooks and teacher materials for generations, we are also recognized for our pure digital
programs and our hybrid solutions that blend digital and print in customized packages. Our K-12 business is one of
the few providers that offer the diversity of product to actively serve core K-12 markets and niche and specialized
markets. In our core markets, our offerings include Reading Wonders and My Math and in our niche and specialized
markets we offer well known programs such as SRA Open Court Reading and Number Worlds. We focus on
supporting each state’s chosen standards through comprehensive and robust offerings. All our key programs meet
the Common Core and college and career readiness standards, as well as the standards chosen by each state to
support its learning goals.

I. Core Programs

Core basal programs consist of digital and print products that serve mainstream educators with research-
based, comprehensive learning solutions. Core basal programs are designed to provide the entire curriculum for a
course, including student instruction, practice, assessment and remediation as well as teacher materials. These
programs may have as few as five or six components (such as in some high school courses) or thousands of
components (such as in K-5 reading and math programs). Core basal programs comprise approximately 80% of
K-12’s sales and cover all major instructional subjects including Reading, Math, Social Studies, Science, and
Literature, while the balance includes specialized programs that include a wide range of products targeted at certain
niche markets.

• Alternative Basal Products: comprehensive classroom programs for particular segments of the market
that require distinct learning methodologies, such as reading teachers who want more directed, skills-
oriented programs and math teachers who want more reform-based, hands-on mathematics programs. These
unique programs demand specialized authors, editing and design skills, marketing strategy and a true
consultative selling model. K-12 is among the largest education providers in its ability to deliver all of these
critical elements.

•

Intervention Products: programs with targeted instruction to students lacking proficiency in a subject
matter, or those who have special learning or behavioral needs. Nearly all students require extra
instructional support at one time or another and K-12 builds this support into all of its Core Basal Programs
while also providing separate targeted programs for intervention and remediation. Programs include
products that focus on reading and mathematics support, and remediation solutions in science, social
studies, career and college readiness, workplace skills and other areas of need.

Supplemental Products: additional learning resources when core program solutions do not meet all of the
needs of certain educators, such as extra online practice in multiplication, kits that enhance phonics skills,
practice books for basic workplace skills or biography readers for middle school students. K-12 competes
in this segment due to its specialized product development capabilities and experienced sales staff who
know how to market to these educators.

For the years ended December 31, 2019, 2018 and 2017, K-12 traditional print represented 60% ($355

million), 65% ($363 million) and 72% ($432 million) of total K-12 revenue, respectively.

II. Digital Learning Solutions

Digital resources are an essential part of the instructional mix across both core basal and specialized

programs. The recent and dramatic increase in hardware, online connectivity and educational focus on technology
has brought many classrooms to a digital tipping point. With the significant investment in its digital portfolio over

recent years, K-12 has an opportunity to capitalize on this ongoing digital transformation and has developed a
number of fully online learning programs. For the years ended December 31, 2019, 2018 and 2017, K-12 digital
revenue represented 39% ($229 million), 35% ($198 million) and 28% ($171 million) of total K-12 revenue,
respectively.

For the years ended December 31, 2019, 2018 and 2017, K-12 digital Billings (including the change in

deferred revenue) represented 40% ($260 million), 37% ($222 million) and 35% ($258 million) of total K-12
Billings, respectively.

Our core digital products include:

• Access Manager: An IMS Global Standards certified integration platform for K-12 Ed Tech

interoperability. Access Manager removes the cost and complexity of schools adopting educational
technology. Access Manager is based on open standards and positions MHE to help districts drive down
the costs of using technology, enhancing the opportunity for greater use of technology in teaching and
learning.

• ConnectEd: an open learning environment providing access and customization of our content for K-12
users. The platform offers a digital learning solution for teachers and students to access teaching and
learning resources.

• Open Learning Solutions: our next generation open learning environment that provides access to

customizable courses and assessments for K-12 users. The platform provides a robust digital experience for
teachers and students accessing McGraw-Hill programs in order to enhance learning.

• ALEKS: an adaptive learning math product for the K-12 market. ALEKS uses research-based, artificial

intelligence to rapidly and precisely determine each student’s knowledge state, pinpointing exactly what a
student knows. ALEKS then instructs students on the topics they are most ready to learn, constantly
updating each student’s knowledge state and adapting to the student’s individualized learning needs. While
ALEKS specializes in remedial and developmental math, we have also integrated ALEKS into all of our
secondary math offerings. During the year ended December 31, 2019, ALEKS had 2.6 million unique users
in K-12, an increase of 14% over the prior year.

• LearnSmart: is an adaptive learning program being deployed with the majority of K-12’s grade 6-12

resources. LearnSmart builds a learning experience to meet each student's individual needs. Smartbook,
built on the LearnSmart engine, highlights core content as students read and identifies concepts students
need to spend additional time reviewing and improving the efficiency and productivity of independent
study.

International Products

International sells higher education, K-12, professional and other products and services to educational,

professional and English language teaching markets in more than 76 languages across Asia-Pacific, Europe, India,
Latin America, the Middle East, and North America. While the business mix and strategic focus of International
varies from region to region according to local market dynamics, International’s business strategy leverages the
content, tools, services and expertise from our domestic businesses. As a result of the widespread use of English as a
universal language, a majority of International’s revenue during the year ended December 31, 2019 was generated
by selling our unmodified English language products internationally. Approximately 77% of International’s revenue
was generated from such unmodified products together with minor regionally-driven cosmetic changes or
translations of English language products. Approximately 31% of International’s revenue for the year ended
December 31, 2019 was derived from content created in local markets or products originating from unrelated
publishers for distribution in our international markets. Although approximately 77% of International’s 2019
revenue was generated by traditional print products, digital offerings are driving significant international growth. In
more developed markets, with a greater prevalence of digital devices, many of our U.S.-developed digital solutions,

such as McGraw-Hill Connect, ALEKS and LearnSmart are gaining market share. For the years ended December 31,
2019, 2018 and 2017, International traditional print revenue represented 77% ($191 million), 80% ($203 million)
and 84% ($237 million) of total International revenue, respectively.

For the years ended December 31, 2019, 2018 and 2017, International digital revenue represented 23%

($58 million), 20% ($52 million) and 16% ($44 million) of total International revenue, respectively.

For the years ended December 31, 2019, 2018 and 2017, International digital Billings (including the change
in deferred revenue) represented 23% ($59 million), 20% ($52 million) and 17% ($49 million) of total International
Billings, respectively.

Professional Products

Professional is a leading provider of medical, technical, engineering, and business content and training

solutions for the professional, education and test preparation communities. Professional’s products include digital
product portfolios and textbooks easily accessible through whichever medium our student and professional
customers prefer. Professional’s digital product portfolio spans two main categories: (i) digital subscription services
and (ii) eContent (including eBooks and related applications).

I. Digital Subscription Services

Digital subscription services are platforms that provide searchable and customizable digital content

integrated with highly functional workflow tools. Professional offers more than 25 digital subscription services
which are organized across three broad subject categories: (i) Medical, (ii) Engineering and Science, and (iii) Test
Preparation. These products are sold on an annual subscription basis to more than 2,200 corporate, academic, library
and hospital customers as of December 31, 2019. Our digital subscription services customer base has a retention rate
across major platforms of 95% in 2019.

The flagship Access line of products provide an integrated digital workspace that combines Professional’s
content, contextualized rich media and high-functionality workflow tools which allow instructors to select specific
reference content, assign to students and monitor progress. For example, AccessMedicine is an innovative online
resource that provides students, residents, clinicians, researchers, and other healthcare professionals with access to
content from nearly 160 medical titles, updated content, thousands of images and illustrations, interactive self-
assessment, case files, time-saving diagnostic and point-of-care tools and a comprehensive search platform as well
as the ability to view from and download content to a mobile device. Frequently updated and continuously expanded
by world-renowned physicians, AccessMedicine provides fast, direct access to the information necessary to complete
evaluations, diagnoses, and case management decisions, and pursue research, medical education, self-assessment
and board review.

The value proposition of Professional’s digital subscription platforms is compelling for our subscribers, and

the economics are attractive and highly scalable for us. Digital subscription platforms provide a stable, recurring
revenue stream with high annual re-order rates. New competitors in the digital subscription market must overcome
large volumes of proprietary content developed over many years. Digital products are highly profitable due to the
low variable cost nature of these products, with gross margins of nearly 90%. For the years ended December 31,
2019, 2018 and 2017, digital subscription revenue represented 48% ($57 million), 45% ($53 million) and 40% ($48
million) of total Professional revenue, respectively.

II. eContent (eBooks) and traditional print

eBooks represent the majority of Professional’s eContent offerings. Professional’s more than 7,100 eBooks

are sold on major eBook retail websites and through Professional’s own websites. Our eBooks are designed to be
compatible with a broad range of devices, including the Kindle and Nook eReaders, the iPad, nearly 250 medical,
test preparation and business mobile applications for the iPhone, other tablets and standard desktop and laptop
computers. Professional provides timely and authoritative knowledge to customers around the world through the

release of over 240 titles per year. Our roster of distinguished authors and prestigious brands represent some of the
best-selling professional publications, such as Harrison’s Principles of Internal Medicine, Perry’s Chemical
Engineers’ Handbook and Graham & Dodd’s Security Analysis, and are well-regarded globally in both academic and
professional career markets. Our products are sold and distributed worldwide in both digital and print format
through multiple channels, including research libraries and library consortia, third-party agents, direct sales to
professional society members, bookstores, online booksellers, direct sales to individuals and other customers. Our
top customers include retail trade, academic and government institutions and corporations. For the years ended
December 31, 2019, 2018 and 2017, Professional digital revenue represented 59% ($70 million), 56% ($65 million)
and 51% ($62 million) of total Professional revenue, respectively.

For the years ended December 31, 2019, 2018 and 2017, Professional digital Billings (including the change
in deferred revenue) represented 60% ($73 million), 57% ($68 million) and 53% ($66 million) of total Professional
Billings, respectively.

Raw Materials, Printing and Binding

Paper is one of the principal raw materials used in our business. We have not experienced and do not
anticipate experiencing difficulty in obtaining adequate supplies of paper for operations. We have contracts to
purchase paper and printing services that have target volume commitments. However, there are no contractual terms
that require us to purchase a specified amount of goods or services and if significant volume shortfalls were to occur
during a contract period, then revised terms may be renegotiated with the supplier.

Environmental

We generally contract with independent printers and binders for their services. However, it is possible that

we could face liability, regardless of fault, if contamination were to be discovered on properties currently or
formerly owned, operated or leased by us or our predecessors, or to which we or our predecessors have sent waste.
We are not currently aware of any material environmental liabilities or other material environmental issues at our
properties or arising from our current operations. However, we cannot assure you that such liabilities or issues will
not materially adversely affect our business, financial position or results of operations in the future.

Seasonality and Comparability

Our revenues, operating profit and operating cash flows are affected by the inherent seasonality of the

academic calendar. In 2019 we realized approximately 18%, 24%, 35% and 23% of our revenues during the first,
second, third and fourth quarters, respectively. This seasonality affects operating cash flow from quarter to quarter
and there are certain months when we operate at a net cash deficit. Changes in our customers’ ordering patterns may
affect the comparison of our current results in prior years where our customers may shift the timing of material
orders for any number of reasons, including, but not limited to, changes in academic semester start dates or changes
to their inventory management practices.

Competition

We are one of the largest education companies in the world by revenue. Our product portfolio and customer

base span the entire educational spectrum, and as a result we compete with a variety of companies in different
product offerings. Our larger competitors are currently Pearson, Houghton Mifflin Harcourt, Wiley and
Cengage. The focus on technology and digital products in education may result in the emergence of additional
competitors over time. We believe that we are well positioned to compete in our markets. We primarily compete on
the quality of our content and effectiveness of our digital solutions, product implementation support, brand and
reputation, author reputation, customers’ history using our products and, to a lesser extent, price.

Personnel

As of December 31, 2019, we had nearly 4,134 employees worldwide directly supporting our operations

with approximately 3,084 employed in the United States. None of our employees in the United States are
represented by a union.

Intellectual Property

Our products contain intellectual property delivered through a variety of media, including digital and print.

We rely on a combination of copyrights, trademarks, patents, non-disclosure agreements and other agreements to
protect our intellectual property and proprietary rights. We also obtain significant content, materials and technology
through license arrangements with third party licensors.

We have registered certain patents, trademarks and copyrights in connection with our publishing
businesses. We also register domain names, when appropriate, for use in connection with our websites and internet
addresses. We believe we either own or have obtained the rights to use all intellectual property rights necessary to
provide our products and services. We believe we have taken, and continue to take, in the ordinary course of
business, appropriate legal steps to protect our intellectual property in all relevant jurisdictions.

We rely on authors for the majority of the content for our products. In most cases, copyright ownership has

either vested in us, as a “work made for hire”, been assigned to us by the original author(s), or the author has
retained the copyright and granted us an exclusive license to utilize the work.

Piracy of intellectual property can negatively affect the value of and demand for our products and services.

We attempt to mitigate the risk of piracy through (1) the implementation of restrictive use mechanisms and other
limitations inherent to our products and (2) the use of online monitoring combined with legal and regulatory actions
and initiatives.

Some of our products contain inherent usage controls and other built-in safeguards that reduce the risk and
ease of piracy, including: (a) requirements that users login to their accounts with user names and passwords; (b) the
fact that sharing account access for many of our products would result in an abnormal user experience and
inaccurate grading; (c) use by our eBook providers of time-based lockouts that allow our eBooks to be automatically
disabled based on subscription length; and (d) the inherent limitations in the usefulness and ease of copying the text
of many of our products, due to the adaptive and interactive nature of our key content together with certain
limitations on copying and pasting.

We also use a variety of legal actions, regulatory initiatives and online monitoring efforts to further mitigate

piracy concerns, including:

•

Online monitoring of piracy-related activities;

Initiation of litigation against certain infringers, both individually and jointly with other domestic and
foreign publishers;

Requesting that third parties take down infringing content;

Lobbying efforts;

Monitoring of our digital applications for abnormal load/usage; and

Anti-piracy educational programs.

Since 2007, we have engaged an outside firm that uses web-based technology to search for active titles that

are illegally posted or distributed on the internet. We also perform other regular searches for illegal use or
distribution of our content, investigate notices of illegal postings of our intellectual property and send take down
notices to internet service providers and web sites where infringing material is identified. Over the past years, we
have joined with other educational publishers to engage outside counsel to investigate and file numerous copyright

and trademark suits in federal court against various online sellers and distributors of infringing copies of our
copyrighted materials. We have partnered with various trade associations, such as the AAP and the Software
Information Industry Association ('SIIA'), to pursue joint actions against sources of both print and electronic piracy,
lobby legislative and other government officials in the U.S. and abroad to establish laws and regulations that might
assist content owners in combating piracy. We place a “Report Piracy” button on various internal and external sites
to enable employees, authors and third parties to report instances of illegal content distribution, which are
investigated and actioned as appropriate.

The Founding Acquisition

On March 22, 2013, MHE Acquisition, LLC ("AcquisitionCo") completed the Founding Acquisition,

pursuant to which a wholly-owned subsidiary of the Company acquired all of the outstanding equity interests of
certain subsidiaries of McGraw-Hill Companies, Inc. (“MHC”) pursuant to a Purchase and Sale Agreement, dated
November 26, 2012 and as amended March 4, 2013 (the “Acquired Business”). The Acquired Business included all
of MHC’s educational materials and learning solutions business, which is comprised of (i) the Higher Education,
Professional, and International Group (the “HPI business”), which includes post-secondary education and
professional products both in the United States and internationally and (ii) the School Education Group business (the
“SEG business”), which includes school and formative assessment products targeting students in the pre-
kindergarten through secondary school market. We refer to the purchase of the Acquired Business and the related
financing transactions as the “Founding Acquisition.” Following the Founding Acquisition, MHC is now known as
S&P Global, Inc.

As of completion of the Founding Acquisition, Apollo Global Management LLC (the “Sponsors”), certain

co-investors and certain members of management directly or indirectly owned all of the equity interests of
AcquisitionCo. In connection with the Founding Acquisition, a restructuring was completed, the result of which was
that the HPI business and the SEG business became held by separate wholly owned subsidiaries of MHE US
Holdings LLC. The HPI business became held by McGraw-Hill Global Education Intermediate Holdings, LLC
( “MHGE Holdings”) and its wholly owned subsidiary McGraw-Hill Global Education Holdings, LLC (“MHGE”),
while the SEG business became held by McGraw-Hill School Education Intermediate Holdings, LLC (“MHSE
Holdings”) and its wholly owned subsidiary McGraw-Hill School Education Holdings, LLC (“MHSE”). In addition,
concurrent with the closing of the Founding Acquisition, subsidiaries of each of MHGE and MHSE entered into
certain credit facilities. Neither MHGE nor its subsidiary companies guaranteed or provided collateral to the
financing of MHSE, and MHSE did not guarantee or provide collateral to the financing of MHGE or its subsidiary
companies.

Proposed Merger

On May 1, 2019, McGraw-Hill Education, Inc. (“McGraw-Hill”), McGraw-Hill Global Educations

Holdings, LLC (“McGraw-Hill Issuer”), Cengage Learning Holdings II, Inc. (“Cengage”), Cengage Learning
Holdco, Inc. (“Cengage Intermediate Holdco ”), and Cengage Learning, Inc. (“Cengage Issuer”), entered into an
Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to and subject to the terms and conditions of the
Merger Agreement, Cengage Intermediate Holdco will merge with and into Cengage, Cengage Issuer will merge
with and into Cengage, and then Cengage will merge with and into McGraw-Hill Issuer (the “Merger”), with
McGraw-Hill Issuer continuing as the surviving entity following the Merger. At the effective time of the Merger (the
“Effective Time”) (1) each share of McGraw-Hill common stock, par value $0.01 per share, will convert into one
share of Class A Common Stock of the combined company, and (2) each share of Cengage common stock, par value
$0.01 per share, will convert into a certain number of shares of Class B Common Stock of the combined company
such that, as of the Effective Time, the aggregate number of issued and outstanding shares of Class A Common
Stock will equal the aggregate number of issued and outstanding shares of Class B Common Stock. Accordingly, the
legacy stockholders of McGraw-Hill and the legacy stockholders of Cengage will, as of the Effective Time, each
collectively own exactly 50% of the issued and outstanding shares of voting common stock of the combined
company.

The proposed transaction is subject to certain closing conditions, including receipt of regulatory approvals.
McGraw-Hill and Cengage submitted Hart-Scott-Rodino Act filings with the U.S. Department of Justice and Federal
Trade Commission on May 31, 2019. McGraw-Hill is working towards closing the transaction in 2020.

McGraw-Hill has also agreed to various customary covenants and agreements, including, among others, to

conduct its business in the ordinary course during the period between the execution of the Merger Agreement and
the Effective Time, and to use reasonable best efforts to obtain all requisite regulatory approvals.

Merger-related costs are expensed as incurred and consist of integration planning costs, legal fees, rating

agency fees, and professional services.

Our Key Metrics

We measure our business using several key financial metrics, including Billings and Adjusted EBITDA by

segment.

Billings is a non-GAAP sales performance measure that we believe provides useful information in

evaluating our period-to-period performance because it reflects the total amount of revenue that would have been
recognized in a period if we recognized all print and digital revenue at the time of sale. We use Billings as a sales
performance measure given that we typically collect full payment for our digital and print solutions at the time of
sale or shortly thereafter, but recognize revenue from digital solutions and multi-year deliverables ratably over the
term of our customer contracts. As sales of our digital learning solutions have increased, so has the amount of
revenue that is deferred in accordance with U.S. GAAP. Billings is a key metric we use to manage our business as it
reflects the sales activity in a given period, provides comparability from period-to-period during this time of digital
transition and is the basis for all sales incentive compensation. In the K-12 market where customers typically pay for
five to eight-year contracts upfront and the ongoing costs to service any contractual obligation are limited, the
impact of the change in deferred revenue is most significant. Billings is GAAP revenue plus the net change in
deferred revenue.

For further information on non-GAAP financial measures and a description of how we calculate Billings

and operating factors that impact Billings, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations-Non-GAAP Measures” and “Use of Non-GAAP Financial Information.”

Adjusted EBITDA by segment, as determined in accordance with Accounting Standards Codification

Topic 280, Segment Reporting, is a measure used by management to assess the performance of our segments. We
exclude from Adjusted EBITDA by segment: interest expense (income), net, income tax (benefit) provision,
depreciation, amortization and pre-publication amortization and certain transactions or adjustments that our
management does not consider for the purposes of making decisions to allocate resources among segments or
assessing segment performance. In addition, Adjusted EBITDA by segment is calculated in a manner consistent with
the definition and meaning of our Adjusted EBITDA non-GAAP debt covenant compliance measure.

Our key metrics are presented under the headings “Selected Financial Data.”

Item 1A. RISK FACTORS

You should carefully consider the risk factors set forth below, as well as the other information contained in
this annual report. Any of the following risks could materially and adversely affect our business, financial condition
or results of operations. In addition, the risks described below are not the only risks that we face. Additional risks
and uncertainties not currently known to us or those that we currently view to be immaterial could also materially
and adversely affect our business, financial condition or results of operations.

Risks Related to Our Business

The pendency of the Cengage merger may adversely affect our business and performance.

On May 1, 2019, we announced that we had entered into a merger agreement with Cengage under which

we and Cengage will combine in a “merger of equals” transaction. The merger agreement prohibits either party from
taking certain material actions without the consent of the other. We may otherwise be disinclined to make material
changes to our business, structure or operations during the pendency of the merger, which may cause us to forgo
pursuing certain opportunities or making certain changes that we would otherwise have made. While the merger is
pending, a portion of the time of senior management and other employees will be devoted to obtaining regulatory
clearances for the merger and planning for the post-merger integration of the two businesses, rather than to our
normal business. In addition, uncertainty regarding future employment at the merged company or the desirability of
working for the merged company may distract employees, cause some high performing employees to leave, and
make it more difficult for us to hire new employees. During the pendency of the merger, we continue to incur
significant costs for financial, legal, accounting and other advisors relating to the merger. All of these factors may
adversely affect our financial performance.

The merger with Cengage may not occur.

Our merger agreement with Cengage currently terminates on May 1, 2020 if the merger has not been
consummated by 5:00 p.m. Eastern Time on that date. There is a possibility that the merger will not be consummated
by that time and, in such event, there is no guarantee that we and Cengage will agree to extend the termination date.
In addition, the obligations of each of us and Cengage under the merger agreement to consummate the merger are
subject to a number of conditions, including obtaining required regulatory clearances for the merger. There is no
guarantee that those conditions will be satisfied or waived. If the merger does not occur, we will not have the
opportunity to realize the anticipated benefits of the merger and any adverse effect of the pendency of the merger on
our financial performance will not be offset by those anticipated benefits.

If the merger with Cengage occurs, we may not realize the anticipated benefits of the merger.

If the merger with Cengage does occur, a number of factors could cause us not to realize the anticipated

benefits of the merger or not to realize them within the anticipated time frame. In order to obtain regulatory approval
for the merger, we and Cengage may be required to sell the assets related to a significant number of Higher Ed titles,
for which we may not be able to obtain fair value and whose sale may adversely affect our future revenue. The
anticipated benefits of the merger include substantial opportunities to reduce ongoing operating costs; however,
there is no guarantee that cost reductions or their estimated magnitude will be realized or realized within the
anticipated time frame. Integrating our business with Cengage’s business (1) will consume a substantial amount of
the time of certain members of management and other employees, which they will be unable to devote to normal
business, (2) may result in internal conflicts that cause high performing employees to leave or cause employees to be
less productive, (3) may cause disruptions in normal business processes and systems, which could temporarily
adversely affect the combined company’s business operations, and (4) will result in the merged company incurring
costs that may not be offset by any post-integration synergies. In addition, the merger will require refinancing or
amending a substantial portion of our and Cengage’s outstanding indebtedness, and the interest rates and other terms
of the new or amended indebtedness may be more onerous than existing terms or than anticipated.

If the merger is consummated, the combined company will be subject to the risks that Cengage faces, in addition
to the risks that we currently face.

While we and Cengage face many of the same risks, if the merger is consummated, the combined entity

will face any litigation or other risks that Cengage faces in addition to the risks that we face. Investors are
encouraged to see Cengage’s disclosures and reports to evaluate those risks.

A substantial portion of our credit facilities will need to be refinanced or extended within the next 14 months, and
most of our credit facilities will need to be refinanced or extended with the next 26 months.

$100,000,000 of our $150,000,000 Receivables Facility is a 364-day commitment that expires on

September 30, 2020; our $350,000,000 Revolving Credit agreement expires on May 2, 2021; the remaining
$50,000,000 of our $150,000,000 Receivables Facility expires on October 29, 2021; our $180,000,000 MHGE
Parent Term Loan matures on April 20, 2022; and our Term Loan Facility ($1.652 billion outstanding) matures on
May 4, 2022. Each of these credit facilities must be refinanced or extended by its expiration or maturity date. The
interest rates and other terms of any refinancing or extensions may be more onerous than existing terms, which
could adversely affect our financial performance, liquidity and ability to take advantage of business opportunities.

We face competition from both large, established, industry participants and new market entrants, the risks of
which are enhanced due to rapid changes in our industry and market.

Our competitors in the market for education products include a few large, established, industry participants.
Some established competitors 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 than we can. 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. The risks of competition are intensified due to the rapid changes in the products our
competitors are offering, the products our customers are seeking and our sales and distribution channels, which
create increased opportunities for significant shifts in market share. Competition has required us to reduce the price
of some of our products or make additional capital investments and may result in reductions in our market share and
sales.

Our investments in new products and distribution channels may not be profitable.

In order to maintain a competitive position, we must continue to invest in new products and new ways to
deliver them. This is particularly true in the current environment where investment in new technology is ongoing
and there are rapid changes in the products our competitors are offering, the products our customers are seeking, and
our sales and distribution channels. In some cases, our investments will take the form of internal development; in
others, they may take the form of an acquisition. Our investments in new products or distribution channels, whether
by internal development or acquisition, 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.

Our failure to win new state adoptions could adversely affect our revenue.

A significant portion of our revenue is derived from sales of K-12 instructional materials pursuant to pre-

determined adoption schedules. 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 sales opportunities than
others. For example, over the next few years, new adoptions are scheduled in one or more of the primary subjects of
reading, language arts and literature, social studies and science in, among others, the states of California, Texas and
Florida, which are the three largest adoption states. In each adoption decision for each state, we face significant
competition and are subject to regulatory approvals. Our failure to participate or do well in new state adoptions
could materially and adversely affect our revenue for the year of adoption and subsequent years.

Reductions in anticipated levels of federal, state and local education funding available for the purchase of
instructional materials could adversely affect demand for our K-12 products.

Most public school districts, which are the primary customers for K-12 products and services, depend

largely on state and local funding programs to purchase materials. In addition, many school districts also receive
substantial funding through Federal education programs. State, local or federal funding available to school districts

may be reduced as a result of reduced tax revenues, efforts to reduce government spending or increased allocation of
tax revenues to other uses. In addition, changes in the laws or regulations that give school districts flexibility in their
use of funds previously dedicated exclusively to the purchase of instructional materials may reduce the share of
district funds allocated to the purchase of instructional materials. Reductions in the amount of funding provided to
school districts or reductions in the portion of those funds allocated to instructional materials could reduce demand
for our K-12 products.

Changes in the timing and order patterns of customer purchases may adversely affect predictability of results and
comparability with prior results.

Traditionally, when the majority of products sold to customers in the higher education market consisted of
print textbooks sold through the campus bookstore, the timing of purchases was predictable because of the long lead
time to order and receive printed books before the start of the semester and because the sale was made to a
distribution partner that needed the inventory ahead of the school year. As the higher education market has shifted to
digital products, there has been a tendency for purchases to occur closer to the beginning of the semester since less
lead time is required for the purchase of a digital product and because the sale is frequently made directly to the
student. The shift to digital and increasing competition for the campus bookstore has diminished the visibility that
the traditional distribution channel has into student demand. As a result, distribution channels are ordering from us
closer to the start of the school year and with increased variability in ordering and return patterns. There is no
assurance that the trend to more digital purchases will continue, but given the current mix of digital versus print
purchasing and increased competition among distribution channels, it has become more difficult to predict the
timing and order patterns of customer purchases of our higher education products.

There is also timing uncertainty in the K-12 business. Within a year, timing of orders can vary significantly,
as the primary season for ordering occurs in the period between May and August, which spans our second and third
quarters. As a result, states and school districts that have significant purchases scheduled for a given year could
materially swing results between quarters based on when in the season the order is placed. Additionally, the timing
of a decision for a state-wide adoption or by an individual school district, in an adoption or open territory state, to
purchase in a given year can be significantly impacted or delayed by various circumstances including but not limited
to funding issues, development of standards and specifications, competing priorities or school readiness to
implement the new curriculum or technology. In addition, whereas in the past most school districts purchased
educational materials in state adoptions up-front, many are now choosing to spend on educational materials over a
multi-year period, and in some cases school districts are choosing to use available funds to purchase hardware,
software and other instructional aids that are not produced by us.

Taken together, it has become increasingly difficult for us to forecast the timing of customer purchases,

causing us to have to wait until later in the buying season in order to assess our financial performance. The change
in ordering patterns may impact the comparison of results between a quarter and the same quarter of the previous
year, between a quarter and the consecutive quarter or between a fiscal year and the prior fiscal year.

Evolving policy changes and funding shifts may impact timing and cost of development and implementation.

A number of political, regulatory and social influences could require unanticipated modifications to our

programs or impact the sales of our programs. In particular, State and district interpretation of Every Student
Succeeds Act (ESSA) guidelines and related evidence-based funding requirements, political pressures and
community activism, influences from various demographic groups and the growing number of English Language
Learners and low income students in certain districts, could each impact state and local adoptions of instructional
materials.These factors have the potential to delay or impair sales of our products, result in our products becoming
obsolete and/or cause us to incur additional product development costs.

A change from up-front payment by school districts for multi-year licenses could adversely affect our cash flow
and results of operation.

In keeping with the past practice of payment for printed materials, school districts typically pay up-front
when buying multi-year licenses. If school districts changed to spreading their payments to us over the term of the
licenses, our cash flow and results of operation could be adversely affected.

Increased availability of free or relatively inexpensive products may reduce demand for or negatively impact the
pricing of our products.

Free or relatively inexpensive educational products are becoming increasingly available, particularly in

digital formats and through the internet. For example, some governmental and regulatory agencies have increased
the amount of information they make publicly available for free. In addition, in recent years there have been
initiatives by not-for-profit organizations such as the Gates Foundation and the Hewlett Foundation to develop
educational content that can be “open sourced” and made available to educational institutions for free or nominal
cost. There is also a possibility that federal or state governments will enact legislation or regulations that mandate or
favor the use by educational institutions of open sourced content. The increased availability of free or relatively
inexpensive educational products may reduce demand for our products or require us to reduce pricing, thereby
impacting our sales revenue.

Increased customer expectations for lower prices or free bundled products could reduce sales revenues.

As the market has shifted to digital products, customer expectations for lower priced products has increased
due to customer awareness of reductions in marginal production costs and the availability of free or low-cost digital
content and products. As a result, there has been pressure to sell digital versions of products at prices below their
print versions and an increase in the amount of products and materials given away as part of bundled packs.
Increased customer demand for lower prices or free bundled products could reduce our sales revenue.

Malfunction or intentional hacking of our technological systems could adversely affect our operations or
business and cause financial loss and reputational damage.

We depend on complex technological systems to provide our products to our customers and to operate our
business. Malfunction or intentional hacking of these 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 such problems could result in liability, harm to our
reputation, loss of revenue, or financial loss.

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, regulations and standards in the United States and
in foreign jurisdictions where we conduct business with regards to access to, collection of, and use of personal data,
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 Health Insurance Portability and
Accountability Act in connection with our self-insured health plan, (iii) the Payment Card Industry Data Security
Standards in connection with collection of credit card information from customers, and (iv) various EU data
protection laws resulting from the EU Privacy Directive. Our failure to comply with applicable privacy laws,
regulations and standards or prevent the improper use or disclosure of the personal data we hold could lead to
penalties, significant remediation costs, reputational damage, potential cancellation of existing contracts, and an
impaired ability to compete for future business.

Defects in our digital products 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 specifications. Growing demand for innovation and additional
functionality in digital products increases the frequency of the product development and product enhancement cycle,
which in turn increases the risk that our products may contain flaws or corrupted data. These defects may only
become apparent after product launch, particularly for new products and new features to existing products that are
developed and brought to market under tight time constraints. Problems with the performance of our digital products
could result in liability, loss of revenue or harm to our reputation.

An increase in unauthorized copying and distribution of our products could adversely affect our sales, and an
increase in efforts to combat such activities could increase our expenses .

Most of the value of our products consists of the intellectual property contained in them. As a result, the
sale price of our products is high relative to the cost of copying them. This disparity makes our products tempting
targets for unauthorized copying and distribution by both end users and illegal commercial enterprises. The risk of
unauthorized copying and distribution of our products is greatest in the higher education and professional markets,
where the purchasers of our products are usually students and other individual customers, who generally obtain our
products through channels that are more susceptible to being used for the distribution of unauthorized copies. In
recent years, technological and market changes have facilitated the unauthorized copying and distribution of our
products to students and other individual customers. Of particular note is the development of on-line distribution
services that allow illegal commercial enterprises to utilize reputable and efficient marketplaces and fulfillment
services for the distribution and sale of counterfeit copies of products. Our management believes that increases in
unauthorized copying and distribution of our products may have contributed to a decline in sales of our higher
education print products in recent years. While we and others in our industry have been and continue to be engaged
in a variety of efforts to reduce the extent of counterfeit textbooks and other illegal copies of our products in the
marketplace, further expansion of the unauthorized copying and distribution of our products could adversely affect
our sales, and ongoing efforts to combat such activities could impact our expenses.

Factors that reduce enrollment at colleges and universities could adversely affect demand for our higher
education products.

Enrollment in U.S. colleges and universities can be adversely affected by many factors, including changes

in government and private student loan and grant programs, uncertainty about current and future economic
conditions, general decreases in family income and net worth and a perception of uncertain job prospects for recent
graduates. In addition, enrollment levels at colleges and universities outside the United States are influenced by the
global and local economic climate, local political conditions and other factors that make predicting foreign
enrollment levels difficult. While enrollment at degree granting institutions in the United States has overall been
steadily growing over the last several decades, enrollment levels have generally declined in recent years. Any
reductions in enrollment at colleges and universities both within and outside the United States could adversely affect
demand for our higher education products.

Growth of the used and rental book markets could adversely affect our revenue.

Active markets exist for the sale and rental of used versions of our printed books. The used and rental

markets are particularly material with respect to our printed higher education and professional printed books, where
most of the purchasers are students and other individual customers who may only need the use of the book for a
limited period of time. The sale of used books and rental of books provides a lower priced option for customers who
do not need a new version of a book to keep. Recent technological and market developments have resulted in an
increase in the size of the used and rental markets. The used and rental market competes directly with our current
new book sales market and reduces our revenue over time from new book sales as used versions become available in
the used and rental market. Although, as discussed in - "Our Growth Strategies - Increase our penetration in our
largest, most profitable disciplines and sub-markets", in 2018 we started a rental program for all our new copyright
higher education titles, we have not previously participated in the used or rental markets for most of our books and

our rental program is not expected to be fully implemented for a number of years. Further expansion of the used and
rental markets in which we do not participate could adversely affect our revenue.

We are dependent on third-party distributors, representatives and retailers for a substantial portion of our sales.

In addition to our own sales force and websites, we offer our products through a variety of third-party

distributors, representatives and retailers. We do not ultimately control the performance of our third-party
distributors, representatives and retailers to perform as required or to our expectations. Also, certain of our
distributors, representatives or retailers may market other products that compete with our products. The loss of one
or more of our distributors, representatives or retailers or their failure to effectively promote our products or
otherwise perform in their functions in the expected manner could adversely affect our ability to bring our products
to market and impact our revenues.

Consolidation and concentration in our distribution and retail channels could adversely affect our profitability
and financial results.

Some of our distribution and retail channels have experienced significant consolidation and

concentration. This concentration could potentially place us at a disadvantage with respect to negotiations regarding
pricing and other terms, which could adversely affect our profitability and financial results.

An adverse change in orders, returns or payments by a material reseller could adversely affect our financial
results.

A significant portion of our sales are to a small number of resellers. As of both December 31, 2019 and
2018, two customers comprised approximately 23% of the gross accounts receivable balance, respectively. The
Company had no single customer that accounted for 10% or more of our gross revenue for the year ended December
31, 2019, 2018 and 2017. An adverse change in orders, returns or payments by a material reseller could adversely
affect our financial results.

We may not be able to retain or attract the key authors and talented personnel that we need to remain competitive
and grow.

Our success depends, in part, on our ability to continue to attract and retain key authors and talented

management, creative, editorial, technology, sales and other personnel. We operate in a number of highly visible
industry segments where there is intense competition for successful authors and other experienced, highly effective
individuals. Our successful operations in these segments may increase the market visibility of our authors and
personnel and result in their recruitment by other businesses. There can be no assurance that we can continue to
attract and retain key authors and talented personnel and, if we fail to do so, it could adversely affect our business.

We may not be able to reduce our costs related to print products as fast as revenues from those products decline.

As the portion of our business that consists of print products declines, our need for certain facilities and

arrangements, such as printing and warehousing, also declines. Some of the costs related to these facilities and
arrangements are relatively fixed over the short term and, as a result, may not decline as quickly as the related
revenues. If our print-related costs do not decline proportionately with our print-related revenues, our results of
operations and financial condition would be adversely affected.

The shift to sales of multi-year licenses may affect the comparability of our GAAP revenue to prior periods and
cause increases or decreases in our sales to be reflected in our results of operation on a delayed basis.

As our business transitions from printed products to digital products, an increasing percentage of our

revenues are derived from the sale of multi-year licenses. Our customers typically pay for both printed products and
multi-year licenses up-front; however, we recognize revenue from multi-year licenses over their respective terms, as
required by GAAP, even if we are paid in full at the beginning of the license. As a result, an increase in the portion

of our sales coming from multi-year licenses may cause our GAAP revenue, when compared to prior periods, to not
provide a truly comparable perspective of our performance. Another effect of recognizing revenue from multi-year
licenses over their respective terms is that any increases or decreases in sales during a particular period do 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.

Unexpectedly large returns could adversely affect our financial results.

We generally permit our distributors to return products they purchase from us. When we record revenue, we

record an allowance for sales returns, which is based on the historical rate of return and current market conditions.
Should the estimate of the allowance for sales returns vary by one percentage point from the estimate we use in
recording our allowance, the impact on operating income would be approximately $0.8 million.

The high degree of seasonality of our business can create cash flow difficulties.

Our business is seasonal. Purchases of Higher Education products have traditionally been made in the third

and fourth quarters for the semesters starting classes in September and January. As the Higher Education business
continues to shift towards digital sales as well as print rental, fourth quarter sales for the January semester have
partially migrated to the first quarter. Purchases of K-12 products are typically made in the second and third quarters
of the calendar year for the beginning of the school year. This sales seasonality affects operating cash flow from
quarter to quarter. There are months when we operate at a net cash deficit from our activities. In 2019, we realized
approximately 18%, 24%, 35% and 23% of our revenues during the first, second, third and fourth quarters,
respectively, making third-quarter results particularly material to our full-year performance. We cannot make
assurances that our third quarter net sales will continue to be sufficient to meet our obligations or that they will be
higher than net sales for our other quarters. In the event that we do not derive sufficient net sales, we may not be
able to meet our debt service requirements and other obligations.

Our substantial indebtedness restricts our ability to react to changes in the economy or our industry and exposes
us to interest rate risk and risk of default.

We are a leveraged company that has substantial indebtedness. As of December 31, 2019, we had
$2,277.3 million face value of outstanding indebtedness (in addition to $350.0 million of commitments under the
Senior Facilities, none of which was drawn and excluding letters of credit of $4.3 million), and for the year ended
December 31, 2019, we had total debt service of $193.1 million (including approximately $51.3 million of debt
service relating to fixed rate obligations, without giving effect to the $500.0 million notional interest rate swap. Our
substantial indebtedness could have important consequences. For example, it could:

•

limit our ability to borrow money for our working capital, capital expenditures, debt service
requirements, strategic initiatives or other purposes;

make it more difficult for us to satisfy our obligations with respect to our indebtedness;

require us to dedicate a substantial portion of our cash flow from operations to the repayment of
our indebtedness, thereby reducing funds available to us for other purposes;

limit our flexibility in planning for, or reacting to, changes in our operations or business;

make us more vulnerable to downturns in our business or the economy;

restrict us from making strategic acquisitions, engaging in development activities, introducing new
technologies or exploiting business opportunities;

cause us to make non-strategic divestitures; or

•

expose us to the risk of increased interest rates, as certain of our borrowings, including borrowings
under the Senior Facilities are at variable rates of interest.

In addition, the agreements governing our indebtedness contain restrictive covenants that will limit our

ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants
could result in an event of default which, if not cured or waived, could result in the acceleration of substantially all
of our indebtedness.

Despite our substantial indebtedness, we may still be able to incur significantly more debt, which could intensify
the risks described above.

We and our subsidiaries may be able to incur additional indebtedness in the future. For example, as of

December 31, 2019, we had $350.0 million available for additional borrowing under the Revolving Facility portion
of the Senior Facilities (excluding letters of credit of $4.3 million), all of which would be secured. In addition,
although the terms of the agreements governing our indebtedness contain restrictions on our and our subsidiaries’
ability to incur additional indebtedness, these restrictions are subject to a number of important qualifications and
exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Further, these
restrictions will not prevent us from incurring obligations that do not constitute indebtedness. The more leveraged
we become, the more we, and in turn our security holders, will be exposed to certain risks described above under
“Our substantial indebtedness restricts our ability to react to changes in the economy or our industry and exposes us
to interest rate risk and risk of default.”

We may record future goodwill or indefinite-lived intangibles impairment charges related to our reporting units,
which could materially adversely impact 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. We assess goodwill for impairment at the reporting unit level and, in evaluating the potential for
impairment of goodwill, 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 reporting unit or small changes in
other key assumptions may result in future goodwill impairment charges, which could materially adversely impact
our results of operations.

Our management determined that there was a material weakness in our accounting for revenue recognition in
our K-12 business.

During 2016, we identified a material weakness in our internal control over financial reporting. A material
weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there
is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or
detected and corrected on a timely basis. This material weakness related to the accounting for revenue recognition in
our K-12 segment. The Company concluded that it previously did not defer certain revenues related to print
subscription products resulting in an overstatement of revenue recognized.

In addition, during the second and third quarters of 2016, the Company entered into certain customer

contracts containing multiple element arrangements, including free with order digital subscription products. The
Company concluded that it previously did not properly identify and account for the free with order digital
subscription products as a separate deliverable resulting in an overstatement of revenue recognized.

We appropriately accounted for our K-12 revenue recognition in the audited consolidated financial

statements and unaudited consolidated quarterly financial information included in this annual report.

Our management is in the process of remediating these material weaknesses. If we are unsuccessful in

remediating these weaknesses or suffer additional deficiencies or material weaknesses in our internal controls in the

future, we may be unable to report financial information in a timely and accurate manner and it could result in a
material misstatement of our annual or interim financial statements that would not be prevented or detected on a
timely basis, which could cause investors to lose confidence in our financial reporting and cause a default under the
agreements governing our indebtedness.

Legal actions against us, including intellectual property infringement claims, could be costly to defend and could
result in significant damages.

In the ordinary course of business, we are occasionally involved in legal actions and claims against us
arising from our business operations and therefore expect that we will likely be subject to additional actions and
claims against us in the future. Litigation alleging infringement of copyrights and other intellectual property rights,
particularly in relation to proprietary photographs and images, has become extensive in the educational publishing
industry. At present, there are various suits pending or threatened which claim that we exceeded the print run
limitation or other restrictions in licenses granted to us to reproduce photographs in our instructional materials. A
large number of similar claims against us have already been settled. A number of our competitors are or have been
defendants in similar lawsuits. We have liability 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 our
damages and, if our liability insurance does cover our damages, that the limits of coverage will be sufficient to fully
cover all potential liabilities and costs of litigation. While management does not expect any of the claims currently
pending or threatened against us 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 resolution of any particular legal proceeding
or change in applicable legal standards could have a meaningful adverse effect on our financial position and results
of operations.

We face risks of doing business abroad.

As we continue to invest in and expand portions of our overseas business, we face exposure to the risks of

doing business abroad, including, but not limited to:

•

lack of local knowledge or acceptance of our products and services;

entrenched competitors;

the need to adapt our products to meet local requirements;

longer customer payment cycles in certain countries;

limitations on the ability to repatriate funds to the United States;

difficulties in protecting intellectual property, enforcing agreements and collecting receivables under
certain foreign legal systems;

compliance under the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-corruption
laws;

the need to comply with local laws and regulations generally; and

in some countries, a higher risk of political instability, economic volatility, terrorism, corruption, social
and ethnic unrest.

Fluctuations between foreign currencies and the U.S. dollar could adversely affect our financial results.

We derived approximately 16% of our total revenue in the year ended December 31, 2019 from our

international sales operations. The financial position and results of operations of our international operations are

primarily measured using the foreign currency in the jurisdiction of operation of such business as the functional
currency. As a result, we are exposed to currency fluctuations both in receiving cash from our international
operations and in translating our financial results into U.S. dollars. For example, foreign exchange rates had a
unfavorable impact on our revenue of $5.2 million for the year ended December 31, 2019. We have operations in
various foreign countries where the functional currency is primarily the local currency. For international operations
that are determined to be extensions of the parent company, the U.S. dollar is the functional currency. Our principal
currency exposures relate to the Australian Dollar, British Pound, Canadian Dollar, Euro, Mexican Peso and
Singapore Dollar. Assets and liabilities of our international operations are translated at the exchange rate in effect at
each balance sheet date. Our income statement accounts are translated at the average rate of exchange during the
period. A strengthening of the U.S. dollar against the relevant foreign currency reduces the amount of income we
recognize from our international operations. In addition, certain of our international operations generate revenues in
the applicable local currency or in currencies other than the U.S. dollar, but purchase inventory and incur costs
primarily in U.S. dollars. While, from time to time, we may enter into hedging arrangements with respect to foreign
currency exposures, variations in exchange rates may adversely impact our results of operations and profitability.
The risks we face in foreign currency transactions and translation may continue to increase as we further develop
and expand our international operations.

We are dependent on third-parties for the performance of many critical operational functions.

We rely on third-parties for many critical operational functions, including general financial shared services,

accounts payable, accounts receivable, royalty processing, printing, warehousing, distribution, technology support,
online product hosting and certain customer support functions. Since those functions are provided by third parties,
our ability to supervise and support the performance of those functions is limited. The loss of one or more of these
third-party partners, a material disruption in their business or their failure to otherwise perform their functions in the
expected manner could cause disruptions in our business that would adversely affect our results of operations and
financial condition.

A significant increase in operating costs and expenses could have a material adverse effect on our profitability.

Our major operating expenses include employee compensation, paper, technology and third-party provider
fees and royalties. Any material increase in these or other operating costs and expenses that we are not able to pass
on in the cost of our products and services could adversely affect our results of operations and financial condition.

Item 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

Item 2. PROPERTIES

Our corporate headquarters are located in leased premises at 1325 Ave of Americas, New York, NY 10019.

We lease offices, warehouses and other facilities at 52 locations, of which 14 are in the United States. In addition,
we occupy real property that we own at 6 locations, of which 4 are in the United States. Our properties consist
primarily of office space used by our operating segments, and we also utilize warehouse space and book distribution
centers. We believe that all of our facilities are well maintained and are suitable and adequate for our current needs.

The properties listed in the table below are our principal owned and leased properties:

Location

Lease Expiration

Approximate Area

Owned Premises:

Blacklick, Ohio

Monterey, California

Columbus, Ohio

Dubuque, Iowa
Leased Premises:

Groveport, Ohio

Ashland, Ohio

Penn Plaza, New York

Avenue of the Americas, New York

Noida, Uttar Pradesh, India

Chicago, Illinois
Irvine, California

Boston, Massachusetts

Seattle, Washington

East Windsor, New Jersey

Owned

2022

2021

2020

2035

2020

2029
2021

2021

2024

548,144

209,204

170,615

139,062

667,672

602,378

168,903

136,176

90,500

59,693
53,220

37,622

24,646

23,183

Principle Use of
Space

Warehouse & Office

Office

Warehouse & Office

Office

Warehouse & Office

Office
Office

Office

In addition, we own and lease other offices that are not material to our operations.

Item 3. LEGAL PROCEEDINGS

In the normal course of business both in the United States and abroad, we are a defendant in various

lawsuits and legal proceedings which may result in adverse judgments, damages, fines or penalties and is subject to
inquiries and investigations by various governmental and regulatory agencies concerning compliance with
applicable laws and regulations. In view of the inherent difficulty of predicting the outcome of legal matters, we
cannot state with confidence what the timing, eventual outcome, or eventual judgment, damages, fines, penalties or
other impact of these pending matters will be. We believe, based on our current knowledge, that the outcome of the
legal actions, proceedings and investigations currently pending should not have a material adverse effect on the
Company’s financial condition.

In 2016, MHE filed a complaint against Illinois National Insurance Company ("INIC") in the Supreme

Court of the State of New York seeking a declaration that it is entitled to full insurance benefits under several multi-
media policies with INIC which has denied liability and asserted a counterclaim on November 28, 2016 in the
Action seeking (i) a declaratory judgment that MHE is not entitled to the coverage sought; (ii) recoupment of
indemnity payments already made by INIC on the claims; and (3) recoupment of defense costs reimbursed by INIC.
On December 17, 2019, the First Department ruled that MHE is entitled to coverage for damages related to the
Copyright Actions under the policies and referred the case back to the trial court for a determination of damages.

Item 4. MINE SAFTEY DISCLOSURES

Not applicable.

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

PART II

Not applicable.

Item 6. SELECTED FINANCIAL DATA

The consolidated statement of operations for the years ended December 31, 2019, 2018, 2017 and the

consolidated balance sheet data as of December 31, 2019 and 2018 have been derived from the audited consolidated
financial statements of the Company included elsewhere in this annual report. The consolidated statement of
operations for the years ended December 31, 2016 and 2015 and the consolidated balance sheet data as of
December 31, 2017, 2016 and 2015 have been derived from the audited consolidated financial statements of the
Company, which are not included elsewhere in this annual report.

As our historical financial information may not be indicative of our future performance, the data presented

below should be read in conjunction with our audited consolidated financial statements and related notes, thereto,
and with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this annual report.

(Dollars in thousands)

Statement of Operations

Revenue

Cost of sales

Gross profit

Operating expenses

Year Ended
December 31,
2019

Year Ended
December 31,
2018

Year Ended
December 31,
2017

Year Ended
December 31,
2016

Year Ended
December 31,
2015

1,571,388

1,596,945

1,719,072

1,740,027

1,828,592

371,387

394,531

426,636

427,409

479,469

1,200,001

1,202,414

1,292,436

1,312,618

1,349,123

Operating and administration expenses

1,030,470

1,038,073

1,065,755

1,078,604

1,127,455

Depreciation

Amortization of intangibles

Total operating expenses

Operating income

Interest expense (income), net

Loss on extinguishment of debt

Other (income) expense

(Loss) income from operations before taxes on
income

Income tax provision (benefit)

56,302

71,849

46,929

86,722

45,243

88,068

37,045

90,886

30,636

94,156

1,158,621

1,171,724

1,199,066

1,206,535

1,252,247

41,380

180,430

—

(7,962)

30,690

180,576

—

(131,088)

(149,886)

12,122

10,535

93,370

179,378

—

(12,727)

(73,281)

(7,351)

(65,930)

106,083

199,506

26,562

—

(119,985)

15,117

96,876

192,918

—

(4,779)

(91,263)

11,530

(135,102)

(102,793)

Net (loss) income from continuing operations

(143,210)

(160,421)

Net (loss) income from discontinued
operations, net of taxes

Net (loss) income attributable to McGraw-Hill
Education, Inc.

—

(1,905)

(76,338)

(143,210)

(160,421)

(65,930)

(137,007)

(179,131)

(Dollars in thousands)

Other Financial data

Billings (1)

Adjusted EBITDA by Segment (1)

Higher Education

K-12

International

Professional

Other

Capital expenditures

Total Net Debt (2)

Working Capital (3)

Statement of Cash Flow data

Cash flows (used for) provided by:

Operating activities

Investing activities

Financing activities

(Dollars in thousands)

Balance Sheet data

Year Ended
December 31,
2019

Year Ended
December 31,
2018

Year Ended
December 31,
2017

Year Ended
December 31,
2016

Year Ended
December 31,
2015

1,663,057

1,661,437

1,866,416

1,912,902

2,057,951

183,252

110,525

15,161

35,453

10,647

(75,239)

200,667

24,085

8,038

35,754

(7,620)

(63,239)

227,707

112,078

18,324

39,944

2,092

(45,127)

233,507

138,368

19,011

33,739

(1,737)

(38,223)

294,540

126,902

33,229

32,193

(1,274)

(41,181)

1,810,357

1,904,766

1,832,207

1,926,503

1,581,601

(66,125)

25,882

131,557

178,433

176,619

262,101

156,353

263,892

197,964

308,422

(151,767)

(54,254)

(160,694)

(52,432)

(135,711)

(142,311)

(139,418)

(190,912)

(151,763)

(12,850)

December 31,
2019

December 31,
2018

December 31,
2017

December 31,
2016

December 31,
2015

As of

Cash, cash equivalents and restricted cash (4)

401,856

345,920

407,632

418,753

553,194

Total assets

Total debt (2)

2,553,615

2,202,303

2,514,436

2,219,711

2,517,272

2,239,839

2,578,075

2,345,256

2,723,683

2,134,795

Stockholders' equity (deficit)

(1,452,235)

(1,306,257)

(1,198,533)

(1,150,088)

(689,102)

(1) Billings, a measure used by management to assess sales performance, is defined as the total amount of revenue that would have been

recognized in a period if all revenue were recognized immediately at the time of sale.
Management believes that Billings is helpful in highlighting the actual sales activity in a given period and provides comparability from
period to period during our ongoing transition from the sale of printed materials to digital solutions which are required to be deferred and
recognized as revenue over time in accordance with U.S. GAAP.

(2) Total debt is presented as long-term debt plus current portion of long-term debt. Total net debt is total debt less cash and cash equivalents.
(3) Working capital is calculated as current assets less current liabilities.
(4) Cash, cash equivalents and restricted cash includes restricted cash included in other non-current assets within the consolidated balance

sheets. Refer to Note 1, "Basis of Presentation and Accounting Policies" within the accompanying notes to the consolidated financial
statements.

Billings is calculated as follows:

(Dollars in thousands)

Revenue

Change in deferred revenue (a)

Billings

Year Ended
December 31,
2019

Year Ended
December 31,
2018

Year Ended
December 31,
2017

Year Ended
December 31,
2016

Year Ended
December 31,
2015

1,571,388

91,669

1,663,057

1,596,945

64,492

1,661,437

1,719,072 $

1,740,027

147,344

172,875

1,866,416

1,912,902

1,828,592

229,359

2,057,951

(a) We receive cash up-front for most product sales but recognize revenue (primarily related to digital sales) over time recording a

liability for deferred revenue at the time of sale. This adjustment represents the net effect of converting deferred revenues to a cash
basis assuming the collection of all receivable balances.

Adjusted EBITDA by segment is a measure used by management to assess the performance of our segments and is calculated in a manner
consistent with the definition and meaning of our Adjusted EBITDA non-GAAP debt covenant compliance measure. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Debt Covenant Compliance”.

Billings is not a presentation made in accordance with U.S. GAAP and does not purport to be an alternative to revenue as a measure of
operating performance or to cash flows from operations as a measure of liquidity. Such measure has limitations as our analytical tool, and
you should not consider such a measure in isolation or as a substitute for our results as reported under U.S. GAAP. Management
compensates for the limitations of using non-GAAP financial measures by using them to supplement U.S. GAAP results to provide a more
complete understanding of the factors and trends affecting the business than U.S. GAAP results alone. Because not all companies use
identical calculations, this measure may not be comparable to other similarly titled measures of other companies. See “Use of Non-GAAP
Financial Information.”

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion provides a narrative of our results of operations and financial condition for the

years ended December 31, 2019, 2018 and 2017. You should read the following discussion of our results of
operations and financial condition in conjunction with the accompanying audited financial statements and notes
thereto, appearing elsewhere in this document.

Company Overview

We are a leading provider of outcome-focused learning solutions, delivering both curated content and

digital learning tools and platforms to the students in the classrooms of approximately 250,000 higher education
instructors, approximately 13,000 pre-kindergarten through 12th
academic institutions, professionals and companies in more than 100 countries. We have evolved our business from
a printcentric producer of textbooks and instructional materials to a leader in the development of digital content and
technology-enabled adaptive learning solutions that are delivered anywhere, anytime. We believe we have
established a reputation as an industry leader in the delivery of innovative educational content and methodologies.

grade (“K-12”) school districts and a wide variety of

Business Segments

We have four operating business segments: Higher Education, K-12, International and Professional. Higher

Education is our largest segment, representing 39%, 42% and 42% of total revenue for the years ended
December 31, 2019, 2018 and 2017, respectively. Our K-12 segment generated 37% 35%, and 35% of total revenue
for the years ended December 31, 2019, 2018 and 2017, respectively. Our International segment generated 16% of
total revenue for the years ended December 31, 2019, 2018 and 2017, respectively. Our Professional segment
represents 8%, 7% and 7% of total revenue for the years ended December 31, 2019, 2018 and 2017, respectively.
The remaining total revenue relates to adjustments made for in-transit product sales.

Higher Education

In the higher education market in the United States, we provide students, instructors and institutions with

adaptive digital learning tools, digital platforms, custom publishing solutions and traditional printed textbook
products with capabilities in adaptive learning, homework tools, lecture capture and Learning Management System
(“LMS”) integration for post-secondary markets. Although we cover all major academic disciplines, our content
portfolio is organized into three key disciplines: (i) Business, Economics & Career; (ii) Science, Engineering &
Math; and (iii) Humanities, Social Science & Languages. Our top selling products include Economics: Principles,
Problems, and Policies (McConnell/Brue/Flynn), ALEKS, Managerial Accounting (Garrison) and The Art of Public
Speaking (Lucas). The primary users of our solutions are students enrolled in two- and four-year non-profit colleges
and universities, and to a much lesser extent, for-profit institutions. Based on NSCRC data, recent declines in 2-year
and 4-year enrollments have been driven in large part by declines in for-profit institutions. While overall enrollments

declined by approximately 2.1 million between Fall 2010 and 2019, the for profit enrollment declines were
approximately 42% of the total while other enrollments declined 58% of the total. In 2019, or-profit colleges
accounted approximately 9% of Higher Education revenue.

We sell our Higher Education solutions to well-known online retailers, distribution partners and college

bookstores, who subsequently sell to students. Our own direct-to-student sales channel is increasing via our
proprietary e-commerce platform, which currently represents the largest distribution channel in this segment.
Although we sell our products to the students as end users, it is the instructor that makes the ultimate decision
regarding new materials for the course. We have longstanding and exclusive relationships with many authors and
nearly all of our products are covered by copyright in major markets, providing us the exclusive right to produce and
distribute such content in those markets during the applicable copyright terms.

In addition, affordability initiatives are a key focus with strong digital activation growth led by our
Inclusive Access institutional delivery and the launch of our formal rental program which was introduced in the fall
of 2018 for our new copyright Higher Education titles with rental agreements executed with all major distribution
partners.

K-12

In the K-12 market in the United States, we primarily sell curriculum and learning solutions, which include

core basal programs, intervention and supplemental products, formative assessment tools, teaching resources and
professional development programs. We sell our learning solutions directly to school districts across the United
States. The process through which products are selected and procured for classroom use varies throughout the
United States. Eighteen states, known as adoption states, approve and procure new basal programs, usually every
five to eight years on a state-wide basis for each major area of study, before individual schools or school districts are
permitted to schedule the purchase of materials. In all remaining states, known as open territories, each individual
school or school district can procure materials at any time, though they usually do so on a five to eight year cycle.
The student population in adoption states represents approximately 47% of the U.S. elementary and secondary
school-age population. Many adoption states provide “categorical funding” for instructional materials, which means
that state funds cannot be used for any other purpose. While we offer all of our curriculum and learning solutions in
digital format, given the varying degrees of availability and maturity of our customers’ technological infrastructure,
a majority of our sales are derived from blended print and digital solutions. Our top selling programs are Reading
Wonders, Everyday Math, Inspire Science and ALEKS K-12.

International

Our International segment, defined as sales outside the United States, serves students in the higher

education, K-12 and professional markets in more than 100 countries. Our products and solutions for the
International segment are produced in more than 75 languages and primarily originate from our offerings for the
United States market, which are later adapted to meet the needs of individual geographies. Sales of our digital
offerings are growing significantly in the international market, and we are continuously increasing our inventory of
digital programs. The growth in the use of the English language is also a driver of demand for digital learning
solutions and printed educational instructional materials.

Professional

In the professional market in the United States, we provide medical, technical, engineering and business

content for the professional, education and test preparation communities. Our digital subscription products are sold
to more than 2,200 customers including corporations, academic institutions, libraries and hospitals. Our digital
subscription products had a 95% annual retention rate in 2019.

Other

Other represents certain transactions or adjustments that are unusual or non-operational. In addition,
adjustments made for in-transit product sales, timing related corporate cost allocations and other costs not attributed
to a single operating segment are recorded within Other.

Factors Affecting Our Performance

Impact of Our Digital Transformation

The acceptance and adoption of digital learning solutions is driving a substantial transformation in the

education market. We believe we are well positioned to take advantage of this transformation given our ability to
offer embedded assessments, adaptive learning, real-time interaction and feedback and student specific
personalization based on our core curated educational content in a platform- and device-agnostic manner.

The demand for our digital solutions has increased substantially over the last five years though the rate of

transformation differs by business segment. In the higher education market, our customers’ technology
infrastructures are sufficiently advanced to support full adoption of digital learning solutions. During the year ended
December 31, 2019, approximately 74% of our Higher Education Billings was derived from digital learning
solutions. In the K-12 market, varying degrees of broadband internet connectivity, adequacy of technical support
staff, and teacher training across our customer base have limited the rate of broad-based adoption of digital
solutions. Product mix in K-12 will impact digital revenue. For example, reading and literacy are less digital than
math and social studies. Recent public policy and funding initiatives have increased emphasis on removing these
limitations. Professional markets have the greatest digital readiness, and a majority of our Professional revenues are
derived from digital product sales. Internationally, the receptivity to digital solutions is also strong, particularly in
developing economies. According to Juniper Networks, people in developing countries are nearly twice as likely to
use connected devices for educational purposes on a regular basis as those in developed markets.

Our revenue models across each of our business segments are transforming along with our customers’

increasing adoption of digital learning solutions. In general, our digital solutions are sold on a subscription basis
with high renewal rates, which provides a more stable and predictable long term revenue model. We believe that the
digital transformation will provide new opportunities for revenue growth. For example, our digital learning solutions
provide an opportunity for us to increase the size of our addressable market as our digital products are not available
in a format that can be utilized for sale in the used and rental market. In addition, the reserve that we maintain for
product returns has declined over time due to the shift from traditional print products to digital learning solutions,
which experience a much lower return rate.

We closely monitor our digital sales given the significant investment being made across our business and

the increasing adoption of digital in the marketplace. Our digital offerings are sold on a standalone basis and as part
of bundled or blended offerings. In instances where we sell digital with a print component, it is our policy to
bifurcate the sale between the digital and print components and attribute value to each of the components in
accordance with U.S. GAAP. When we discuss or present digital revenues, such information is based upon the
attribution of value in accordance with U.S. GAAP and does not include print revenues.

The transition from traditional print to digital solutions also improves our cost structure as we tag and
leverage content across the entire business instead of duplicating development efforts in each segment. We also
expect to reduce raw material, warehouse and delivery costs as a result of the shift to digital solutions, as well as
reducing sampling costs that are incurred to provide traditional print products to purchasing decision makers at no
cost to them.

The development cycle for traditional print products involves periodic revisions, which give rise to
significant pre-publication costs that are capitalized and recognized through amortization expense over time.
Our total spend on pre-publication costs is influenced mostly by the timing of new adoption opportunities in our
K-12 business and the timing of investment in front-list titles in our Higher Education business, during any given

period. With our digital solutions, we employ a continuous revision cycle that permits smaller and more frequent
investment over the lifecycle of a product to maintain the product’s relevancy by quickly incorporating feedback and
enhancement opportunities. The cost of the smaller and more frequent investment is expensed and not capitalized, a
shift from the historical accounting for pre-publication costs.

Our digital learning solutions are supported by our in-house Digital Platform Group (“DPG”), which was

formed in 2013 to drive innovation and to develop, maintain and leverage our digital learning solutions and
technology tools and platforms across our entire business. To maintain and grow our leading digital position, we
have increased our annual digital learning solutions spending, including operating and capital expenditures, from
less than $90 million in 2012 to approximately $170 million in 2019. While we are committed to continue
significant digital investment, growth rates of spending has declined as we have achieved scale. While our
investment has increased significantly since 2012, our annual expenditures have stabilized as our major initiatives
and the build-out of certain foundational capabilities near completion.

Revenue

Higher Education

We derive revenue primarily from the sale of digital learning solutions and content, traditional and custom

print content and instructional materials. Our digital and print revenues are a function of sales volume and, to a
lesser extent, changes in unit pricing. Our revenues are comprised of product and services sales less an allowance for
product returns and revenue that is required to be deferred in accordance with U.S. GAAP.

Our business is driven by our ability to maintain and win instructor adoptions and purchasing decisions

made by students. Trends in student enrollment impacts the number of students requiring our digital and print
solutions in a given year. Because instructors are the ultimate decision makers for content and instructional materials
to be used in their courses, we compete for instructor adoptions of our products. After an instructor has adopted our
products for use in his or her course, students have the option to purchase new content and instructional materials,
purchase used versions of printed materials, rent printed materials from a number of outlets, or forego the
acquisition of course content and materials altogether. Our sales depend heavily on the volume of new content and
instructional materials sold and we did not benefit from sales in the used and rental markets prior to the launch of
our rental program in the fall of 2018. As digital solutions are adopted by more instructors, and increasingly become
part of the instructors’ graded curriculum, more students are purchasing our digital solutions. This trend has
increased sales of our digital solutions and is resulting in more predictable and recurring revenues as sales volumes
begin to more closely align with trends in student enrollment.

For our print products, we recognize revenue at the time of shipment to our distribution partners, who

typically order products several weeks before the beginning of an academic semester to ensure sufficient physical
product inventory. Revenue relating to our rental program is deferred and subsequently recognized over the rental
period which begins when the print product is transferred to the customer and is typically for one semester. Digital
products are generally sold as subscriptions, which are paid for at the time of sale or shortly thereafter, and we
recognize revenues derived from these products over the life of the subscription. In most cases, students purchase
digital products at the beginning of the academic semester, or shortly thereafter, which has tended to shift the timing
of revenues to later in the academic year as we sell more digital products and fewer print products. In addition, the
difference in our revenue recognition policies between print and digital products has caused comparisons of current
and historical revenues to less accurately reflect the actual sales performance of our business during this time of
transition. As a result, we use the non-GAAP measure Billings to provide a consistent comparison of sales
performance from period to period. See “-Non-GAAP Measures” for a description of Billings.

Revenues are also impacted by our reserve for product returns. Our distribution partners are permitted to

return products at any time, though they primarily do so following the heavy student purchasing period at the
beginning of each academic semester. To more accurately reflect the economic impact of returns on our operating
performance, we reserve a percentage of our gross sales in anticipation of these returns when calculating our net

revenues. This reserve has declined in recent years as we shift from sales of traditional print products to digital
learning solutions, which experience a much lower return rate.

K-12

We derive revenue primarily from the sale of digital learning solutions, traditional print offerings and other

instructional materials. Our revenues are driven primarily by sales volume and, to a lesser extent, changes in unit
pricing. Our revenues are comprised of product and services sales less an allowance for product returns and revenue
that is required to be deferred in accordance with U.S. GAAP. The required revenue deferral for digital solutions in
K-12 is significantly greater than in Higher Education due to the longer, multi-year contractual terms of our
customer arrangements in K-12 (typically five to eight years).

Sales volumes are driven primarily by the availability of funding for instructional materials. Most public
school districts are largely dependent on state and local funding for the purchase of instructional materials, which
correlate with state and local receipts from income, sales and property taxes. Nationally, total state funding for
public schools has been trending upward as state income and sales tax revenues recover from the lows of the
2008-2009 economic recession. The improving economy has driven a recovery in housing, which has led to higher
property tax revenues for local governments and increased budgets for public schools.

The purchasing cycles of adoption states also have a significant impact on our sales volumes. We monitor the
purchasing cycles for specific disciplines in adoption states in order to manage our product development and to plan
sales campaigns. Our sales may be materially impacted by the purchasing schedules of major adoption states such as
Florida, California and Texas. For example, Florida purchased new reading/language arts and mathematics programs
in 2013-2014, followed by social studies in 2017 and science materials in 2018. Mathematics was previously scheduled
for 2019 and has been moved to a purchase year of 2022 and reading/language arts was previously scheduled for 2020
and has been moved to 2021. Texas school districts purchased new mathematics and science materials in 2014, social
studies and high school math in 2015 and a new reading/language arts program for grades K-8 in 2019 and scheduled
to purchase grades 9-12 in 2020. California adopted new math materials, with purchases over the 2013-2015 period,
and reading/language arts with purchases beginning in 2016 and continuing through 2018. California is purchasing
social studies over the 2018-2020 period and science over 2019-2020. Florida, Texas and 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.

Sales volume in the United States K-12 market is also affected by changes in state curriculum standards
and by student enrollment. 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 basal programs. School enrollment
is highly predictable, as they correlate with the overall growth in birth rates in the United States, and are expected to
continue trending upward over the long term. According to NCES, K-12 enrollment in the United States as of Fall
2016 was over 56 million and enrollment is projected to grow to over 57 million in 2028.

Our product pricing is generally determined at the time our products are adopted by a state or district. Price
has historically been of lesser importance than curriculum quality and service levels in state and district purchasing
decisions. The vast majority of our program offerings is hybrid, incorporating both print and digital elements.

Revenue from traditional print products is typically recognized at the time of shipment, which closely

aligns with when a school district takes possession of the required number of products at the outset of a multi-year
adoption. Traditional print products are typically re-used by students over the term of the adoption, and school
districts will occasionally purchase replacement products due to wear or increasing enrollment over the life of the
adoption. Sales of these replacement products are known as residual sales, from which we derive a significant
portion of our revenue. Our online and digital solutions are sold as a subscription, which states and districts pay for
at the beginning of a multi-year adoption. We typically defer revenue related to online and digital solutions for the
entirety of the contract upfront and recognize it ratably over the term of the contract. Because they are consumable
products, revenue for workbooks is deferred when we enter into a multi-year contract and is recognized when
delivery takes place, often at the beginning of each academic year over the contract term. As our customers purchase

more of our digital and hybrid learning solutions, the percentage of our revenue that is deferred continues to
increase. The total amount of the sale and the cash received upfront for a fully-digital or hybrid program is
comparable to a fully print program; however, the time period over which the revenue is recognized increases with
the shift to digital. The difference in our revenue recognition policies between print and digital solutions has caused
comparisons of current and historical revenues to less accurately reflect the actual sales performance of our business
during this time of transition. As a result, we use the non-GAAP measure Billings to provide a consistent
comparison of sales performance from period to period. See “-Non-GAAP Measures” for a description of how we
define Billings.

Unlike our Higher Education segment, product returns in our K-12 segment have an immaterial impact on
net revenues because we sell directly to school districts, which are better able to predict end demand and are limited
to primary market purchases.

International

We derive revenue primarily from the sale of digital learning solutions and content, traditional print content

and instructional materials to the higher education, K-12 and professional markets in more than 100 countries
worldwide. Our revenues are a function of the market conditions in the countries in which we operate and our ability
to expand our sales to customers in these countries and to new countries. A majority of our international revenue is
generated by selling our unmodified English language products, which were originally created for the United States
market, internationally. Our revenues are comprised of product and services sales less an allowance for product
returns and revenue that is required to be deferred in accordance with U.S. GAAP.

Our International business covers five major regions. Each of these regions and the underlying country

performance can be impacted by the economy, government policy and competitive situations. These regions and the
general revenue drivers for each are as follows:

EMEA: the majority of our business is driven by Higher Education, followed by K-12 (including English
Language Learning) and Professional. The majority of our Higher Education revenues come from the
sale of original United States product translations and adaptations of those products. Our K-12 business
in Spain is primarily driven by the development and sale of local original publications and is subject to
the cyclical nature of government driven curriculum renewals. Our K-12 business in the Middle East is
primarily driven by print and digital orders for United States product as well as translations and
adaptations.

Asia Pacific: our business is driven primarily by Higher Education and Professional. China provides the
largest share of revenue driven by English Language Learning and translation of United States books
from Higher Education and Professional into local language. In addition, in southeast Asia, we operate
in 15 countries, some of which are subject to volatile political and economic conditions. Our Australian
business is primarily driven by the sale of original United States Higher Education product as well as
adaptations.

India: Higher Education is a major driver of our business, followed by Professional and K-12. Our
product portfolio in India primarily consists of local publishing programs, followed by adaptations of
United States product.

Latin America: this region is primarily driven by K-12 (including English Language Learning), followed
by Higher Education and Professional. From a regional perspective, our largest market is Mexico,
followed by Colombia, Chile and Venezuela. Latin America’s business is exposed to volatile political
and economic conditions. The majority of our Higher Education revenues are derived from the sale of
original United States products that have been translated and / or adapted. Our K-12 business is
primarily driven by the development and sale of local/original publications and is subject to the cyclical
nature of government driven curriculum renewals.

Canada: Higher Education is the largest driver of our Canadian business, followed by Professional.
Higher Education sales consist primarily of original United States Higher Education product as well as
translations and adaptations. We sold our K-12 business in Canada in 2017.

Product pricing varies by region and country with pricing comparable to equivalent products sold in the

United States in some instances. Within developing economies, price points tend to be lower than in the United
States, dictated by the economic conditions prevalent in that country.

Foreign exchange rates also impact our international revenues as the functional currency is often the
foreign currency of the countries in which we operate. As a result, we are exposed to currency fluctuations in
translating our financial results into U.S. dollars. In 2019, approximately 77% of our international sales were
denominated in currencies other than the U.S. dollar. Recent strengthening of the dollar has resulted in unfavorable
foreign exchange impacts. We monitor the impact of foreign currency movements and the correlation between local
currencies and the U.S. dollar. We also periodically review our hedging strategy and may enter into other
arrangements as appropriate.

Revenue recognition for international products is similar to products sold in the United States. Revenue for

traditional print products is typically recognized upon shipment, while digital revenues are recognized over the
contractual term of the product. The difference in our revenue recognition policies between print and digital
solutions has caused comparisons of current and historical revenues to less accurately reflect the actual sales
performance of our business during this time of transition. As a result, we use the non-GAAP measure Billings to
provide a consistent comparison of sales performance from period to period. See “-Non-GAAP Measures” for a
description of how we define Billings.

Professional

We derive revenue primarily from the sale of digital subscription services and content, both digital and

print. Our digital and print revenues are a function of sales volume and, to a lesser extent, changes in unit pricing.
Our revenues are comprised of product and services sales less an allowance for product returns and revenue that is
required to be deferred in accordance with U.S. GAAP.

Sales volume is driven by demand for subscription based, professional content and by growth in

knowledge-based industries, especially in the medical, technical and engineering fields. As the United States
economy continues to recover, we expect the market for professional education resources to grow, particularly
among professions that are experiencing more rapid job growth. The Professional and Business Services and
Healthcare and Social Assistance industry sectors are expected to add over 6 million jobs between 2016 and 2026,
more than all other United States industries combined, according to the Bureau of Labor Statistics (“BLS”). We
derive a substantial portion of our Professional revenue from these two industries.

Sales of our digital subscription services provide a stable and highly recurring revenue stream, with a

retention rate across major platforms of 95% in 2019. Our digital subscription services are sold as annual and multi-
year contracts.

Revenue for traditional print products is typically recognized upon shipment, while digital revenues are
recognized over the contractual term. The continued shift from print to digital will increase the percentage of our
sales that are deferred and recognized over the contractual term. The difference in our revenue recognition policies
between print and digital solutions has caused comparisons of current and historical revenues to less accurately
reflect the actual sales performance of our business during this time of transition. As a result, we use the non-GAAP
measure Billings to provide a consistent comparison of sales performance from period to period. See “-Non-GAAP
Measures” for a description of Billings.

Cost of Sales

Cost of sales include variable costs such as paper, printing and binding, certain transportation and freight

costs related to our print products, as well as content related royalty expenses and gratis costs (products provided at
no charge as part of the sales transaction) for both print and digital products. Gratis costs are predominately incurred
in our K-12 business and tend to be higher for adoption state sales as compared to open territory sales. As such,
these costs will vary based upon the level of adoption state sales during a given period.

Due to the inherent subjectivity in the classification of costs between cost of sales and operating and

administrative expense across the Company’s industry, the Company does not focus on gross profit or gross margin
as a key metric for the Company’s business. Additionally, the classification of costs between cost of sales and
operating and administrative expense does not impact the Company’s key metrics, including Billings and Adjusted
EBITDA by segment.

Operating and Administration Expenses

Our operating and administration expenses include the expenses of our employees and outside vendors

engaged in our marketing, selling, editorial and administrative activities as well as pre-publication cost amortization.
A significant component of our total operating and administration expense relates to our ongoing investment in
DPG. These costs are both fixed and variable in nature and while we are committed to continue significant digital
investment, growth rates of spending has declined and our annual expenditures have stabilized as our major
initiatives and the build-out of certain foundational capabilities near completion.

Costs associated with design and content creation for both digital and print products are capitalized as a

component of pre-publication expenditures. Capitalized pre-publication expenditures are subsequently amortized as
a component of operating and administration expenses.

Outside of costs directly associated with DPG, we incur additional digital related costs, including content
tagging and digital solutions hosting, which have increased as the digital transformation continues. The Company
relies primarily on internal resources to develop the Company’s digital platform, host the Company’s digital
solutions and tag the Company’s digital content, and these costs have no clear attribution to specific products or
services and do not directly correlate to sales of products or delivery of services. As a result, the Company has
classified these costs within operating and administrative expenses.

We incur expense for products provided to decision makers in the educational materials purchasing process

as part of our sampling program, primarily in our K-12 business. Annual samples expense can vary significantly
depending upon the adoption calendar and the mix of programs being considered for adoption. As our revenues
continue to shift from traditional print offerings to digital solutions, we expect the expense incurred for sampling to
decline.

In the United States, our products are sold in over 5,000 higher education institutions and approximately
3,000 K-12 school districts across all 50 states. Our nearly 1,100 person sales force, which includes approximately
350 sales people in the United States higher education and approximately 300 sales people in the United States K-12
markets, maintains close relationships with the individual instructors that represent the primary decision makers in
the higher education market and the states, school districts, and individual schools that primarily make purchase
decisions in the K-12 market. We incur significant selling and market expense to maintain and support our extensive
sales force. Subsequent to the Founding Acquisition, we invested in sales and marketing to drive future revenue
opportunities and enhance our product branding. As revenues grow in the future, we expect to see modest increases
in selling and marketing expense that will vary with the K-12 adoption cycle.

Since the Founding Acquisition, we have incurred significant non-recurring restructuring and separation
costs to establish the standalone operations of our business and facilitate cost saving opportunities. The physical
separation costs incurred to establish our standalone operations ceased in 2014 upon the completion of the
separation from our former parent. Excluding the impact of restructuring and separation costs, we expect our

operating and administration expense to increase nominally as we continue to invest in the business and drive our
digital transformation.

Interest Expense

Our interest expense primarily includes interest related to our indebtedness, including the amortization of

deferred financing fees and debt discounts, and outstanding capital lease and other financing obligations.

Interest expense varies based on the amount of indebtedness outstanding and the rates at which we were

able to secure the indebtedness. The interest rate on certain tranches of indebtedness is based on London InterBank
Offered Rate (LIBOR) or the prime lending rate (Prime), plus an applicable margin. As a result, changes in the
LIBOR or Prime rate can impact interest expense. Interest expense for the years ended December 31, 2019, 2018
and 2017 was $180.4 million, $180.6 million and $179.4 million, respectively.

Intangible Amortization

Our intangible asset amortization expense primarily includes the amortization of acquired intangible assets

consisting of customer relationships, content rights, trade names, non-compete rights and technology. The largest
component of our intangibles asset balance is related to content acquired as part of the Founding Acquisition and is
being amortized over a period of 8 to 14 years. The remaining balances will be amortized over varying periods of
time from 4 to 14 years from the date of acquisition. Intangible asset amortization expense for the years ended
December 31, 2019, 2018 and 2017 was $71.8 million, $86.7 million and $88.1 million, respectively.

Pre-publication Expenditures and Amortization

Pre-publication expenditures are capitalized costs incurred and principally consist of design and content

creation. Costs incurred prior to the publication date of a title or release date of a product represent activities
associated with product development. These may be performed internally or outsourced to subject matter specialists
and include, but are not limited to, editorial review and fact verification, graphic art design and layout and the
process of conversion from print to digital media or within various formats of digital media. These costs are
capitalized when the costs can be directly attributable to a project or title and the title is expected to generate
probable future economic benefits. Capitalized costs are amortized upon publication of the title over its estimated
useful life of up to six years, with a higher proportion of the amortization typically taken in the earlier years.

Over the last several years, we have optimized our pre-publication expenditures to emphasize investment in

content that can be leveraged across our full range of products, which maximizes our long-term returns on this
investment. This has been accomplished, in part, by the creation of DPG, which supports ongoing innovation,
development and maintenance of our technology platforms. Our total pre-publication cash costs are influenced
mostly by the timing of new adoption opportunities in our K-12 business and the timing of investment in front-list
titles in our Higher Education business, during any given period.

Pre-publication expenditure demands differ by business segment for a variety of reasons, including the
speed with which the digital transformation has occurred. In Higher Education, pre-publication expenditures are
highest for the first edition of a new title, and lower for subsequent revisions. Our pre-publication investment to
create content used in our adaptive tools, such as the assessment questions in the LearnSmart, product is increasing.
This foundational investment is expected to reduce the variability of pre-publication expenditures in the future as we
are able to leverage the content across the business.

Higher Education

Pre-publication expenditures in the Higher Education segment relate to the development of product across
all disciplines, since the content is created by authors on a royalty basis. We develop “first editions,” which are new
titles or programs that can be revised over time based on market acceptance. As we continue our digital
transformation, our pre-publication expenditure is increasingly related to content used in our adaptive tools, such as

the assessment questions in the LearnSmart product. Development of the technology underlying our digital products
is either supported by DPG with costs recorded in operating expenses, or capitalized if a new capability is developed
(i.e., new product). Pre-publication expenditures are typically incurred in the year before the copyright is acquired
on a printed textbook. The cash spend for the years ended December 31, 2019, 2018 and 2017 was $30.2 million,
$38.7 million and $33.0 million, respectively.

K-12

Pre-publication expenditures in the K-12 segment relate to content development and are the highest in the

company, representing approximately 44% of total spend in 2019. Unlike the Higher Education segment, most
content is developed by our K-12 product development teams. Pre-publication expenditures are incurred for external
content development (work for hire), permissions, artwork and the physical design and layout of the printed books.
Created content is used in our digital offerings as well. New basal programs such as reading, math, social studies or
science are published around the adoption cycles for large adoption states such as California, Texas and Florida. Pre-
publication expenditures are typically spent up to three years prior to an adoption sales year. The cash spend for the
years ended December 31, 2019, 2018 and 2017 was $33.1 million, $43.3 million and $47.0 million, respectively.

International

Pre-publication expenditures in the international segment relate to locally developed products or
adaptations and translations of existing Higher Education, K-12 and Professional products in both digital and print
format. Similar to our Higher Education and Professional segments, pre-publication is typically spent in the year
before the copyright is established. The cash spend for the years ended December 31, 2019, 2018 and 2017 was $7.3
million, $8.9 million and $11.3 million, respectively.

Professional

Pre-publication expenditures in the Professional segment relate to new titles and revisions, similar to the
Higher Education segment, and include activities related to the creation of the actual product, since the content is
created by authors on a royalty basis. Pre-publication expenditures are typically incurred in the year before the
copyright is established. For our Access platforms, any additional content needed to supplement the print product
will be funded through pre-publication expenditures. The cash spend for the years ended December 31, 2019, 2018
and 2017 was $8.5 million, $8.6 million and $7.9 million, respectively.

Capital Expenditures

Capital expenditures relate to expenditures for fixed assets, leasehold improvements and software
development. The expense related to these purchases is recorded as depreciation in our statement of operations over
the useful life of the asset. Our capital expenditures vary based upon the level of digital investment being made as
well as the timing of asset purchases. For the years ended December 31, 2019, 2018 and 2017 our capital
expenditures were $75.2 million, $63.2 million and $45.1 million, respectively.

Consolidated Operating Results

The following tables set forth certain historical consolidated financial information for the years ended
December 31, 2019, 2018 and 2017. The following tables and discussion should be read in conjunction with the
information contained in our historical consolidated financial statements and the notes thereto included elsewhere in
this Annual Report.

Consolidated Operating Results for the Years Ended December 31, 2019 and 2018

(Dollars in thousands)
Revenue

Cost of sales

Gross profit

Operating expenses

Operating and administration
expenses

Depreciation

Amortization of intangibles

Total operating expenses

Operating income

Interest expense (income), net

Other (income) expense

(Loss) income from
operations before taxes on
income

$ Change

% Change

Year Ended
December 31, 2019

Year Ended
December 31, 2018

1,571,388

1,596,945

371,387

1,200,001

1,030,470

56,302

71,849

1,158,621

41,380

180,430

(7,962)

394,531

1,202,414

1,038,073

46,929

86,722

1,171,724

30,690

180,576

—

(25,557)
(23,144)
(2,413)

(7,603)
9,373
(14,873)
(13,103)
10,690
(146)
(7,962)

(1.6 )%
(5.9 )%
(0.2 )%

(0.7 )%
20.0 %
(17.2 )%
(1.1 )%
34.8 %
(0.1 )%
n/m

(12.5 )%
15.1 %
(10.7)%

Income tax (benefit) provision
Net (loss) income

(131,088)

12,122
(143,210) $

(149,886)
10,535
(160,421) $

18,798

1,587
17,211

Revenue

(Dollars in thousands)
Reported Revenue by segment:

Higher Education

K-12

International

Professional

Other
Total Reported Revenue

Year Ended
December 31, 2019

Year Ended
December 31, 2018

$ Change

% Change

609,730

660,881

590,244

248,698

119,227

560,802

254,995

116,903

3,489
1,571,388

3,364
1,596,945

(51,151)
29,442
(6,297)
2,324

125
(25,557)

(7.7 )%
5.2 %
(2.5 )%
2.0 %

3.7 %
(1.6)%

Revenue for the years ended December 31, 2019 and 2018 was $1,571.4 million and $1,596.9 million,

respectively, a decrease of $25.6 million or 1.6%. The decrease was driven by the segment factors described below.

Higher Education

Higher Education revenue for the years ended December 31, 2019 and 2018 was $609.7 million and $660.9

million, respectively, a decrease of $51.2 million or 7.7%. The decrease was primarily due to:

a decline in print revenue, driven by the ongoing migration from print to digital learning solutions and
limited sales of our 2019 and 2020 copyright titles which were primarily available only through our
rental program;

continued price compression as affordability solution offerings are implemented across the industry;
partially offset by

growth in Inclusive Access digital sales of approximately 53%; and

lower product returns reserve driven by the ongoing shift to digital learning solutions and our rental
program introduced in 2018.

•

K-12

K-12 revenue for the years ended December 31, 2019 and 2018 was $590.2 million and $560.8 million

respectively, an increase of $29.4 million or 5.2%. The increase was primarily due to:

•

higher adoption market sales driven by a large market opportunity in certain adoptions, most notably
California Social Studies and Science, as well as Texas English Language Arts, and

higher Open Territory sales driven primarily by Social Studies in Illinios; partially offset by

a decline in California English Language Arts sales as 2018 was the third and final year of purchasing
for the adoption cycle.

International

International revenue for the years ended December 31, 2019 and 2018 was $248.7 million and $255.0

million, respectively, a decrease of $6.3 million or 2.5%. The decrease was primarily due to:

•

lower print revenue, primarily driven by limited sales of our 2019 and 2020 copyrights titles as part of
the Higher Education rental program and stronger controls on sales to distributors to prevent product
from being resold in the U.S. secondary market;

lower print revenue, resulting from an accounting change whereby co-publishing revenue was recorded
on a net as opposed to gross basis; and

a $5.2 million unfavorable foreign exchange rate impact (estimated by re-calculating current period
results of foreign operations using the average exchange rate from the prior period); partially offset by

revenue growth in Asia region resulting from new product release, adoptions and co-publishing
arrangements.

Professional

Professional revenue for the years ended December 31, 2019 and 2018 was $119.2 million and $116.9
million, respectively, an increase of $2.3 million or 2.0%. The increase was primarily due to the increase digital
subscription revenue related to our Access platform offerings partially offset by decrease in our print sales due to the
shift towards digital.

Cost of Sales

Cost of sales for the years ended December 31, 2019 and 2018 was $371.4 million and $394.5 million,

respectively, a decrease of $23.1 million or 5.9%. The decrease was primarily due to lower manufacturing costs and

freight attributable to lower print sales resulting from ongoing shift to digital learning solutions and lower royalty
expense driven by the decline in sales.

Operating and Administration Expenses

Operating and administration expenses for the years ended December 31, 2019 and 2018 were $1,030.5
million and $1,038.1 million, respectively, a decrease of $7.6 million or 0.7%. Included within operating and
administration expense is the amortization of pre-publication expenditures which increased by $6.7 million or 8%
driven by the higher sales at K-12. The remaining variance was primarily due to:

•

lower compensation due to a strategic headcount reductions;

lower technology related expenditures due to operational improvements and contract negotiations;
partially offset by

an increase in restructuring charges due to strategic headcount reductions.

Depreciation & Amortization of Intangibles

Depreciation and amortization expenses for the years ended December 31, 2019 and 2018 were $128.2

million and $133.7 million, respectively, a decrease of $5.5 million or 4.1%. The decrease was driven by the use of
accelerated amortization methods for certain of our acquired intangible assets, partially offset by an increase in
depreciation expense associated with our deferred technology costs.

Interest expense, net

Interest expense, net, for the years ended December 31, 2019 and 2018 was $180.4 million and $180.6

million, respectively, a decrease of $0.1 million or 0.1%. The decrease was primarily due to:

•

no borrowing under Revolving Facility as compared to $42 million weighted average borrowing in
2018; and

a reduction in interest expense primarily due to the redemption and discharge of the $243.6 million face
value of MHGE PIK Toggle Notes by April 20, 2018; offset by

a higher applicable LIBOR related to the Term Loan Facility in comparison to the prior year due to
higher market interest rates;

the issuance of $180 million MHGE Parent Term Loan on April 20, 2018; and

a $60.5 million drawn down on the Receivables Facility entered into on October 29, 2018.

Refer to Note 7, "Debt," of our consolidated financial statements included elsewhere in this Annual Report

for further discussion of our debt.

Other (income) expense

During the year ended December 31, 2019, the Company recorded a earn out of $8.0 million related to the

sale of CTB business to Data Recognition Corporation in 2015. Refer to Note 3, "Other Income" of our consolidated
financial statements included elsewhere in this Annual Report for further discussion of CTB business sale.

Income tax (benefit) provision

Taxes on income from continuing operations for the years ended December 31, 2019 and 2018 were a

provision of $12.1 million and $10.5 million, respectively. For the years ended December 31, 2019 and 2018, the
effective tax rate on continuing operations was (9.1)% and (7.0)%, respectively. A valuation allowance was recorded
for federal and state and certain foreign deferred tax assets due to negative evidence associated with our estimation
of the realization of cumulative book losses. For the years ended December 31, 2019 and 2018, no deferred income
tax benefit was recognized for the domestic loss and certain foreign losses on operations as a result of the valuation
allowance recorded against these tax benefits.

Adjusted EBITDA by Segment for the Years Ended December 31, 2019 and 2018

Adjusted EBITDA by segment, as determined in accordance with Accounting Standards Codification

(Dollars in thousands)
Adjusted EBITDA by segment:

Year Ended
December 31, 2019

Year Ended
December 31, 2018

$ Change

% Change

Higher Education

183,252

200,667

K-12

International

Professional

Other

Higher Education

110,525

15,161

35,453

10,647

24,085

8,038

35,754
(7,620)

(17,415)
86,440

7,123
(301)
18,267

(8.7)%

358.9 %

88.6 %

(0.8)%

n/m

Adjusted EBITDA for the years ended December 31, 2019 and 2018 was $183.3 million and $200.7

million, respectively, a decrease of $17.4 million or 8.7%. The decrease was primarily due to:

•

the impact of the $40.9 million unfavorable Billings variance discussed under “Non-GAAP Measures-
Billings for the Year Ended December 31, 2019 and 2018 - Higher Education”; partially offset by

a decrease in pre-publication investment cash costs related to spend on new front-list titles;

lower manufacturing costs during the period as a result of ongoing shift to digital learning solution sales;
and

lower compensation due to a strategic headcount reductions.

K-12

Adjusted EBITDA for the years ended December 31, 2019 and 2018 was $110.5 million and $24.1 million,

respectively, an increase of $86.4 million or 358.9%. The increase was due primarily to:

•

the impact of the $46.8 million favorable Billings variance discussed under “Non-GAAP Measures-
Billings for the Year Ended December 31, 2019 and 2018- K-12”;

a decrease in pre-publication investment cash costs due to the timing of new adoptions in comparison to
the prior period; and

lower compensation due to strategic headcount reductions; partially offset by

higher manufacturing costs due to higher Billings.

International

Adjusted EBITDA for the years ended December 31, 2019 and 2018 was $15.2 million and $8.0 million,

respectively, an increase of $7.1 million or 88.6%. The increase was primarily due to:

•

a decrease in pre-publication investment cash costs due to timing; and

lower manufacturing costs due to the decline in revenue and the shift towards digital learning solutions;
partially offset by

the impact of the $6.2 million unfavorable Billings variance discussed under "Non-GAAP Measures-
Billings for the Year Ended December 31, 2019 and 2018 - International".

Professional

Adjusted EBITDA for the years ended December 31, 2019 and 2018 was $35.5 million and $35.8 million,

respectively, a decrease of $0.3 million or 0.8%. The decrease was due primarily to:

the gross profit impact of the $3.3 million favorable Billings variance discussed under “Non-GAAP
Measures-Billings for the Year Ended December 31, 2019 and 2018 - Professional”

higher compensation costs due to strategic headcount increase to better manage our business and
customer base; offset by

•

Other

Adjusted EBITDA for the years ended December 31, 2019 and 2018 was $10.6 million and $(7.6) million,

respectively, a variance of $18.3 million. The variance was due to the impact of timing related corporate expenses.

Consolidated Operating Results for the Years Ended December 31, 2018 and 2017

(Dollars in thousands)
Revenue

Cost of sales

Gross profit

Operating expenses

Operating and administration
expenses

Depreciation

Amortization of intangibles

Total operating expenses

Operating income

Interest expense (income), net

Other (income) expense

(Loss) income from
operations before taxes on
income

$ Change

% Change

Year Ended
December 31, 2018

Year Ended
December 31, 2017

1,596,945

1,719,072

394,531

1,202,414

1,038,073

46,929

86,722

1,171,724

30,690

180,576

—

426,636

1,292,436

1,065,755

45,243

88,068

1,199,066

93,370

179,378
(12,727)

(122,127)
(32,105)
(90,022)

(27,682)
1,686
(1,346)
(27,342)
(62,680)
1,198

12,727

(7.1)%

(7.5)%

(7.0)%

(2.6)%

3.7 %

(1.5)%

(2.3)%

(67.1)%

0.7 %

n/m

104.5 %

n/m
143.3 %

Income tax (benefit) provision
Net (loss) income

(149,886)

10,535
(160,421) $

(73,281)
(7,351)
(65,930) $

(76,605)
17,886
(94,491)

Revenue

(Dollars in thousands)
Reported Revenue by segment:

Higher Education

K-12

International

Professional

Other
Total Reported Revenue

Year Ended
December 31, 2018

Year Ended
December 31, 2017

$ Change

% Change

660,881

713,583

560,802

254,995

116,903

602,627

281,486

120,470

3,364
1,596,945

906
1,719,072

(52,702)
(41,825)
(26,491)
(3,567)
2,458
(122,127)

(7.4 )%
(6.9 )%
(9.4 )%
(3.0 )%
n/m
(7.1)%

Revenue for the years ended December 31, 2018 and 2017 was $1,596.9 million and $1,719.1 million,

respectively, a decrease of $122.1 million or 7.1%. Excluding the impact of purchase accounting (which negatively
impacted revenue as a result of the adjustment recorded to reduce the carrying value of deferred revenue on the
opening balance sheet), revenue for the years ended December 31, 2018 and 2017 was $1,600.0 million and
$1,728.6 million, respectively, a decrease of $128.7 million or 7.4%. The decrease was driven by the segment factors
described below.

Higher Education

Higher Education revenue for the years ended December 31, 2018 and 2017 was $660.9 million and $713.6

million, respectively, a decrease of $52.7 million or 7.4%. The decrease was primarily due to:

•

a decline in print revenue, driven by the limited sales of our 2019 copyright titles which were primarily
available only through our new rental program and pricing compression as print affordability solution
offerings are implemented across the industry; and

a non-recurring prior period digital content sale; partially offset by

growth in back-list digital revenue, driven by inclusive access sales (paid activations of Connect/
LearnSmart grew by approximately 8%); and

lower product returns reserve rate driven by the ongoing shift to digital learning solutions and a
continued decline in actual product returns from major distribution partners.

•

K-12

K-12 revenue for the years ended December 31, 2018 and 2017 was $560.8 million and $602.6 million,
respectively, a decrease of $41.8 million or 6.9%. Excluding the impact of purchase accounting, revenue for the
years ended December 31, 2018 and 2017 was $563.8 million and $612.2 million, respectively, a decrease of $48.4
million or 7.9%. The decrease was primarily due to:

•

a decline in California ELA adoption sales as a result of a smaller market opportunity in the third and
final year of purchasing;

a cyclically smaller adoption market year-over-year as California ELA is replaced by other much smaller
adoption opportunities; and

a decline in open territory due to lower purchasing in core subjects ahead of new editions across the
industry for 2019-2020 large adoptions, under-performance in our math, intervention and supplemental
program sales and timing of prior period sales, including elementary reading, math and science in
Indiana, elementary reading in Arizona, Kentucky and Pennsylvania and social studies in Virginia;
partially offset by

•

strong performance in California social studies and, Florida and Tennessee science adoptions.

International

International revenue for the years ended December 31, 2018 and 2017 was $255.0 million and $281.5

million, respectively, a decrease of $26.5 million or 9.4%. The decrease was primarily due to:

•

lower print revenue, primarily driven by the sale of the K-12 Canadian business in the prior period,
limited investment in regional front-list titles, limited 2019 copyright early release sales as part of the
Higher Education rental program and stronger controls on sales to distributors to prevent product from
being resold in the U.S. secondary market; and

a $1.0 million unfavorable foreign exchange rate impact (estimated by re-calculating current period
results of foreign operations using the average exchange rate from the prior period); partially offset by

revenue growth in China and Latin America, as well as strong digital revenue growth in Canada driven
by Connect sales.

Professional

Professional revenue for the years ended December 31, 2018 and 2017 was $116.9 million and $120.5

million, respectively, a decrease of $3.6 million or 3.0%. The decrease was primarily due to the decline in print and
eBook revenue, partially offset by an increase in the recognition of previously deferred revenue as compared to the
prior year as a result of the growth in Access platform sales.

Cost of Sales

Cost of sales for the years ended December 31, 2018 and 2017 was $394.5 million and $426.6 million,
respectively, a decrease of $32.1 million or 7.5%. The decrease was primarily due to lower manufacturing costs
attributable to lower print sales and the ongoing shift to digital learning solutions and lower royalty expense driven
by the decline in sales.

Operating and Administration Expenses

Operating and administration expenses for the years ended December 31, 2018 and 2017 were $1,038.1

million and $1,065.8 million, respectively, a decrease of $27.7 million or 2.6%. Included within operating and
administration expense is the amortization of pre-publication expenditures which decreased by $13.0 million or 13%
driven by the timing and level of pre-publication expenditures. The remaining variance was primarily due to:

•

lower compensation (including incentives and commissions) due to a decline in revenue and a strategic
reduction in headcount;

lower professional fees, as well as discretionary spending; and

lower technology related expenditures due to operational improvements and contract negotiations;
partially offset by

an increase in samples expense primarily driven by the large new adoption opportunities in 2019.

Depreciation & Amortization of Intangibles

Depreciation and amortization expenses for the years ended December 31, 2018 and 2017 were $133.7

million and $133.3 million, respectively, an increase of $0.3 million or 0.3%. The increase was driven by:

•

an increase in depreciation expense associated with additional capital lease arrangements; and

a $5.5 million impairment of a technology intangible asset related to our K-12 segment; partially offset
by

a decrease in amortization expense due to the use of accelerated amortization methods for certain of our
acquired intangible assets.

Interest expense, net

Interest expense, net, for the years ended December 31, 2018 and 2017 was $180.6 million and $179.4

million, respectively, an increase of $1.2 million or 0.7%. The increase was primarily due to:

•

a higher applicable LIBOR rate related to the Term Loan Facility in comparison to the prior period due
to rising market interest rates;

the issuance of $180 million MHGE Parent Term Loan on April 20, 2018; and

a $50 million Receivables Facility entered into on October 29, 2018; partially offset by

a reduction in interest expense primarily due to the repurchase of $207.8 million face value of MHGE
PIK Toggle Notes during the second half of 2017 (with the remaining $243.6 million face value being
repaid in full by April 20, 2018).

Refer to Note 7, "Debt," of our consolidated financial statements included elsewhere in this Annual Report

for further discussion of our debt.

Other (income) expense

During the year ended December 31, 2017, the Company recorded a gain of $12.7 million primarily due to:

•

a $5.8 million gain on disposal related to the divestiture of the K-12 Canadian business; and

a $4.9 million gain due to the sale of an equity method investment.

Income tax (benefit) provision

Taxes on income from continuing operations for the years ended December 31, 2018 and 2017 were a

provision of $10.5 million and a benefit of $7.4 million, respectively. For the years ended December 31, 2018 and
2017, the effective tax rate on continuing operations was (7.0)% and 10.0%, respectively. A full valuation allowance
was recorded for federal and state and certain foreign deferred tax assets due to negative evidence associated with
our estimation of the realization of cumulative book losses. For the years ended December 31, 2018 and 2017, no
deferred income tax benefit was recognized for the domestic loss and certain foreign losses on operations as a result
of the valuation allowance recorded against these tax assets.

The Tax Cuts and Jobs Act (TCJA), signed in to law on December 22, 2017, made significant changes to

the Internal Revenue Code, including reducing the federal corporate income tax rate from 35% to 21% effective
January 1, 2018. As a result, the Company’s domestic deferred tax assets were re-valued downward by $149.5
million to reflect the 21% federal income tax rate. The revaluation was offset by an adjustment in the valuation
allowance resulting in no impact to the consolidated statement of operations for the year ended December 31, 2017.
The Company’s domestic deferred tax liability related to indefinite lived intangibles was also re-valued recognizing
a benefit of $14.6 million. Another provision in the TCJA allows an unlimited carry forward period for net operating
losses (NOLs) arising after December 31, 2017 while limiting the use of these NOLs to 80% of the year’s taxable
income. As a result, the domestic deferred tax liability related to indefinite lived intangibles can now be considered
a source of income to the extent of 80% and the Company was able to reduce the level of the valuation allowance
and record a provision benefit of $17.2 million for the year ended December 31, 2017.

Adjusted EBITDA by Segment for the Years Ended December 31, 2018 and 2017

Adjusted EBITDA by segment, as determined in accordance with Accounting Standards Codification

(Dollars in thousands)
Adjusted EBITDA by segment:

Year Ended
December 31, 2018

Year Ended
December 31, 2017

$ Change

% Change

Higher Education

200,667

227,707

K-12

International

Professional

Other

24,085

8,038

35,754

(7,620)

112,078

18,324

39,944

2,092

(27,040)
(87,993)
(10,286)
(4,190)
(9,712)

(11.9)%

(78.5)%

(56.1)%

(10.5)%

n/m

Higher Education

Adjusted EBITDA for the years ended December 31, 2018 and 2017 was $200.7 million and $227.7

million, respectively, a decrease of $27.0 million or 11.9%. The decrease was primarily due to:

the gross profit impact of the $36.3 million unfavorable Billings variance discussed under “Non-GAAP
Measures-Billings for the Year Ended December 31, 2018 and 2017- Higher Education”; and

an increase in pre-publication investment cash costs related to spend on new front-list titles; partially
offset by

lower manufacturing costs and royalty expense as a result of the decline in revenue as well as the
ongoing shift to digital learning solution sales; and

lower discretionary spending and lower compensation (including incentives and commissions) due to the
decline in revenue and strategic headcount reductions.

•

•
•

•

K-12

Adjusted EBITDA for the years ended December 31, 2018 and 2017 was $24.1 million and $112.1 million,

respectively, a decrease of $88.0 million or 78.5%. The decrease was due primarily to:

•

the gross profit impact of the $132.5 million unfavorable Billings variance discussed under “Non-GAAP
Measures-Billings for the Year Ended December 31, 2018 and 2017- K-12”;

an increase in samples expense primarily driven by the large new adoption opportunities in 2019;
partially offset by

lower compensation (including incentives and commissions) primarily due to the decline in revenue and
strategic headcount reductions, as well as lower discretionary spending including professional fees;

lower manufacturing costs due to the decline in revenue; and

a decrease in pre-publication investment cash costs due to the timing of new adoptions in comparison to
the prior period.

International

Adjusted EBITDA for the years ended December 31, 2018 and 2017 was $8.0 million and $18.3 million,

respectively, a decrease of $10.3 million or 56.1%. The decrease was primarily due to:

•

the gross profit impact of the $30.9 million unfavorable Billings variance discussed under "Non-GAAP
Measures- Billings for the Year Ended December 31, 2018 and 2017 - International"; and

a $3.4 million unfavorable foreign exchange rate impact (estimated by re-calculating current period
results of foreign operations using the average exchange rate from the prior period.); partially offset by

lower pre-publication investment cash costs, primarily due to the costs incurred in the prior year
associated with the development of localized digital offerings for the multi-year United Arab Emirates
contract entered into in 2016;

•

lower manufacturing costs and royalty expense due to the decline in revenue; and

•

lower discretionary spending and lower compensation (including incentives and commissions) due to
strategic headcount reductions.

Professional

Adjusted EBITDA for the years ended December 31, 2018 and 2017 was $35.8 million and $39.9 million,

respectively, a decrease of $4.2 million or 10.5%. The decrease was due primarily to:

the gross profit impact of the $6.0 million unfavorable Billings variance discussed under “Non-GAAP
Measures-Billings for the Year Ended December 31, 2018 and 2017 - Professional”; and

higher pre-publication investment cash costs; partially offset by

lower discretionary spending and lower compensation as a result of strategic headcount reductions in
prior periods.

•

Other

Adjusted EBITDA for the years ended December 31, 2018 and 2017 was $(7.6) million and $2.1 million,

respectively, a variance of $9.7 million. The variance was due to the impact of adjustments made for in-transit
product sales and timing related corporate expenses.

Non-GAAP Measures

Billings, EBITDA and Adjusted EBITDA

The SEC has adopted rules to regulate the use in filings with the SEC and in public disclosures of “non-

GAAP financial measures,” such as Billings, EBITDA and Adjusted EBITDA. These measures are derived on the
basis of methodologies other than in accordance with U.S. GAAP.

Billings is a non-GAAP performance measure that provides useful information in evaluating our period-to-
period performance because it reflects the total amount of revenue that would have been recognized in a period if we
recognized all print and digital revenue at the time of sale. We use Billings as a performance measure given that we
typically collect full payment for our digital and print solutions at the time of sale or shortly thereafter, but recognize
revenue from digital solutions and multi-year deliverables ratably over the term of our customer contracts. As sales
of our digital learning solutions have increased, so has the amount of revenue that is deferred in accordance with
U.S. GAAP. Billings is a key metric we use to manage our business as it reflects the sales activity in a given period,
provides comparability from period-to-period during this time of digital transition and is the basis for all sales
incentive compensation. In the K-12 market where customers typically pay for five to eight year contracts upfront
and the ongoing costs to service any contractual obligation are limited, the impact of the change in deferred revenue
is most significant. Billings is U.S. GAAP revenue plus the net change in deferred revenue.

EBITDA, a measure used by management to assess operating performance, is defined as net income from

continuing operations plus net interest, income taxes, depreciation and amortization (including amortization of pre-
publication investment cash costs). Adjusted EBITDA is a non-GAAP debt covenant compliance measure that is
defined in accordance with our debt agreements. Adjusted EBITDA is a material term in our debt agreements and
provides an understanding of our debt covenant compliance, ability to service our indebtedness and make capital
allocation decisions in accordance with our debt agreements.

Each of the above described measures is not a recognized term under U.S. GAAP and does not purport to be

an alternative to revenue, income from continuing operations, or any other measure derived in accordance with U.S.
GAAP as a measure of operating performance, debt covenant compliance or to cash flows from operations as a
measure of liquidity. Additionally, each such measure is not intended to be a measure of free cash flows available for
management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax

payments and debt service requirements. Such measures have limitations as analytical tools, and you should not
consider any of such measures in isolation or as substitutes for our results as reported under U.S. GAAP.
Management compensates for the limitations of using non-GAAP financial measures by using them to supplement
U.S. GAAP results to provide a more complete understanding of the factors and trends affecting the business than
U.S. GAAP results alone. Because not all companies use identical calculations, our measures may not be
comparable to other similarly titled measures of other companies.

Management believes Adjusted EBITDA is helpful in highlighting trends because Adjusted EBITDA excludes

the results of certain transactions or adjustments that are non-recurring or non-operational and can differ
significantly from company to company depending on long-term strategic decisions regarding capital structure, the
tax rules in the jurisdictions in which companies operate, and capital investments. In addition, Billings and Adjusted
EBITDA provide more comparability between the historical operating results and operating results that reflect
purchase accounting and the new capital structure post the Founding Acquisition as well as the digital
transformation that we are undertaking which requires different accounting treatment for digital and print solutions
in accordance with U.S. GAAP.

Management believes that the presentation of Adjusted EBITDA, which is defined in accordance with our debt

agreements, is appropriate to provide additional information to investors about certain material non-cash items and
about unusual items that we do not expect to continue at the same level in the future as well as other items to assess
our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in
accordance with our debt agreements.

Billings for the Years Ended December 31, 2019 and 2018

(Dollars in thousands)
Reported Revenue by segment:

Higher Education

K-12

International
Professional

Other

Total Reported Revenue

Change in deferred revenue

Billings

Billings by Segment:

Higher Education

K-12

International
Professional

Other

Total Billings

Year Ended
December 31, 2019

Year Ended
December 31, 2018

$ Change

% Change

609,730

660,881

590,244

248,698

119,227

3,489
1,571,388

91,669
1,663,057

560,802

254,995

116,903

3,364
1,596,945

64,492
1,661,437

641,316

682,232

647,482

249,657

122,720

600,726

255,867

119,459

1,882
1,663,057

3,153
1,661,437

(51,151)
29,442
(6,297)
2,324

125
(25,557)

27,177
1,620

(40,916)
46,756
(6,210)
3,261
(1,271)
1,620

(7.7 )%
5.2 %
(2.5 )%
2.0 %

3.7 %
(1.6)%
42.1 %
0.1 %

(6.0 )%
7.8 %
(2.4 )%
2.7 %
(40.3 )%
0.1 %

Billings for the years ended December 31, 2019 and 2018 was $1,663.1 million and $1,661.4 million,
respectively, an increase of $1.6 million or 0.1%. These variances were driven by the segment factors described
below.

Higher Education

Billings for the years ended December 31, 2019 and 2018 was $641.3 million and $682.2 million,

respectively, a decrease of $40.9 million or 6.0%. The decrease was due to:

continued price compression as print affordability solution offerings are implemented across the
industry; partially offset by

growth in Inclusive Access sales of approximately 53%; and

lower product returns reserve driven by the ongoing shift to digital learning solutions and our rental
program introduced in 2018.

•

K-12

Billings for the years ended December 31, 2019 and 2018 was $647.5 million and $600.7 million,
respectively, an increase of $46.8 million or 7.8%. The increase was primarily due to an increase in adoption market
sales driven by a larger market opportunity in certain adoptions, most notably California Social Studies and Science,
as well as Texas ELA.

International

Billings for the years ended December 31, 2019 and 2018 was $249.7 million and $255.9 million,

respectively, a decrease of $6.2 million or 2.4%. The decrease was due to:

•

lower print revenue, resulting from an accounting change whereby co-publishing revenue was recorded
net of cost of sales; and

revenue growth in Asia region (excluding China) resulting from new product release.

Professional

Billings for the years ended December 31, 2019 and 2018 was $122.7 million and $119.5 million,
respectively, an increase of $3.3 million or 2.7%. The increase was primarily due to the increase in digital
subscription revenue related to our Acces platform offerings partially offset by decrease in our print sales due to the
shift towards digital.

Billings for the Years Ended December 31, 2018 and 2017

(Dollars in thousands)
Reported Revenue by segment:

Higher Education
K-12
International
Professional
Other

Total Reported Revenue

Change in deferred revenue

Billings

Billings by Segment:
Higher Education
K-12
International
Professional
Other

Total Billings

Year Ended
December 31, 2018

Year Ended
December 31, 2017

$ Change

% Change

660,881
560,802
254,995
116,903
3,364
1,596,945

64,492
1,661,437

682,232
600,726
255,867
119,459
3,153
1,661,437

713,583
602,627
281,486
120,470
906
1,719,072

147,344
1,866,416

718,511
733,252
286,762
125,411
2,480
1,866,416

(52,702)
(41,825)
(26,491)
(3,567)
2,458
(122,127)
(82,852)
(204,979)

(36,279)
(132,526)
(30,895)
(5,952)
673
(204,979)

(7.4 )%
(6.9 )%
(9.4 )%
(3.0 )%
n/m
(7.1)%
(56.2 )%
(11.0)%

(5.0 )%
(18.1 )%
(10.8 )%
(4.7 )%
27.1 %
(11.0)%

Billings for the years ended December 31, 2018 and 2017 was $1,661.4 million and $1,866.4 million,

respectively, a decrease of $205.0 million or 11.0%. These variances were driven by the segment factors described
below.

Higher Education

Billings for the years ended December 31, 2018 and 2017 was $682.2 million and $718.5 million, respectively, a
decrease of $36.3 million or 5.0%. The decrease was due to:

a non-recurring prior period digital content sale; partially offset by

growth in back-list digital revenue, driven by inclusive access sales (paid activations of Connect/
LearnSmart grew by approximately 8%); and

lower product returns reserve rate driven by the ongoing shift to digital learning solutions and a
continued decline in actual product returns from major distribution partners.

•

K-12

Billings for the years ended December 31, 2018 and 2017 was $600.7 million and $733.3 million,

respectively, a decrease of $132.5 million or 18.1%. The decrease was due to:

•

a decline in California ELA adoption sales as a result of a smaller market opportunity in the third and
final year of purchasing;

•

a cyclically smaller adoption market year-over-year as California ELA is replaced by other much smaller
adoption opportunities; and

•

strong performance in California social studies and, Florida and Tennessee science adoptions.

International

Billings for the years ended December 31, 2018 and 2017 was $255.9 million and $286.8 million,

respectively, a decrease of $30.9 million or 10.8%. The decrease was due to:

•

a $2.8 million unfavorable foreign exchange rate impact (estimated by re-calculating current period
results of foreign operations using the average exchange rate from the prior period); partially offset by

revenue growth in China and Latin America, as well as strong digital revenue growth in Canada driven
by Connect sales.

Professional

Billings for the years ended December 31, 2018 and 2017 was $119.5 million and $125.4 million,
respectively, a decrease of $6.0 million or 4.7%. The decrease was primarily due to the decline in print and eBook
billings, partially offset by an increase in digital subscription billings for our Access platform offerings.

Debt Covenant Compliance

Adjusted EBITDA is an important measure because, under our debt agreements, our ability to incur
additional indebtedness or issue certain preferred shares, make certain types of acquisitions or investments, operate
our business and make dividends, conduct asset sales or dispose of all or substantially all of our assets, all of which
will impact our financial performance, is impacted by our Adjusted EBITDA, as our lenders measure our
performance with a net first lien leverage ratio by comparing our senior secured bank indebtedness to our Adjusted
EBITDA and a fixed charge coverage ratio, and several of our debt, investment and restricted payment baskets are
measured using Adjusted EBITDA.

The Senior Facilities and the indentures governing the MHGE Parent Term Loan and the MHGE Senior

Notes contain, among other provisions, certain customary covenants regarding indebtedness, payments and
distributions, mergers and acquisitions, asset sales and affiliate transactions. Capacity for investments, debt,
distributions and certain prepayments is measured in many instances by a multiple of Adjusted EBITDA. Our
revolving credit facility requires that MHGE Holdings, after an initial grace period and subject to a testing threshold,
comply on a quarterly basis with a maximum net first lien senior secured leverage ratio (the ratio of consolidated net
debt secured by first-priority liens on the collateral to Adjusted EBITDA, as defined in the credit agreement
governing the Senior Facilities) of (a) with respect to the first, third and fourth fiscal quarters of any year, 4.80 to
1.00 and (b) with respect to the second quarter of any fiscal year, 5.25 to 1.00. The testing threshold is satisfied at
any time at which the sum of outstanding revolving credit facility loans, swingline loans and certain letters of credit
exceeds thirty percent (30%) of commitments under the revolving credit facility at quarter end. Payment of

borrowings under the debt agreements may be accelerated if there is an event of default. Events of default include
the failure to pay principal and interest when due, a material breach of a representation or warranty, certain non-
payments or defaults under other indebtedness, covenant defaults, events of bankruptcy and a change of control. Our
historical debt agreements, including the MHGE Facilities, the MHSE Revolving Facility and the MHSE Term
Loan, contained similar covenants predicated on the same Adjusted EBITDA measure. Failure to comply with these
covenants, which are based, in part, upon Adjusted EBITDA could limit our long-term growth prospects by
hindering our ability to incur future debt or make acquisitions.

“Adjusted EBITDA” as defined in our Senior Facilities debt agreements, is net income, adjusted for the
items summarized in the table below. Adjusted EBITDA is intended to show our unleveraged, pre-tax operating
results and therefore reflects our financial performance based on operational factors, excluding non-operational or
non-recurring losses or gains. Adjusted EBITDA is not a presentation made in accordance with U.S. GAAP, and our
use of the term Adjusted EBITDA varies from others in our industry. This measure should not be considered as an
alternative to net income (loss) from continuing operations or any other performance measures derived in
accordance with U.S. GAAP. Adjusted EBITDA has important limitations as an analytical tool, and you should not
consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. For example,
Adjusted EBITDA does not reflect: (a) our cash capital expenditure requirements for the assets being depreciated
and amortized that may have to be replaced in the future; (b) changes in, or cash requirements for, our working
capital needs; (c) the significant interest expenses, or the cash requirements necessary to service interest or principal
payments, on our debt; (d) tax payments that may represent a reduction in cash available to us; (e) management fees
paid to entities and investment funds affiliated with Apollo Global Management, LLC; (f) one-time expenditures to
realize the synergies referred to above; or (g) the impact of earnings or charges resulting from matters that we and
the lenders under our debt agreements may not consider indicative of our ongoing operations. In particular, our
definition of Adjusted EBITDA allows us to add back certain non-cash and other charges or costs that are deducted
in calculating net income from continuing operations. However, these are expenses that may recur, vary greatly and
are difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. In
addition, certain of these expenses can represent the reduction of cash that could be used for other corporate
purposes.

Further, although not included in the calculation of Adjusted EBITDA below, the measure may at times

allow us to add estimated cost savings and operating synergies related to operational changes ranging from
acquisitions or dispositions to restructurings, and/or exclude one-time transition expenditures that we anticipate we
will need to incur to realize cost savings before such savings have occurred.

The calculation of Adjusted EBITDA in accordance with our debt agreements is presented in the table

below. The results of such calculation could differ in the future based on the different types of adjustments that may
be included in such respective calculations at the time.

Net (loss) income from continuing
operations

Interest (income) expense, net

Income tax provision (benefit)

Depreciation, amortization and pre-
publication investment amortization
EBITDA
Change in deferred revenue (a)

Change in deferred royalties (b)

Change in deferred commissions (c)

Restructuring and cost savings
implementation charges (d)

Sponsor fees (e)
Transaction costs (f)

Merger integration costs (g)

Other (h)

Pre-publication investment (i)
Adjusted EBITDA

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Year Ended
December 31, 2017

(143,210) $

(160,421) $

180,430

12,122

220,785

270,127
91,669
(18,727)

(466)

21,772

3,500
21,044

7,030

38,199
(79,110)
355,038

180,576

10,535

219,513

250,203
64,492
(5,426)

1,281

9,770

3,500
—

—

36,643
(99,539)
260,924

(65,930)

179,378
(7,351)

232,212

338,309
147,344
(22,426)

—

14,261

3,500
—

—

18,376
(99,219)
400,145

(a) We receive cash up-front for most sales but recognize revenue (primarily related to digital sales) over time

recording a liability for deferred revenue at the time of sale. This adjustment represents the net effect of
converting deferred revenues to a cash basis assuming the collection of all receivable balances.

(b) Royalty obligations are generally payable in the period incurred with limited recourse. This adjustment

represents the net effect of converting deferred royalties to a cash basis assuming the payment of all amounts
owed in the period incurred.

converting deferred commissions to a cash basis assuming the payment of all amounts owed in the period
incurred.

(d) Represents severance and other expenses associated with headcount reductions and other cost savings initiated

as part of our formal restructuring initiatives to create a flatter and more agile organization.

(e) Represents $3.5 million of annual management fees and payable to Apollo.

(f)

The amount represents the transaction costs associated with the Merger Agreement entered into between the
Company and Cengage on May 1, 2019.

(g) The amount represents the integration costs associated with the Merger Agreement entered into between the

Company and Cengage on May 1, 2019.

(h) For the Year Ended December 31, 2019, the amount represents (i) non-cash incentive compensation expense

of $13.5 million and (ii) other adjustments required or permitted in calculating covenant compliance under our
debt agreements.

For the year ended December 31, 2018, the amount represents (i) non-cash incentive compensation expense of
$20.2 million and (ii) other adjustments required or permitted in calculating covenant compliance under our
debt agreements.

For the year ended December 31, 2017, the amount represents (i) non-cash incentive compensation expense of
$14.3 million (ii) elimination of a $5.8 million gain on disposal of the K-12 Canadian business (iii)
elimination of a $4.9 million gain related to the sale of an equity method investment and (iv) other adjustments
required or permitted in calculating covenant compliance under our debt agreements.

(i) Represents the cash cost for pre-publication investment during the period.

In addition, the Senior Facilities credit agreement, the indentures governing the MHGE Senior Notes and

MHGE Parent Term Loan, contain a financial covenant that requires the disclosure of a description of the
quantitative differences from the parent, McGraw Hill Education Inc., (“MHE”) to MHGE and its subsidiaries (for
the Senior Facilities and MHGE Senior Notes) and from MHE to MHGE Parent, LLC (“MHGE Parent”) and its
subsidiaries (for the MHGE Parent Term Loan).

As of December 31, 2019, the material quantitative differences from MHE to MHGE and its subsidiaries

relate to $11.0 million of cash and cash equivalents, of which $10.5 million was held by MHGE Parent and $0.5
million was held by MHE. There were no other material assets or liabilities other than the $175.6 million of MHGE
Parent Term Loan due in 2024 and its related accrued interest of $4.1 million.

As of December 31, 2019, the material quantitative differences from MHE to MHGE Parent and its
subsidiaries relate to $0.5 million of cash and cash equivalents held by MHE. There were no other material assets or
liabilities.

Furthermore, MHE and MHGE Parent do not generate revenue or conduct, transact or engage in any

material business or operations other than their direct or indirect ownership of the equity interests in MHGE.

Seasonality and Comparability

Our revenues, operating profit and operating cash flows are affected by the inherent seasonality of the

academic calendar. In 2019 we realized approximately 18%, 24%, 35% and 23% of our revenues during the first,
second, third and fourth quarters, respectively. This seasonality affects operating cash flow from quarter to quarter
and there are certain months when we operate at a net cash deficit. Changes in our customers’ ordering patterns may
affect the comparison of our results in a quarter with the same quarter of the previous year or in a fiscal year with the
prior fiscal year, where our customers may shift the timing of material orders for any number of reasons, including,
but not limited to, changes in academic semester start dates or changes to their inventory management practices.

Quarterly Results of Operations

2018

2019

First
Quarter
2018

Second
Quarter
2018

Third
Quarter
2018

Fourth
Quarter
2018

First
Quarter
2019

Second
Quarter
2019

Third
Quarter
2019

Fourth
Quarter
2019

Reported revenue by segment:

Higher Education

$ 142,411

$ 127,557

$ 200,798

$ 190,115

$ 138,805

$ 119,089

$ 189,027

$ 162,809

K-12

International

Professional

Other

64,758

43,581

25,942

1,664

172,650

241,362

60,990

27,356

(4,342)

73,521

32,070

4,393

82,032

76,903

31,535

1,649

68,069

42,643

27,079

2,357

178,255

252,396

59,948

29,735

(2,053)

68,275

30,613

2,306

91,524

77,832

31,800

879

Total Reported Revenue

$ 278,356

$ 384,211

$ 552,144

$ 382,234

$ 278,953

$ 384,974

$ 542,617

$ 364,844

Change in deferred revenue

(57,071)

(31,138)

232,491

(79,790)

(36,640)

8,568

216,807

(97,067)

Billings

$ 221,285

$ 353,073

$ 784,635

$ 302,444

$ 242,313

$ 393,542

$ 759,424

$ 267,777

Billings by segment:

Higher Education

K-12

International

Professional

Other

Total Billings

$ 135,547

86,248

$ 320,473

$ 139,964

$ 151,996

83,689

$ 294,803

$ 110,828

29,773

37,976

17,903

181,126

343,741

55,586

29,260

853

90,484

28,999

938

46,086

71,821

43,297

1,276

31,301

38,694

20,126

196

222,457

350,412

55,397

31,566

433

83,696

30,186

327

43,312

71,870

40,842

925

$ 221,285

$ 353,073

$ 784,635

$ 302,444

$ 242,313

$ 393,542

$ 759,424

$ 267,777

2018

2019

First
Quarter
2018

Second
Quarter
2018

Third
Quarter
2018

Fourth
Quarter
2018

First
Quarter
2019

Second
Quarter
2019

Third
Quarter
2019

Fourth
Quarter
2019

Adjusted EBITDA by segment:

Higher Education

16,199

$ (15,686) $ 172,775

27,379

31,525

$ (16,885) $ 164,551

4,061

K-12

International

Professional

Other

(84,570)

(12,936)

(2,290)

(9,620)

20,616

157,492

(69,453)

(79,943)

71,964

177,179

(58,675)

(8,655)

7,601

7,527

23,237

11,900

2,830

6,392

18,543

(8,357)

(10,183)

(3,137)

(1,374)

3,600

9,495

1,837

16,366

10,532

3,046

12,115

16,800

2,164

Indebtedness and Liquidity

As of
December 31, 2019 December 31, 2018 December 31, 2017

Cash, cash equivalents and restricted cash

401,856

345,920

Current portion of long-term debt
Long-term debt

61,669
2,140,634

31,297
2,188,414

407,632

17,269
2,222,570

Historically, we have generated operating cash flows sufficient to fund our seasonal working capital, capital

requirements, expenditure and financing requirements. We use our cash generated from operating activities for a
variety of needs, including among others: working capital requirements, pre-publication investment cash costs,
capital expenditures and strategic acquisitions.

Our operating cash flows are affected by the inherent seasonality of the academic calendar. This seasonality

also impacts cash flow patterns as investments are typically made in the first half of the year to support the
significant selling period that occurs in the second half of the year. As a result, our cash flow is typically lower in the
first half of the fiscal year and higher in the second half of the fiscal year.

Going forward, we may need cash to fund operating activities, working capital, pre-publication investment

cash costs, capital expenditures and strategic investments. Our ability to fund our capital needs will depend on our
ongoing ability to generate cash from operations and our access to the bank and capital markets. We believe that our
future cash flow from operations, together with our access to funds on hand and capital markets, will provide
adequate resources to fund our operating and financing needs for at least the next twelve months. We also expect our
working capital requirements to be positively impacted by our migration from print products to digital learning
solutions.

If our cash flows from operations are less than we require, we may need to incur debt or issue equity. From

time to time we may need to access the long-term and short-term capital markets to obtain financing. Although we
believe we can currently finance our operations on acceptable terms and conditions, our access to, and the
availability of, financing on acceptable terms and conditions in the future will be affected by many factors,
including: (i) our credit ratings, (ii) the liquidity of the overall capital markets and (iii) the current state of the
economy. There can be no assurance that we will continue to have access to the capital markets on terms acceptable
to us.

Cash, cash equivalents and restricted cash

Cash and cash equivalents include bank deposits and highly liquid investments with original maturities of

three months or less that consist primarily of interest bearing demand deposits with daily liquidity, money market
and time deposits. The balance also includes cash that is held by the Company outside the United States to fund
international operations or to be reinvested outside of the United States. The investments and bank deposits are
stated at cost, which approximates market value. These investments are not subject to significant market risk.

Restricted cash, including restricted cash included in other non-current assets, represents interest payable

through April 15, 2020 relating to the MHGE Parent Term Loan (refer to Note 7, “Debt”) and collateral for
insurance coverage including workers’ compensation, general liability and automobile claims. As of December 31,
2019, the restricted cash was $9.9 million. Refer to Note 1, "Basis of Presentation and Accounting Policies" in the
accompanying notes to the consolidated financial statements.

As of December 31, 2019 and 2018, we had cash and cash equivalents of $391.9 million and $314.9

million, respectively. The cash held by foreign subsidiaries as of December 31, 2019 and 2018, was $70.4 million
and $67.3 million. These cash balances held outside the United States will be used to fund international operations
and to make investments outside of the United States. In the event funds from international operations were needed
to fund operations in the United States, we would provide for taxes in the United States, if any, on repatriated funds.

MHGE Senior Notes

On May 4, 2016, the Company issued $400.0 million aggregate principal amount of the 7.875% Senior

Notes due 2024, ("MHGE Senior Notes") in a private placement. The MHGE Senior Notes mature on May 15, 2024
and bear interest at a rate of 7.875% per annum, payable semi-annually in arrears on May 15 and November 15 of
each year, and commenced on November 15, 2016.

As of December 31, 2019 and 2018, the unamortized debt discount and deferred financing costs were $33.4

million and $15.2 million, respectively, which are amortized over the term of the MHGE Senior Notes using the
effective interest method.

The Company may redeem the MHGE Senior Notes at their option, in whole or in part, at any time on or

after May 15, 2019, at certain redemption prices.

The MHGE Senior Notes are fully and unconditionally guaranteed by each of McGraw-Hill Global

Education Intermediate Holdings, LLC ("MHGE Holdings") domestic restricted subsidiaries that guarantee the
Senior Facilities.

The MHGE Senior Notes contain certain customary negative covenants and events of default. The negative

covenants limit MHGE Holdings and its restricted subsidiaries’ ability to, among other things: incur additional
indebtedness or issue certain preferred shares, create liens on certain assets, pay dividends or prepay junior debt,
make certain loans, acquisitions or investments, materially change its business, engage in transactions with affiliates,
conduct asset sales, restrict dividends from subsidiaries, restrict liens, or merge, consolidate, sell or otherwise
dispose of all or substantially all of MHGE Holdings’ assets.

The fair value of the MHGE Senior Notes was approximately $344.0 million and $310.0 million as of

December 31, 2019 and 2018, respectively. The Company estimates the fair value of its MHGE Senior Notes based
on trades in the market. Since the MHGE Senior Notes do not trade on a daily basis in an active market, the fair
value estimates are based on market observable inputs based on borrowing rates currently available for debt with
similar terms and average maturities (Level 2). As of December 31, 2019, the remaining contractual life of the
MHGE Senior Notes is approximately 4.25 years.

Senior Facilities

On May 4, 2016, the Company entered into the Senior Facilities. The Senior Facilities provide for senior

secured financing of up to $1,925.0 million, consisting of:

• Term Loan Facility in an aggregate principal amount of $1,575.0 million with a maturity of 6 years; and

•

a senior secured revolving credit facility in an aggregate principal amount of up to $350.0 million with a
maturity of 5 years (the "Revolving Credit Facility"), including both a letter of credit sub-facility and a
swingline loan sub-facility.

On December 15, 2017, the Company completed an incremental aggregate principal amount of $150,000

under the existing Term Loan Facility. The incremental Term Loan Facility was issued at a 0.25% discount and will
mature concurrently with the existing Term Loan Facility.

Borrowings under the Senior Facilities bear interest at a rate equal to a LIBOR or Prime rate plus an

applicable margin, subject to a 1.00% floor in the case of the Term Loan Facility. As of December 31, 2019, the
interest rate for the Term Loan Facility was 5.8%. In addition, the Term Loan Facility was issued at a discount of
0.5%. As of December 31, 2019, the unamortized debt discount and deferred financing costs was $8.7 million and
$12.6 million, respectively, which are amortized over the term of the facility using the effective interest method.

As of December 31, 2019, the amount available under the Revolving Facility was $350.0 million

(excluding outstanding letters of credit of $4.3 million). In addition, we are required to pay a commitment fee of
0.50% per annum to the lenders under the Revolving Facility in respect of the unutilized commitments thereunder.

The Senior Facilities require scheduled quarterly principal payments on the term loans in amounts equal to

0.25% of the original principal amount of the term loans commencing with the end of the first full fiscal quarter
ending after the closing date, with the balance payable at maturity. The Term Loan Facility also includes customary
mandatory prepayment requirements based on certain events such as asset sales, debt issuances and defined levels of
excess cash flow. As of December 31, 2019, the Company determined that a $44.4 million mandatory prepayment
of indebtedness is required and is payable five business days after the Company's annual financial statements are
delivered. This amount is included within the current portion of long-term debt in the consolidated balance sheets as
of December 31, 2019.

All obligations under the Senior Facilities are unconditionally guaranteed by each of MHGE Holdings’

existing and future direct and indirect material, wholly owned domestic subsidiaries. The obligations are secured by
substantially all of MHGE Holdings’ assets and those of each subsidiary guarantor, capital stock of the subsidiary
guarantors and 65% of the voting capital stock of the first-tier foreign subsidiaries that are not subsidiary guarantors,
in each case subject to exceptions. Such security interests consist of a first priority lien with respect to the collateral.

Our Revolving Facility includes a springing covenant that requires MHGE Holdings, subject to a testing

threshold, comply on a quarterly basis with a maximum net first lien senior secured leverage ratio (the ratio of
consolidated net debt secured by first-priority liens on the collateral to Adjusted EBITDA) of (a) with respect to the
first, third and fourth fiscal quarters of any year, 4.80 to 1.00 and (b) with respect to the second quarter of any fiscal
year, 5.25 to 1.00. The testing threshold is satisfied at any time at which the sum of outstanding revolving credit
facility loans, swingline loans and certain letters of credit exceeds thirty percent (30%) of commitments under the
revolving credit facility at year end.

Adjusted EBITDA reflects EBITDA as defined in the credit agreement governing the Senior Facilities.

Solely for the purpose of calculating the springing financial covenant, pre-publication investments should be
excluded from the calculation of Adjusted EBITDA.

The Senior Facilities contain certain customary affirmative covenants and events of default. The negative

covenants in the Senior Facilities include, among other things, limitations on MHGE Holdings’ and its subsidiaries’
ability to incur additional debt or issue certain preferred shares; create liens on certain assets; make certain loans or
investments (including acquisitions); pay dividends on or make distributions in respect of capital stock or make
other restricted payments; consolidate, merge, sell or otherwise dispose of all or substantially all of their assets; sell
assets; enter into certain transactions with affiliates; enter into sale-leaseback transactions; change their lines of
business; restrict dividends from their subsidiaries or restrict liens; change their fiscal year; and modify the terms of
certain debt or organizational agreements.

The fair value of the Term Loan Facility was approximately $1,590.4 million and $1,536.3 million as of

December 31, 2019 and 2018, respectively. The Company estimates the fair value of its Term Loan Facility based on
trades in the market. Since the Term Loan Facility do not trade on a daily basis in an active market, the fair value
estimates are based on market observable inputs based on borrowing rates currently available for debt with similar

terms and average maturities (Level 2). As of December 31, 2019, the remaining contractual life of the Term Loan
Facility is approximately 2.25 years.

MHGE Parent Term Loan

On April 20, 2018, the Company, entered into a term loan agreement ("MHGE Parent Term Loan") with

Ares Agent Services, L.P., as administrative agent, and clients of Ares Capital Management, LLC and certain funds
and accounts advised by Guggenheim Partners Investment Management, LLC, as lenders, providing for a $180,000
term loan facility (the “MHGE Parent Term Loan”) with a maturity of April 20, 2022. The MHGE Parent Term Loan
was issued at a discount of 2.5%.

The MHGE Parent Term Loan bears interest at 11.00% per annum for interest paid in cash and 11.75% per

annum for interest paid in kind. Interest is payable semiannually on April 15 and October 15 of each year,
commencing on October 15, 2018. Upon closing, the Company was required to deposit $39.3 million of the MHGE
Parent Term Loan proceeds into an escrow account, representing the first four interest payments which must be paid
in cash. The deposit in the escrow account was released for the period commencing on June 15, 2019, and ending on
and including July 15, 2019. Thereafter, the determination as to whether interest is paid in cash or in kind will be
based on the amount of cash available to pay interest and the ability of the MHGE Parent subsidiaries to make
distributions and dividends to MHGE Parent to fund such payments. The MHGE Parent Term Loan is unsecured and
is not guaranteed by any of the MHGE Parent subsidiaries.

As of December 31, 2019 and 2018, the unamortized debt discount and deferred financing costs was $2.6

million and $1.8 million, respectively, which are amortized over the term of the MHGE Parent Term Loan using the
effective interest method.

The MHGE Parent Term Loan contains certain customary affirmative covenants and events of default that

are similar to those contained in the indenture governing the MHGE Senior Notes. The negative covenants in the
MHGE Parent Term Loan limit MHGE Parent and its subsidiaries’ ability to, among other things: incur additional
indebtedness or issue certain preferred shares, create liens on certain assets, pay dividends or prepay junior debt,
make certain loan, acquisitions or investments, materially change its business, engage into transactions with
affiliates, conduct asset sales, restrict dividends from subsidiaries or restrict liens, or merge, consolidate, sell or
otherwise dispose of all or substantially all of MHGE Parent’s assets.

The fair value of the MHGE Parent Term Loan was approximately $170.7 million and $163.2 million as of

December 31, 2019 and 2018, respectively. The Company estimates the fair value of its MHGE Parent Term Loan
based on trades in the market. Since the MHGE Parent Term Loan do not trade on a daily basis in an active market,
the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt
with similar terms and average maturities (Level 2). As of December 31, 2019, the remaining contractual life of the
MHGE Parent Term Loan is approximately 2.25 years.

Receivables Facility

On October 29, 2018, MHE Receivables LLC (the “Borrower”), a newly formed special purpose subsidiary

of McGraw-Hill Global Education, LLC ("MHGE Global"), entered into a Receivables Financing Agreement
("RFA") with MHGE Global, as initial servicer, the lenders from time to time party thereto, and PNC Bank, National
Association, as administrative agent (the “Administrative Agent”), providing for a receivables financing facility up
to a committed principal amount of $50.0 million (the “Receivables Facility”) with a maturity of October 29, 2021.

Furthermore, an additional principal amount of $100.0 million has been committed for an agreed seasonal
period, that expires on September 30, 2020 and an annual renewal feature through to October 2021. The borrowing
capacity under the Receivables Facility is subject to a borrowing limit that is based on the Borrower’s Eligible
Receivables, as defined in the RFA. Under a Purchase and Sale Agreement entered into in connection with the
Receivables Facility, with MHGE Global and McGraw-Hill School Education, LLC ("MHSE"), as originators,
MHGE Global as initial servicer, and the Borrower, as buyer, all existing receivables of MHGE Global and MHSE

have been assigned to the Borrower and all future receivables of MHGE Global and MHSE will be automatically
assigned to the Borrower when they are created.

As of December 31, 2019, $45.0 million was outstanding under the Receivables Facility of which is

included in long-term debt within the consolidated balance sheet. Borrowings under the Receivables Facility bear
interest at LIBOR plus 2.00%, subject to adjustments and are payable monthly. In addition, we also incur an
undrawn fee of 0.50% on unutilized commitments. The unamortized deferred financing costs as of December 31,
2019 was $0.7 million which are amortized over the term of the Receivables Facility using the effective interest
method.

Scheduled Principal Payments

The scheduled principal payments required under the terms of the MHGE Senior Notes, Senior Facilities,

MHGE Parent Term Loan and Receivables Facility were as follows:

2020
2021

2022

2023

2024

Less: Current portion

Cash Flows

As of

December 31, 2019

61,669
62,269

1,753,385

—

400,000

2,277,323
(61,669)
2,215,654

Cash flows from operating, investing and financing activities are presented in the following table:

(Dollars in thousands)

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Year Ended
December 31, 2017

Cash flows from operating activities

Cash flows from investing activities

Cash flows from financing activities

262,101
(151,767)
(54,254)

156,353
(160,694)
(52,432)

263,892
(135,711)
(142,311)

Net cash flows from operating activities consist of profit after income tax, adjusted for changes in net

working capital and non-cash items such as depreciation, amortization and write-offs, and provisions.

Operating Activities

• Cash flows provided by operating activities for the year ended December 31, 2019 and 2018 were $262.1
million and $156.4 million, respectively, an increase of $105.7 million. The increase in cash provided by
operating activities was primarily driven by changes in accounts receivable.

• Cash flows provided by operating activities for the years ended December 31, 2018 and 2017 were $156.4
million and $263.9 million, respectively, a decrease of $107.5 million. The decrease in cash used for
operating activities was primarily driven by:

higher inventory levels in comparison to prior periods primarily due to the impact of the inventory
investment made in our K-12 segment in advance of the large new adoption opportunities in 2019;
and

lower sales and accounts receivable primarily related to our K-12 segment (after removing the
impact of the reclassification of $90.4 million of sales returns from accounts receivable, net to
other current liabilities).

Investing Activities

• Cash flows used for investing activities for the year ended December 31, 2019 and 2018 were $151.8

million and $160.7 million, respectively, an decrease of $8.9 million. Cash flows used for investing
activities decreased as a result of $20.4 million lower pre-publication investment cash costs due to timing
partially offset by $12.0 million increase in capital expenditures primarily related to capital lease
arrangements for assets that were historically purchased outright or were under operating lease.

• Cash flows used for investing activities for the years ended December 31, 2018 and 2017 was $160.7
million and $135.7 million, respectively, an increase of $25.0 million. Cash flows used for investing
activities increased as a result of an $18.1 million increase in capital expenditures primarily related to
capital lease arrangements for assets that were historically purchased outright, leasehold improvements in
our leased properties related to the relocation of multiple locations and the timing of software license
renewals.

Financing Activities

• Cash flows used for financing activities for the year ended December 31, 2019 and 2018 were $54.3

million and $52.4 million, respectively, an increase of $1.8 million. Cash flows used for financing activities
remained unchanged as additional borrowing under the Receivables Facility was offset by the higher debt
service cash outflows related to MHGE Parent Term Loan and Receivables Facility, respectively, as well as
lower repurchase of common stock.

• Cash flows used for financing activities for the years ended December 31, 2018 and 2017 was $52.4

million and $142.3 million, respectively. Cash flows used for financing activities decreased primarily as a
result of higher borrowings in 2018 of $175.5 million and $50.0 million related to our MHGE Parent Term
Loan and Receivables Facility, respectively, compared to borrowings of $149.6 million in 2017.

Capital Expenditures and Pre-publication Expenditures

Part of our plan for growth and stability includes disciplined capital expenditures and pre-publication

expenditures.

An important component of our cash flow generation is our pre-publication efficiency. We have been

focused on optimizing our pre-publication expenditures to generate content that can be leveraged across our full
range of products, maximizing long-term return on investment. Pre-publication expenditures, principally external
preparation costs, are amortized from the year of publication over their estimated useful lives, one to five years,
using either an accelerated or straight-line method. The majority of the programs are amortized using an accelerated
methodology. We periodically evaluate the amortization methods, rates, remaining lives and recoverability of such
costs. In evaluating recoverability, we consider our current assessment of the market place, industry trends, and the
projected success of programs. Our pre-publication expenditures were $79.1 million, $99.5 million and $99.2
million for the years ended December 31, 2019, 2018 and 2017, respectively.

Capital expenditures include purchases of property, plant and equipment and capitalized technology costs

that meet certain internal and external criteria. Capital expenditures were $75.2 million, $63.2 million and $45.1
million for the years ended December 31, 2019, 2018 and 2017, respectively.

Our planned capital expenditures and pre-publication expenditures will require, individually and in the

aggregate, significant capital commitments and, if completed, may result in significant additional revenues. Cash
needed to finance investments and projects currently in progress, as well as additional investments being pursued, is
expected to be made available from operating cash flows and our credit facilities. See “Indebtedness and Liquidity”
for further information.

Off-Balance Sheet Arrangements

As of December 31, 2019 we did not have any relationships with unconsolidated entities, such as entities
often referred to as specific purpose or variable interest entities where we are the primary beneficiary, which would
have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As such we are not exposed to any financial liquidity, market or credit risk that could arise if we
had engaged in such relationships.

Contractual Obligations

We typically have various contractual obligations, which are recorded as liabilities in our consolidated balance

sheets, while other items, such as certain purchase commitments and other executory contracts, are not recognized,
but are disclosed herein. For example, we are contractually committed to acquire paper and other printing services
and make certain minimum lease payments for the use of property under operating and capital lease agreements.

The following table summarizes our significant debt related contractual obligations over the next several years

that relate to our continuing operations as of December 31, 2019:

Payments due by Period

Total

2020

2021-2022

2023-2024

Long-term debt, including current portion (1)

$ 2,277,323

61,669

$ 1,815,654

400,000

Interest on long-term debt (2)

Operating lease obligations (3)

Finance lease obligations (4)

Paper and printing services (5)

Purchase obligations and other (6)

421,582

192,168

29,320

213,800

114,516

152,091

18,183

13,106

118,600

59,321

222,241

32,582

14,151

95,200

52,068

47,250

25,512

2,063

—

3,127

2025 and
beyond

—

115,891

—

(1) Amounts shown include principal on the MHGE Senior Notes, Term Loan Facility, Revolving Facility, MHGE

Parent Term Loan and Receivables Facility.

(2) Amounts shown include interest on the MHGE Senior Notes, Term Loan Facility, Revolving Facility, MHGE

Parent Term Loan and Receivables Facility.

(3) Amounts shown include taxes and escalation payments related to our operating lease obligations, net of

sublease income.

(4) Amounts shown include future minimum lease payments on our finace leases.
(5) We have contracts to purchase paper and printing services that have target volume commitments. However,
there are no contractual terms that require us to purchase a specified amount of goods or services and if
significant volume shortfalls were to occur during a contract period, then revised terms may be renegotiated
with the supplier. These obligations are not recorded in our consolidated financial statements until contract
payment terms take effect.
“Other” consists primarily of commitments for global technology support and maintenance and enhancement
activity related to the Oracle ERP system.

(6)

Critical Accounting Policies and Estimates

Critical accounting policies are those that require the Company to make significant judgments, estimates or
assumptions that affect 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, revenue recognition, allowance for
doubtful accounts and sales returns, inventories, pre-publication costs, accounting for the impairment of long-lived
assets (including other intangible assets), goodwill and indefinite-lived intangible assets, stock-based compensation,
income taxes and contingencies. The Company bases its judgments, estimates and assumptions on current facts,
historical experience and various other factors that the Company believes to be reasonable and prudent under the
circumstances. Actual results may differ materially from these estimates. For a complete description of our
significant accounting policies, see Note 1, "Basis of Presentation and Accounting Policies" of the notes to
consolidated financial statements included elsewhere in this Annual Report.

Allowance for Doubtful Accounts and Sales Returns

The allowance for doubtful accounts and sales returns reserves methodologies is based on historical
analysis, a review of outstanding balances and current conditions. In determining these reserves, we consider, among
other factors, the financial condition and risk profile of our customers, areas of specific or concentrated risk as well
as applicable industry trends or market indicators. The allowance for sales returns is a significant estimate, which is
based on historical rates of return and current market conditions. The provision for sales returns is reflected as a
reduction to “revenues” in our consolidated statements of operations. Sales returns are charged against the reserve as
products are returned to inventory. Accounts receivable losses for bad debt are charged against the allowance for
doubtful accounts when the receivable is determined to be uncollectible.

Inventories

Inventories, consisting principally of books, are stated at the lower of cost or net realizable value and are

valued using the first in first out (FIFO) method. The majority of our inventories relate to finished goods. A
significant estimate, the reserve for inventory obsolescence, is reflected in operating and administration expenses. In
determining this reserve, we consider management’s current assessment of the marketplace, industry trends and
projected product demand as compared to the number of units currently on hand.

Consigned Inventory

Consigned inventory consists mainly of books available through our formal rental program stated at the lower
of cost or net realizable value. At the time a rental transaction is completed, the book is moved from inventories, net
to property, plant and equipment, net. The cost of the book is amortized down to its estimated residual value over the
rental period with the related amortization expense included within cost of sales in the consolidated statements of
operations. Returns are moved back into inventories, net at the current residual value.

Pre-publication Costs

Pre-publication costs include both the cost of developing educational content and the development of
assessment solution products. Costs incurred prior to the publication date of a title or release date of a product
represent activities associated with product development. These may be performed internally or outsourced to
subject matter specialists and include, but are not limited to, editorial review and fact verification, graphic art design
and layout and the process of conversion from print to digital media or within various formats of digital media.
These costs are capitalized when the costs can be directly attributable to a project or title and the title is expected to
generate probable future economic benefits. Capitalized costs are amortized upon publication of the title over its
estimated useful life of up to five years, with a higher proportion of the amortization typically taken in the earlier
years. Amortization expenses for prepublication costs are charged as a component of operating and administration
expenses within the accompanying consolidated statement of operations. In evaluating recoverability, we consider
management’s current assessment of the marketplace, industry trends and the projected success of programs.

Deferred Technology Costs

We capitalize certain software development and website implementation costs. Capitalized costs only

include incremental, direct costs of materials and services incurred to develop the software after the preliminary
project stage is completed, funding has been committed and it is probable that the project will be completed and
used to perform the function intended. Incremental costs are expenditures that are out-of-pocket to us and are not
part of an allocation or existing expense base. Software development and website implementation costs are expensed
as incurred during the preliminary project stage. Capitalized costs are amortized from the period the software is
ready for its intended use over its estimated useful life, three to seven years, using the straight-line method.
Periodically, we evaluate the amortization methods, remaining lives and recoverability of such costs. Capitalized
software development and website implementation costs are included in other non-current assets in the consolidated
balance sheets and are presented net of accumulated amortization.

Accounting for the Impairment of Long-Lived Assets (Including Other Intangible Assets)

We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the

carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held
and used is measured by comparing the carrying amount of an asset to current forecasts of undiscounted future net
cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future
cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Long-lived assets held for sale are written down to fair value, less cost to sell.
Fair value is determined based on market evidence, discounted cash flows, appraised values or management’s
estimates, depending upon the nature of the assets.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess of purchase price and related costs over the fair value of identifiable assets

acquired and liabilities assumed in a business combination. Indefinite-lived intangible assets consist of the
Company’s acquired brands. Goodwill and indefinite-lived intangible assets are not amortized, but instead are tested
for impairment annually during the fourth quarter each year, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. We have four reporting units, Higher Education, K-12,
International and Professional with goodwill and indefinite-lived intangible assets that are evaluated for impairment.

We initially perform a qualitative analysis evaluating whether there are events or circumstances that

provide evidence that it is more likely than not that the fair value of any of our reporting units or indefinite-lived
intangible assets are less than their carrying amount. If, based on our evaluation we do not believe that it is more
likely than not that the fair value of any of our reporting units or indefinite-lived intangible assets are less than their
carrying amount, no quantitative impairment test is performed. Conversely, if the results of our qualitative
assessment determine that it is more likely than not that the fair value of any of our reporting units or indefinite-
lived intangible assets are less than their respective carrying amounts we perform a two-step quantitative impairment
test.

During the first step, the estimated fair value of the reporting units are compared to their carrying value
including goodwill and the estimated fair value of the intangible assets is compared to their carrying value. Fair
values of the reporting units are estimated using the income approach, which incorporates the use of a discounted
free cash flow analysis, and are corroborated using the market approach, which incorporates the use of revenue and
earnings multiples based on market data. The discounted free cash flow analyses are based on the current operating
budgets and estimated long-term growth projections for each reporting unit. Future cash flows are discounted based
on a market comparable weighted average cost of capital rate for each reporting unit, adjusted for market and other
risks where appropriate. Fair values of indefinite-lived intangible assets are estimated using avoided royalty
discounted free cash flow analyses. Significant judgments inherent in these analyses include the selection of
appropriate royalty and discount rates and estimating the amount and timing of expected future cash flows. The
discount rates used in the discounted free cash flow analyses reflect the risks inherent in the expected future cash
flows generated by the respective intangible assets. The royalty rates used in the discounted free cash flow analyses

are based upon an estimate of the royalty rates that a market participant would pay to license the Company’s trade
names and trademarks.

If the fair value of the reporting units or indefinite-lived intangible assets are less than their carrying value,
a second step is performed which compares the implied fair value of the reporting unit’s goodwill or indefinite-lived
intangible assets to the carrying value. The fair value of the goodwill or indefinite-lived intangible assets is
determined based on the difference between the fair value of the reporting unit and the net fair value of the
identifiable assets and liabilities of the reporting unit or carrying value of the indefinite-lived intangible asset. If the
implied fair value of the goodwill or indefinite-lived intangible assets is less than the carrying value, the difference
is recognized as an impairment charge. Significant judgments inherent in this analysis include estimating the amount
and timing of future cash flows and the selection of appropriate discount rates, royalty rate and long-term growth
rate assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value
for each reporting unit and indefinite-lived intangible asset and for some of the reporting units and indefinite-lived
intangible assets could result in an impairment charge, which could be material to our financial position and results
of operations.

The following table summarizes the changes in the carrying value of goodwill by reporting segment:

As of December 31, 2017

Adjustment to goodwill
As of December 31, 2018

Adjustment to goodwill
As of December 31, 2019

Higher
Education

K-12

426,165

(1,709)
424,456

(1,399)
423,057

29,936
(1,500)
28,436

—
28,436

International Professional
37,078
$

4,089

—
4,089

—
37,078

Total

497,268
(3,209)
494,059
(1,399)
492,660

Goodwill in the table above includes a $1.4 million and $3.2 million impact from foreign exchange and

other as of December 31, 2019 and 2018, respectively.

Stock-Based Compensation

The Company issues stock options and other stock-based compensation to eligible employees, directors and

consultants and accounts for these transactions under the provisions of Accounting Standards Codification (“ASC”)
718, Compensation-Stock Compensation. For equity awards, total compensation cost is based on the grant date fair
value. For liability awards, total compensation cost is based on the fair value of the award on the date the award is
granted and is remeasured at each reporting date until settlement. For performance-based options issued, the value of
the instrument is measured at the grant date as the fair value of the common stock and expensed over the vesting
term when the performance targets are considered probable of being achieved. The Company recognizes stock-based
compensation expense for all awards, on a straight-line basis, over the service period required to earn the award,
which is typically the vesting period.

Revenue Recognition

Revenue is recognized when control of goods or services are transferred to our customers, in an amount
that reflects the consideration we expect to be entitled to in exchange for those goods or services. We determine
revenue recognition through the following steps:

•
•
•
•
•

Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, we satisfy a performance obligation.

Arrangements with multiple deliverables

Revenue relating to products that provide for more than one deliverable is recognized based upon the

relative fair value to the customer of each deliverable as each deliverable is provided. Revenue relating to
agreements that provide for more than one service is recognized based upon the relative fair value to the customer of
each service component as each component is earned. If the fair value to the customer for each service is not
determinable based on stand-alone selling price, we make our best estimate of the services’ stand-alone selling price
and recognize revenue as earned as the services are delivered. Because we determine the basis for allocating
consideration to each deliverable primarily on prices experienced from completed sales, the portion of consideration
allocated to each deliverable in a multiple deliverable arrangement may increase or decrease depending on the most
recent selling price of a comparable product or service sold on a stand-alone basis. For example, as the demand for,
and prevalence of, digital products increases, as new sales occur we may be required to increase the amount of
consideration allocable to digital products included in multiple deliverable arrangements because the fair value of
such products or services may increase relative to other products or services bundled in the arrangement.
Conversely, in the event that demand for our print products decreases, thereby causing us to experience reduced
prices on our print products, we may be required to allocate less consideration to our print products in our
arrangements that include multiple deliverables.

Subscription-based products

Subscription income is recognized over the related subscription period that the subscription is available and

is used by the customer. Subscription revenue received or receivable in advance of the delivery of services or
publications is included in deferred revenue. Incremental costs that are directly related to the subscription revenue
are deferred and amortized over the subscription period. Included among the underlying assumptions related to our
estimates that impact the recognition of subscription income is the extent of our responsibility to provide access to
our subscription-based products, and the extent of complementary support services customers demand to access our
products.

Service arrangements

Revenue relating to arrangements that provide for more than one service is recognized based upon the

relative fair value to the customer of each service component as each component is earned. Such arrangements may
include digital products bundled with traditional print products, obligations to provide products and services in the
future at no additional cost, and periodic training pertinent to products and services previously provided. If the fair
value to the customer for each service is not objectively determinable, we make our best estimate of the services’
stand-alone selling price and recognize revenue as earned as the services are delivered.

Rental program

Revenue relating to our rental program is deferred and subsequently recognized over the rental period. The

rental period begins when the print product is transferred to the customer and are typically for a one semester. All
rental periods are less than one year in duration.

Income Taxes

We determine the provision for income taxes using the asset and liability approach. Under this approach,

deferred income taxes represent the expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities.

Valuation allowances are established when management determines that it is more likely than not that some

planning strategies, and estimated future taxable income. The valuation allowance can also be affected by changes in
tax laws and changes to statutory tax rates.

We prepare and file tax returns based on management’s interpretation of tax laws and regulations. As with

all businesses, our tax returns are subject to examination by various taxing authorities. Such examinations may result
in future tax assessments based on differences in interpretation of the tax law and regulations. We adjust our
estimated uncertain tax positions reserves based on audits by and settlements with various taxing authorities as well
as changes in tax laws, regulations, and interpretations. The Company recognizes accrued interest and penalties
related to uncertain tax positions in income tax (benefit) provision within the consolidated statement of operations.

Recently Adopted Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842): The company adopted ASU

No. 2016-02, effective January 1, 2019 using the modified retrospective approach. The adoption of Topic 842
resulted in the recognition of lease liabilities of $56,640 and lease assets of $48,086 (net of lease incentives and
deferred rent), as of January 1, 2019 on the consolidated balance sheet, with no material impact on the consolidated
statement of operations. For required disclosures relating to the impact of adopting Topic 842 and a discussion on
the Company's updated accounting policies relating to leases, see Note 14, “Leases”.

In February 2018, the FASB issued ASU No. 2018-02, “Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, to allow a reclassification
from accumulated other comprehensive income (loss) for stranded tax effects resulting from the Tax Cuts and Jobs
Act. This standard is effective for interim and annual reporting periods after December 15, 2018, with early adoption
permitted. The adoption of this standard has no material impact on the Company's consolidated financial statements.

Recently Issued Accounting Standards

In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure

Framework—Changes to the Disclosure Requirements for Fair Value Measurement," which modifies the disclosure
requirements on fair value measurements. This standard is effective for interim and annual reporting periods after
December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of this guidance
on its consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, "Derivative and Hedging (Topic 815): Targeted
Improvements to Accounting for Hedging Activities", which aligns hedge accounting with risk management activities
and changes both how companies assess hedge effectiveness and presentation and disclosure requirements. This
standard is effective for interim and annual reporting periods after December 15, 2019, with early adoption
permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) -

Measurement of Credit Losses on Financial Instruments. The FASB’s new guidance changes how entities will
measure credit losses for most financial assets and certain other instruments that are not measured at fair value
through net income, including trade receivables, based on historical experience, current conditions and reasonable
and supportable forecasts. This amendment is effective for interim and annual reporting periods beginning after
December 15, 2019. We are currently evaluating the impact this amendment may have on our consolidated financial
statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and other - Internal-Use Software

(Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that
is a Service Contract. This standard requires a customer in a cloud computing arrangement that is a service contract
to follow the internal-use software guidance in Topic 350-40 to determine which implementation costs to capitalize
as assets. This standard is effective for annual reporting periods beginning after 15 December 2020, and interim
periods within annual periods beginning after 15 December 2021, with early adoption permitted. The Company is
currently evaluating the impact of this guidance on its consolidated financial statements.

Recently issued FASB accounting standard codification updates, except for the above standards, did not
have a material impact to the Company’s consolidated financial statements for the year ended December 31, 2019.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Foreign Exchange Risk

Our exposure to market risk includes changes in foreign exchange rates. We have operations in various

foreign countries where the functional currency is primarily the local currency. For international operations that are
determined to be extensions of the parent company, the United States dollar is the functional currency. Our principal
currency exposures relate to the Australian Dollar, British Pound, Canadian Dollar, Euro, Mexican Peso and
Singapore Dollar. From time to time, we may enter into hedging arrangements with respect to foreign currency
exposures.

Interest Rate Risk

Term Loan Facility

Borrowings under our Term Loan Facility will accrue interest at variable rates with a LIBOR floor of 1%,

and a 100 basis point increase in the LIBOR on our debt balances outstanding as of December 31, 2019 would
increase our annual interest expense by $11.6 million.

From time to time we may enter into hedging arrangements with respect to floating interest rate

borrowings. While we may enter into agreements limiting our exposure to higher interest rates, any such agreements
may not offer complete protection from this risk.

We do not purchase or hold any derivative financial instruments for trading purposes.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Auditors

The Board of Directors and Shareholders of McGraw-Hill Education, Inc. and its subsidiaries

We have audited the accompanying consolidated financial statements of McGraw-Hill Education, Inc. and
subsidiaries (the “Company”), which comprise the consolidated balance sheets as of December 31, 2019 and 2018,
and the related consolidated statements of operations, comprehensive (loss) income, changes in equity (deficit), and
cash flows for each of the years ended December 31, 2019, 2018 and 2017, and the related notes to the consolidated
financial statements. Our audits also included the financial statement schedules listed on pages 114 to 116.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements and schedules in
conformity with U.S. generally accepted accounting principles; this includes the design, implementation and
maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free
of material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments,
the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of
significant accounting estimates made by management, as well as evaluating the overall presentation of the financial
statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of McGraw-Hill Education, Inc. and subsidiaries at December 31, 2019 and 2018, and the
consolidated results of their operations and their cash flows for the years ended December 31, 2019, 2018, and 2017,
in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.

New York, New York
March 10, 2020

McGraw-Hill Education, Inc. and subsidiaries
Consolidated Statements of Operations
(Dollars in thousands)

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Year Ended
December 31, 2017

Revenue

Cost of sales

Gross profit

Operating expenses

Operating and administration expenses

Depreciation

Amortization of intangibles

Total operating expenses

Operating income

Interest expense (income), net

Other (income) expense

(Loss) income from operations before
taxes on income

Income tax provision (benefit)

Net (loss) income from continuing
operations

Net (Loss) income

1,571,388

1,596,945

371,387

1,200,001

1,030,470

56,302

71,849

1,158,621

41,380

180,430
(7,962)

(131,088)
12,122

394,531

1,202,414

1,038,073

46,929

86,722

1,171,724

30,690

180,576

—

(149,886)
10,535

(143,210)
(143,210) $

(160,421)
(160,421) $

See accompanying notes to the consolidated financial statements.

1,719,072

426,636

1,292,436

1,065,755

45,243

88,068

1,199,066

93,370

179,378
(12,727)

(73,281)
(7,351)

(65,930)
(65,930)

McGraw-Hill Education, Inc. and subsidiaries
Consolidated Statements of Comprehensive (Loss) Income
(Dollars in thousands)

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Year Ended
December 31, 2017
(65,930)

(160,421) $

Net (loss) income

Other comprehensive (loss) income:

Foreign currency translation adjustment,
net of tax

Unrealized gain (loss) on interest rate
swap agreements, net of tax

Total other comprehensive (loss)
income
Comprehensive (loss) income

$
$

(143,210) $

(2,123)

(11,992)

(7,922)

5,052

(14,115) $
(157,325) $

(2,870) $
(163,291) $

See accompanying notes to the consolidated financial statements.

15,975

721

16,696
(49,234)

McGraw-Hill Education, Inc. and subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)

Current assets

Cash and cash equivalents

Restricted cash

Accounts receivable, net of allowance for doubtful accounts of $16,883 and
$17,000 as of December 31, 2019 and 2018, respectively

Inventories, net

Prepaid and other current assets

Total current assets

Pre-publication costs, net

Property, plant and equipment, net

Goodwill

Other intangible assets, net

Investments

Operating lease right-of-use assets

Deferred income taxes

Other non-current assets

Total assets

Liabilities and equity (deficit)

Current liabilities

Accounts payable

Accrued royalties

Accrued compensation

Deferred revenue

Current portion of long-term debt

Operating lease liabilities

Other current liabilities, including sales returns of $81,445 and $90,388 as of
December 31, 2019 and December 31, 2018, respectively

Total current liabilities

Long-term debt

Deferred income taxes

Long-term deferred revenue

Operating lease liabilities

Other non-current liabilities

Total liabilities

Commitments and contingencies (Note 16)
Stockholders' equity (deficit)

December 31, 2019

December 31, 2018

391,946

9,910

323,707

164,599

84,421

974,583

161,871

135,503

492,660

514,529

6,206

76,091

6,256

185,916

2,553,615

108,949

103,515

65,654

507,410

61,669

14,492

179,019

1,040,708

2,140,634

12,592

684,450

88,070

39,396

314,945

19,800

346,350

185,531

91,378

958,004

175,024

102,483

494,059

581,189

6,049

—

6,422

191,206

2,514,436

132,599

114,759

36,634

450,738

31,297

—

166,095

932,122

2,188,414

13,318

649,453

—

37,386

4,005,850

3,820,693

Common stock, par value $0.01 per share; 100,000,000 shares authorized,
11,033,000 and 10,869,767 shares issued as of December 31, 2019 and 2018,
respectively; and 10,792,190 and 10,728,489 shares outstanding as of December
31, 2019 and 2018, respectively

Additional paid in capital

Treasury stock, 240,810 and 141,278 shares as of December 31, 2019 and 2018,
respectively

Accumulated deficit

Accumulated other comprehensive loss

Total stockholders' equity (deficit)

Total liabilities and equity (deficit)

106

56,251

(23,529)

(1,427,036)

(58,027)

(1,452,235)

2,553,615

105

40,790

(19,414)

(1,283,826)

(43,912)

(1,306,257)

2,514,436

See accompanying notes to the consolidated financial statements.

McGraw-Hill Education, Inc. and subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)

Operating activities

Net (loss) income from continuing operations

(143,210) $

(160,421) $

(65,930)

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Year Ended
December 31, 2017

Adjustments to reconcile net (loss) income to net cash
provided by operating activities

Depreciation (including amortization of technology
projects)

Amortization of intangibles

Amortization of pre-publication costs

Gain on sale of investment

Gain on disposition

Provision for losses on accounts receivable

Inventory obsolescence

Deferred income taxes

Stock-based compensation

Amortization of debt discount

Amortization of deferred financing costs

Amortization of deferred royalties

Amortization of deferred commission costs

Restructuring charges

Other

Changes in operating assets and liabilities, net of the
effect of acquisitions

Accounts receivable

Inventories

Prepaid and other current assets

Accounts payable and accrued expenses

Deferred revenue

Other current liabilities

Net change in operating assets and liabilities

Cash (used for) provided by operating activities

Investing activities

Investment in pre-publication costs

Capital expenditures

Proceeds from sale of investments

Proceeds from dispositions

Cash (used for) provided by investing activities

Financing activities

Borrowings on Term Loan Facility

Borrowings on MHGE Parent Term Loan

Borrowings on Receivables Facility

Repayment on Receivables Facility

Repurchase of MHGE PIK Toggle Notes

Payment of Term Loan Facility

Payment of deferred financing costs

Payment of capital lease obligations

Issuance of common stock

Repurchase of common stock

56,302

71,849

92,634

—

(2,129)

5,452

25,214

(726)

13,536

10,197

11,783

19,201

8,069

26,605

(157)

18,740

(4,208)

(20,462)

(5,094)

90,904

(1,142)

(11,257)

262,101

(79,110)

(75,239)

—

2,582

(151,767)

—
—
60,900

(65,900)

—

(31,269)

—

(12,930)

—

(4,115)

46,929

86,722

85,862

—

6,222

26,669

624

20,190

10,084

12,558

17,737

8,048

13,202

207

(80,838)

(45,345)

(17,833)

(12,364)

65,171

74,599

(1,670)

156,353

(99,539)

(63,239)

—

2,084

(160,694)

—

175,500

50,000

—

(243,496)

(17,403)

(3,893)

(10,323)

10,000

(9,763)

45,243

88,068

98,902

(4,931)

(5,750)

3,804

20,838

(21,369)

14,288

9,557

13,215

10,131

—

10,151

1,914

(3,130)

(13,728)

(5,108)

(12,274)

146,484

(32,936)
(33,547)

263,892

(99,219)

(45,127)

4,931

3,704

(135,711)

149,625
—
—

—

(256,498)

(16,130)

(1,662)

(7,321)

—

(2,924)

McGraw-Hill Education, Inc. and subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)

Repurchase of vested stock options and restricted stock units

Dividend equivalents on vested stock options

Dividend equivalents on vested restricted stock units

Cash (used for) provided by financing activities

Effect of exchange rate changes on cash, cash equivalents
and restricted cash

Net change in cash, cash equivalents and restricted
cash

Cash, cash equivalents, and restricted cash at the beginning
of the period

Cash, cash equivalents, and restricted cash ending balance

Supplemental disclosures

Cash paid for interest expense

Cash paid for income taxes

—

(940)

—

(54,254)

(144)

55,936

345,920

401,856

161,782

6,927

—

(1,656)

(1,398)

(52,432)

(4,939)

(61,712)

407,632

345,920

164,948

8,751

(3,814)

(1,966)

(1,621)

(142,311)

3,009

(11,121)

418,753

407,632

166,030

11,519

See accompanying notes to the consolidated financial statements.

McGraw-Hill Education, Inc. and subsidiaries
Consolidated Statement of Changes in Equity (Deficit)
(Dollars in thousands, except share data)

Common Stock

Amount

Additional
Paid in
Capital

Treasury
Stock

Accumulated
Deficit

Accumulated
Other
Comprehensive
(Loss) Income

Total
Stockholders'
Equity
(Deficit)

Balance at December 31, 2016

10,567,864

104

— $

(6,727) $

(1,085,727) $

(57,738) $

(1,150,088)

Issuance of common stock

Conversion of restricted stock units

Net loss

Other comprehensive loss, net of taxes

Stock-based compensation

Dividend equivalents on vested stock
options

Dividend equivalents on restricted stock
units

12,500

39,113

—

Repurchase of common stock

(31,002)

Repurchase of vested stock options and
restricted stock units

Modification of stock options

—

14,288

(2,793)

(365)

—

(1,660)

(5,757)

—

(2,924)

—

(65,930)

—

16,696

—

(65,930)

16,696

14,288

(2,793)

(365)

(2,924)

(1,660)

(5,757)

Balance at December 31, 2017

10,588,475

104

3,713

(9,651) $

(1,151,657) $

(41,042) $

(1,198,533)

Issuance of common stock

Conversion of restricted stock units

Net loss

Impact from adoption of Topic 606

Other comprehensive loss, net of taxes

Stock-based compensation

Dividend equivalents on vested stock
options

Exercise of stock options

Share settlement

Repurchase of common stock

Repurchase of vested stock options and
restricted stock units

83,333

71,470

—

67,215

—

(82,004)

—

9,999

—

21,964

(695)

3,329

5,913

—

(9,763)

(3,433)

—

(160,421)

28,252

—

(2,870)

—

10,000

—

(160,421)

28,252

(2,870)

21,964

(695)

3,329

5,913

(9,763)

(3,433)

Balance at December 31, 2018

10,728,489

105

40,790

(19,414) $

(1,283,826) $

(43,912) $

(1,306,257)

Conversion of restricted stock units

30,582

Net loss

Other comprehensive loss, net of taxes

Stock-based compensation

Exercise of stock options

Repurchase of common stock

Repurchase of vested stock options and
restricted stock units

Modification of Stock Options

—

38,353

(5,234)

—

13,536

3,450

—

(3,257)

1,732

—

(4,115)

—

(143,210)

—

(14,115)

—

(143,210)

(14,115)

13,536

3,451

(4,115)

(3,257)

1,732

Balance at December 31, 2019

10,792,190

106

56,251

(23,529) $

(1,427,036) $

(58,027) $

(1,452,235)

See accompanying notes to the consolidated financial statements.

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

1. Basis of Presentation and Accounting Policies

McGraw-Hill Education Inc. (“MHE”, the “Company”, “Parent”, “we”, “us”, or “our”), is a global provider

of outcome-focused learning solutions, delivering both curated content and digital learning tools and platforms to
the students in the classrooms of approximately 250,000 higher education instructors, 13,000 K-12 school districts
and a wide variety of academic institutions, professionals and companies in more than 100 countries. We have
evolved our business from a print-centric producer of textbooks and instructional materials to a developer of digital
content and technology-enabled adaptive learning solutions that are delivered anywhere, anytime. Our business is
comprised of the following four operating segments:

• Higher Education: In the higher education market in the United States, we provide students, instructors

and institutions with adaptive digital learning tools, digital platforms, custom publishing solutions and
traditional printed textbook products. The primary users of our solutions are students enrolled in two-and
four-year non-profit colleges and universities, and to a lesser extent, for profit institutions. We sell our
Higher Education solutions to well-known online retailers, distribution partners and college bookstores,
who subsequently sell to students. We also increasingly sell via our proprietary e-commerce platform,
primarily directly to students, and through our formal rental program which was introduced in the fall of
2018 with rental agreements with all major distribution partners.

• K-12: In the K-12 market in the United States, we sell our learning solutions directly to K-12 school

districts across the United States. While we offer all of our major curriculum and learning solutions in
digital format, given the varying degrees of availability and maturity of our customers’ technological
infrastructure, a majority of our sales are derived from selling blended print and digital solutions.

•

International: We leverage our global scale, brand recognition and extensive product portfolio to serve
students in the higher education, K-12 and professional markets in more than 100 countries outside of the
United States. Our products and solutions for the International segment are produced in more than 75
languages and primarily originate from our offerings produced for the United States market and that are
later adapted to different international markets.

• Professional: We are a leading provider of medical, technical, engineering and business content for the

professional, education and test preparation communities.

Proposed Merger

On May 1, 2019, McGraw-Hill Education, Inc. (“McGraw-Hill”), McGraw-Hill Global Educations

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

McGraw-Hill has also agreed to various customary covenants and agreements, including, among others, to

Merger-related costs are expensed as incurred and consist of integration planning costs, legal fees, rating
agency fees and professional services. For the year ended December 31, 2019, transaction and merger integration
costs were $21.0 million and $7.0 million, respectively.

Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with U.S.

Generally Accepted Accounting Principles ("U.S. GAAP") and all significant intercompany transactions and
balances have been eliminated. In the opinion of management, the accompanying consolidated financial statements
include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation.

These consolidated financial statements and notes reflect the Company’s evaluation of events occurring
subsequent to the balance sheet date through March 10, 2020, the date the financial statements were available for
issuance.

Seasonality and Comparability

Our revenues, operating profit and operating cash flows are affected by the inherent seasonality of the

academic calendar, which varies by country. Changes in our customers’ ordering patterns may impact the
comparison of our results in a quarter with the same quarter of the previous year, or in a fiscal year with the prior
fiscal year, where our customers may shift the timing of material orders for any number of reasons, including, but
not limited to, changes in academic semester start dates or changes to their inventory management practices.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue
recognition, allowance for doubtful accounts and sales returns, inventories, pre-publication costs, accounting for the
impairment of long-lived assets (including other intangible assets), goodwill and indefinite-lived intangible assets,
restructuring, stock-based compensation, income taxes and contingencies.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents include bank deposits and highly liquid investments with original maturities of

Restricted cash, including restricted cash included in other non-current assets, represents interest payable

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the
consolidated balance sheets to the total of the same amounts reported in the consolidated statements of cash flows:

Cash and cash equivalents

Restricted cash

Restricted cash included in other non-current assets
Total Cash, Cash Equivalents and Restricted Cash

Accounts Receivable

As of

December 31, 2019

December 31, 2018

391,946

9,910

—
401,856

314,945

19,800

11,175
345,920

Credit is extended to customers based upon an evaluation of the customer’s financial condition. Accounts

receivable are recorded at net realizable value.

Allowance for Doubtful Accounts and Sales Returns

The allowance for doubtful accounts and sales returns reserves methodology is based on historical analysis,

a review of outstanding balances and current conditions. In determining these reserves, we consider, among other
factors, the financial condition and risk profile of our customers, areas of specific or concentrated risk as well as
applicable industry trends or market indicators. The allowance for sales returns is a significant estimate, which is
based on historical rates of return and current market conditions. The provision for sales returns is reflected as a
reduction to “Revenues” in our consolidated statements of operations. Sales returns are charged against the reserve
as products are returned to inventory. Accounts receivable losses for bad debt are charged against the allowance for
doubtful accounts when the receivable is determined to be uncollectible. The change in the allowance for doubtful
accounts is reflected as part of operating and administrative expenses in our consolidated statement of operations.

Concentration of Credit Risk

As of December 31, 2019 and 2018, two customers comprised 23% of the gross accounts receivable

balance, which is reflective of concentration and seasonality in our industry. In addition, the Company mitigates
concentration of credit risk with respect to accounts receivable by performing ongoing credit evaluations of its
customers and by periodically entering into arrangements with third parties who have agreed to provide credit
insurance or purchase our accounts receivables of certain customers in the event of the customer's financial inability
to pay, subject to certain limitations.

The Company had no single customer that accounted for 10% of our gross revenue for the years ended

December 31, 2019, 2018, and 2017. The loss of, or any reduction in sales from, a significant customer or
deterioration in their ability to pay could harm our business and financial results.

Inventories, net

Inventories, consisting principally of books, are stated at the lower of cost or net realizable value and are

valued using the first in first out (FIFO) method. The majority of our inventories relate to finished goods. A
significant estimate, the reserve for inventory obsolescence, is reflected in inventories, net within the accompanying
consolidated balance sheets. In determining this reserve, we consider management’s current assessment of the
marketplace, industry trends and projected product demand as compared to the number of units currently on hand.

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

Pre-publication Costs, net

Property, Plant and Equipment, net

Property, plant and equipment are stated at cost less accumulated depreciation as of December 31, 2019 and

December 31, 2018. Depreciation and amortization are recorded on a straight-line basis, over the assets’ estimated
useful lives. Buildings have an estimated useful life, for purposes of depreciation, from ten to forty years. Furniture,
fixtures and equipment are depreciated over periods not exceeding twelve years. Leasehold improvements are
amortized over the life of the lease or the life of the assets, whichever is shorter. The Company evaluates the
depreciation periods of property, plant and equipment to determine whether events or circumstances warrant revised
estimates of useful lives.

Consigned Inventory

Consigned inventory consists mainly of books available through our formal rental program stated at the lower
of cost or net realizable value. At the time a rental transaction is completed, the book is moved from inventories, net
to property, plant and equipment, net. The cost of the book is amortized down to its estimated residual value over the
rental period with the related amortization expense included within cost of sales within the accompanying consolidated
statement of operations. Returns are moved back into inventories, net at the current residual value.

Royalty Advances

Royalty advances are initially capitalized and subsequently expensed as related revenues are earned or

when the Company determines future recovery is not probable. The Company has a long history of providing
authors with royalty advances, and it tracks each advance earned with respect to the sale of the related publication.
Historically, the longer the unearned portion of the advance remains outstanding, the less likely it is that the
Company will recover the advance through the sale of the publication, as the related royalties earned are applied first
against the remaining unearned portion of the advance. The Company applies this historical experience to its
existing outstanding royalty advances to estimate the likelihood of recovery. Additionally, the Company’s editorial
staff reviews its portfolio of royalty advances at a minimum quarterly to determine if individual royalty advances are
not recoverable for discrete reasons, such as the death of an author prior to completion of a title or titles, a Company
decision to not publish a title, poor market demand or other relevant factors that could impact recoverability. Based
on this information, the portion of any advance that we believe is not recoverable is expensed. The net amount of
royalty advances was $4,923 and $4,518 as of December 31, 2019 and 2018, respectively and is included within
other non-current assets in the consolidated balance sheets.

Deferred Technology Costs

We capitalize certain software development and website implementation costs. Capitalized costs only

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

part of an allocation or existing expense base. Software development and website implementation costs are expensed
as incurred during the preliminary project stage. Capitalized costs are amortized from the period the software is
ready for its intended use over its estimated useful life, generally three years, using the straight-line method and are
included within depreciation in the consolidated statements of operations. Periodically, we evaluate the amortization
methods, remaining lives and recoverability of such costs. Capitalized software development and website
implementation costs are included in other non-current assets in the consolidated balance sheets and are presented
net of accumulated amortization. Gross deferred technology costs were $199,121 and $164,297 as of December 31,
2019 and December 31, 2018, respectively. Accumulated amortization of deferred technology costs were $115,567
and $89,248 as of December 31, 2019 and December 31, 2018, respectively. Amortization of deferred technology
costs were $31,988, $23,068, and $23,802 for the period ended December 31, 2019, 2018, and 2017, respectively.

Accounting for the Impairment of Long-Lived Assets (Including Other Intangible Assets)

We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the

Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess of purchase price and related costs over the fair value of identifiable assets

acquired and liabilities assumed in a business combination. Indefinite-lived intangible assets consist of the
Company's acquired brands. Goodwill and indefinite-lived intangible assets are not amortized, but instead are tested
for impairment annually during the fourth quarter each year, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. We have four reporting units, Higher Education, K-12,
International, and Professional with goodwill and indefinite-lived intangible assets that are evaluated for
impairment.

We initially perform a qualitative analysis evaluating whether there are events or circumstances that

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

are based upon an estimate of the royalty rates that a market participant would pay to license the Company's trade
names and trademarks.

Fair Value Measurements

In accordance with authoritative guidance for fair value measurements, certain assets and liabilities are

required to be recorded at fair value on a recurring basis. Fair value is defined as the amount that would be received
to sell an asset or transfer a liability in an orderly transaction between market participants. A fair value hierarchy has
been established which requires us to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The three levels of inputs used to measure fair value are as follows:

• Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities.

• Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the asset or liabilities.

• Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to

the fair value of the assets or liabilities.

Financial Instruments

We enter into interest rate hedge agreements to manage risks associated with interest rate exposures and are

not used for trading or speculative purposes. Interest rate swap agreements are derivative financial instruments and
generally involve the conversion of variable-rate debt to fixed-rate debt over the life of the interest rate swap
agreement without exchange of the underlying notional amount.

Interest rate swap agreements which are designated and qualify as a hedge of the exposure to variability in

expected future cash flows are considered cash flow hedges. The Company prepares written hedge documentation
for all interest rate swap agreements which are designated as cash flow hedges. The written hedge documentation
includes identification of, among other items, the risk management objective, hedging instrument, hedged item and
methodologies for assessing and measuring hedge effectiveness and ineffectiveness, along with support for
management’s assertion that the hedge will be highly effective.

For designated hedging relationships, the Company performs retrospective and prospective effectiveness

testing to determine whether the hedging relationship has been highly effective in offsetting changes in cash flows of
hedged items and whether the relationship is expected to continue to be highly effective in the future. Assessments
of hedge effectiveness and measurements of hedge ineffectiveness are performed at least quarterly. The effective
portion of the changes in the fair value of an interest rate swap that is highly effective and that has been designated
and qualifies as a cash flow hedge are initially recorded in accumulated other comprehensive income (loss) and

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

reclassified to earnings in the same period that the hedged item impacts earnings or when the hedging relationship is
terminated. The ineffective portion of the gain or loss, if any, is recognized in earnings.

The Company recognizes all interest rate swap agreements as assets or liabilities in the balance sheet at fair

value and is included with other non-current assets or other non-current liabilities, respectively. Cash flows from
interest rate swap agreements used to manage interest rate risk are classified as operating activities. In addition, we
enter into interest rate swap agreements with a variety of financial institutions that we believe are creditworthy in
order to reduce our concentration of credit risk.

Foreign Currency Translation

We have operations in many foreign countries. For most international operations, the local currency is the

functional currency. For international operations that are determined to be extensions of the U.S. operations or where
a majority of revenue and/or expenses is USD denominated, the United States dollar is the functional currency. For
local currency operations, assets and liabilities are translated into United States dollars using end-of-period exchange
rates, and revenue and expenses are translated into United States dollars using weighted-average exchange rates.
Foreign currency translation adjustments are accumulated in a separate component of equity.

Stock-Based Compensation

The Company issues stock options and other stock-based compensation to eligible employees, directors and

consultants and accounts for these transactions under the provisions of Accounting Standards Codification (“ASC”)
718, Compensation - Stock Compensation. For equity awards, total compensation cost is based on the grant date fair
value. For liability awards, total compensation cost is based on the fair value of the award on the date the award is
granted and is remeasured at each reporting date until settlement. For performance-based options issued, the value of
the instrument is measured at the grant date as the fair value of the common stock and expensed over the vesting
term when the performance targets are considered probable of being achieved. The Company recognizes stock-based
compensation expense for all awards, on a straight-line basis, over the service period required to earn the award,
which is typically the vesting period.

Revenue Recognition

•
•
•
•
•

Arrangements with multiple deliverables

Revenue relating to products that provide for more than one deliverable is recognized based upon the

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

consideration allocable to digital products included in multiple deliverable arrangements because the fair value of
such products or services may increase relative to other products or services bundled in the arrangement.
Conversely, in the event that demand for our print products decreases, thereby causing us to experience reduced
prices on our print products, we may be required to allocate less consideration to our print products in our
arrangements that include multiple deliverables.

Subscription-based products

Subscription revenue is recognized over the related subscription period that the subscription is available
and is used by the customer. Subscription revenue received or receivable in advance of the delivery of services or
publications is included in deferred revenue. Incremental costs that are directly related to the subscription revenue
are deferred and amortized over the subscription period. Included among the underlying assumptions related to our
estimates that impact the recognition of subscription income is the extent of our responsibility to provide access to
our subscription-based products, and the extent of complementary support services customers demand to access our
products.

Service arrangements

Revenue relating to arrangements that provide for more than one service is recognized based upon the

Rental program

Revenue relating to our rental program is deferred and subsequently recognized over the rental period. The
rental period begins when the print product is transferred to the customer and are typically for a semester. All rental
periods are less than one year in duration.

Shipping and Handling Costs

All amounts billed to customers in a sales transaction for shipping and handling are classified as revenue.

Shipping and handling costs are also a component of cost of sales. We recognized revenues in the amount of
$17,037, $18,600 and $20,322 in shipping and handling costs for the years ended December 31, 2019, 2018 and
2017, respectively.

Income Taxes

The Company’s operations are subject to United States federal, state and local income taxes, and foreign

income taxes.

We determine the provision for income taxes using the asset and liability approach. Under this approach,

deferred income taxes represent the expected future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities.

Valuation allowances are established when management determines that it is more-likely-than not that some

portion or all of the deferred tax asset will not be realized. Management evaluates the weight of both positive and
negative evidence in determining whether a deferred tax asset will be realized. Management will look to a history of
losses, future reversal of existing taxable temporary differences, taxable income in carryback years, feasibility of tax
planning strategies, and estimated future taxable income. The valuation allowance can also be affected by changes in
tax laws and changes to statutory tax rates.

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

We prepare and file tax returns based on management’s interpretation of tax laws and regulations. As with

all businesses, our tax returns are subject to examination by various taxing authorities. Such examinations may result
in future tax assessments based on differences in interpretation of the tax law and regulations. We adjust our
estimated uncertain tax positions reserves based on audits by and settlements with various taxing authorities as well
as changes in tax laws, regulations, and interpretations. The Company recognizes accrued interest and penalties
related to uncertain tax positions in income tax provision (benefit) within the consolidated statement of operations.
The Company elected to account for Global intangible low-taxed income (GILTI) as a current period tax expense
when incurred.

Contingencies

We accrue for loss contingencies when both (a) information available prior to issuance of the financial

statements indicates that it is probable that a loss had been incurred at the date of the financial statements and (b) the
amount of loss can reasonably be estimated. When we accrue for loss contingencies and the reasonable estimate of
the loss is within a range, we record its best estimate within the range. We disclose an estimated possible loss or a
range of loss when it is at least reasonably possible that a loss may have been incurred. Neither an accrual nor
disclosure is required for losses that are deemed remote.

Recently Adopted Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (Topic 842): The company adopted ASU

In February 2018, the FASB issued ASU No. 2018-02, “Reporting Comprehensive Income (Topic 220):

Recently Issued Accounting Standards

In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) -

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and other - Internal-Use Software

(Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that
is a Service Contract. This standard requires a customer in a cloud computing arrangement that is a service contract
to follow the internal-use software guidance in Topic 350-40 to determine which implementation costs to capitalize
as assets. This standard is effective for annual reporting periods beginning after December 15, 2020, and interim
periods within annual periods beginning after December 15, 2021, with early adoption permitted. The Company is
currently evaluating the impact of this guidance on its consolidated financial statements.

2. Revenue from Contracts with Customers

On January 1, 2018, we adopted ASU 2014-09, "Revenue from Contracts with Customers" ("Topic 606"),

applying the modified retrospective method to all contracts that were not completed as of that date. Results for
reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period results are not
adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded an
increase to opening equity of $28,252 as of January 1, 2018 due to the cumulative impact of adopting Topic 606.

Disaggregation of Revenue

The following table summarizes our revenue from contracts with our customers disaggregated by segment

and product type for the year ended December 31, 2019 and 2018:

Reported Revenue by
segment:

Higher Education
K-12
International
Professional
Other

Total Reported Revenue

Year Ended December 31, 2019
Total
Print (1)
Digital

Year Ended December 31, 2018
Total
Print (1)
Digital

$ 439,063
229,376
57,602
69,750
2,241
$ 798,032

$ 170,667
360,868
191,096
49,477
1,248
$ 773,356

$ 609,730
590,244
248,698
119,227
3,489
$1,571,388

$ 415,803
197,895
51,522
65,235
2,831
$ 733,286

$ 245,078
362,907
203,473
51,668
533
$ 863,659

$ 660,881
560,802
254,995
116,903
3,364
$1,596,945

(1)

Print revenue contains traditional print, consumable print workbooks and custom revenue.

Higher Education

For our print products, our performance obligation is typically satisfied at the time of shipment directly to

the student or to our distribution partners, who typically order products several weeks before the beginning of an
academic semester to ensure sufficient physical product inventory. Digital products are generally sold as
subscriptions, which are paid for at the time of sale or shortly thereafter, and our performance obligation is satisfied
over the life of the subscription.

K-12

Our performance obligation from traditional print products is typically satisfied at the time of shipment,

which closely aligns with when a school district takes possession of the required number of products at the outset of
a multi-year adoption. Traditional print products are typically re-used by students over the term of the adoption, and
school districts will occasionally purchase replacement products due to wear or increasing enrollment over the life
of the adoption. Sales of these replacement products are known as residual sales, from which we derive a significant

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

portion of our revenue. Our digital solutions are sold as a subscription, which states and districts generally pay for at
the beginning of a multi-year adoption. We defer revenue related to digital solutions for the entirety of the contract
upfront and satisfy our performance obligation ratably over the term of the contract. Revenues for print workbooks
are deferred when we enter into a multi-year contract and our performance obligation is satisfied when delivery
takes place, often at the beginning of each academic year over the contract term.

International

Revenue recognition for international products is similar to products sold in the United States, primarily in
the Higher Education market. Our performance obligations for traditional print products are typically satisfied upon
shipment, while digital performance obligations are satisfied over the contractual term of the product.

Professional

Our performance obligations for traditional print products are typically satisfied upon shipment, while our

performance obligations for digital products are satisfied over the contractual term.

In addition, revenues are also impacted by our reserve for product returns. To more accurately reflect the

economic impact of returns on our operating performance, we reserve a percentage of our gross sales in anticipation
of these returns when calculating our net revenues.

Significant Judgments

Our contracts with customers often include promises to transfer multiple products and services to a
customer. Determining whether products and services are considered distinct performance obligations that should be
accounted for separately versus together may require significant judgment. We use an observable price to determine
the stand-alone selling price for separate performance obligations if available or when not available, an estimate that
maximizes the use of observable inputs and faithfully depicts the selling price of the promised goods or services if
the entity sold those goods or services separately to a similar customer in similar circumstances.

Deferred Commission Costs

Our incremental direct costs of obtaining a contract, which consist of sales commissions, are deferred and
amortized over the expected period of benefit or the related contractual renewal period, depending on whether the
contract is an initial or renewal contract, respectively. We classify deferred commission costs as current or non-
current based on the timing of when we expect to recognize the expense. The current and non-current portions of
deferred commission costs are included in prepaid and other current assets, and other non-current assets,
respectively, in our consolidated balance sheets. Deferred commission costs were as follows:

Current

Non-current
Total Deferred Commission Costs

As of

December 31, 2019

December 31, 2018

8,107

20,441
28,548

7,270

20,812
28,082

Amortization expense related to deferred commission costs were $8,069 and $8,048 for the year ended

December 31, 2019 and 2018, respectively.

In addition, there were no impairment losses of deferred commission costs for the year ended December 31,

2019 and 2018.

Contract Assets and Contract Liabilities

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

Our contract assets consist of unbilled receivables that are recorded for contracts with performance
obligations that have been satisfied but have not yet been billed. Contract assets are included in accounts receivable,
net, on our consolidated balance sheets.

Our contract liabilities consist of revenues from our digital subscription products and multi-year
consumable products that are deferred at the time of sale and are recognized in earnings on a pro-rata basis over the
term of the subscription or contract period. We classify contract liabilities as current or non-current deferred revenue
on our consolidated balance sheets based on the timing of when we expect to recognize revenue.

Contract assets and contract liabilities consisted of the following:

December 31, 2019

December 31, 2018

As of

Contract assets

Contract liabilities (deferred revenue):

Current

Non-current

Total Contract liabilities

2,147

507,410
684,450
1,191,860

4,975

450,738

649,453
1,100,191

Revenue recognized from amounts included within deferred revenue at January 1, 2019 and 2018 was

approximately $427,348 and $398,815 for the year ended December 31, 2019 and 2018, respectively.

In addition, estimated revenue expected to be recognized in the future related to the deferred revenue as of

December 31, 2019 is approximately 78% over the next one to three years.

Practical expedients

We expense commission costs when incurred related to customer contracts that have a duration of less than

one year. We recognize these costs within operating and administration expenses in our consolidated statements of
operations.

3. Other Income

On June 30, 2015, the Company entered into a definitive agreement and consummated the sale of substantially all

of the assets and certain liabilities of the Company's wholly owned CTB business to Data Recognition Corporation
("DRC"). As part of the agreement, the Company was entitled to receive an earn-out in the event that the performance of
the CTB business exceeded certain thresholds over a five year period. In 2019, the Company recognized $7,962 related to
the earn-out arrangement in Other (income) expense.

On May 10, 2017, the Company entered into a definitive agreement and consummated the sale of substantially all

of the assets and certain liabilities of the Company’s wholly-owned K-12 Canadian business to Nelson Education Ltd.
(“Nelson”). The aggregate sales price was $7,884, subject to a working capital adjustment, of which $2,205 was received
at closing on June 1, 2017. On November 30, 2017, the working capital adjustment was finalized resulting in the
Company making a payment of $49. The remaining proceeds will be received in semi-annual installments with the first
received on November 30, 2017 and ending May 31, 2020. As the disposal does not represent a strategic shift that will
have a major effect on the Company’s operations and financial results, the K-12 Canadian business does not qualify as
discontinued operations. As a result, the gain on disposal of $5,750 was recognized in Other (income) expense
within the consolidated statement of operations.

In addition, during the year ended December 31, 2017, the Company recorded a gain of $4,931 within other

(income) expense in the consolidated statement of operations related to the sale of an equity method investment.

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

Inventories, net

Inventories consist of the following:

Raw materials

Work-in-progress

Finished goods

Reserves
Inventories, net

5. Property, Plant and Equipment

As of
December 31, 2019 December 31, 2018

3,199

1,063

249,691

253,953
(68,422)
185,531

1,994

1,531

224,290

227,815
(63,216)
164,599

As of

Useful Life December 31, 2019 December 31, 2018

Furniture and equipment

2 - 12 years

118,213

Buildings and leasehold improvements

Consigned inventory

Land and land improvements

2 - 40 years

2 years

Less: accumulated depreciation and amortization
Total Property, plant and equipment, net

111,675

2,878

7,852
(105,115)
135,503

100,323

76,881

1,790

8,302
(84,813)
102,483

Depreciation expense related to property, plant and equipment was $24,314, $23,861 and $21,441 for the
years ended December 31, 2019, 2018 and 2017, respectively. Depreciation expense related to consigned inventory
was $1,163 and $344 for the year ended December 31, 2019 and 2018, respectively, and is included in cost of sales
in the consolidated statements of operations.

There were no impairments of property, plant and equipment for the years ended December 31, 2019, 2018

and 2017.

6. Goodwill and Other Intangible Assets

Goodwill

Goodwill represents the excess of purchase price and related costs over the value assigned to the net

tangible and identifiable assets and liabilities assumed of businesses acquired. The Company performs an annual
impairment test of goodwill and intangible assets with indefinite lives during the fourth quarter and also between
annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a
reporting unit or an indefinite-lived intangible asset below its carrying value.

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

The following table summarizes the changes in the carrying value of goodwill by reporting segment:

As of December 31, 2017

Adjustment to goodwill
As of December 31, 2018

Adjustment to goodwill
As of December 31, 2019

Higher
Education

426,165

(1,709)
424,456

(1,399)
423,057

K-12

International

Professional

Total

29,936
(1,500)
28,436

—
28,436

4,089

—
4,089

37,078

—
37,078

497,268
(3,209)
494,059
(1,399)
492,660

Goodwill in the table above includes a $1,399 and $3,209 impact from foreign exchange and other as of

December 31, 2019 and 2018, respectively.

Based on the results of the impairment analysis performed by the Company, there were no impairment

charges recognized relating to the goodwill recorded within the Higher Education, K-12, International or
Professional reporting units for the years ended December 31, 2019, 2018 and 2017.

Other Intangible Assets

The following information details the carrying amounts and accumulated amortization of the Company's

intangible assets:

Useful
Lives

8 - 14
years

Content

December 31, 2019

December 31, 2018

Gross
amount

Accumulated
amortization

Foreign
exchange

Net
amount

Gross
amount

Accumulated
amortization

Foreign
exchange

Net
amount

571,457

(422,955) $

— $ 148,502

571,457

(377,867) $

— $ 193,590

Brands

Indefinite

284,000

—

284,000

—

147,700

91,550

(75,611)

(78,412)

(5,171)

72,089

7,967

147,700

91,550

(64,387)

(67,762)

(6,021)

—

284,000

83,313

17,767

—

Customers

11 -14
years

Technology

5 years

Other
intangibles

4 to 10
years

9,050

(6,842)

(237)

1,971

9,050

(6,365)

(166)

2,519

Total

$ 1,103,757

(583,820) $ (5,408) $ 514,529

$ 1,103,757

(516,381) $

(6,187) $ 581,189

The fair values of the definite-lived acquired intangible assets are amortized over their useful lives, which

is consistent with the estimated useful life of considerations used in determining their fair values. Customer and
Technology intangibles are amortized on a straight-line basis while Content intangibles are amortized using the sum
of years digits method. The weighted average amortization period is 12.8 years. Amortization expense was $67,439,
$81,039, and $82,415 for the years ended December 31, 2019, 2018 and 2017, respectively.

The Company's expected aggregate annual amortization expense for existing intangible assets subject to
amortization assuming no further acquisitions or dispositions, is as follows:

2020

2021

2022

2023

2024

2025 and beyond

Expected
Amortization
Expense

59,176

44,013

37,082

31,231

23,975

35,052

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

There were no impairments of definite-lived intangible assets for the years ended December 31, 2019.

During the year end December 31, 2018, we recognized an impairment charge of $5.5 million related to a definite-
lived technology intangible within our K-12 segment which resulted from changes in estimated future revenues of
the related intangible. There were no impairments of definite-lived intangible assets for the years ended December
31, 2017 and 2019.

7. Debt

Long-term debt consisted of the following:

MHGE Senior Notes

Term Loan Facility

MHGE Parent Term Loan

Receivables Facility

Total long-term debt outstanding
Less: unamortized debt discount

Less: unamortized deferred financing costs

Less: current portion of long-term debt
Long-Term Debt

MHGE Senior Notes

As of
December 31, 2019 December 31, 2018

400,000

1,652,323

180,000

45,000

2,277,323
(44,763)
(30,257)
(61,669)
2,140,634

400,000

1,683,593

180,000

50,000

2,313,593
(54,960)
(38,922)
(31,297)
2,188,414

On May 4, 2016, the Company issued $400,000 aggregate principal amount of the 7.875% Senior Notes
due 2024, ("MHGE Senior Notes") in a private placement. The MHGE Senior Notes mature on May 15, 2024 and
bear interest at a rate of 7.875% per annum, payable semi-annually in arrears on May 15 and November 15 of each
year, and commenced on November 15, 2016.

As of December 31, 2019, the unamortized debt discount and deferred financing costs were $33,403 and

$15,215, respectively, which are amortized over the term of the MHGE Senior Notes using the effective interest
method.

The Company may redeem the MHGE Senior Notes at their option, in whole or in part, at any time on or

after May 15, 2019, at certain redemption prices.

The MHGE Senior Notes are fully and unconditionally guaranteed by each of McGraw-Hill Global

Education Intermediate Holdings, LLC ("MHGE Holdings") domestic restricted subsidiaries that guarantee the
Senior Facilities.

The MHGE Senior Notes contain certain customary negative covenants and events of default. The negative

The fair value of the MHGE Senior Notes was approximately $344,000 and $310,000 as of December 31,

2019 and 2018, respectively. The Company estimates the fair value of its MHGE Senior Notes based on trades in the
market. Since the MHGE Senior Notes do not trade on a daily basis in an active market, the fair value estimates are
based on market observable inputs based on borrowing rates currently available for debt with similar terms and

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

average maturities (Level 2). As of December 31, 2019, the remaining contractual life of the MHGE Senior Notes is
approximately 4.25 years.

Senior Facilities

On May 4, 2016, the Company entered into the Senior Facilities. The Senior Facilities provide for senior

secured financing of up to $1,925,000, consisting of:

• Term Loan Facility in an aggregate principal amount of $1,575,000 with a maturity of 6 years; and

•

a senior secured revolving credit facility in an aggregate principal amount of up to $350,000 with a
maturity of 5 years (the "Revolving Credit Facility"), including both a letter of credit sub-facility and a
swingline loan sub-facility.

On December 15, 2017, the Company completed an incremental aggregate principal amount of $150,000

under the existing Term Loan Facility. The incremental Term Loan Facility was issued at a 0.25% discount and will
mature concurrently with the existing Term Loan Facility.

Borrowings under the Senior Facilities bear interest at a rate equal to a LIBOR or Prime rate plus an

applicable margin, subject to a 1.00% floor in the case of the Term Loan Facility. As of December 31, 2019, the
interest rate for the Term Loan Facility was 5.8%. In addition, the Term Loan Facility was issued at a discount of
0.5%. As of December 31, 2019, the unamortized debt discount and deferred financing costs was $8,717 and
$12,591, respectively, which are amortized over the term of the facility using the effective interest method.

As of December 31, 2019, the amount available under the Revolving Facility was $350,000 (excluding

outstanding letters of credit of $4,271). In addition, we are required to pay a commitment fee of 0.50% per annum to
the lenders under the Revolving Facility in respect of the unutilized commitments thereunder.

The Senior Facilities require scheduled quarterly principal payments on the term loans in amounts equal to

0.25% of the original principal amount of the term loans commencing with the end of the first full fiscal quarter
ending after the closing date, with the balance payable at maturity. The Term Loan Facility also includes customary
mandatory prepayment requirements based on certain events such as asset sales, debt issuances and defined levels of
excess cash flow. As of December 31, 2019, the Company determined that a $44,400 mandatory prepayment of
indebtedness is required and is payable five business days after the Company's annual financial statements are
delivered. This amount is included within the current portion of long-term debt in the consolidated balance sheets as
of December 31, 2019.

All obligations under the Senior Facilities are unconditionally guaranteed by each of MHGE Holdings’

Our Revolving Facility includes a springing covenant that requires MHGE Holdings, subject to a testing

Adjusted EBITDA reflects EBITDA as defined in the credit agreement governing the Senior Facilities.

Solely for the purpose of calculating the springing financial covenant, pre-publication investments should be
excluded from the calculation of Adjusted EBITDA.

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

The Senior Facilities contain certain customary affirmative covenants and events of default. The negative
covenants in the Senior Facilities include, among other things, limitations on MHGE Holdings’ and its subsidiaries’
ability to incur additional debt or issue certain preferred shares; create liens on certain assets; make certain loans or
investments (including acquisitions); pay dividends on or make distributions in respect of capital stock or make
other restricted payments; consolidate, merge, sell or otherwise dispose of all or substantially all of their assets; sell
assets; enter into certain transactions with affiliates; enter into sale-leaseback transactions; change their lines of
business; restrict dividends from their subsidiaries or restrict liens; change their fiscal year; and modify the terms of
certain debt or organizational agreements.

The fair value of the Term Loan Facility was approximately $1,590,361 and $1,536,279 as of December 31,

2019 and 2018, respectively. The Company estimates the fair value of its Term Loan Facility based on trades in the
market. Since the Term Loan Facility do not trade on a daily basis in an active market, the fair value estimates are
based on market observable inputs based on borrowing rates currently available for debt with similar terms and
average maturities (Level 2). As of December 31, 2019, the remaining contractual life of the Term Loan Facility is
approximately 2.25 years.

MHGE Parent Term Loan

On April 20, 2018, the Company, entered into a term loan agreement ("MHGE Parent Term Loan") with

The MHGE Parent Term Loan bears interest at 11.00% per annum for interest paid in cash and 11.75% per

annum for interest paid in kind. Interest is payable semiannually on April 15 and October 15 of each year,
commencing on October 15, 2018. Upon closing, the Company was required to deposit $39,325 of the MHGE
Parent Term Loan proceeds into an escrow account, representing the first four interest payments which must be paid
in cash. The deposit in the escrow account was released for the period commencing on June 15, 2019, and ending on
and including July 15, 2019. Thereafter, the determination as to whether interest is paid in cash or in kind will be
based on the amount of cash available to pay interest and the ability of the MHGE Parent subsidiaries to make
distributions and dividends to MHGE Parent to fund such payments. The MHGE Parent Term Loan is unsecured and
is not guaranteed by any of the MHGE Parent subsidiaries.

As of December 31, 2019, the unamortized debt discount and deferred financing costs was $2,643 and

$1,765, respectively, which are amortized over the term of the MHGE Parent Term Loan using the effective interest
method.

The MHGE Parent Term Loan contains certain customary affirmative covenants and events of default that

The fair value of the MHGE Parent Term Loan was approximately $170,706 and $163,244 as of
December 31, 2019 and 2018, respectively. The Company estimates the fair value of its MHGE Parent Term Loan
based on trades in the market. Since the MHGE Parent Term Loan do not trade on a daily basis in an active market,
the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt
with similar terms and average maturities (Level 2). As of December 31, 2019, the remaining contractual life of the
MHGE Parent Term Loan is approximately 2.25 years.

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

Receivables Facility

On October 29, 2018, MHE Receivables LLC (the “Borrower”), a newly formed special purpose subsidiary

of McGraw-Hill Global Education, LLC ("MHGE Global"), entered into a Receivables Financing Agreement
("RFA") with MHGE Global, as initial servicer, the lenders from time to time party thereto, and PNC Bank, National
Association, as administrative agent (the “Administrative Agent”), providing for a receivables financing facility up
to a committed principal amount of $50,000 (the “Receivables Facility”) with a maturity of October 29, 2021.

Furthermore, an additional principal amount of $100,000 has been committed for an agreed seasonal
period, which has a maturity of October 28, 2019 and an annual renewal feature through to October 2021. The
borrowing capacity under the Receivables Facility is subject to a borrowing limit that is based on the Borrower’s
Eligible Receivables, as defined in the RFA. Under a Purchase and Sale Agreement entered into in connection with
the Receivables Facility, with MHGE Global and McGraw-Hill School Education, LLC ("MHSE"), as originators,
MHGE Global as initial servicer, and the Borrower, as buyer, all existing receivables of MHGE Global and MHSE
have been assigned to the Borrower and all future receivables of MHGE Global and MHSE will be automatically
assigned to the Borrower when they are created.

As of December 31, 2019, $45,000 was outstanding under the Receivables Facility which is included in
long-term debt, within the consolidated balance sheet. Borrowings under the Receivables Facility bear interest at
LIBOR plus 2.00%, subject to adjustments, and are payable monthly. In addition, we also incur an undrawn fee of
0.50% on unutilized commitments. The unamortized deferred financing costs as of December 31, 2019 was $686
which are amortized over the term of the Receivables Facility using the effective interest method.

Scheduled Principal Payments

The scheduled principal payments required under the terms of the MHGE Senior Notes, Senior Facilities,

MHGE Parent Term Loan and Receivables Facility were as follows:

2020

2021

2022

2023

2024

Less: Current portion

Interest Rate Hedge

As of
December 31, 2019

61,669

62,269

1,753,385

—

400,000

2,277,323
(61,669)
2,215,654

In the normal course of business, the Company may enter into interest rate hedge agreements to manage

exposure to interest rate risk. Interest rate swap agreements are derivative financial instruments and generally
involve the conversion of variable-rate debt to fixed-rate debt over the life of the interest rate swap agreement
without exchange of the underlying notional amount.

Interest rate swap agreements which are designated and qualify as a hedge of the exposure to variability in

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

For designated hedging relationships, the Company performs retrospective and prospective effectiveness

The Company recognizes all interest rate swap agreements as assets or liabilities in the balance sheet at fair

value and is included with other non-current assets or other non-current liabilities, respectively. Cash flows from
interest rate swap agreements used to manage interest rate risk are classified as operating activities. We do not use
derivative instruments for trading or speculative purposes. In addition, we enter into interest rate swap agreements
with a variety of financial institutions that we believe are creditworthy in order to reduce our concentration of credit
risk.

On March 15, 2017, the Company entered into interest rate swap agreements with various financial

institutions having an aggregate notional value of $500,000 to convert a portion of its variable-rate debt to a fixed
rate debt. The Company will receive payments from the counterparties at one-month LIBOR and make payments to
the counterparties at a fixed rate of 2.07%. The cash flow payments on the interest rate swap agreements began in
April 2017 and terminate April 2022. The notional amount and interest payment date of the interest rate and interest
rate swaps match the principal, interest payment and maturity date of the related debt.

The interest rate swap agreements have been designated as a cash flow hedge and qualifies for hedge

accounting under the accounting guidance related to derivatives and hedging. Accordingly, we recorded an
unrealized loss of $(11,992) in our consolidated statements of comprehensive income (loss) to account for the
changes in fair value of these derivatives as of December 31, 2019 and a unrealized gain of $5,052 as of
December 31, 2018. The corresponding hedge liability of $6,219 and an asset of $5,773 is included within other
non-current liabilities and other non-current assets in our consolidated balance sheets as of December 31, 2019 and
December 31, 2018, respectively. Ineffectiveness of the cash flow hedge was not material for the periods presented.
The Company records the fair value of its interest rate swap agreements on a recurring basis using Level 2 inputs of
quoted prices for similar assets or liabilities in active markets.

9. Segment Reporting

The Company manages and reports its businesses in the following segments:

• Higher Education: We provide students, instructors and institutions with adaptive digital learning, tools,

digital platforms, custom publishing solutions, traditional printed textbook and rental textbook products.

• K - 12: Provides curriculum and learning solutions to the K-12 market. We sell our learning solutions

directly to K-12 school districts across the United States. While we offer all of our major curriculum and
learning solutions in digital format, given the varying degrees of availability and maturity of our customers’
technological infrastructure, a majority of our sales are derived from selling blended print and digital
solutions.

•

International:We leverage our global scale, brand recognition and extensive product portfolio to serve
students in the higher education, K-12 and professional markets in more than 100 countries outside of the
United States. Our products and solutions for the International segment are produced in more than 75
languages and primarily originate from our offerings produced for the United States market and that are
later adapted to different international markets.

• Professional: We are a leading provider of medical, technical, engineering and business content for the

professional, education and test preparation communities.

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

• Other: Includes certain transactions or adjustments that our Chief Operating Decision Maker ("CODM")

considers to be unusual and/or non-operational.

The Company’s business segments are consistent with how management views the markets served by the
Company. The CODM reviews their separate financial information to assess performance and to allocate resources.
We measure and evaluate our reportable segments based on segment Billings and Adjusted EBITDA and believe
they provide additional information to management and investors to measure our performance and evaluate our
ability to service our indebtedness. We include the change in deferred revenue to GAAP revenue to arrive at
Billings. Billings is a key metric that we use to manage our business as it reflects the sales activity in a given period
and provides comparability during this time of digital transition, particularly in the K-12 market, in which our
customers typically pay for five to eight-year contracts upfront. Furthermore, Billings incorporates the change in
deferred revenue that is reflected in the calculation of Adjusted EBITDA. Therefore when the Company uses a
margin calculation based on Adjusted EBITDA, the margin has to be based on Billings. We exclude from segment
Adjusted EBITDA: interest expense (income), net, income tax provision (benefit), depreciation, amortization and
pre-publication amortization and certain transactions or adjustments that our CODM does not consider for the
purposes of making decisions to allocate resources among segments or assessing segment performance. Although we
exclude these amounts from segment Adjusted EBITDA, they are included in reported consolidated net (loss)
income and are included in the reconciliation below.

Billings and Adjusted EBITDA are not presentations made in accordance with U.S. GAAP and the use of

the terms, Billings and Adjusted EBITDA, varies from others in our industry. Billings and Adjusted EBITDA should
be considered in addition to, not as a substitute for, revenue and net (loss) income, or other measures of financial
performance derived in accordance with U.S. GAAP as measures of operating performance or cash flows as
measures of liquidity.

Segment asset disclosure is not used by the CODM as a measure of segment performance since the segment
evaluation is driven by Billings and Adjusted EBITDA. As such, segment assets are not disclosed in the notes to the
accompanying consolidated financial statements.

The following tables set forth information about the Company’s operations by its segments:

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Year Ended
December 31, 2017

Billings:

Higher Education
K - 12

International
Professional

Other

Total Billings (1)

641,316

682,232

647,482

249,657
122,720

1,882
1,663,057

600,726

255,867
119,459

3,153
1,661,437
(64,492)
1,596,945

Change in deferred revenue
Total Consolidated Revenue

(91,669)
1,571,388

(1) The elimination of inter-segment revenues was not significant to the revenues of any one segment.

718,511

733,252

286,762
125,411

2,480
1,866,416
(147,344)
1,719,072

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

Adjusted EBITDA:

Higher Education

K - 12

International

Professional

Other

Total Adjusted EBITDA

183,252

200,667

110,525

15,161

35,453

10,647
355,038

24,085

8,038

35,754
(7,620)
260,924

227,707

112,078

18,324

39,944

2,092
400,145

Reconciliation of Adjusted EBITDA to the consolidated statements of operations is as follows:

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Year Ended
December 31, 2017

Total Adjusted EBITDA

Interest (expense) income, net

Income tax (provision) benefit

Depreciation, amortization and pre-
publication amortization

Change in deferred revenue

Change in deferred royalties

Change in deferred commissions

Restructuring and cost savings
implementation charges

Sponsor fees

Transaction Costs

Merger Integration Costs

Other

Pre-publication investment
Net loss from continuing operations
Net (loss) income

355,038
(180,430)
(12,122)

(220,785)
(91,669)
18,727

466

(21,772)
(3,500)
(21,044)
(7,030)
(38,199)
79,110
(143,210)
(143,210) $

260,924
(180,576)
(10,535)

(219,513)
(64,492)
5,426
(1,281)

(9,770)
(3,500)
—

—
(36,643)
99,539
(160,421)
(160,421) $

400,145
(179,378)
7,351

(232,212)
(147,344)
22,426

—

(14,261)
(3,500)
—

—
(18,376)
99,219
(65,930)
(65,930)

The following is a schedule of revenue and long-lived assets by geographic region:

United States

International
Total

Year Ended
December 31, 2019

Revenue (1)
Year Ended
December 31, 2018

Year Ended
December 31, 2017

1,322,688

248,700
1,571,388

1,341,950

254,995
1,596,945

1,437,586

281,486
1,719,072

(1) Revenues are attributed to a geographic region based on the location of customer.

100

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

United States

International
Total

Long-lived Assets (2)
As of
December 31, 2019 December 31, 2018

515,424

37,850
553,274

420,405

41,005
461,410

(2) Reflects total assets less current assets, goodwill, intangible assets, investments, deferred financing costs

and non-current deferred tax assets.

10. Taxes on Income (Loss)

(Loss) income before taxes on income that resulted from domestic and foreign operations is as follows:

Domestic operations

Foreign operations
Total (loss) income before taxes

(154,194) $
23,106
(131,088) $

The provision for taxes on income consists of the following:

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Year Ended
December 31, 2017
(103,642)
30,361
(73,281)

(158,952) $
9,066
(149,886) $

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Year Ended
December 31, 2017

Federal:

Current

Deferred

Total federal

Foreign:

Current

Deferred

Total foreign

State and local:

Current

Deferred

Total state and local

Total provision (benefit) for taxes

— $

(325)
(325)

10,909
(925)
9,984

1,863

600

2,463
12,122

— $

(416)
(416)

8,745
(54)
8,691

1,459

801

2,260
10,535

—
(27,119)
(27,119)

15,449

2,543

17,992

1,694

1,776
(7,351)

101

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

A reconciliation of the U.S. federal statutory tax rate to our effective income tax rate for financial reporting

purposes is as follows:

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Year Ended
December 31, 2017

U.S. federal statutory income tax rate

Effect of state and local income taxes

Foreign rate differential

Foreign withholding and branch taxes

Research and development credit

Inventory contribution

Unrecognized tax benefit

Valuation allowance on deferred tax assets

U.S. Federal rate change on deferred tax
assets

Previously taxed deferred revenue
Deferred tax adjustment for intangibles

Nontaxable royalty and interest income

Stock Option expirations

Transaction Costs

Other - net

Effective income tax rate

21.0 %
(1.5)
(0.9)
(1.1)
4.4

—
(1.7)
(25.3)

—

—
—

1.9
(1.2)
(1.2)
(3.5)
(9.1)%

21.0 %
(1.2)
(3.0)
(4.5)
3.4

0.4
(1.1)
(22.2)

—

—
—

2.1

—

—
(1.9)
(7.0)%

35.0 %

(1.6)

4.9

(6.3)

5.1

1.6

(6.6)

176.2

(194.3)

0.8
(3.7)

4.6

—

(5.7)
10.0%

102

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

The principal temporary differences between accounting for income and expenses for financial reporting

and income tax purposes as of December 31, 2019 and 2018 are as follows:

December 31, 2019 December 31, 2018

36,140

Deferred tax assets:

Inventory and pre-publication costs

Intangible and fixed assets

Capitalized research and development

Employee compensation

Deferred revenue

Loss carryforwards

Operating lease liability

Interest expense carryforward

Other

Total deferred tax assets

Deferred tax liabilities:

Accrued expenses

Deferred financing costs

Operating lease right of use asset

Indefinite lived intangibles and goodwill

Total deferred tax liabilities

Net deferred income tax asset (liability) before valuation
allowance

Valuation allowance

Net deferred income tax asset (liability)

Reported as:

Non-current deferred tax assets

Non-current deferred tax liabilities
Net deferred income tax asset (liability)

55,291

47,198

19,193

188,809

87,808

24,903

6,059

1,265
466,666

(28,073)
(12,760)
(18,206)
(37,399)
(96,438)

370,228
(376,564)

(6,336) $

6,256
(12,592)
(6,336) $

27,486

49,787

23,692

13,934

180,516

107,641

—

894

737
404,687

(25,955)
(16,721)
—
(33,036)
(75,712)

328,975
(335,871)
(6,896)

6,422
(13,318)
(6,896)

We record valuation allowances against deferred income tax assets when we determine that it is more likely

than not based upon all the current evidence that such deferred income tax assets will not be realized. Management
assesses the available positive and negative evidence to estimate if sufficient future income will be available to use
the existing deferred tax assets. A significant piece of objective evidence evaluated was the cumulative book loss
incurred which limits the ability to consider other subjective evidence such as future taxable income. On the basis of
this evaluation, as of December 31, 2019, a valuation allowance of $366,615 has been recorded for federal and state
and $9,949 for select international deferred tax assets, including carryover of net operating losses, charitable
contributions, capital loss, and research and development credits. The Company will continue to assess the available
positive and negative evidence to estimate if sufficient future book income will be available to use the existing tax
assets. As a result, the amount of the deferred tax asset considered realizable could be adjusted if estimates of future
taxable income during the carryforward period improve or objective negative evidence in the form of the level of
cumulative book losses is reduced, and additional weight may be given to subjective evidence.

As of December 31, 2019, the Company had U.S. federal net operating losses of $142,011 which are

subject to expiration in 2035-2037 and $32,124 of net operating losses which will not expire. The Company's state

103

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

net operating loss carryforwards of $163,261 are subject to expiration in 2020-2037. The Company also has
charitable contribution carryforwards of $26,020 which are subject to expiration in 2020-2022 and carryforwards of
research and development credits of $21,925 which are subject to expiration in 2033-2038. International net
operating loss carryforwards as of December 31, 2019 are $27,884, predominately in UK, Spain, Taiwan, and
Australia which are subject to expiration in 2022-indefinite.

The undistributed earnings of the Company's foreign subsidiaries have been retained and permanently

reinvested by the subsidiaries as of December 31, 2019. Accordingly, no provision has been made for foreign
withholding taxes, which may become payable if the undistributed earnings of foreign subsidiaries were paid as
dividends.

For the years ended December 31, 2019 and 2018, we made net state, local and foreign income tax

payments of $6,927 and $8,751, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Year Ended
December 31, 2017

Balance at the beginning of the year

Additions based on tax positions related
to the current year

Additions for tax positions of prior years

Reduction for tax positions of prior year

Balance at end of year

11,835

9,932

—

2,986
(5)
14,816

—

1,914
(11)
11,835

3,874

1,571

4,639
(152)
9,932

As of December 31, 2019, there is $10,007 of unrecognized tax benefits that if recognized would affect the

annual effective tax rate after considering the valuation allowance.

McGraw-Hill Education, Inc. is under examination by the Internal Revenue Service as part of the
Compliance Assurance Process for tax year 2019. The 2018 federal income tax audit was completed. For state and
local, and foreign jurisdictions, generally tax years 2013 to 2018 are open and subject to examination.

We believe that our accrual for tax liabilities is adequate for all open audit years based on an assessment of
past experience and interpretations of tax law. This assessment relies on estimates and assumptions and may involve
a series of complex judgments about future events. Until formal resolutions are reached with tax authorities, the
determination of a possible audit settlement range with respect to the impact on unrecognized tax benefits is not
practicable. On the basis of present information, it is our opinion that any assessments resulting from the current
audits will not have a material adverse effect on our financial statements. Total uncertain tax liabilities as of
December 31, 2019 are $16,533 of which $11,725 is included in other non-current liabilities and $4,808 is included
in deferred income taxes non-current within the balance sheet. Total uncertain tax liabilities as of December 31,
2018 were $12,845 of which $9,085 is included in other non-current liabilities and $3,760 is included in deferred
income taxes non-current within the consolidated balance sheet. Although the timing of income tax audit resolution
and negotiations with taxing authorities is highly uncertain, we do not anticipate a significant change to the total
amount of unrecognized income tax benefits as a result of audit developments within the next twelve months.

11. Employee Benefits

A majority of the Company’s employees are participants in voluntary 401(k) plans sponsored by the

Company under which the Company matches employee contributions up to certain levels of compensation. The
Company's contributions were $20,094 and $19,481 for the year ended December 31, 2019 and 2018, respectively,
and is included within operating and administration expenses in the consolidated statement of operations.

104

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

12. Stock-Based Compensation

The Company issues share based compensation under the Management Equity Plan (the “Plan”) which was

established during the quarter ended June 30, 2013. The Plan permits the grant of stock options, restricted stock,
restricted stock units and other equity based awards to the Company’s employees and directors. As of December 31,
2019, the Board of Directors of the Company authorized up to 1,717,871 shares under the plan. The number of
shares available for grant under the Plan are 443,719.

The Company measures compensation cost for share based awards according to the equity method. In

accordance with the expense recognition provisions of those standards, the Company amortizes unearned
compensation associated with share based awards on a straight-line basis over the vesting period of the option or
award.

The following table sets forth the total recognized compensation expense related to stock option grants and

restricted stock and restricted stock units issuances for all periods presented:

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Year Ended
December 31, 2017

Stock option expense

Market stock option expense

Restricted stock and unit awards expense
Total stock-based compensation expense

2,594

2,513

8,429
13,536

6,321

1,901

11,968
20,190

6,838

—

7,450
14,288

An income tax benefit for stock options and restricted stock units was recognized and subsequently offset

with a full valuation allowance for the years ended December 31, 2019, 2018 and 2017.

Stock Options

Stock options issued prior to 2018 generally vest up to five years with 50% vesting on cumulative financial

performance measures under the Plan and the remaining 50% vest in annually in equal installments, in each case
subject to continued service. Stock options issued during the years ended December 31, 2019 and 2018 generally
vest up to three years annually in equal installments and are subject to continued service. Stock options terminate on
the earliest of the tenth year from the date of the grant or other committee action, as defined under the Plan.

During the year ended December 31, 2016, the Board of Directors authorized a modification to certain

unvested stock options, which converted their vesting requirements from performance based grants to service based
grants. Due to the modification, the Company recognized incremental compensation expense related to stock options
of $7,732 of which was recognized during the years 2016 through 2018.

105

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

The following table presents a summary of stock option activity as of December 31, 2019:

Weighted-
Average
Exercise Price
per Share (1)

Weighted-
Average
Remaining
Contractual
Term

Number of
Shares

Aggregate
Intrinsic Value

Outstanding as of December 31, 2016

653,144

Granted

Exercised

Forfeited and expired

311,000

(32,491)

(137,024)

Outstanding as of December 31, 2017

794,629

Granted

Exercised

Forfeited and expired

Outstanding as of December 31, 2018

Granted

Exercised

Forfeited and expired

Outstanding as of December 31, 2019

Vested and expected to vest as of
December 31, 2019

Exercisable as of December 31, 2019

265,932

(94,377)

(212,422)

753,762

62,500

(112,838) $

(294,569) $

408,855

375,562

65.80

135.00

60.51

116.73

82.43

120.00

35.27

126.82

89.08

75.00

28.74

141.73

82.61

85.26

6.9

47,713

7.0

35,224

6.1

12,773

5.4

3.1

7,297

6,803

(1) As disclosed in Note 17 - Related Party Transactions, the Company has paid dividends to common stockholders.
The Company's stock options are issued in accordance to the provisions of the Management Equity Plan, which
contains mandatory anti-dilution provisions requiring modification of the options in the event of an equity
restructuring, such as the dividends repaid. Accordingly, through April 2015, on payment of each dividend, the
exercise price per share of each outstanding option is reduced in an amount equal to the value of the dividend, in
compliance with applicable tax laws and regulatory guidance. The Company evaluated the fair value of the stock
options following the reduction of the exercise price associated with the dividend issuance as compared to the fair
value prior to the modification. As a result, since the fair value of the award after the modification was unchanged,
the Company did not record any additional incremental compensation expense associated with the dividends.

The total intrinsic value of stock options exercised during the years ended December 31, 2019, 2018 and

2017 was $5,210, $7,996 and $2,559, respectively.

106

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

The Company uses the Black-Scholes closed-form option pricing model to estimate the fair value of stock

options granted which incorporates the assumptions as presented in the following table, shown at their weighted-
average values:

Expected dividend yield

Expected stock price volatility (a)

Risk-free interest rate (b)

Expected option term (years) (c)

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Year Ended
December 31, 2017

—%

50.0%

2.6%

6.50

—%

50.0%

2.6%

6.00

—%

40.0%

2.2%

6.00

(a) Expected volatility. The Company bases its expected volatility on a group of companies believed to be a
representative peer group, selected based on industry and market capitalization.
(b) Risk free rate. The risk-free rate for periods within the expected term of the award is based on the U.S.
Government Bond yield with a term equal to the awards' expected term on the date of grant.
(c) Expected term. Expected term represents the period of time that awards granted are expected to be outstanding.
The Company elected to use the "simplified" calculation method, as applicable companies that lack extensive
historical data. The mid-point between the vesting date and the contractual expiration date is used as the expected
term under this method.

The weighted-average grant date fair value of the stock options issued in 2019, 2018 and 2017 were

$38.95, $49.80 and $55.70, respectively.

As of December 31, 2019, there was $2,944 of unrecognized compensation expense related to the

Company's stock options. Unrecognized compensation expense related to stock options issued to employees is
expected to be recognized over a weighted-average period of 0.4 years.

Market Stock Options

During 2018, the Company issued market stock options ("MSOs") to certain employees of the Company.

The MSOs vest over two to four years pursuant to certain market conditions set forth by the Company and subject to
continued service. Employees can earn between 0% and 150% of the number of MSOs issued based on the
attainment of these market-based conditions. These MSOs terminate on the earliest of the tenth year from the date of
grant or other committee action, as defined under the Plan.

The following table presents a summary of MSO activity as of December 31, 2019:

Weighted-
Average
Exercise Price
per Share

Weighted-
Average
Remaining
Contractual
Term

Number of
Shares

Aggregate
Intrinsic Value

Outstanding as of December 31, 2018

245,000

120.00

Granted

Exercised

Forfeited and expired

Outstanding as of December 31, 2019

Vested and expected to vest as of
December 31, 2019

Exercisable as of December 31, 2019

—

(65,000)

180,000

—

120.00

—

9.5

— $

8.1

—

107

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

As of December 31, 2019, there was $573 of unrecognized compensation expense related to the Company's MSOs.
Unrecognized compensation expense related to MSOs issued to employees is expected to be recognized over a
weighted-average period of 0.3 years.

Restricted Stock and Restricted Stock Units

Restricted stock and restricted stock units (collectively, "RSUs") issued prior to 2017 vest either subject to

the achievement of certain performance measures and continued service over a three year period, or vest in equal
installments over a three period subject only to continued service. RSUs issued during the year ended December 31,
2017 and 2018 vest in equal installments over a two to four year period subject only to continued service.

The following table table presents a summary of RSU unit activity as of December 31, 2019:

Number of Restricted
Stock Units

Weighted-Average
Grant Date Fair Value

Non-vested as of December 31, 2016

Granted

Vested

Forfeited

Non-vested as of December 31, 2017

Granted

Vested

Forfeited

Non-vested as of December 31, 2018

Granted

Vested

Forfeited

Non-vested as of December 31, 2019

106,132

49,085
(52,014)
(7,856)
95,347

167,581
(49,464)
(27,075)
186,389

59,672
(34,549)
(30,081)
181,431

145.95

135.00

177.19

140.12

146.12

120.00

147.54

134.31

124.36

75.00
(87.16)
(84.26)
(107.47)

As of December 31, 2019, there was $6,651 of unrecognized compensation expense related to the
Company's grant of RSUs to employees. Unrecognized compensation expense related to RSUs issued to employees
is expected to be recognized over a weighted-average period of 1.1 years.

13. Restructuring

In order to contain costs and mitigate the impact of current and expected future economic and market

conditions, as well as a continued focus on process improvements, we have initiated various restructuring plans over
the last several years. The charges for each restructuring plan are classified as operating and administration expenses
within the consolidated statements of operations.

In certain circumstances, reserves are no longer needed because of efficiencies in carrying out the plans, or
because employees previously identified for separation resigned from the Company and did not receive severance or
were reassigned due to circumstances not foreseen when the original plans were initiated. In these cases, we reverse
reserves through the consolidated statements of operations when it is determined they are no longer needed.

108

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

The following table summarizes restructuring information by reporting segment:

As of December 31, 2016

9,461

488

4,922

105

2,818

17,794

Higher
Education

K-12

International Professional

Other

Total

Charges:

Employee severance and other
personal benefits

Payments:

Employee severance and other
personal benefits

7,493

2,658

—

10,151

(10,259)

(1,358)

(4,565)

(60)

(2,278)

(18,520)

As of December 31, 2017

6,695

1,788

357

540

9,425

4,360

2,380

6,463

—

13,203

Charges:

Employee severance and other
personal benefits

Payments:

Employee severance and other
personal benefits

Charges:

Employee severance and other
personal benefits

Payments:

Employee severance and other
personal benefits

As of December 31, 2018

3,641

1,360

1,653

(7,414)

(2,808)

(5,167)

(45)

— $

(540)

(15,974)

— $

6,654

As of December 31, 2019

3,216

12,108

591

(6,976)

(8,416)

(1,952)

6,551

19,164

890

—

26,605

(17,344)

— $

15,915

—

— $

The Company expects to utilize the remaining reserves of $15,449 and $466 in 2020 and 2021 respectively.

14. Leases

On January 1, 2019, the Company adopted Topic 842 using the modified retrospective transition for all

leases that existed as of the date of adoption. Because of the transition method we used, Topic 842 was not applied
to periods prior to adoption and the adoption of Topic 842 had no impact on our previously reported results. We
elected to apply the package of practical expedients available for leases that expired prior to or existed as of January
1, 2019, and therefore did not reassess (1) whether contractual arrangements are or contain leases; (2) the
classification of leases; and (3) initial direct costs for leases.

We lease property under operating leases with expiration dates through 2035 as well as computer systems

and office equipment under finance leases with lease terms ranging from 12 to 50 months. For operating lease
arrangements with terms greater than 12 months, we record a lease liability and right-of-use asset on our
consolidated balance sheets at the lease commencement date. We measure lease liabilities based on the present value
of the total lease payments not yet paid. As most of our leases do not provide an implicit rate, we use our estimated
incremental borrowing rate at the lease commencement date to determine the present value of the total lease
payments. We measure right-of-use assets based on the corresponding lease liability adjusted for (i) payments made
to the lessor at or before the commencement date, (ii) initial direct costs we incur and (iii) tenant incentives under
the lease. Certain lease arrangements contain escalation clauses covering increased costs for various defined real
estate taxes and operating services which are factored into our determination of lease payments, however, we do not
assume renewals or early terminations unless we are reasonably certain to exercise these options at commencement,
and we do not allocate consideration between lease and non-lease components.

For short-term leases, we record expense in our consolidated statement of operations on a straight-line basis

over the lease term.

109

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

In addition, the adoption of Topic 842 had no material impact to our consolidated statement of operations,

cash flows from or used in operating, financing, or investing activities on our consolidated cash flow statements,
Billings or Adjusted EBITDA.

Lease position as of December 31, 2019

The table below presents the lease-related assets and liabilities recorded on the consolidated balance sheet:

Classification on the Balance Sheet

December 31, 2019

As of

Operating lease right-of-use assets

Property and equipment, net

Operating lease liabilities

Other current liabilities

Operating lease liabilities

Other non-current liabilities

Assets

Operating leases

Finance leases
Total lease assets

Liabilities

Current:

Operating leases

Finance Leases

Non-current:

Operating leases

Finance leases

Total lease liabilities

Weighted-average remaining lease term:

Operating leases

Finance Leases

Weighted-average discount rate:

Operating leases

Finance Leases

76,091

23,183
99,274

14,492

11,619

88,070

14,936
129,117

11.28

2.18

10.94%

7.50%

110

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

Lease costs

The table below presents certain information related to the lease costs for operating and finance leases

during the Year Ended December 31, 2019:

Operating lease cost

Short-term lease cost

Finance lease cost:

Amortization of assets

Interest on lease liabilities

Sub-lease income
Total net lease cost

Other Information

Supplemental cash flow information related to leases was as follows:

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

Operating cash flows from finance leases

Undiscounted cash flows

Year Ended December 31, 2019

29,162

1,268

9,513

1,356
(3,739)
37,560

Year Ended
December 31, 2019

23,719

11,381

The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining
years to the operating and finance lease liabilities recorded on the balance sheet:

Year Ended December 31, 2019

Operating Leases

Finance Leases

2020

2021

2022

2023

2024

2025 and beyond

Total lease payments

Less: amounts related to interest

Total lease liabilities

Less: Current liabilities
Non-current lease liabilities

18,183

18,996

13,586

13,563

11,949

115,891

192,168
(89,606)
102,562
(14,492)
88,070

13,106

8,860

5,291

1,701

362

—

29,320
(2,765)
26,555
(11,619)
14,936

111

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

15. Transactions with Apollo Global Management LLC ( the "Sponsors")

Transactions Fee Agreement

The Company entered into a transaction fee agreement on March 22, 2013 ( the "Transactions Fee

Agreement") with Apollo Global Securities, LLC (the “Service Provider”) relating to the provision of certain
structuring, financial, investment banking and other similar advisory services by the Service Provider to the
Company, its direct and indirect divisions and subsidiaries, parent entities or controlled affiliates (collectively, the
“Company Group”) in connection with future transactions. Subject to the terms and conditions of the Transactions
Fee Agreement, a transaction fee equal to 1% of the aggregate enterprise value is payable in connection with any
merger, acquisition, disposition, recapitalization, divestiture, sale of assets, joint venture, issuance of securities
(whether equity, equity-linked, debt or otherwise), financing or any similar transaction effected by a member of the
Company Group. For the years ended December 31, 2019 and 2018, no transaction fees were recorded. For year
ended December 31, 2017, $150 was recorded.

Management Fee Agreement

The Company entered into a management fee agreement (the “Management Fee Agreement”) with Apollo

Management VII, L.P. (the “Advisor”) on March 22, 2013, relating to the provision of certain management
consulting and advisory services to the members of the Company Group. In exchange for the provision of such
services, the Advisor will receive a non-refundable annual management fee of $3,500 in the aggregate. Subject to
the terms and conditions of the Management Fee Agreement, upon a change of control or an initial public offering
(“IPO”) of a member of the Company Group, the Advisor may elect to receive a lump sum payment in lieu of future
management fees payable to them under the Management Fee Agreement. For the years ended December 31, 2019,
2018 and 2017, the Company recorded an expense of $3,500 for management fees, respectively.

16. Commitments and Contingencies

Legal Matters

In 2016, MHE filed a complaint against Illinois National Insurance Company ("INIC") in the Supreme

In the normal course of business both in the United States and abroad, the Company is a defendant in

various lawsuits and legal proceedings which may result in adverse judgments, damages, fines or penalties and is
subject to inquiries and investigations by various governmental and regulatory agencies concerning compliance with
applicable laws and regulations. In view of the inherent difficulty of predicting the outcome of legal matters, we
cannot state with confidence what the timing, eventual outcome, or eventual judgment, damages, fines, penalties or
other impact of these pending matters will be. We believe, based on our current knowledge, that the outcome of the
legal actions, proceedings and investigations currently pending should not have a material adverse effect on the
Company’s financial condition.

17. Related Party Transactions

In the normal course of business, the Company has transactions with its wholly owned consolidated

subsidiaries and affiliated entities.

112

McGraw-Hill Education, Inc. and subsidiaries
Notes to the Consolidated Financial Statements
(Dollars in thousands, unless otherwise indicated)

RackSpace

The Company has an agreement with RackSpace, Inc., a portfolio company of the Sponsors, primarily

related to managed cloud and hosting services. For the years ended December 31, 2019, 2018 and 2017 the
Company paid this vendor $16,000, $13,917 and $1,060, respectively.

Presidio

In addition, the Company purchases technology equipment from Presidio Networked Solutions ("Presidio

Networked"), a portfolio company of the Sponsors. For the years ended December 31, 2019, 2018 and 2017 the
Company paid Presidio Networked $849, $677 and $1,890, respectively.

University of Phoenix

University of Phoenix is owned by Apollo Education Group, which was acquired by the Sponsors and
certain co-investors in February 2017. For the year ended December 31, 2019 and 2018, the Company’s sales to
University of Phoenix totaled $5,624 and $2,324, respectively.

CEVA Group

The Company utilizes CEVA Freight Management, a wholly owned subsidiary of CEVA Group PLC, a
U.K. based portfolio company of the Sponsors, as one of our freight forwarding contractors. For the years ended
December 31, 2019, 2018 and 2017 the Company paid CEVA $2,244, $1,069 and $1,600, respectively.

18. Subsequent Events

In December 2019, a novel strain of coronavirus ("COVID-19") was reported in Wuhan, China. The World

Health Organization has declared COVID-19 to constitute a "Public Health Emergency of International Concern."
On January 30, 2020, the U.S. Department of State issued a Level 4 "do not travel" advisory for China. The U.S.
government has also implemented enhanced screenings, quarantine requirements and travel restrictions in
connection with the COVID-19 outbreak. The extent of the impact of the COVID-19 on the Company's operational
and financial performance will depend on future developments, including the duration and spread of the outbreak.

The Company has evaluated events occurring subsequent to the balance sheet date through March 10, 2020,

the date the financial statements were available for issuance. Based upon this evaluation, it was determined that no
subsequent events occurred that require recognition or disclosure in the financial statements.

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Schedule I

McGraw-Hill Education, Inc. and subsidiaries
Condensed Financial Information of Registrant
Parent Company Information
(Dollars in thousands)

Consolidated Statements of Operations

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Year Ended
December 31, 2017

Revenue

Cost of sales

Gross profit

Operating expenses

Operating and administration expenses

Depreciation

Amortization of intangibles

Equity in income/loss of subsidiaries

Total operating expenses

Operating (loss) income

Interest expense (income), net

(Loss) income from operations before
taxes on income

— $

—

895

—

142,315

143,210
(143,210)
—

(143,210)
—

(143,210) $

Consolidated Balance Sheets

— $

—

5,967

—

155,582

161,549
(161,549)
—

(161,549)
(1,128)
(160,421) $

—

1,394

—

64,536

65,930
(65,930)
—

(65,930)
—
(65,930)

Income tax (benefit) provision
Net (loss) income

Current assets

Cash and equivalents

Prepaid and other current assets

Total current assets

Other non-current assets

Total assets

Liabilities and equity

Current liabilities

Accounts payable

Intercompany

Total current liabilities

Investment losses in subsidiaries

Total liabilities

Stockholders' equity (deficit)

Common stock

Additional paid in capital

Treasury stock

Accumulated deficit

Total stockholders' equity (deficit)

Total liabilities and stockholders' equity (deficit)

December 31, 2019 December 31, 2018

513

1,129

1,642

—
1,642

250

35,586

35,836

1,360,014

1,395,850

106

56,251
(23,529)
(1,427,036)
(1,394,208)
1,642

385

1,129

1,514

—
1,514

34,810

34,814

1,229,045

1,263,859

105

40,790
(19,414)
(1,283,826)
(1,262,345)
1,514

114

McGraw-Hill Education, Inc. and subsidiaries
Condensed Financial Information of Registrant
Parent Company Information
(Dollars in thousands)

Consolidated Statement of Cash Flows

Schedule I

Year Ended
December 31, 2019

Year Ended
December 31, 2018

Year Ended
December 31, 2017

4,243

(82) $

(3,899)

—
(4,115)

(4,115)

128

385
513

10,000
(9,763)

237

155

230
385

—
(2,924)

(2,924)

(6,823)

7,053
230

Operating activities

Cash provided by (used for) operating
activities

Financing activities

Issuance of common stock

Repurchase of common stock

Cash provided by (used for) financing
activities

Net change in cash and cash
equivalents

Cash and cash equivalents at the beginning
of the period
Cash and cash equivalents, ending balance

Basis of Presentation

McGraw-Hill Education, Inc. (formerly known as Georgia Holdings, Inc.) (the "Company") became the

ultimate parent of MHE Acquisition, LLC pursuant to the Founding Acquisition on March 22, 2013. Pursuant to the
terms of the credit agreements governing the MHGE Senior Notes, the Term Loan Facility and the MHGE PIK
Toggle Notes as discussed in Note 7, "Debt", within the accompanying notes to consolidated financial statements
included in this filing, the Company and certain of its subsidiaries have restrictions on their ability to, among other
things, incur additional indebtedness, pay dividends or make certain intercompany loans and advances. As a result of
these restrictions, these parent company financial statements have been prepared in accordance with Rule 12-04 of
Regulation S-X, as restricted net assets of the Company’s subsidiaries (as defined in Rule 4-08(e)(3) of Regulation
S-X) exceed 25% of the Company’s consolidated net assets as of December 31, 2019.

The Company on a standalone basis has accounted for all investments in subsidiaries using the equity

method. Under the equity method, the investment in subsidiaries is stated at cost plus contributions and equity in
undistributed income (loss) of subsidiaries. The accounting policies used in the preparation of the parent financial
statements are generally consistent with those used in the preparation of the consolidated financial statements of the
Company. The accompanying condensed financial information should be read in conjunction with the consolidated
financial statements and accompanying notes to the consolidated financial statements included in this filing.

115

McGraw-Hill Education, Inc. and subsidiaries
Consolidated Financial Statements
Valuation and Qualifying Accounts
(Dollars in thousands)

Schedule II

Balance at
beginning of
the year

Additions

Deductions

Balance at
end of the year

Year ended December 31, 2019

Allowance for Doubtful Accounts
Allowance for returns
Inventory
Valuation Allowance

Year ended December 31, 2018

17,000
90,388
68,422
335,871

6,135
81,445
26,382
41,551

(6,252) $
(90,388)
(31,588)
(858)

Allowance for Doubtful Accounts

15,185

7,760

(5,945) $

Allowance for returns

Inventory
Valuation Allowance

Year ended December 31, 2017

119,483

63,424
299,356

112,481

27,591
38,152

(141,576)
(22,593)
(1,637)

Allowance for Doubtful Accounts

14,086

6,924

(5,825) $

Allowance for returns

Inventory

Valuation Allowance

121,951

64,152

392,997

100,712

22,606

5,958

(103,180)
(23,334)
(99,599)

16,883
81,445
63,216
376,564

17,000

90,388

68,422
335,871

15,185

119,483

63,424

299,356

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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

Change in Fiscal Year

Item 9B. OTHER INFORMATION

Pursuant to authority conferred on the Board under the Company’s Bylaws, on November 22, 2019, the
Board approved a change in the Company’s fiscal year end from December 31 to March 31. The change in fiscal
year is effective after the issuance of the Company's fiscal year ended December 31, 2019 financial statements. The
Company will file an Annual Report for the twelve month period ended March 31, 2020 and December 31, 2019.

117

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table provides information regarding the executive officers and the members of the Board of

MHE, as of the date of this annual report.

Name

Simon Allen

Garet Guthrie

David Stafford

Angelo T. DeGenaro

Larry Berg

Lloyd G. Waterhouse

Nancy Lublin

Jonathan Mariner

Antoine Munfakh

Ronald Schlosser

Itai Wallach

Mark Wolsey-Paige

Age
58

Position

Interim President & CEO

Executive Vice President and Chief Financial Officer

Senior Vice President, General Counsel and Secretary

Chief Information and Operations Officer

Chairman and Director

Director

Simon Allen was named Interim CEO of McGraw-Hill in October 2019. While serving as Interim CEO,
Simon continues in his role as President of McGraw-Hill's International Group (appointed in March 2018). As the
leader of McGraw-Hill’s International group, he is responsible for a business that provides content, educational
services and customized learning solutions in more than 75 languages to K-12 schools and higher education
institutions in more than 100 countries outside of the United States.

Simon has deep experience in educational publishing having led large teams across six continents focused
on K-12 and higher education, as well as science, technical and medical digital and print products for professional,
governmental and institutional markets. Before joining McGraw-Hill, he was the CEO of Macmillan Education,
leading the company’s transition from print to blended learning products and solutions. Previously, he was Senior
Vice President, International at The McGraw-Hill Companies and during that time was elected President of The
Publishers Association in the U.K., serving for three years on its council. Before that, Simon was President, Higher
Education at both Pearson Education EMEA and Prentice Hall Europe. Earlier in his career, he held sales leadership
roles with the Times Mirror Group in the U.S., Europe and the Middle East.

Simon received his BA with honors from Middlesex University School of Business and completed

Executive Education programs in Leadership and Strategic Management at the London Business School.

Garet Guthrie Garet Guthrie was named Chief Financial Officer for McGraw-Hill in July 2019. As CFO,

Garet is responsible for Accounting, Finance, Global Business Services, Investor Relations, Real Estate, Tax and
Treasury.

Previously Garet served as McGraw-Hill's Senior Vice President of Financial Planning and Analysis,

responsible for providing management, the company's Board of Directors and investors with insight and analysis on
financial performance and overseeing corporate costs. In addition, he supported investor relations activities,
including capital market transactions and oversaw financial aspects of mergers, acquisitions, investments and
divestitures.

Before joining McGraw-Hill in 2013, Garet was part of PwC's Deals practice focused on global private

equity and multinational corporate transactions for many of PwC's largest clients. His experience with PwC spanned

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multiple industries and technology sectors and provided a diverse combination of strategic, financial and capital
market experiences. He earned his bachelor's degree in Accounting from Oklahoma State University and his Master
of Business Administration from Texas A&M University, is a Certified Financial Analyst charterholder and is a
Certified Public Accountant

David Stafford was appointed general counsel and secretary of McGraw-Hill Education in May 2012. As

general counsel, he is responsible for all legal matters affecting McGraw-Hill Education and manages McGraw-Hill
Education's legal, compliance and risk and government affairs departments. Prior to May 2012, Mr. Stafford was
vice president and associate general counsel at The McGraw-Hill Companies. As a senior member of the company’s
legal department, he practiced in a wide variety of legal areas, with a focus on the company’s financial information
businesses.

From 2006 to 2009, Mr. Stafford served as senior vice president, Corporate Affairs, and assistant to the
chairman and chief executive officer, where he was responsible for the marketing, communications, government
affairs, and community relations activities of the company and advising the chairman and chief executive officer on
matters involving the Board of Directors and the management and operation of the company generally. Prior to 2006
he was associate general counsel at The McGraw-Hill Companies. Before joining The McGraw-Hill Companies in
1992, he was an associate at two different New York City law firms, where he specialized in corporate law. Mr
Stafford is a graduate of Columbia University, where he received his bachelor’s degree, and a graduate of Cornell
Law School, where he received his J.D. degree. He also serves on the Board of Directors of the Association of
American Publishers and as Vice Chairman of the Board of Trustees of YAI Network, a not-for-profit that provides a
variety of services to people in the New York metropolitan area who have developmental disabilities.

Angelo T. DeGenaro joined the company in 2015 and serves as Chief Information and Operations Officer

for McGraw-Hill. He leads McGraw-Hill’s Global Technology and Digital Platform Groups, including the
development and support of customer-facing products, as well as the IT architecture, infrastructure, operations, and
cybersecurity of front and back-office systems. He oversees Global Supply Chain Management, including
manufacturing, inventory planning, fulfillment, and order management. Angelo also leads the Customer Experience
Group, providing customer support for students using our digital products. In May 2019, after McGraw-Hill and
Cengage announced their intent to merge, Angelo was appointed to lead McGraw-Hill’s Integration Management
Office.

Angelo began working for The McGraw-Hill Companies in 2004, with his last position being Senior Vice

President and Chief Technology Officer at McGraw-Hill Financial. In that role, he was responsible for enterprise
architecture, global infrastructure delivery, business systems, and IT risk management. Before joining The McGraw-
Hill Companies, Angelo held senior technology leadership positions at Cigna and Citi. He spent seven years at
Cigna as the Senior Vice President of Infrastructure Implementation Services and also held several operational and
engineering leadership roles during his earlier 18-year tenure at Citi.

Angelo is a member of The Research Board, a New York-based international think tank. He holds a

bachelor's degree in Economics from New York University and a Master of Science in telecommunications and
computing management from Polytechnic University.

Larry Berg has been the Chairman of the Board of McGraw-Hill Education since March 2014 and has been

a Director since March 2013. Mr. Berg is a Senior Partner at Apollo having joined in 1992, and oversees the Firm’s
efforts in industrials and education. Before that time, Mr. Berg was a member of the Mergers and Acquisitions group
of Drexel Burnham Lambert Incorporated. Mr. Berg serves on the board of directors of Maxim Crane, University of
Phoenix and Los Angeles Football Club and he previously served on the boards of Laureate International
Universities, Sylvan Learning, Berlitz, Connections Academy and Crisis Text Line. Mr. Berg graduated magna cum
laude with a BS in Economics from the University of Pennsylvania’s Wharton School of Business and received an
MBA from the Harvard Business School.

Lloyd G. Waterhouse has been a Director of McGraw-Hill Education since March 2013. Mr. Waterhouse
served as interim President and Chief Executive Officer of McGraw-Hill Education from October 2017 until April

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2018. He was previously the President and Chief Executive Officer from March 2013 until April 8, 2014 and, before
that, the President of the McGraw-Hill Education segment of MHC from June 2012 until March 2013. Mr.
Waterhouse began his career with International Business Machines Corporation (“IBM”) in 1973 in the firm’s data
processing division. He later became General Manager of Marketing and Services for IBM Asia Pacific. In 1992, he
was appointed President of IBM’s Asia Pacific Services Corporation and later became Director of Global Strategy at
IBM. In 1996, Mr. Waterhouse was named General Manager Marketing and Business Development, IBM Global
Services, before being promoted to General Manager, E-Business Services, a division focused on consulting,
education and training for customers. In 1999, Mr. Waterhouse became President and Chief Operating Officer, and
later Chief Executive Officer of Reynolds & Reynolds Co., a company primarily focused on software for the
automotive industry. In 2006, he was appointed Chief Executive Officer of Harcourt Education, a leader in the
United States School Education sector. The parent company of Harcourt Education decided to sell the business in
2007 and it merged with Houghton Mifflin Harcourt at the end of that year. Mr. Waterhouse has since served on the
board of directors of SolarWinds, Inc., ITT Educational Services, Ascend Learning LLC, Digimarc Corporation, i2
Technologies, Inc., Atlantic Mutual Insurance Companies, JDA, Instructure, Larry H. Miller Companies and Sparta
in addition to being a Senior Advisor at New Mountain Capital LLC. Mr. Waterhouse is a graduate of Pennsylvania
State University and holds an MBA from Youngstown State University.

Nancy Lublin has been a Director of McGraw-Hill Education since November 2015. Ms. Lublin has served

as CEO of Crisis Text Line since 2015. From 2003 until 2015, Ms. Lublin has served as CEO of DoSomething.org.
In 2013, while still the CEO of DoSomething.org, Ms. Lublin turned her popular TED talk into Crisis Text Line.
Crisis Text Line is the first 24/7, free, nationwide-text line for people in crisis. Prior to her work at DoSomething.org
and Crisis Text Line, Ms. Lublin founded Dress for Success, a global entity that provides interview suits and career
development training to women in need. Ms. Lublin is the author of the best-selling business books, Zilch: The
Power of Zero in Business and XYZ Factor.

Jonathan Mariner has been a Director of McGraw-Hill Education since February 2016. Mr. Mariner is a

private investor and entrepreneur, and is currently the Founder and President of TaxDay, LLC, a private software
firm that helps users track their multi-state travel for tax purposes. Mr. Mariner recently retired from Major League
Baseball, Office of the Commissioner, having served as Executive VP and CFO for 12 years, and as Chief
Investment Officer. He previously served as Executive VP and CFO of the Florida Marlins Baseball Club. Mr.
Mariner currently serves on the board of directors of Ultimate Software Inc., IEX Stock Exchange and Little League
Baseball. Mr. Mariner holds a bachelor’s degree in accounting from the University of Virginia, an MBA from
Harvard Business School and is a former Certified Public Accountant.

Antoine Munfakh has been a Director of McGraw-Hill Education since March 2013. Mr. Munfakh is a

Partner at Apollo having joined in 2008. Before that time, Mr. Munfakh spent two years as an Associate at the
private equity firm Court Square Capital Partners, where he focused on investments into the Business & Industrial
Services sectors. Prior thereto, he started his career as an Analyst in the Financial Sponsor Investment Banking
group at JPMorgan, where he provided M&A and financing services in support of private equity transactions. Mr.
Munfakh serves on the board of directors of Sun Country Airlines, Volotea Airlines, Maxim Crane Works, and
Apollo Education Group. He previously served on the board of directors of CH2M HILL Companies. Mr. Munfakh
graduated summa cum laude from Duke University with a BS in Economics, where he was elected to Phi Beta
Kappa.

Ronald Schlosser has been a Director of McGraw-Hill Education since March 2013 and previously served
as Executive Chairman of McGraw-Hill Education since March 2013 through May 1, 2014. Mr. Schlosser currently
advises global leaders in private equity investing in information services, including healthcare, data services and
education. He has served as Chairman and Chief Executive Officer of Haights Cross Communications, an
educational and library information company, and has served as a Senior Advisor to Providence Equity Partners and
Chairman of several education and information services portfolio companies, including Jones & Bartlett,
Assessment Technologies Institute, Edline and Survey Sampling International. Mr. Schlosser served as Chief
Executive Officer of Thomson Learning Group, after serving as Chief Executive Officer of Thomson Scientific and
Healthcare, after joining Thomson Financial Publishing as its President & Chief Executive Officer in 1995. He
serves on the board of directors of Copyright Clearance Center and the Warehouse Arts District in Florida. Mr.

120

Schlosser is currently a private investor in several information businesses. Mr. Schlosser is a graduate of Rider
University and holds an MBA from Fairleigh Dickinson University.

Itai Wallach has been a Director of McGraw-Hill Education since March 2017. Mr. Wallach is a Principal

at Apollo, having joined in 2012. Before joining Apollo, Mr. Wallach was a member of the Financial Sponsors
Group at Barclays Capital. Mr. Wallach also serves on the Board of Directors of The Fresh Market and formerly on
Jacuzzi Brands. He graduated with distinction from the Richard Ivey School of Business at the University of
Western Ontario where he was an Ivey Scholar.

Mark Wolsey-Paige has been a Director of McGraw-Hill Education since May 2013. From 2010 to 2014

Mr. Wolsey-Paige served as an advisor to Apollo, largely on healthcare-related deals. Before becoming an advisor to
Apollo, Mr. Wolsey-Paige served as Executive Vice President, Product Development & Supply at Siemens
Healthcare Diagnostics from 2007 to 2009. In 2007, he was appointed Chief Strategy and Technology Officer for
Dade Behring Inc. before its acquisition by Siemens. Previously, Mr. Wolsey-Paige worked at Baxter Diagnostics,
which became a part of Dade Behring, and became Vice President, Strategy and Business Development in 2000; he
remained in this role until the company was acquired, while also becoming head of Research and Development,
Instrument Manufacturing and Supply Chain Management. Before joining Dade Behring, he was a consultant at
Bain & Company in Boston. Before that, Mr. Wolsey-Paige served four years in the U.S. Army, achieving the rank
of Captain and worked in the Strategic Plans and Policy Directorate on the Army staff in the Pentagon. Mr. Wolsey-
Paige holds a bachelor's degree in Business Administration from Washington University and an MBA from Harvard
University.

Committees of the Board

Audit Committee. The Audit Committee consists of four members: Ms. Lublin and Messrs. Mariner,
Wallach and Wolsey-Paige, all of whom qualify as audit committee financial experts, as such term is defined in Item
407(d)(5) of Regulation S-K. Mr. Mariner is the chair of the Audit Committee. In light of our status as a privately-
held company and the absence of a public trading market for our common stock, there are no requirements that we
have an independent audit committee.

The Audit Committee is directly responsible for the appointment, compensation, retention (including

termination) and oversight of the independent auditors, the granting of appropriate pre-approvals of all auditing
services and nonaudit services to be provided by the independent auditors, meeting and discussing with
management, the internal audit group and independent auditors the annual audited and quarterly unaudited financial
statements, any legal, regulatory any compliance matters (including tax) that could have a significant impact on
financial statements, reviewing and discussing with management major financial risk exposures and steps taken to
monitor, controlling and managing them and review the responsibilities and results of the internal audit group.

Compensation Committee. The Compensation Committee is responsible for formulating, evaluating and

approving the compensation and employment arrangements of the officers of McGraw-Hill Education and the
Company. The Compensation Committee consists of three members: Messrs. Berg, Schlosser and Wallach.

Nominating and Corporate Governance Committee. The Nominating and Corporate Governance
Committee is responsible for assisting McGraw-Hill Education in identifying and recommending candidates to the
Board, recommending composition of the Board and committees and reviewing and recommend revisions to the
corporate governance guidelines. The Nominating and Corporate Governance Committee consists of three members:
Ms. Lublin and Messrs. Berg and Waterhouse.

Code of Ethics

We have adopted a code of ethics, referred to as our “Code of Business Ethics,” that applies to all of our

employees, including our Chief Executive Officer, Chief Financial Officer and senior financial and accounting
officers. A copy of our Code of Business Ethics is available on our website at www.mheducation.com.

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Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

We or one of our subsidiaries may occasionally enter into transactions with certain “related parties.”

Related parties include its executive officers, directors, nominees for directors, a beneficial owner of 5% or more of
its common stock and immediate family members of these parties. We refer to transactions in which the related party
has a direct or indirect material interest as “related party transactions.”

Transactions Fee Agreement

The Company entered into a transaction fee agreement on March 22, 2013 ( the "Transactions Fee

Management Fee Agreement

The Company entered into a management fee agreement (the “Management Fee Agreement”) with Apollo

RackSpace

The Company has an agreement with RackSpace, Inc., a portfolio company of the Sponsors, primarily

related to managed cloud and hosting services. For the years ended December 31, 2019, 2018 and 2017 the
Company paid this vendor $16,000, $13,917 and $1,060, respectively.

Presidio

In addition, the Company purchases technology equipment from Presidio Networked Solutions ("Presidio

Networked"), a portfolio company of the Sponsors. For the years ended December 31, 2019, 2018 and 2017 the
Company paid Presidio Networked $849, $677 and $2,705, respectively.

University of Phoenix

CEVA Group

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Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees for professional services provided by our independent auditors, Ernst & Young LLP, for fiscal year

2019 and 2018, in each of the following categories, including related expenses, are:

Audit Fees (1)

Audit Related Fees (2)

Tax Fees (3)

Other (4)

2019

2018

3,715

803

610
5,178

5,005

936

—
5,988

(1) This category includes the aggregate fees billed for professional services rendered for the audit of the Company’s
annual financial statements, the reviews of the financial statements included in the Company’s quarterly reports,
statutory audits of certain international subsidiaries and services normally provided by the independent auditor in
connection with statutory and regulatory filings.

(2) Audit-Related Fees consisted of fees for services that are reasonably related to the performance of the audit and
the review of our financial statements.

(3) This category includes the aggregate fees billed for tax services. Tax Fees consisted of fees for federal, state,
local and international tax compliance and tax advisory services.

(4) This category includes professional services provided for due diligence, costs related to organizational & talent
integration and culture & leadership assessment services.

123