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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 001-36166

 

Houghton Mifflin Harcourt Company

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

27-1566372

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

125 High Street

Boston, MA 02110

(617) 351-5000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock, $0.01 par value

 

HMHC

 

The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

  

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of common stock, par value $0.01 per share, outstanding as of November 2, 2020 was 125,850,114.

 

 

 


Table of Contents

 

 

  

Page (s)

 

 

 

 

 

 

Special Note Regarding Forward-Looking Statements

  

 

3

 

 

 

 

PART I.

 

FINANCIAL INFORMATION

  

 

4

 

 

 

 

Item 1.

 

Consolidated Financial Statements (Unaudited):

  

 

4

 

 

 

 

 

 

Consolidated Balance Sheets

  

 

4

 

 

 

 

 

 

Consolidated Statements of Operations

  

 

5

 

 

 

 

 

 

Consolidated Statements of Comprehensive (Loss) Income

  

 

6

 

 

 

 

 

 

Consolidated Statements of Cash Flows

  

 

7

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity

  

 

8

 

 

 

 

 

 

Notes to Consolidated Financial Statements

  

 

9

 

 

 

 

Item 2.

 

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

  

 

27

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

  

 

49

 

 

 

 

Item 4.

 

Controls and Procedures

  

 

50

 

 

 

 

PART II.

 

OTHER INFORMATION

  

 

51

 

 

 

 

Item 1.

 

Legal Proceedings

  

 

51

 

 

 

 

Item 1A.

 

Risk Factors

  

 

51

 

 

 

 

Item 5.

 

Other Information

 

 

51

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

  

 

53

 

 

 

SIGNATURES

  

 

54

 

 

2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The statements contained herein include forward-looking statements, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “projects,” “anticipates,” “expects,” “could,” “intends,” “may,” “will,” “should,” “forecast,” “intend,” “plan,” “potential,” “project,” “target” or, in each case, their negative, or other variations or comparable terminology. Forward-looking statements include all statements that are not statements of historical facts. They include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations; financial condition; liquidity; prospects, growth and strategies; the expected impact of the COVID-19 pandemic; our competitive strengths; the industry in which we operate; the impact of new accounting guidance and tax laws; expenses; effective tax rates; future liabilities; the outcome and impact of pending or threatened litigation; decisions of our customers; education expenditures; population growth; state curriculum adoptions and purchasing cycles; the impact of dispositions, acquisitions and other investments; the timing, structure and expected impact of our operational efficiency and cost-reduction initiatives and the estimated savings and amounts expected to be incurred in connection therewith; and potential business decisions. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. We caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this report.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that actual results may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if actual results are consistent with the forward-looking statements contained herein, those results or developments may not be indicative of results or developments in subsequent periods.

Important factors that could cause actual results to vary from expectations include, but are not limited to: the duration and severity of the COVID-19 pandemic and its impact on the federal, state and local economies and on K-12 schools, including uncertainties regarding the format (in-person, fully remote or hybrid) and other safety procedures schools may follow at various points during the school year; changes in state and local education funding and/or related programs, legislation and procurement processes; changes in state academic standards; industry cycles and trends; the rate and state of technological change; state requirements related to digital instructional materials; changes in product distribution channels and concentration of retailer power; changes in our competitive environment, including free and low cost open educational resources; periods of operating and net losses; our ability to enforce our intellectual property and proprietary rights; risks based on information technology systems and potential breaches of those systems; dependence on a small number of print and paper vendors; third-party software and technology development; possible defects in digital products; our ability to identify, complete, or achieve the expected benefits of, acquisitions; our ability to execute on our long-term growth strategy; increases in our operating costs; exposure to litigation; contingent liabilities; risks related to our indebtedness; future impairment charges; changes in school district payment practices; a potential increase in the portion of our sales coming from digital sales; risks related to doing business abroad; changes in tax law or interpretation; management and personnel changes; timing, higher costs and unintended consequences of our operational efficiency and cost-reduction initiatives, including our recently announced workforce reduction; our ability to sell the HMH Books & Media business and the terms of any such potential sale; and other factors discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (and our subsequent filings pursuant to the Securities Exchange Act of 1934, as amended), including in Part II, Item 1A of this Quarterly Report on Form 10-Q. In light of these risks, uncertainties and assumptions, the forward-looking events described herein may not occur.

We undertake no obligation, and do not expect, to publicly update or publicly revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained herein.

3


PART 1 – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Houghton Mifflin Harcourt Company

Consolidated Balance Sheets (Unaudited)

 

(in thousands of dollars, except share information)

 

September 30,

2020

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

271,543

 

 

$

296,353

 

Accounts receivable, net of allowances for bad debts and book returns of

   $19.5 million and $19.7 million, respectively

 

 

282,179

 

 

 

184,425

 

Inventories

 

 

175,820

 

 

 

213,059

 

Prepaid expenses and other assets

 

 

23,214

 

 

 

19,257

 

Total current assets

 

 

752,756

 

 

 

713,094

 

Property, plant, and equipment, net

 

 

95,265

 

 

 

100,388

 

Pre-publication costs, net

 

 

222,186

 

 

 

268,197

 

Royalty advances to authors, net

 

 

41,661

 

 

 

44,743

 

Goodwill

 

 

454,977

 

 

 

716,977

 

Other intangible assets, net

 

 

440,111

 

 

 

474,225

 

Operating lease assets

 

 

129,154

 

 

 

132,247

 

Deferred income taxes

 

 

2,520

 

 

 

2,520

 

Deferred commissions

 

 

32,972

 

 

 

29,291

 

Other assets

 

 

34,726

 

 

 

31,490

 

Total assets

 

$

2,206,328

 

 

$

2,513,172

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

19,000

 

 

$

19,000

 

Accounts payable

 

 

71,512

 

 

 

52,128

 

Royalties payable

 

 

52,339

 

 

 

72,985

 

Salaries, wages, and commissions payable

 

 

37,009

 

 

 

54,938

 

Deferred revenue

 

 

356,823

 

 

 

305,285

 

Interest payable

 

 

3,981

 

 

 

3,826

 

Severance and other charges

 

 

34,901

 

 

 

12,407

 

Accrued postretirement benefits

 

 

1,571

 

 

 

1,571

 

Operating lease liabilities

 

 

9,339

 

 

 

8,685

 

Other liabilities

 

 

26,383

 

 

 

24,325

 

Total current liabilities

 

 

612,858

 

 

 

555,150

 

Long-term debt, net of discount and issuance costs

 

 

628,066

 

 

 

638,187

 

Operating lease liabilities

 

 

133,214

 

 

 

134,994

 

Long-term deferred revenue

 

 

596,630

 

 

 

542,821

 

Accrued pension benefits

 

 

19,316

 

 

 

23,648

 

Accrued postretirement benefits

 

 

13,911

 

 

 

15,113

 

Deferred income taxes

 

 

18,787

 

 

 

30,871

 

Other liabilities

 

 

3,502

 

 

 

6,028

 

Total liabilities

 

 

2,026,284

 

 

 

1,946,812

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: 20,000,000 shares authorized; no shares

   issued and outstanding at September 30, 2020 and December 31, 2019

 

 

 

 

 

 

Common stock, $0.01 par value: 380,000,000 shares authorized;

   150,427,148 and 148,928,328 shares issued at September 30, 2020 and

   December 31, 2019, respectively; 125,850,114 and 124,351,294 shares

   outstanding at September 30, 2020 and December 31, 2019, respectively

 

 

1,504

 

 

 

1,489

 

Treasury stock, 24,577,034 shares as of September 30, 2020 and December 31,

   2019, respectively, at cost

 

 

(518,030

)

 

 

(518,030

)

Capital in excess of par value

 

 

4,915,806

 

 

 

4,906,165

 

Accumulated deficit

 

 

(4,172,685

)

 

 

(3,775,992

)

Accumulated other comprehensive loss

 

 

(46,551

)

 

 

(47,272

)

Total stockholders’ equity

 

 

180,044

 

 

 

566,360

 

Total liabilities and stockholders’ equity

 

$

2,206,328

 

 

$

2,513,172

 

 

The accompanying notes are an integral part of these consolidated financial statements.

4


Houghton Mifflin Harcourt Company

Consolidated Statements of Operations (Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands of dollars, except share and per share information)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net sales

 

$

386,590

 

 

$

565,668

 

 

$

827,731

 

 

$

1,149,199

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales, excluding publishing rights and pre-publication

   amortization

 

 

182,767

 

 

 

246,527

 

 

 

397,139

 

 

 

533,413

 

Publishing rights amortization

 

 

4,761

 

 

 

6,341

 

 

 

15,295

 

 

 

20,217

 

Pre-publication amortization

 

 

31,647

 

 

 

39,319

 

 

 

94,043

 

 

 

108,140

 

Cost of sales

 

 

219,175

 

 

 

292,187

 

 

 

506,477

 

 

 

661,770

 

Selling and administrative

 

 

127,324

 

 

 

188,957

 

 

 

367,006

 

 

 

516,206

 

Other intangible asset amortization

 

 

6,274

 

 

 

6,383

 

 

 

18,819

 

 

 

19,519

 

Impairment charge for goodwill

 

 

 

 

 

 

 

 

262,000

 

 

 

 

Restructuring/severance and other charges

 

 

33,545

 

 

 

270

 

 

 

33,545

 

 

 

5,921

 

Operating income (loss)

 

 

272

 

 

 

77,871

 

 

 

(360,116

)

 

 

(54,217

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement benefits non-service income

 

 

61

 

 

 

41

 

 

 

183

 

 

 

125

 

Interest expense

 

 

(16,168

)

 

 

(11,597

)

 

 

(50,433

)

 

 

(35,142

)

Interest income

 

 

32

 

 

 

509

 

 

 

873

 

 

 

1,698

 

Change in fair value of derivative instruments

 

 

432

 

 

 

(737

)

 

 

172

 

 

 

(1,171

)

Gain on investments

 

 

1,738

 

 

 

 

 

 

1,738

 

 

 

 

 

Income from transition services agreement

 

 

 

 

 

571

 

 

 

 

 

 

4,248

 

(Loss) income before taxes

 

 

(13,633

)

 

 

66,658

 

 

 

(407,583

)

 

 

(84,459

)

Income tax (benefit) expense

 

 

(1,081

)

 

 

(2,602

)

 

 

(10,890

)

 

 

4,256

 

Net (loss) income

 

$

(12,552

)

 

$

69,260

 

 

$

(396,693

)

 

$

(88,715

)

Net (loss) income per share attributable to common stockholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.10

)

 

$

0.56

 

 

$

(3.17

)

 

$

(0.71

)

Diluted

 

$

(0.10

)

 

$

0.55

 

 

$

(3.17

)

 

$

(0.71

)

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

125,799,018

 

 

 

124,315,491

 

 

 

125,317,284

 

 

 

124,089,257

 

Diluted

 

 

125,799,018

 

 

 

124,807,488

 

 

 

125,317,284

 

 

 

124,089,257

 

 

The accompanying notes are an integral part of these consolidated financial statements.

5


Houghton Mifflin Harcourt Company

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands of dollars, except share and per share information)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net (loss) income

 

$

(12,552

)

 

$

69,260

 

 

$

(396,693

)

 

$

(88,715

)

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax

 

 

(86

)

 

 

(351

)

 

 

(266

)

 

 

(478

)

Unrealized gain on short-term investments, net of tax

 

 

 

 

 

 

 

 

 

 

 

9

 

Net change in unrealized gain (loss) on derivative

   financial instruments, net of tax

 

 

258

 

 

 

(257

)

 

 

987

 

 

 

(3,661

)

Other comprehensive income (loss), net of taxes

 

 

172

 

 

 

(608

)

 

 

721

 

 

 

(4,130

)

Comprehensive (loss) income

 

$

(12,380

)

 

$

68,652

 

 

$

(395,972

)

 

$

(92,845

)

 

The accompanying notes are an integral part of these consolidated financial statements.

6


Houghton Mifflin Harcourt Company

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Nine Months Ended

September 30,

 

(in thousands of dollars)

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(396,693

)

 

$

(88,715

)

Adjustments to reconcile net loss to net cash provided by operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

171,027

 

 

 

201,593

 

Amortization and impairments of operating lease assets

 

 

9,565

 

 

 

12,898

 

Amortization of debt discount and deferred financing costs

 

 

4,504

 

 

 

3,136

 

Gain on investments

 

 

(1,738

)

 

 

 

Deferred income taxes

 

 

(12,084

)

 

 

2,580

 

Stock-based compensation expense

 

 

8,751

 

 

 

11,094

 

Impairment charge for goodwill

 

 

262,000

 

 

 

 

Change in fair value of derivative instruments

 

 

(172

)

 

 

1,171

 

Changes in operating assets and liabilities, net of acquisitions

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(97,754

)

 

 

(231,296

)

Inventories

 

 

37,239

 

 

 

(27,535

)

Other assets

 

 

(13,374

)

 

 

(23,649

)

Accounts payable and accrued expenses

 

 

6,213

 

 

 

37,488

 

Royalties payable and author advances, net

 

 

(17,564

)

 

 

1,165

 

Deferred revenue

 

 

105,347

 

 

 

241,091

 

Interest payable

 

 

155

 

 

 

11

 

Severance and other charges

 

 

22,494

 

 

 

(464

)

Accrued pension and postretirement benefits

 

 

(5,532

)

 

 

(2,761

)

Operating lease liabilities

 

 

(7,598

)

 

 

(12,450

)

Other liabilities

 

 

380

 

 

 

2,015

 

Net cash provided by operating activities

 

 

75,166

 

 

 

127,372

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from sales and maturities of short-term investments

 

 

 

 

 

50,000

 

Additions to pre-publication costs

 

 

(51,321

)

 

 

(81,532

)

Additions to property, plant, and equipment

 

 

(35,275

)

 

 

(27,350

)

Acquisition of business, net of cash acquired

 

 

 

 

 

(5,447

)

Investment in preferred stock

 

 

 

 

 

(750

)

Net cash used in investing activities

 

 

(86,596

)

 

 

(65,079

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Borrowings under revolving credit facility

 

 

150,000

 

 

 

60,000

 

Payments of revolving credit facility

 

 

(150,000

)

 

 

(60,000

)

Payments of long-term debt

 

 

(14,250

)

 

 

(6,000

)

Payments of deferred financing fees

 

 

 

 

 

(311

)

Tax withholding payments related to net share settlements of restricted stock units

 

 

(48

)

 

 

(1,963

)

Issuance of common stock under employee stock purchase plan

 

 

918

 

 

 

1,027

 

Net collections under transition services agreement

 

 

 

 

 

265

 

Net cash used in financing activities

 

 

(13,380

)

 

 

(6,982

)

Net (decrease) increase in cash and cash equivalents

 

 

(24,810

)

 

 

55,311

 

Cash and cash equivalents at beginning of the period

 

 

296,353

 

 

 

253,365

 

Cash and cash equivalents at end of the period

 

$

271,543

 

 

$

308,676

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Interest paid

 

$

45,913

 

 

$

32,264

 

Income taxes paid

 

 

1,848

 

 

 

469

 

Non-cash investing activities

 

 

 

 

 

 

 

 

Pre-publication costs included in accounts payable and accruals

 

$

2,192

 

 

$

7,299

 

Property, plant, and equipment included in accounts payable and accruals

 

 

1,648

 

 

 

2,317

 

Property, plant, and equipment acquired under finance leases

 

 

205

 

 

 

366

 

 

The accompanying notes are an integral part of these consolidated financial statements.

7


Houghton Mifflin Harcourt Company

Consolidated Statements of Stockholders’ Equity (Unaudited)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands of dollars, except share information)

 

Shares

Issued

 

 

Par

Value

 

 

Treasury

Stock

 

 

Capital

in excess

of Par

Value

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

Balance at December 31, 2018

 

 

148,164,854

 

 

$

1,481

 

 

$

(518,030

)

 

$

4,893,174

 

 

$

(3,562,971

)

 

$

(45,184

)

 

$

768,470

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(117,362

)

 

 

 

 

 

(117,362

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,550

)

 

 

(1,550

)

Effects of adoption of new lease accounting

   standard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

725

 

 

 

 

 

 

725

 

Issuance of common stock for employee

   purchase plan

 

 

78,105

 

 

 

1

 

 

 

 

 

 

701

 

 

 

 

 

 

 

 

 

702

 

Issuance of common stock for vesting of

   restricted stock units

 

 

444,622

 

 

 

5

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

Stock withheld to cover tax withholdings

   requirements upon vesting of restricted stock

   units

 

 

 

 

 

 

 

 

 

 

 

(1,756

)

 

 

 

 

 

 

 

 

(1,756

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

3,442

 

 

 

 

 

 

 

 

 

3,442

 

Balance at March 31, 2019