HMH Earnings Call
February 23, 2017
Fourth Quarter and Full Year 2016
FORWARD LOOKING STATEMENTS AND
NON-GAAP MEASURES This presentation and oral statements made in connection with this presentation contain certain statements that are not historical
facts, including information regarding our intentions, beliefs or current expectations concerning, among other things, our results of
operations, including billings and net sales; financial performance, including adjusted EBITDA margin and free cash flow; financial
condition; pre-publication (or content development) costs and total capital expenditures; liquidity; EdTech integration timing and
impact; products and services, including for new adoptions; outlook for full year 2017; prospects; growth; markets and market
share; strategies, including with respect to investing in our core products and adjacent markets; efficiency and cost savings
initiatives; the industry in which we operate; our transition to a new CEO; and potential business decisions.
Those statements constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual
results to differ materially from the results express in or implied by our forward-looking statements, including, but not limited to,
those identified under the caption “Forward-Looking Statements” in our news release issued on February 23, 2017 and in the
“Special Note Regarding Forward-Looking Statements” and “Risk Factors” in our most recent Annual Report on Form 10-K and
our Quarterly Reports on Form 10-Q. 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.
In addition, this presentation and oral statements made in connection with this presentation reference non-GAAP financial
measures, such as adjusted EBITDA and free cash flow. The use of these non-GAAP measures are limited as they include
and/or do not include certain items not included and/or included in the most directly comparable GAAP measure. A reconciliation
of non-GAAP financial measures to the most directly comparable GAAP financial measures (to the extent available without
unreasonable efforts) is provided in the appendix to this presentation and in our news release issued on February 23, 2017, which
are posted on hmhco.com under the Investor Relations section.
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Agenda
Welcome/Introductions
Business Update
Financial Overview
Questions and Answers
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Business Update
Focus on restoring growth to core business; making strategic
investments to position HMH for long-term growth and profitability
2016 net sales of $1.37 billion; billings of $1.41 billion
Met revised year-end guidance for 2016
Fourth Quarter and Full Year 2016 Highlights
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Investing in Our Core Education Products
• HMH Science Dimensions launched in October, first
comprehensive K-12 science program specifically
designed to meet NGSS
• HMH Social Studies, 6-12 launched in November
• HMH Kids Discover Social Studies launched this
month, offers K-6 solution
• New programs effectively combine print and digital assets,
including interactive tools like HMH Field Trips for Google
Expeditions
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Expanding Upon Our Core Education Strength
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Strong
opportunities
to integrate
intervention and
core programs
and products
Increase in the
percentage of
professional
services
within core
product sales
in 2016
Strong
performance with
11 consecutive
years of sales
growth in the
Heinemann
business
Curious World
receives
industry awards
and adds
original content
from celebrated
partners
Bestselling Titles in Trade
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2018 – 2019 Opportunities
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Market Opportunity Outlook
Maintain Leadership Position and Focus on Regaining Market Share
Implement Operating Efficiencies and Improvements
Focus on Growing Adjacencies that Elevate and Enhance the Core
Invest in Core K-12 Product Development
Priorities for 2017
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1
2
3
4
Financial Overview
$239 $175
$1,375 $1,189
$36 $35
$166 $221
Q4 2015 Q4 2016 FY 2015 FY 2016
$256 $200
$1,274 $1,182
$42 $42
$142 $191
Q4 2015 Q4 2016 FY 2015 FY 2016
Fourth Quarter and Full Year 2016 Highlights1
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1 Fourth quarter and Full Year ending December 31, 2016
2 An operating measure which we derive from net sales taking into account the change in deferred revenue. See calculation
of this metric in the appendix to this presentation. 3 Please see appendix for a reconciliation of non-GAAP measures.
Adjusted
EBITDA3
$ in millions
Billings2 Net Sales
Net Income (Loss)
EdTech HMH
$1,373
$1,541 $1,410
• Net sales and Billings2
decreased primarily
due to smaller new
adoption market and
domestic education
market share loss
• Adjusted EBITDA3
lower due to decrease
in net sales
$1,416
$242 $298 $275 $210
($97)
($181)
($134)
($285)
Q4 2015 Q4 2016 FY 2015 FY 2016
$16
($19)
$235
$183
Q4 2015 Q4 2016 FY 2015 FY 2016
New State Adoptions - 2014 to 2019
State 2014A 2015A 2016A 2017E 2018E 2019E
Texas
Science
Mathematics
Social Studies
Mathematics Foreign Language Reading/Language Arts
California-SA Mathematics Mathematics
Reading/Language Arts
Mathematics
Reading/Language Arts
ESL
Reading/Language Arts
ESL
Social Studies
Social Studies
Science
Florida
Reading/Language Arts
Mathematics
Reading/Language Arts
Mathematics
Reading/Language Arts
Mathematics Social Studies
Science
Social Studies Mathematics
Alabama Social Studies
Georgia Reading/Language Arts Mathematics Reading/Language Arts Science
Social Studies
Science
Social Studies
Mathematics
Tennessee Social Studies Mathematics Science Social Studies
South Carolina Reading/Language Arts Reading/Language Arts Mathematics Reading/Language Arts
Louisiana Reading/Language Arts Mathematics Reading/Language Arts
West Virginia Reading/Language Arts
Oklahoma Reading/Language Arts
New Mexico Reading/Language Arts
Oregon
Mathematics
Reading/Language Arts
Science
Mathematics
North Carolina Mathematics
Virginia Social Studies Mathematics
Reading/Language Arts
Mathematics
Mississippi Reading/Language Arts
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Source: States’ related education websites
2017 Outlook1
Billings $1,375 million to $1,455 million
Net Sales $1,325 million to $1,405 million
Content Development Spend $140 million to $160 million
Total Capital Expenditure $190 million to $220 million
Guidance
Addressable Market Flat to slightly higher than 2016, ~$2.7B
Market Share Consistent with 2016, ~ 39%
Adjusted EBITDA Margin2 3 Flat to slightly below 2016
Free Cash Flow3 Negative at mid-point of billings guidance with potential to be break-even at top end
Additional Insight
1 HMH’s expectations as of February 23, 2017. 2 Percentage of net sales. 3 Please see appendix for a reconciliation of non-GAAP measures (to the extent available without unreasonable efforts).
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Questions and Answers
Appendix
Financial Highlights
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$ in Millions Q4 FY
2015 2016 Variance % 2015 2016 Variance %
Net Sales $298 $242 (19%) $1,416 $1,373 (3%)
Change in Deferred Revenue (23) (32) 39% 124 38 (69%)
Billings1 275 210 (24%) 1,541 1,410 (8%)
Net Loss (97) (181) 87% (134) (285) 113%
Adjusted EBITDA2 16 (19) (219%) 235 183 (22%)
Cash and Short Term Investments3 432 307 (29%)
Free Cash Flow 127 90 (29%) 162 (86) (153%)
Pre-publication Costs (25) (29) 19% (104) (124) 20%
Capital Expenditures4 $(58) $(44) (23%) $(187) $(230) 23%
1 An operating measure which we derive from net sales taking into account the change in deferred revenue. See calculation of this metric in the appendix to this presentation. 2 Please see the appendix for a reconciliation of non-GAAP measures.
3 As of December 31, 2015, cash and short term investments includes cash and cash equivalents of $234.3M and short term investments of $198.1M. As of December 31, 2016,
it includes, cash and cash equivalents of $226.1M and short term investments of $80.8M. 4 Capital expenditures include pre-publication costs and property, plant and equipment expenditures.
Non-GAAP Reconciliation – Adjusted EBITDA1
1 Details may not sum to total due to rounding.
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($ in millions) Q4 FY
2015 2016 2015 2016
Net Loss $(97) $(181) $(134) $(285)
Interest Expense 10 10 32 39
Provision (Benefit) for Income Taxes 10 (81) (20) (65)
Depreciation Expense 19 21 73 80
Amortization Expense 60 60 224 218
Non-Cash Charges - Stock Compensation 3 2 12 11
Non-Cash Charges- Loss on Derivative Instrument 0 1 2 1
Non-Cash Charges- Asset Impairment Charges - 139 - 139
Purchase Accounting Adjustments 2 1 7 5
Fees Expenses or Charges for Equity Offerings, Debt or Acquisitions 7 0 26 1
Restructuring/Integration - 2 5 14
Severance, Separation Costs and Facility Closures 1 7 5 16
Loss on Extinguishment of Debt - - 3 -
Legal Settlement - - - 10
Adjusted EBITDA $16 $(19) $235 $183
Non-GAAP Reconciliation – Free Cash Flow1
1 Details may not sum to total due to rounding.
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$ in Millions Q4 FY
2015 2016 2015 2016
Net Cash Used in Operating Activities $185 $134 $348 $144
Additions to Pre-publication Costs (25) (29) (104) (124)
Additions to Property, Plant, and Equipment (33) (15) (83) (106)
Free Cash Flow $127 $90 $162 $(86)
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Billings 1
$ in millions Q4 FY
2015 2016 2015 2016
Net Sales $298 $242 Net Sales $1,416 $1,373
Change in Deferred Revenue (23) (32) Change in Deferred Revenue 124 38
Billings $275 $210 Billings $1,541 $1,410
1 Details may not sum to total due to rounding
Forward Looking Non-GAAP Reconciliations
Forward-Looking Adjusted EBITDA Margin and Free Cash Flow
Management has presented certain forward-looking statements about the Company’s expected future performance on a non-GAAP
basis, including adjusted EBITDA margin and free cash flow. Management is unable to present a quantitative reconciliation of these
forward-looking non-GAAP financial measures to their most directly comparable forward-looking GAAP financial measures of net
income/loss margin and net cash provided by operating activities because management cannot reliably predict all of the necessary
components of such GAAP measures on a forward-looking basis.
The adjusted EBITDA component of adjusted EBITDA margin (which we calculate as adjusted EBITDA over net sales) is derived by
excluding and/or including certain items required to be included in/excluded from the most directly comparable GAAP financial
measure of net income/loss. The determination of the items excluded from/included in adjusted EBITDA is a matter of management
judgment and depends upon, among other things, the nature of the underlying items recognized in a given period. Historically,
management has excluded/included the following items from adjusted EBITDA (a component of adjusted EBITDA margin), and such
items may also be excluded/included in future periods and could be significant in amount.
Interest expense, tax benefit/expense, depreciation and amortization expense
Non-cash charges related to stock compensation, asset impairments and unrealized gains and losses for derivative instruments
Fees, expenses or charges related to the acquisition of other businesses, including purchase accounting adjustments, integration
costs and transaction costs
Fees, expenses or charges related to securities offerings and debt refinancings
Charges associated with restructuring and cost saving initiatives, including severance, separation and facility closure costs
Certain legal settlements or awards
Non-routine charges or gains
Our inability to present a quantitative reconciliation of adjusted EBITDA, and consequently adjusted EBITDA margin, to net
income/loss and net income/loss margin, respectively, on a forward-looking basis also prevents us from being able to present a
quantitative reconciliation of free cash flow to net cash provided by operating activities on a forward-looking basis.
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Balance Sheet ($ in Millions)
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Dec 31 2015 Dec 31 2016
Current Assets
Cash and cash equivalents $234 $226
Short-term investments 198 81
Accounts receivable less allowance for bad debts
and book returns 256 216
Inventories 171 162
Prepaid expenses and other assets 23 20
Total current assets 883 706
Property, plant, and equipment, net 150 175
Pre-publication costs, net 322 315
Royalty advances to authors, net 45 44
Goodwill 783 783
Other intangible assets, net 913 686
Deferred income taxes 4 3
Other assets 23 20
Total assets $3,122 $2,731
Dec 31 2015 Dec 31 2016
Current Liabilities
Current portion of long-term debt $8 $8
Accounts payable 94 76
Royalties payable 86 72
Salaries, wages, and commissions payable 45 41
Deferred revenue 231 273
Interest payable 0 0
Severance and other charges 5 9
Accrued postretirement benefits 2 2
Other liabilities 35 24
Total current liabilities 507 505
Long-term debt, net of discount and issuance costs 769 765
Long-term deferred revenue 441 437
Accrued pension benefits 24 29
Accrued postretirement benefits 24 22
Deferred income taxes 140 71
Other liabilities 20 22
Total liabilities 1,924 1,851
Stockholder's Equity
Common stock 1 1
Treasury stock (463) (518)
Capital in excess of par value 4,833 4,868
Retained earnings (accumulated deficit) (3,134) (3,418)
Accumulated other comprehensive income (loss) (40) (53)
Total stockholder's equity (deficit) 1,198 880
Total liability and stockholder's equity $3,122 $2,731
Income Statement ($ in Millions)
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Q4 FY
2015 2016 2015 2016
Net Sales $298 $242 $1,416 $1,373
Costs and expenses
Cost of sales, excluding publishing right and pre-publication amortization 138 126 623 611
Publishing rights amortization 19 15 81 61
Pre-publication amortization 34 37 121 130
Cost of sales 191 177 824 802
Selling and administrative (related parties of $10,489 for FY 2015) 176 161 681 700
Impairment charge for intangible assets - 139 - 139
Other intangible asset amortization 7 9 22 27 Severance and other charges 1 7 5 16
Operating Income (Loss) (77) (251) (116) (311)
Other Income (Expense)
Interest expense (10) (10) (32) (39)
Change in fair value of derivative instruments (0) (1) (2) (1)
Loss on extinguishment of debt - - (3) -
Income (Loss) before taxes (87) (262) (154) (350)
Income tax expense (benefit) 10 (81) (20) (65)
Net Income (Loss) (97) (181) (134) (285)
Statement of Cash Flows ($ in Millions)
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Twelve Months Ended
Dec 31 2015 Dec 31 2016
Cash flows from investing activities
Purchases of short-term investments $(199) $(81)
Proceeds from sales and maturities of
short-term investments 287 198
Additions to pre-publication costs (104) (124)
Additions to property, plant, and equipment (83) (106)
Acquisition of business, net of cash acquired (578) -
Investment in preferred stock - (1)
Net cash used in investing activities (677) (114)
Cash flows from financing activities
Proceeds from term loan, net of discount 796 -
Payments of long-term debt (247) (8)
Payments of deferred financing fees (15) -
Tax withholding payments related to net share
settlements of restricted stock units (1) (2)
Proceeds from stock option exercises 36 25
Repurchases of common stock (related parties
of $193,493 in 2015) (463) (55)
Issuance of common stock under employee
stock purchase plan - 2
Net cash provided by (used in) financing
activities 106 (38)
Cash and cash equivalents at beginning of
period 457 234
Net decrease in cash and cash equivalents (222) (8)
Cash and cash equivalents at end of period $234 $226
Twelve Months Ended
Dec 31 2015 Dec 31 2016
Cash flows from operating activities
Net Loss $(134) $(285)
Adjustments to reconcile net loss to net cash provided by operating
activities
Depreciation and amortization expense 297 298
Amortization of debt discount and deferred financing costs 7 4
Deferred income taxes 48 (68)
Stock-based compensation expense 12 11
Loss on extinguishment of debt 3 0
Impairment charge for intangible assets 0 139
Change in fair value of derivative instruments 2 1
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 31 40
Inventories 26 9
Other Assets (3) 7
Accounts payable and accrued expenses 13 (24)
Royalties, net 6 (13)
Deferred revenue 124 38
Interest payable 0 0
Severance and other charges (4) 4
Accrued pension and postretirement benefits (5) 4
Other liabilities (78) (21)
Net cash provided by operating activities $348 $144
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