Houghton Mifflin Harcourt reports sharp rise in revenue and net income in Q2 earnings report
Net sales rise 11 percent, while net income comes in at $12 million, versus a loss in the same quarter of 2013
BOSTON, Mass. – August 14, 2014 — Global education leader Houghton Mifflin Harcourt Company today announced its financial results for the second quarter ended June 30, 2014.
Second Quarter 2014 Financial Highlights:
- Net sales in the second quarter 2014 increased 11% from 2013 to $402 million.
- Adjusted EBITDA rose 12% to $109 million from the second quarter of 2013.
- Net income for the quarter was $12 million compared with a loss of $14 million in the second quarter of 2013.
- New sales orders for the first six months of 2014 increased approximately 40% compared with the same period in 2013.
- Gross sales or billings increased 31% for the second quarter of 2014 compared with the same period in 2013. Deferred revenue grew $114 million from March 31, 2014 to June 30 2014, primarily from increased digital content sales.
Linda K. Zecher, HMH’s President and Chief Executive Officer, commented, “The opportunity within the U.S. adoption market is on pace to exceed initial expectations for 2014 and, as evidenced by our strong second quarter results and substantial market share, we are capitalizing on these positive dynamics. Our successful efforts to bundle digital components into new orders positions us for growth as our best-in-class technology fuels a broader industry and learning transformation. We also remain focused on pursuing complementary growth initiatives that will expand our presence beyond the K-12 classroom to more holistically meet the needs of lifelong learners.”
Eric Shuman, Chief Financial Officer of HMH, stated, “The strength of our strategy and execution ability is reflected in our financial performance, which includes double-digit sales growth and approximately 40% new order growth. As the percentage of new orders evolves toward digital, our revenue cycles have naturally extended, and, as a result, we generated a $114 million quarter over quarter increase in deferred revenue.”
Second Quarter Business Highlights:
Education segment: HMH has captured 50% market share among the 90% of adoption school districts that have announced content provider selections. In particular, GO Math! and ScienceFusion sales were very strong in Texas, while increased penetration within California and Florida also contributed to overall increased sales. The Company had a solid performance in open territories as it grew in Illinois, Washington, and Connecticut. HMH’s new Woodcock Johnson assessment solution had an immediate positive impact to the Company’s Riverside Assessment business, growing over 10% year over year.
Trade Publishing segment: The segment reported the second highest second quarter net sales in the history of the business despite a year-over-year decline following an exceptionally strong performance in the second quarter of 2013. The Giver by Lois Lowry, which has been a top-selling print and e-book title, will have its movie release this month which could to provide ongoing tie-in sales in the coming quarters.
Acquisitions: HMH executed on initiatives to enhance its presence in the Early Childhood segment and build on its best-in-class digital capabilities through a series of strategic acquisitions in the second quarter.
- Channel One News: HMH’s acquisition of Channel One News brings expertise in digital content tailored to the K-12 market, strengthening the Company’s ability to develop and distribute information across multiple media modalities. With a 25 year track record and award-winning programming, Channel One News is broadcast to nearly five million upper elementary, middle and high school students across the U.S. via satellite and at ChannelOne.com. The acquisition will enable HMH to further integrate video content into its current product lineup.
- Curiosityville: In line with its focus on creating a meaningful presence in the Early Childhood space, in the second quarter HMH completed the acquisition of subscription-based, personalized learning platform Curiosityville. Founded on extensive research and promoting at-home and online learning, Curiosityville leverages unique characters as well as a proprietary analytics engine to better prepare children for classroom learning.
- SchoolChapters: HMH acquired ePortfolio company SchoolChapters, which offers cloud-based applications for education providers to organize credentials and assessments, as well as share and discuss classroom planning with an online community.
Digital Expansions: This quarter, in addition to newly acquired assets, HMH extended its digital leadership with the launch of HMH Player for Google Chrome and the iPad. The HMH Player creates a new category in our market and enables districts considering 1:1 technology implementations to execute on those plans. This application creates a solution to ensure a more consistent, engaging and effective learning environment fueled by technology.
Also in the second quarter, HMH launched subscription-based, at-home learning tool Go Math! Academy. Based on the success of this product, HMH plans to extend the consumer-focused Academy product line to other subject areas.
HMH also announced a strategic collaboration with Microsoft Corp. to optimize core K-12 education content for the Windows 8 operating system, providing an even greater level of choice and access to students and educators across a broad range of devices. This partnership includes the development a new eTextbook reader application for Windows 8.
Second Quarter 2014 Unaudited Financial Results
Net Sales: HMH reported total net sales of $402 million for the quarter ended June 30, 2014, $39 million or 11% higher than the $363 million reported in second quarter of 2013. This increase was driven by a 13%, or $41 million, year-over-year rise in the Company’s Education sales to $365 million from $324 million, as domestic education basal sales grew $47 million on increased adoptions primarily in Texas, and to a lesser extent, California and Florida. Deferred revenue increased $114 million for the three months ended June 30, 2014 from March 31, 2014, primarily due to higher digital components and print workbooks associated with the increased adoption sales. Additionally, assessment sales increased by $5 million following the launch of a new edition of the Woodcock Johnson product. This growth was slightly offset by $6 million and $5 million declines in professional services and international sales, respectively.
Within HMH’s Trade Publishing division, net sales in the second quarter of 2014 declined 5%, or $2 million, to $37 million from $39 million as the prior year benefitted from strong net sales of backlist titles associated with the theatrical releases of the movies The Hobbit and Life of Pi along with strong front list titles such as Francona and How Children Succeed which did not occur in the current period.
Cost of Sales: Cost of sales, excluding pre-publication and publishing rights amortization, for the second quarter of 2014 were $167 million, up $8 million, or 5% as compared with $159 million for the same period in 2013. Cost of sales, excluding pre-publication and publishing rights amortization, as a percentage of sales decreased to 42% compared with 44% in the second quarter of 2013. This favorable shift is the result of the mix of basal programs sold carrying low product cost which have benefitted from economies of scale of large print runs, slightly offset by an increase in royalties.
Selling and Administrative Costs: In the second quarter of 2014, Selling and Administrative costs were $152 million, or 14% higher than the $133 million recorded in the same period in 2013. The higher costs were primarily due to increased commission costs associated with the higher sales volumes, increased outside labor costs to support the adoptions in 2014, and increased technology costs to support ongoing digital initiatives.
Operating Income (Loss): Operating income for the second quarter of 2014 was $18 million compared with a loss of $6 million in the same period in 2013. The $24 million increase is primarily due to the aforementioned increase in net sales, improvement in gross margin, and lower impairment costs, and a reduction in net amortization expense related to publishing rights, pre-publication and other intangible assets due to HMH’s use of accelerated amortization methods.
Net Income (Loss): Net income for the quarter was $12 million, an increase of almost $26 million compared with a loss of $14 million in the second quarter of 2013, primarily due to the same drivers impacting operating income as well as lower interest expenses resulting from the Company’s debt refinancings.
Adjusted EBITDA: Adjusted EBITDA for the second quarter of 2014 was $109 million, up 12% compared with $97 million in the same period of 2013. Adjusted EBITDA for HMH’s Education segment was $119 million, compared with $100 million in the same quarter of last year, and Adjusted EBITDA for the Trade Publishing segment was $2 million compared with nearly $5 million in the second quarter of 2013. Corporate and Other costs, which represent certain general overhead costs not fully allocated to the business segments, such as legal, accounting, treasury, human resources, technology and executive functions, were a loss of $12 million in the second 2014 compared with a loss of $8 million in the year-ago period as the Company incurred higher selling and administrative expenses from increased consulting and professional fees, as well as an increase in equity compensation charges.
Cash Flow: Net cash used by operating activities for the six months ended June 30, 2014 was $132 million as compared to $153 million for the same period in 2013. The $21 million improvement is primarily due to working capital changes. For the six months ended June 30, 2014, the Company had $193 million of cash and cash equivalents and short term investments compared with $213 million for the same period in 2013. Operating cash flows are impacted by the inherent seasonality of the academic calendar. Consequently, the performance of the businesses is difficult to compare quarter to consecutive quarter and should be considered on the basis of results for the whole year.