May 7, 2015 Last Updated 7:51 am

Houghton Mifflin Harcourt reports higher sales, but a larger loss, as well

Net sales were up about 6 percent to $163 million, due to higher Education and Trade Publishing sales and recognition of previously deferred revenue

BOSTON, Mass. – May 7, 2015 — Global learning company Houghton Mifflin Harcourt Company today announced its financial results for the first quarter ended March 31, 2015.

First Quarter 2015 Highlights:

  • Billings increased approximately 3% to $148 million in the first quarter compared to $144 million in the first quarter of 2014 primarily due to higher sales from the assessment business.
  • Net sales were $163 million, up approximately 6%, compared with $154 million in the first quarter of 2014, driven by higher Education and Trade Publishing sales and the recognition of previously deferred revenue.
  • Adjusted EBITDA improved, with a loss of $52 million compared to a loss of $53 million in the first quarter of 2014. Adjusted cash EBITDA, which accounts for the change in deferred revenue, decreased to a loss of $67 million compared to a loss of $63 million in the first quarter of 2014.
  • Net loss increased to $160 million from $146 million in the first quarter of 2014.
    HMH captured 51% market share among adoption school districts that announced content provider selections.
  • The Company is seeking an increase in the size of their new term loan from $500 million to $800 million.
  • The Board of Directors has authorized the repurchase of up to $500 million of shares of HMH’s common stock.

hmh-logoLinda K. Zecher, HMH’s President and Chief Executive Officer, commented, “We began 2015 on solid footing as we executed against our growth strategy. We remain the clear leader within K-12 adoption school districts thus far in 2015 and have continued to build momentum in key growth areas. As recently announced, we believe our planned acquisition of the EdTech business of Scholastic will enhance our ability to drive value for our shareholders by strengthening our core business and accelerating growth in adjacent markets. This transaction, together with the increase of our share repurchase program to $500 million, reflects HMH’s continued focus on pursuing opportunities that are consistent with our capital allocation strategy.”

Eric Shuman, Chief Financial Officer of HMH, stated, “During the first quarter we saw encouraging demand for our products across both our Education and Trade Publishing segments, and we believe that the recognition of previously deferred revenue highlights the long-term financial benefits of our digital growth. We expect that our operations will continue to provide us with the cash and flexibility to execute our strategy. Further, we believe that the debt markets are favorable and we are pleased with the early indication of demand we have experienced for the new term loan. Therefore we are planning to increase the new term loan to $800 million.”

First Quarter and Recent 2015 Business Highlights:

Education Segment: HMH saw encouraging demand for its education products in early 2015 as the Company captured a 51% market share among adoption school districts that announced content providers. HMH had key wins in adoption states, including California, Florida, and Tennessee. Additionally, strong sales of HMH’s Woodcock Johnson IV assessment product continued into 2015.

Within HMH’s direct-to-consumer business, CuriousWorld.com has gained traction and continues to garner acclaim. In addition to the app reaching more than 500,000 downloads, the website was named the number one educational website for kids by Parenting.com.

Trade Publishing Segment: In the first quarter of 2015, sales in HMH’s Trade Publishing segment were driven by strong backlist sales of J.R.R. Tolkien and Lois Lowry, and continued success with What if? and the Newbery medal winning children’s book, The Crossover. HMH’s culinary line also had a strong start to the year with the release of The Whole30, The Real Paleo Diet Cookbook, and Cake My Day. The Company recently secured publishing rights to Umberto Eco’s Numero Zero and has announced plans to publish an anthology series entitled 100 Years of The Best American Short Stories, which will be available in late 2015.

Planned Acquisition of Scholastic’s Educational Technology and Services Business: On April 23, 2015, HMH entered into a definitive agreement to acquire the Educational Technology and Services (“EdTech”) business of Scholastic Corporation for $575 million in cash. The acquisition, which is expected to close in the second quarter of 2015, would provide HMH with a leading position in intervention curriculum and services and extend our product offerings in other key growth areas, including educational technology, early learning, and education services, creating a more comprehensive offering for students, teachers and schools. The transaction is expected to be accretive to HMH’s net income and free cash flow in 2016 and to yield synergies in 2016 and beyond with annual cost savings of $10 to $20 million.

First Quarter 2015 Financial Results

Net Sales: Net sales for the three months ended March 31, 2015 increased $9 million to $163 million, up 6%, from $154 million in the first quarter 2014. Net sales for HMH’s Education segment increased $7 million year-over-year from $122 million to $129 million, driven by a $6 million increase in assessment sales from the Woodcock Johnson product and a $3 million increase in domestic education basal sales, attributable to the recognition of previously deferred revenue. This increase was partially offset by a $2 million decline in sales of traditional print supplemental products due to an aging product base. First quarter 2015 net sales for HMH’s Trade Publishing segment increased $2 million, or 5%, from $32 million for the same period in 2014, to $34 million, driven by strong net sales of front-list culinary titles such as The Whole 30, The Real Paleo Diet Cookbook and Cake My Day as well as of the Newbery Medal winning children’s book The Crossover.

Cost of Sales: Overall cost of sales in the first quarter 2015 decreased 4% or $6 million to $146 million compared to $152 million in the first quarter of 2014. During this period, cost of sales, excluding pre-publication and publishing rights amortization grew by $4 million year-over-year from $93 million to $97 million. As a percent of net sales, cost of sales, excluding pre-publication and publishing rights amortization improved slightly from 60% to 59%. HMH reported a $10 million reduction in net amortization expense related to publishing rights, pre-publication and other intangible assets, primarily due to its use of accelerated amortization methods.

Selling and Administrative Costs: Selling and administrative costs in the first quarter of 2015 increased $6 million year-over-year to $143 million, primarily due to higher professional and legal fees.

Operating Loss: Operating loss for the three months ended March 31, 2015 improved $9 million, or 7%, from a loss of $140 million in the first quarter of 2014 to a loss of $131 million, due to the aforementioned changes in net sales, cost of sales, and selling and administrative costs.

Net Loss: Net loss of $160 million in the first quarter of 2015 increased $14 million, or 10%, compared to a net loss of $146 million in the same quarter of 2014, primarily due to the timing of the recognition of our non-cash deferred income tax.

Adjusted EBITDA: Adjusted EBITDA for the first quarter of 2015 was a loss of $52 million compared to a loss of $53 million in the same quarter for 2014. Adjusted EBITDA in HMH’s Education segment was a loss of $37 million, compared with a loss of $40 million in the same quarter last year. Adjusted EBITDA for the Trade Publishing segment was a loss of $1 million, relatively flat on a year-over-year basis. 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 $13 million for the quarter compared with a loss of $12 million in the year-ago period. Adjusted cash EBITDA, defined as adjusted EBITDA plus the change in deferred revenue, was a loss of $67 million compared to a loss of $63 million in the first quarter of 2014.

Cash Flow: Net cash used in operating activities for the three months ended March 31, 2015 was $93 million as compared with $103 million for the same period in 2014. The $10 million improvement is primarily due to the timing of working capital. HMH’s free cash flow, defined as net cash from operating activities minus capital expenditures, for the three months ended March 31, 2015 was a usage of $125 million compared with a usage of $156 million for the same period in 2014. As of March 31, 2015, HMH had $562 million of cash and cash equivalents and short-term investments compared to $268 million at March 31, 2014. Operating cash flow is impacted by the inherent seasonality of the academic calendar. Consequently, the performance of the business is difficult to compare quarter to consecutive quarter and should be considered on the basis of results for the whole year.

HMH-Q12015

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