May 4, 2016
HMH Earnings Call First Quarter 2016
FORWARD LOOKING STATEMENTS AND NON-GAAP MEASURES This presentation and oral statements made in connection herewith contain forward-looking statements, which can be identified by the use of forward-looking terminology. These statements include all maters that are not historical facts, including statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, including billings, net sales, deferred revenue; financial condition; pre-publication or content development costs; liquidity; EdTech integration efforts; platform and systems upgrades; products, including product mix and format; our outlook for 2016; prospects; growth; markets and market share; strategies, including with respect to adjacent markets and capital structure and allocation; the industry in which we operate; and potential business decisions. These statements constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. Important factors that could cause our actual results to differ materially from the results expressed 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 May 04, 2016 and in the “Special Note Regarding Forward-Looking Statements” and “Risk Factors” in our most recent Annual Report on Form 10-K and subsequent 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, except as required by law.
In addition, this presentation and oral statements made in connection herewith reference non-GAAP financial measures, such as
adjusted EBITDA, adjusted cash EBITDA, adjusted post plate cash EBITDA, billings and free cash flow. These measures are supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. The use of these non-GAAP measures is 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 is provided in the appendix to this presentation and in our news release issued on May 04, 2016, which are posted on hmhco.com under the Investor Relations section. hmhco.com
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Agenda Welcome/Introductions Business Update
Financial Overview Questions and Answers
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Business Update
Education Highlights Q1 Wins in Key States
Opportunities in Major 2016 New Adoptions
1
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The Educational Technology and Services business acquired from Scholastic Corporation on May 29, 2015
More than 3,000 resources available at launch
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Solid conversion rate; Positive user engagement
Expanded digital offerings to extend the customer experiences
Leveraging Unique Assets & Expanding in Adjacencies
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Seamless integration of Core and Intervention with Read 180 Universal, the next generation of our industry leading intervention platform
Leveraging content in the U.S. and internationally with three 10-year Department of Defense (DoD) contracts
Enhance our education content and expand relationship with bestselling Trade author Randall Munroe to include exclusive content for HMH Science programs
Expand our core customer base, to grow in pre-K with Curious World; adding to our digital library with new, original content
Bestselling Titles in Trade Publishing
Over one million copies sold
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Other Business Highlights Upgrading and standardizing platforms and technology infrastructure, including HMH One and SAP
Making progress on the EdTech integration which is exceeding our expectations – product development/ sales force largely integrated, integration of back office systems expected by the end of Q2 FY16
Enhancing strategic position in key growth areas, including intervention, early learning and professional services
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Financial Overview
First Quarter 2016 Highlights1 • Billings increased 13% year-overyear to $168 million; Net sales increased 27% year-over-year to $206 million • Adjusted Cash EBITDA was a loss of $79 million vs. a loss of $67 million in Q1 FY15 • Repurchase of over 1.5 million in shares, approximately $31 million • Launched Read 180 Universal and HMH Marketplace and continued to demonstrate transformation into a leading educational media company
Billings2
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1 2
Three months ended March 31, 2016. Please see appendix for a reconciliation of non-GAAP measures.
Net Sales
$206 $148
$168
$163
$37
$24 $169
$144
Q1 2015
Q1 2016 EdTech
Adjusted Cash EBITDA2
($67)
Q1 2015 HMH
Q1 2016
Post Plate Adjusted Cash EBITDA2
($85) ($79)
Q1 2015
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$ in millions
Q1 2016
($112) Q1 2015
Q1 2016
Financial Highlights $ in Millions
Q1 2015 2016
Billings1
148
168
13%
Net Sales
163
206
27%
Adjusted Cash EBITDA
(67)
(79)
(19%)
Pre-publication costs (Plate)
(18)
(33)
(80%)
(85)
(112)
(33%)
(160)
(165)
(3%)
432
236
(45%)
(125)
(170)
(36%)
(32)
(58)
(78%)
1
1
Post Plate Adjusted Cash EBITDA Net Loss Cash and Short Term Investments Free Cash Flow
1
Capital Expenditures
1
Variance %
3
2
Please see the appendix for a reconciliation of non-GAAP measures. 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 March 31, 2016, it includes, cash and cash equivalents of $168.9M and short-term investments of $67.5M. 3 Capital expenditures include pre-publication costs and property, plant and equipment expenditures. 2 As
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Questions and Answers
Appendix
Non-GAAP Reconciliation – Adj EBITDA, Adj Cash EBITDA, Post Plate Adj Cash EBITDA 1 Q1
($ in millions) Net Loss Interest Expense Provision for Income Taxes Depreciation Expense Amortization Expense Non-Cash Charges - Stock Compensation Non-Cash Charges- (Gain) Loss on Derivative Instruments Purchase Accounting Adjustments2 Fees, Expenses or Charges for Equity Offerings, Debt or Acquisitions Restructuring Severance separation costs and facility closures Adjusted EBITDA Change in Deferred Revenue Adjusted Cash EBITDA Additions to Pre-publication Costs Post Plate Adjusted Cash EBITDA 1 2
Details may not sum to total due to rounding. Represents certain non-cash accounting adjustments, relating to deferred revenue.
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2015 (160) 6 21 18 53 3 2 0
2016 (165) 9 34 18 52 3 (1) 2
3
0
0 1 (52) (15) (67) (18) (85)
4 2 (41) (38) (79) (33) (112)
Non-GAAP Reconciliation – Free Cash Flow1 $ in Millions
Three Months Ended Mar 31 2015
Mar 31 2016
Net cash used in operating activities
(93)
(113)
Additions to pre-publication costs
(18)
(33)
Additions to property, plant, and equipment
(14)
(25)
(125)
(170)
Free Cash Flow
1
Details may not sum to total due to rounding.
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Non-GAAP Reconciliation – Billings Q1
$ in millions 2015 163
2016 206
Change in Deferred Revenue
(15)
(38)
Billings
148
168
Net Sales
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Balance Sheet ($ in Millions)
Dec 31, 2015 Current Assets Cash and cash equivalents Short-term investments Accounts receivable less allowance for bad debts and book returns Inventories Prepaid expenses and other assets Total current assets Property, plant, and equipment, net Pre-publication costs, net Royalty advances to authors, net Goodwill Other intangible assets, net Deferred income taxes Other assets Total assets
Unaudited Mar 31, 2016
$234 198 256 256 171 23 883
$169 68 183 183 222 25 667
150 322 45 783 913 4 23 3,122
160 323 45 783 889 4 23 2,895
Current Liabilities Current portion of long-term debt Accounts payable Royalties payable Salaries, wages, and commissions payable Deferred revenue Severance and other charges Accrued postretirement benefits Other liabilities Total current liabilities Long-term debt, net of discount and issuance costs Long-term deferred revenue Accrued pension benefits Accrued postretirement benefits Deferred income taxes Other liabilities Total liabilities Stockholders' Equity Common Stock Treasury Stock Capital in excess of par value Accumulated deficit Accumulated other comprehensive loss Total stockholder's equity Total liabilities and stockholder's equity
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Dec 31, 2015
Mar 31, 2016
$8 94 86
$8 101 60
45
28
231 5 2 35 507
212 5 2 38 454
769 441 24 24 140 20 1,924
768 422 23 23 173 25 1,888
1 (463) 4,833 (3,134) (40)
1 (494) 4,844 (3,299) (46)
1,198
1,006
3,122
2,895
Income Statement (unaudited) ($ in Millions)
Q1 2016
2015 $163
$206
97
106
23 26 146 143 3 1 (131)
18 28 152 169 6 2 (122) (9) 1
Loss before taxes
(6) (2) (139)
(131)
Income tax expense Net Loss
21 (160)
34 (165)
Net Sales Costs and expenses Cost of sales, excluding publishing rights and prepublication amortization Publishing rights amortization Pre-publication amortization Cost of sales Selling and administrative Other intangible asset amortization Severance and other charges Operating Loss Other Income (Expense) Interest expense, net Change in fair value of derivative instruments
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Statement of Cash Flows (unaudited) ($ in Millions) Three Months Ended Mar 31 2015 Mar 31 2016
Cash flows from operating activities Net loss Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization expense Amortization of deferred financing costs Deferred income taxes Stock-based compensation expense Change in fair value of derivative instruments Changes in operating assets and liabilities Accounts receivable Inventories Other Assets Accounts payable and accrued expenses Royalties, net Deferred revenue Interest payable Severance and other charges Accrued pension and postretirement benefits Other, net Net cash used in operating activities
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($160)
71 3 14 3 2 59 (29) (0) (22) (25) (15) (0) (1) (1) 8 (93)
Mar 31 2015
Cash flows from investing activities ($165) Purchases of short-term investments Proceeds from sales and maturities of short-term investments Additions to pre-publication costs Additions to property, plant, and equipment 71 Acquisition of business, net of cash acquired 1 Net cash provided by (used in) by investing activities 33 Cash flows from financing activities 3 Proceeds from term loan (1) Payments of long-term debt Tax withholding payments related to net share settlements of Payments Proceeds from of capital stockrestructuring option exercises costs 73 Repurchases of common stock (51) Issuance of common stock under employee stock purchase plan (3) Advances to affiliates (13) Net cash used in financing activities
(26) (38) (0) (2) 5 (113)
Mar 31 2016
$0 287 (18) (14) 254
$0 130 (33) (25) 73
(64) (0) 8 (56)
(2) (1) 8 (31) 1 (25)
Net (decrease) increase in cash and cash equivalents
105
(65)
Cash and cash equivalents at beginning of period Net (decrease) increase in cash and cash equivalents
457 105 562
234 (65) 169
Cash and cash equivalents at end of period