HMH Earnings Call First Quarter 2016 FORWARD LOOKING STATEMENTS AND - - PowerPoint PPT Presentation

HMH Earnings Call

First Quarter 2016

May 4, 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

• perate; 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

• n May 04, 2016, 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

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Education Highlights

Q1 Wins in Key States Opportunities in Major 2016 New Adoptions

1 The Educational Technology and Services business acquired from Scholastic Corporation on May 29, 2015

Solid conversion rate; Positive user engagement More than 3,000 resources available at launch Expanded digital

• fferings to extend the

customer experiences

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Leveraging Unique Assets & Expanding in Adjacencies

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Seamless integration

• f Core and

Intervention with Read 180 Universal, the next generation of our industry leading intervention platform Enhance our education content and expand relationship with bestselling Trade author Randall Munroe to include exclusive content for HMH Science programs Leveraging content in the U.S. and internationally with three 10-year Department of Defense (DoD) contracts Expand our core customer base, to grow in pre-K with Curious World; adding to our digital library with new,

• riginal content

Bestselling Titles in Trade Publishing

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Over one million copies sold

Enhancing strategic position in key growth areas, including intervention, early learning and professional services 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 Upgrading and standardizing platforms and technology infrastructure, including HMH One and SAP

Other Business Highlights

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Financial Overview

First Quarter 2016 Highlights1

• Billings increased 13% year-over-

year 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

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1 Three months ended March 31, 2016. 2 Please see appendix for a reconciliation of non-GAAP measures.

Billings2 Adjusted Cash EBITDA2 Net Sales

($67) ($79) Q1 2015 Q1 2016 ($85) ($112) Q1 2015 Q1 2016

Post Plate Adjusted Cash EBITDA2

$ in millions

$163 $206 $37 Q1 2015 Q1 2016 $169 $148 $144 $24 Q1 2015 Q1 2016 $168 EdTech HMH

Financial Highlights

1 Please see the appendix for a reconciliation of non-GAAP measures. 2 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 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.

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$ in Millions 2015 2016 Variance % Billings1 148 168 13% Net Sales 163 206 27% Adjusted Cash EBITDA1 (67) (79) (19%) Pre-publication costs (Plate) (18) (33) (80%) Post Plate Adjusted Cash EBITDA1 (85) (112) (33%) Net Loss (160) (165) (3%) Cash and Short Term Investments2 432 236 (45%) Free Cash Flow1 (125) (170) (36%) Capital Expenditures3 (32) (58) (78%) Q1

Questions and Answers

Appendix

Non-GAAP Reconciliation – Adj EBITDA, Adj Cash EBITDA, Post Plate Adj Cash EBITDA 1

1 Details may not sum to total due to rounding. 2 Represents certain non-cash accounting adjustments, relating to deferred revenue.

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($ in millions) 2015 2016 Net Loss (160) (165) Interest Expense 6 9 Provision for Income Taxes 21 34 Depreciation Expense 18 18 Amortization Expense 53 52 Non-Cash Charges - Stock Compensation 3 3 Non-Cash Charges- (Gain) Loss on Derivative Instruments 2 (1) Purchase Accounting Adjustments2 2 Fees, Expenses or Charges for Equity Offerings, Debt or Acquisitions 3 Restructuring 4 Severance separation costs and facility closures 1 2 Adjusted EBITDA (52) (41) Change in Deferred Revenue (15) (38) Adjusted Cash EBITDA (67) (79) Additions to Pre-publication Costs (18) (33) Post Plate Adjusted Cash EBITDA (85) (112) Q1

Non-GAAP Reconciliation – Free Cash Flow1

1 Details may not sum to total due to rounding.

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$ 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) Free Cash Flow (125) (170)

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Non-GAAP Reconciliation – Billings

$ in millions 2015 2016 Net Sales 163 206 Change in Deferred Revenue (15) (38) Billings 148 168 Q1

Balance Sheet

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($ in Millions)

hmhco.com / 18 Dec 31, 2015 Mar 31, 2016 Current Liabilities Current portion of long-term debt $8 $8 Accounts payable 94 101 Royalties payable 86 60 Salaries, wages, and commissions payable 45 28 Deferred revenue 231 212 Severance and other charges 5 5 Accrued postretirement benefits 2 2 Other liabilities 35 38 Total current liabilities 507 454 Long-term debt, net of discount and issuance costs 769 768 Long-term deferred revenue 441 422 Accrued pension benefits 24 23 Accrued postretirement benefits 24 23 Deferred income taxes 140 173 Other liabilities 20 25 Total liabilities 1,924 1,888 Stockholders' Equity Common Stock 1 1 Treasury Stock (463) (494) Capital in excess of par value 4,833 4,844 Accumulated deficit (3,134) (3,299) Accumulated other comprehensive loss (40) (46) Total stockholder's equity 1,198 1,006 Total liabilities and stockholder's equity 3,122 2,895

Unaudited Dec 31, 2015 Mar 31, 2016 Current Assets Cash and cash equivalents $234 $169 Short-term investments 198 68 Accounts receivable less allowance 256 183 for bad debts and book returns 256 183 Inventories 171 222 Prepaid expenses and other assets 23 25 Total current assets 883 667 Property, plant, and equipment, net 150 160 Pre-publication costs, net 322 323 Royalty advances to authors, net 45 45 Goodwill 783 783 Other intangible assets, net 913 889 Deferred income taxes 4 4 Other assets 23 23 Total assets 3,122 2,895

Income Statement (unaudited)

13

($ in Millions)

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2015 2016 Net Sales $163 $206 Costs and expenses Cost of sales, excluding publishing rights and pre- publication amortization 97 106 Publishing rights amortization 23 18 Pre-publication amortization 26 28 Cost of sales 146 152 Selling and administrative 143 169 Other intangible asset amortization 3 6 Severance and other charges 1 2 Operating Loss (131) (122) Other Income (Expense) Interest expense, net (6) (9) Change in fair value of derivative instruments (2) 1 Loss before taxes (139) (131) Income tax expense 21 34 Net Loss (160) (165) Q1

Statement of Cash Flows (unaudited)

13

($ in Millions)

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Three Months Ended Mar 31 2015 Mar 31 2016 Cash flows from operating activities Net loss ($160) ($165) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization expense 71 71 Amortization of deferred financing costs 3 1 Deferred income taxes 14 33 Stock-based compensation expense 3 3 Change in fair value of derivative instruments 2 (1) Changes in operating assets and liabilities Accounts receivable 59 73 Inventories (29) (51) Other Assets (0) (3) Accounts payable and accrued expenses (22) (13) Royalties, net (25) (26) Deferred revenue (15) (38) Interest payable (0)

• Severance and other charges

(1) (0) Accrued pension and postretirement benefits (1) (2) Other, net 8 5 Net cash used in operating activities (93) (113)

Mar 31 2015 Mar 31 2016 Cash flows from investing activities Purchases of short-term investments $0 $0 287 130 Additions to pre-publication costs (18) (33) Additions to property, plant, and equipment (14) (25) Acquisition of business, net of cash acquired

• 254

73 Cash flows from financing activities Proceeds from term loan

• Payments of long-term debt

(64) (2) (0) (1) P Proceeds from stock option exercises 8 8 Repurchases of common stock

• (31)

Issuance of common stock under employee stock purchase plan

• 1

Advances to affiliates

• (56)

(25) 105 (65) Cash and cash equivalents at beginning of period 457 234 Net (decrease) increase in cash and cash equivalents 105 (65) 562 169 Cash and cash equivalents at end of period Proceeds from sales and maturities of short-term investments Net cash provided by (used in) by investing activities Net cash used in financing activities Net (decrease) increase in cash and cash equivalents Tax withholding payments related to net share settlements of