HMH Earnings Call Second Quarter and First Half 2017 August 3, - - PowerPoint PPT Presentation

Second Quarter and First Half 2017

August 3, 2017

HMH Earnings Call

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 and condition; liquidity; 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 basal business and extensions thereof; efficiency and cost savings initiatives; the industry in which we

• perate; 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 August 3, 2017 and in the “Special Note Regarding Forward-Looking Statements” and “Risk Factors” in our most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. We undertake no obligation, and do not expect, to publicly update or 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, billings 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 is provided in the appendix to this presentation and in our news release issued on August 3, 2017, which are posted on hmhco.com under the Investor Relations section. 2

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Agenda

Welcome / Introduction Business Updates Financial Overview Questions & Answers

Business Updates

• Net sales of $615 million, up 3% compared to

the first half of 2016

• Billings1 of $579 million, flat comparable to

first half of 2016

• Free cash flow1 was a usage of $224 million,

an improvement of $66 million compared to the first half of 2016

• On track to deliver 2017 annual guidance

5

First Half 2017 Highlights

Net Sales

($ in Millions)

Billings1

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

$598 $615 H1 2016 H1 2017 $580 $579 H1 2016 H1 2017

($ in Millions)

Focused on Driving Growth

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OPTIMIZING FREE CASH FLOW THROUGH THE CYCLE ALLOCATING CAPITAL TO HIGH-GROWTH, HIGH- MARGIN EXTENSIONS STRENGTHENING OUR CORE BASAL BUSINESS

1H Net sales Performance Led By Trade and Extensions

7

100%

C E RT I F I E D

9%

A N N U A L T U R N O V E R

• First-half sales up 13% year over year
• Growth driven by Whole30 series, Tools of Titans

and Papi, stronger eBook sales as well as strong backlist titles EXTENSIONS

• Extensions contributed strong performance in the

first half of the year, with sales up $25 million year

• ver year
• Intervention sales increased due to strong Read

180 Universal growth

• Heinemann growth driven by Classroom Libraries
• Integrated solution selling provides opportunity to

increase share of wallet TRADE

Financial Overview

Second Quarter and First Half 2017 Highlights1

$392 $393 $598 $615 Q2 2016 Q2 2017 YTD 2016 YTD 2017

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$413 $395 $580 $579 Q2 2016 Q2 2017 YTD 2016 YTD 2017 $75 $73 $34 $49 Q2 2016 Q2 2017 YTD 2016 YTD 2017 ($120) ($83) ($290) ($224) Q2 2016 Q2 2017 YTD 2016 YTD 2017

Net Sales Billings2 Free Cash Flow3 Adjusted EBITDA3

1 Three and Six months ended June 30, 2017 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.

• Q2 and YTD results consistent with 2017 outlook
• Net Sales were essentially flat in 2Q, and grew 3% YTD
• Billings2 were down 4% in 2Q, and were essentially flat

YTD

• Adjusted EBITDA3 declined 3% in 2Q, and grew 43%

YTD

• Free Cash Flow improved 31% in 2Q, and improved 23%

YTD

• Net Loss increased 65% in 2Q, but improved 13% YTD

Net Income (Loss)

($28) ($47) ($194) ($168) Q2 2016 Q2 2017 YTD 2016 YTD 2017

• Operating efficiency program on track

– Organizational design changes substantially complete – Expect $70 to $80 million in annualized cost savings by end of 2018

• Next Generation Science program submitted to Florida

– Billings opportunity in 2018

• Next Generation Social Studies program submitted to California

– Billings opportunity in 2018

• Next Generation Reading and Math programs in development

– Large expected adoptions in Texas and Florida, with billings opportunities beginning in 2019

• Reaffirming guidance for 2017

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Second Quarter and First Half Business Updates

Questions & Answers

Appendix

New State Adoptions - 2016 to 2019

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State 2016A 2017E 2018E 2019E Texas Foreign Language Reading/Language Arts California-SA Reading/Language Arts Mathematics Reading/Language Arts ESL/Mathematics Reading/Language Arts ESL Social Studies Social Studies Science Florida Reading/Language Arts Mathematics Social Studies Science Social Studies Mathematics Georgia Reading/Language Arts Reading/Language Arts Science Social Studies Science Social Studies Mathematics Tennessee Science Social Studies South Carolina Reading/Language Arts Social Studies Louisiana Reading/Language Arts Social Studies Oklahoma Reading/Language Arts Reading/Language Arts Mathematics New Mexico Reading/Language Arts Oregon Mathematics Reading/Language Arts Virginia Mathematics Reading/Language Arts Mathematics Mississippi Reading/Language Arts

Financial Highlights

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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, 2016, cash and short term investments included cash and cash equivalents of $226.1M and short term investments of $80.8M. As of June 30,

2017, it includes cash and cash equivalents of $78.7M.

4 Capital expenditures include pre-publication costs and property, plant, and equipment expenditures.

$ in Millions Q2 YTD 2016 2017 Variance % 2016 2017 Variance %

Net Sales $392 $393 0% $598 $615 3% Change in Deferred Revenue 21 2 (88%) (17) (36) 104% Billings1 413 395 (4%) 580 579 (0%) Net Loss (28) (47) 65% (194) (168) (13%) Adjusted EBITDA2 75 73 (3%) 34 49 43% Cash and Short Term Investments3 307 79 (74%) Free Cash Flow2 (120) (83) (31%) (290) (224) (23%) Pre-publication Costs (32) (29) (9%) (65) (57) (12%) Capital Expenditures4 (64) (39) (39%) (121) (84) (31%)

Non-GAAP Reconciliation – Adjusted EBITDA1

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1 Details may not sum to total due to rounding 2 Three and Six months ended June 30, 2017

($ in millions) Q22 YTD2 2016 2017 2016 2017

Net Loss

(28) (47) (194) (168)

Interest Expense

9 10 19 21

(Benefit) Provision for Income Taxes

(3) 6 32 21

Depreciation Expense

19 19 38 38

Amortization Expense

52 49 104 98

Non-Cash Charges - Stock Compensation

4 3 7 5

Non-Cash Charges - Loss (Gain) on Derivative Instrument

1 (1) (0) (1)

Purchase Accounting Adjustments

1

• 3
• Fees Expenses or Charges for Equity Offerings, Debt or Acquisitions

1 (0) 1

2017 Restructuring Plan

• 33
• 37

Restructuring/Integration

6

• 10
• Severance, Separation Costs and Facility Closures

4 5 1

Legal Settlement

10

• 10

(5)

Adjusted EBITDA

$75 $73 $34 $49

Non-GAAP Reconciliation – Free Cash Flow1

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1 Details may not sum to total due to rounding 2 Three and Six months ended June 30, 2017

$ in Millions Q22 YTD2 2016 2017 2016 2017 Net Cash Used in Operating Activities ($56) ($44) ($169) ($140) Additions to Pre-publication Costs (32) (29) (65) (57) Additions to Property, Plant, and Equipment (31) (9) (56) (27) Free Cash Flow ($120) ($83) ($290) ($224)

Billings1

$ in millions Q22 YTD2 2016 2017 2016 2017 Net Sales $392 $393 $598 $615 Change in Deferred Revenue 21 2 (17) (36) Billings $413 $395 $580 $579 17

1 Details may not sum to total due to rounding 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 Three and Six months ended June 30, 2017.

Balance Sheet

December 31, 2016 June 30, 2017 Current Liabilities Current portion of long-term debt $8 $8 Accounts payable 76 92 Royalties payable 72 69 Salaries, wages, and commissions payable 41 44 Deferred revenue 273 243 Interest payable Severance and other charges 9 16 Accrued postretirement benefits 2 2 Other liabilities 24 38 Total current liabilities 505 512 Long-term debt, net of discount and issuance costs 765 762 Long-term deferred revenue 437 431 Accrued pension benefits 29 27 Accrued postretirement benefits 22 21 Deferred income taxes 71 90 Other liabilities 22 21 Total liabilities 1,851 1,865 Stockholder's Equity Common stock 1 1 Treasury stock (518) (518) Capital in excess of par value 4,868 4,874 Accumulated Deficit (3,418) (3,586) Accumulated other comprehensive loss (53) (52) Total stockholder's equity 880 719 Total liability and stockholder's equity $2,731 $2,584

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(unaudited) (unaudited)

($ in Millions) December 31, 2016 June 30, 2017 Current Assets Cash and cash equivalents $226 $79 Short-term investments 81 $0 Accounts receivable, net 216 304 Inventories 162 198 Prepaid expenses and other assets 20 26 Total current assets 706 607 Property, plant, and equipment, net 175 157 Pre-publication costs, net 315 317 Royalty advances to authors, net 44 49 Goodwill 783 783 Other intangible assets, net 686 645 Deferred income taxes 3 3 Other assets 20 22 Total assets $2,731 $2,584

Income Statement (unaudited)

Q2 YTD 2016 2017 2016 2017 Net Sales $392 $393 $598 $615 Costs and expenses Cost of sales, excluding publishing right and pre-publication amortization 173 176 279 283 Publishing rights amortization 14 11 32 24 Pre-publication amortization 31 30 60 57 Cost of sales 219 216 371 365 Selling and administrative 184 166 353 323 Other intangible asset amortization 6 8 12 16 Restructuring 33 5 37 Severance and other charges 4 1 Operating Loss (21) (31) (143) (127) Other Income (Expense) Interest expense (9) (10) (19) (21) Change in fair value of derivative instruments (1) 1 1 Loss before taxes (31) (41) (162) (147) Income tax (benefit) expense (3) 6 32 21 Net Loss ($28) ($47) ($194) ($168)

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($ in Millions)

Statement of Cash Flows (unaudited)

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($ in Millions) Six Months Ended June 30, 2016 June 30, 2017 Cash flows from investing activities Proceeds from sales and maturities of short-term investments 198 81 Additions to pre-publication costs (65) (57) Additions to property, plant, and equipment (56) (27) Net cash provided by (used in) investing activities 76 (3) Cash flows from financing activities Payments of long-term debt (4) (4) Tax withholding payments related to net share settlements of restricted stock units and awards (1) (1) Proceeds from stock option exercises 11 1 Repurchases of common stock (51)

• Issuance of common stock under employee stock

purchase plan 1 1 Net cash used in investing activities (44) (4) Net decrease in cash and cash equivalents (136) (147) Cash and cash equivalents at beginning of period 234 226 Cash and cash equivalents at end of period $98 $79 Six Months Ended June 30, 2016 June 30, 2017 Cash flows from operating activities Net loss ($194) ($168) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization expense 142 136 Amortization of debt discount and deferred financing costs 2 2 Deferred income taxes 29 19 Stock-based compensation expense 7 5 Restructuring charges related to property, plant, and equipment

• 10

Change in fair value of derivative instruments (0) (1) Changes in operating assets and liabilities Accounts receivable (91) (88) Inventories (47) (35) Other assets (10) (8) Accounts payable and accrued expenses 12 12 Royalties, net (3) (8) Deferred revenue (17) (36) Interest payable

• (0)

Severance and other charges 10 Accrued pension and postretirement benefits (3) (3) Other liabilities 5 12 Net cash used in operating activities (169) (140)