august 4, 2016 hmh earnings call€¦ · financial measures to the most directly comparable gaap...
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HMH Earnings CallAugust 4, 2016
Second Quarter 2016
FORWARD LOOKING STATEMENTS AND NON-GAAP MEASURESThis 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, net sales, deferred revenue; financial condition; pre-publication or content development costs; liquidity;
EdTech impact; systems integration; products, including product pipeline; our outlook for 2016; prospects; growth; markets and
market share; strategies, including with respect to leveraging our core product portfolio and expanding into new and adjacent
markets; the industry in which we operate; 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 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 our 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.
In addition, this presentation and oral statements made in connection with this presentation reference non-GAAP financial measures,
such as adjusted EBITDA 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 04, 2016, which are posted on hmhco.com under the Investor Relations section. hmhco.com / 2
Agenda
Welcome/Introductions
Business Update
Financial Overview
Questions and Answers
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Business Update
2016 Education Landscape
hmhco.com / 5 1 The Educational Technology and Services business acquired from Scholastic Corporation on May 29, 2015
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HMH Field Trips
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Always Enhancing our Education Products
Science• Aligned to Next Generation
Science Standards• More digital solutions,
including HMH Field Trips• Heavy STEM focus• Incorporates engaging
material from Randall Munroe’s “Thing Explainer”
Social Studies• Effective combination of
print and digital assets• Incorporates HMH Field
Trips• Modular program for
flexible purchase model
Reading• Incorporates best-in-class
fiction, non-fiction, poetry and drama
• More interactive and digital delivery content
• Flexible instruction program• Designed based on input
from top reading/literacy thought leaders
HMH Marketplace• Strong momentum since
launch in Q1 2016• Number of listings doubled
in three months• Continued to onboard new
sellers, including Google and Microsoft
Open orders in Professional Services increased; our Educator Confidence Report shares key insights on educator sentiment and further establishes HMH’s thought leadership.
Read 180, Math 180 and System 44 programs continued to improve the learning experience of students around the country.
Curious World reached the one million download mark. HMH launched the coast-to-coast “Curious World Tour,” bringing fun, educational experiences to 20,000 children and parents.
Progress in Key Growth Areas
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Top Performers in Trade Publishing
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Company confident in revised outlook and growth strategy for the remainder of 2016 and beyond
EdTech fully migrated to new SAP system; HMH expects to see integration savings in second half of 2016
Continued upgrading and standardizing platforms and technology infrastructure, including HMH One and SAP
Other Business Highlights
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Financial Overview
Second Quarter 2016 Highlights 1
hmhco.com / 121 Three months ended June 30, 2016.2 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.
Adjusted EBITDA3
$ in millions
• Net Sales increased 3% mainly due to the EdTechbusiness partially offset by a smaller new adoption market
• Billings2 decreased 5% primarily due to a smaller new adoption market
• Adjusted EBITDA3 decreased 5% due to higher fixed costs partially offset by increased net sales
• Higher open orders at end of Q2; expected to convert to billings in later quarters
• Continued infrastructure upgrades and investment in core products and technology
Billings2Net Sales
Net Loss
($8) ($28)
($168) ($194)
Q2 2015 Q2 2016 YTD2015 YTD 2016
$80 $75
$28 $34
Q2 2015 Q2 2016 YTD2015 YTD 2016
$415 $376
$563 $519 $21
$37
$21$61
Q2 2015 Q2 2016 YTD 2015 YTD 2016
$413
$584 $580
$436
EdTech HMH
$362 $357
$525 $526 $18 $35
$18 $72
Q2 2015 Q2 2016 YTD 2015 YTD 2016
$380
$543 $598
$392
Financial Highlights
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, 2015, cash and short term investments includes cash and cash equivalents of $234.3M and short term investments of $198.1M. As of June 30, 2016, it
includes, cash and cash equivalents of $98.0M 4 Capital expenditures include pre-publication costs and property, plant and equipment expenditures.
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$ in Millions Q2 Year to Date2015 2016 Variance % 2015 2016 Variance %
Net Sales 380 392 3% 543 598 10%
Change in Deferred Revenue 56 21 (63%) 41 (17) N/A
Billings1 436 413 (5%) 584 580 (1%)
Net Loss (8) (28) N/A (168) (194) 15%
Adjusted EBITDA2 80 75 (5%) 28 34 23%
Cash and Short Term Investments3 432 98 (77%)
Free Cash Flow2 (86) (120) (39%) (212) (290) 37%
Pre-publication Costs (27) (32) 20% (45) (65) 43%
Capital Expenditures4 (44) (64) 43% (77) (121) 58%
Full Year 2016 Outlook1
NET SALES
BILLINGS2
CONTENT DEVELOPMENT SPEND
$1,485 million to $1,555 million
$1,525 million to $1,595 million
$120 million to $140 million
1 HMH’s expectations as of August 4, 2016.2 An operating measure which we derive from net sales taking into account the change in deferred revenue. The difference between net sales and billings is the change in deferred revenue.
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Questions and Answers
Appendix
Non-GAAP Reconciliation – Adjusted EBITDA1
1 Details may not sum to total due to rounding.
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($ in millions) Q2 YTD2015 2016 2015 2016
Net Loss (8) (28) (168) (194)Interest Expense 6 9 12 19 Provision (benefit) for Income Taxes (11) (3) 10 32 Depreciation Expense 18 19 36 38 Amortization Expense 51 52 104 104 Non-Cash Charges - Stock Compensation 4 4 7 7 Non-Cash Charges - (Gain) Loss on Derivative Instruments (0) 1 2 (0)Purchase Accounting Adjustments 1 1 1 3 Fees, Expenses or Charges for Equity Offerings, Debt or Acquisitions 16 1 19 1 Restructuring/ Integration 1 6 1 10 Severance, Separation costs and Facility closures 1 4 2 5 Loss on Extinguishment of Debt 2 - 2 -Legal Settlement - 10 - 10Adjusted EBITDA 80 75 28 34
Non-GAAP Reconciliation – Free Cash Flow1
1 Details may not sum to total due to rounding.
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$ in Millions Six Months EndedJune 30, 2015 June 30, 2016
Net cash used in operating activities (135) (169)
Additions to pre-publication costs (45) (65)
Additions to property, plant, and equipment (31) (56)
Free Cash Flow (212) (290)
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Billings$ in millions Q2 YTD
2015 2016 2015 2016Net Sales 380 392 543 598
Change in Deferred Revenue 56 21 41 (17)
Billings 436 413 584 580
Balance Sheet($ in Millions)
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unaudited unaudited
Dec 31, 2015 June 30, 2016Current AssetsCash and cash equivalents 234 98 Short-term investments 198 -Accounts receivable less allowance 256 347
for bad debts and book returnsInventories 171 219Prepaid expenses and other assets 23 30Total current assets 883 694Property, plant, and equipment, net 150 175Pre-publication costs, net 322 325Royalty advances to authors, net 45 47Goodwill 783 783Other intangible assets, net 913 869Deferred income taxes 4 4Other assets 23 25Total assets 3,122 2,922
Dec 31, 2015 June 30, 2016Current LiabilitiesCurrent portion of long-term debt 8 8 Accounts payable 94 124 Royalties payable 86 85 Salaries, wages, and commissions payable 45 34 Deferred revenue 231 210 Severance and Other Charges 5 6 Interest payable 0 0 Accrued postretirement benefits 2 2 Other liabilities 35 39 Total current liabilities 507 507 Long-term debt, net of discount & issuance costs 769 767 Long-term deferred revenue 441 445 Accrued pension benefits 24 22 Accrued postretirement benefits 24 23 Deferred income taxes 140 169 Other liabilities 20 28 Total liabilities 1,924 1,960 Stockholders' EquityCommon Stock 1 1 Treasury Stock (463) (514)Capital in excess of par value 4,833 4,851 Accumulated deficit (3,134) (3,327)Accumulated other comprehensive loss (40) (49)Total stockholder's equity 1,198 962
Total liabilities and stockholder's equity 3,122 2,922
Income Statement (unaudited)
($ in Millions)
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Q2 Year to Date
2015 2016 2015 2016
Net Sales $380 $392 $543 $598
Costs and expensesCost of sales, excluding publishing rights and pre-publication amortization
168 173 265 279
Publishing rights amortization 19 14 42 32 Pre-publication amortization 28 31 54 60
Cost of sales 215 219 361 371 Selling and administrative 171 184 314 353 Other intangible asset amortization 4 6 7 12 Severance and other charges 1 4 2 5
Operating Loss (11) (21) (142) (143)
Other Income (Expense)Interest expense, net (6) (9) (12) (19)Change in fair value of derivative instruments 0 (1) (2) 0Loss on extinguishment of debt (2) - (2) -
Loss before taxes (19) (31) (158) (162)
Income tax expense (benefit) (11) (3) 10 32 Net Loss (8) (28) (168) (194)
Statement of Cash Flows (unaudited)($ in Millions)
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Six Months EndedJune 30 2015 June 30 2016
Cash flows from operating activitiesNet loss (168) (194)Adjustments to reconcile net loss to net cash used in operating activitiesDepreciation and amortization expense 140 142 Amortization of debt discount and deferred financing costs 4 2 Deferred income taxes 6 29 Stock compensation expense 7 7 Loss on extinguishment of debt 2 -Change in fair value of derivative instruments 2 (0)Changes in operating assets and liabilities, net of acquisitionsAccounts receivable (138) (91)Inventories (32) (47)Other Assets (4) (10)Accounts payable and accrued expenses (7) 12 Royalties, net 10 (3)Deferred revenue 41 (17)Interest payable 0 -Severance and other charges (2) 0 Accrued pension and postretirement benefits (3) (3)Other liabilities 5 5 Net cash used in operating activities (135) (169)
Six Months EndedJune 30 2015 June 30 2016
Cash flows from investing activitiesProceeds from sales and maturities of short-term investments 287 198 Additions to pre-publication costs (45) (65)Additions to property, plant, and equipment (31) (56)Acquisition of business, net of cash acquired (578) -Net cash provided by (used in) investing activities (368) 76 Cash flows from financing activitiesProceeds from term loan, net of discount 796 -Payments of long-term debt (243) (4)Payments of deferred financing fees (14) -Repurchases of Common Stock (191) (51)Tax withholding payments related to net share settlements of restricted stock units (0) (1)Proceeds from stock option exercises 18 11 Issuance of Common Stock under employee stock purchase plan - 1 Net cash provided by (used in) financing activities 365 (44)Net decrease in cash and cash equivalents (137) (136)Cash and cash equivalents at beginning of period 457 234 Cash and cash equivalents at end of period 319 98