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McGraw‐Hill EducationQ1‐2017 Update
May 12, 2017
This presentation has been prepared for existing debt holders of McGraw‐Hill Global Education Holdings LLC and MHGE Parent, LLC . Final
Important Notice
Forward‐Looking Statements
This presentation includes statements that are, or may be deemed to be, “forward‐looking statements.” These forward‐looking statements can be identified by the use of forward‐looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward‐looking statements include all matters that are not historical facts. They appear in a number of places throughout this presentation and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.
By their nature, forward‐looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward‐looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from those made in or suggested by the forward‐looking statements contained in this presentation. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward‐looking statements contained in this presentation, those results of operations, financial condition and liquidity or developments may not be indicative of results or developments in subsequent periods.
Any forward‐looking statements we make in this presentation speak only as of the date of such statement, and we undertake no obligation to update such statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
Non‐GAAP Financial Measures
Certain financial information included herein, including Billings, EBITDA and Adjusted EBITDA, are not presentations made in accordance with U.S. GAAP, and use of such terms varies from others in our industry. Billings, EBITDA and Adjusted EBITDA should not be considered as alternatives to revenue, net income from continuing operations, operating cash flows or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance, debt covenant compliance or cash flows as measures of liquidity. Billings, EBITDA and Adjusted EBITDA have important limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. This presentation includes a reconciliation of certain non‐GAAP financial measures to the most directly comparable financial measures calculated in accordance with U.S. GAAP.
Adjusted EBITDA, which is defined in accordance with our debt agreements, is provided herein on a segment basis and on a consolidated basis. Adjusted EBITDA by segment, as determined in accordance with Accounting Standards Codification Topic 280, Segment Reporting, is a measure used by Management to assess the performance of our segments. Adjusted EBITDA on a consolidated basis is presented as a debt covenant compliance measure. Management believes that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about certain material non‐cash items and about unusual items that we do not expect to continue at the same level in the future as well as other items to assess our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in accordance with our debt agreements.
2
Business Review
McGraw‐Hill Education Q1‐2017 ResultsSeasonally small quarter for MHE; 2017 outlook unchanged
4
Total MHE Performance: YTD 3/31/17MHE Billings $229M (‐3.8%) MHE Adjusted EBITDA ‐$91M (‐11.9%)
MHE Digital Billings $116M (+3.3%)% MHE Digital Billings 51% (+400bps)
Market Share1Higher Ed ‐ LTM March 2017 (+) ~100 bps K‐12 Market Share Q1 Not Meaningful
YTD 3/31/17 Key Indicators Connect/LearnSmart Paid Activations 1.4M (+8.7%)ALEKS Unique Users 1.5M (+24.9%)
MHE Inc. Liquidity at 3/31/17Cash $188MCredit Line Capacity 350MTotal Liquidity $538M
Q1‐17 Debt Repurchase $49M(Open market purchases)
McGraw‐Hill Education Q1 is the seasonally smallest quarter for MHE, historically comprising ~10‐15% of annual Billings
Higher Ed digital growth continued with significant direct‐to‐student e‐commerce sales and favorable actual returns
‐ Increased Higher Ed market share on a net sales basis LTM 3/31
‐ Front‐list sell‐through for the fall back‐to‐school season remains a key driver for 2017
K‐12 Billings in Q1 are less than 10% of annual Billings with the Q1 decline driven primarily by timing
‐ Pipeline of pending shipments as of 4/30 was greater than prior year
‐ Early indication in key adoption states is that MHE is performing well against tougher competition and a tougher comp relating to extraordinary 2016 share in California
$188M in cash and fully available $350M credit line at 3/31
‐ Repurchased $49M of 2019 maturity debt; $58M remaining debt repurchase authorization
1Management Practice, Inc. (MPI)
5
1Management Practice, Inc. (MPI)
McGraw‐Hill Higher Education Q1‐2017 ResultsPositive Billings growth in seasonally small quarter; front‐list a key driver for 2017
Digital Billings in Q1 more than offset the print decline; actual returns continued to decline
‐ Digital back‐list net sales grew double‐digits Y/Y driven primarily by direct‐to‐student e‐commerce sales
Anticipating both strong sell‐through of new, larger front‐list for back‐to‐school and continued abatement of channel destocking (increased reordering and continued decline in returns) which together are expected to stabilize the decline in print sales in 2017
‐ Front‐list revenue opportunity is materially larger than 2016 and should also drive digital transition among professors using older print editions
‐ Actual product returns continued to trend materially lower through April
During 2017 MHE will continue investing in the front‐list for future years as well as test various secondary market disintermediation strategies
McGraw‐Hill Higher Ed Performance: YTD 3/31/17Billings (net of accrued returns) $131M (+2.7%) Digital Billings $90M (+11.5%)% Digital Billings 69% (+600bps)
Direct‐to‐Student e‐commerce Net Sales $77M (+22.3%)
*Net Sales (net of actual returns) $89M (+26.6%)Back‐list Sales (net of actual returns) $74M (+35.3%)Front‐list Sales (net of actual returns) $15M (‐4.1%)
MHE Actual Product ReturnsYTD Actual Returns Change ‐$17M (‐17.9%)
Industry Net Sales (actual returns basis)1YTD 3/31/17 +24.1%
MHE Market Share LTM 3/31/171Market Share Change (actual returns basis) (+~100bps)
YTD 3/31/17 Key IndicatorsConnect/LearnSmart Paid Activations 1.4M (+8.7%)ALEKS Unique Users 0.4M (+30.3%)
*Primary difference between Billings and net sales (industry market share measure) is the accrual of returns
Higher Education
6
1 As per Monthly AAP data ‐ Cohort of publishers for monthly AAP data differs from that of annual AAP data‐Monthly data reflects net sales on an actual returns basis submitted by 6‐7 publishers‐ Annual data reflects net sales on an actual returns basis submitted by 5 publishers2 Projected industry net sales reflect an average of MHE estimates with estimates from three wall street firms
McGraw‐Hill K‐12 Q1‐2017 ResultsWell positioned for new adoptions; expect more normalized CA market share
Q1 Billings lower Y/Y due to prior period non‐recurring adoption sales in Texas, South Carolina and Utah, partially offset by continued strong performance in California
‐ Seasonally small quarter not indicative of full year performance
‐ Pipeline of pending shipments was greater than prior year as of April 30th
New adoption market in 2017 expected to be larger vs. 2016, driven by larger year 2 purchases of CA K‐8 English Language Arts (ELA) and FL K‐12 Social Studies
Expect to perform well in 2017 new state adoptions
‐ Anticipate remaining a market leader in CA despite more normalized market share; challenge to repeat outsized K‐8 market share of 57% in CA ELA
‐ Increased competition, including from smaller niche players, as competitors enhance selling efforts in year 2
Still early in open territory cycle; preliminary indicators point to improvement over prior year performance
McGraw‐Hill K‐12 Performance: YTD 3/31/17Billings (net of accrued returns) $37M (‐20.8%)Digital Billings $10M (‐29.0%)% Digital Billings 28% (‐300bps)
*Industry Net Sales (actual returns basis)1YTD 3/31/17 ‐0.7%
2017 Market Drivers:Total Market Size: Larger overall market vs. 2016
$2.7‐3.2B estimated range2
California Expect 50% of 3 year buy in 2017(K‐8 ELA): vs. 33% purchased in 2016
Florida 1 year buy(K‐12 Social Studies): Smaller market vs. CA in 2017
MHE Market Share: More normalized share
YTD 3/31/17 Key IndicatorsConnectED Unique Users 3.7M (+35.9%)ALEKS Unique Users 1.0M (+22.7%)
*Primary difference between Billings and net sales (industry market share measure) is the accrual of returns
K‐12
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McGraw‐Hill International & Professional Q1‐2017 ResultsInternational impacted by investment spend; Professional impacted by timing
International & Professional
McGraw‐Hill International Performance: YTD 3/31/17Billings (constant fx) $42M (‐1.8%)Digital Billings $7M (‐10.4%)Digital Billings % 16% (‐100bps)
YTD 3/31/17 Key Indicators ‐ InternationalConnect/LearnSmart Paid Activations 156K (+35.9%)ALEKS Unique Users 59K (+47.4%)
McGraw‐Hill Professional Performance: YTD 3/31/17Billings $21M (‐6.0%)Digital Billings $9M (‐6.9%)Digital Billings % 43% (‐100bps)
Key Indicators ‐ ProfessionalAccess Platform Renewal Rate1 93%
1 As of December 2016; updated on an annual basis.
International
International business impacted by a decline in Higher Ed print Billings in select markets
Q1 digital Billings unfavorably impacted by UAE timing; expect digital to drive continued growth as we focus on new products such as Connect2, now available across more disciplines, and ELLevate English
Q1 margin adversely impacted predominantly by timing of pre‐publication expense associated with the multi‐year UAE contract
Announced sale of our K‐12 business in Canada: very small and non‐strategic with annual Billings of less than CAD$10M
Professional
Q1 Billings lower primarily due to renewal timing of Accessplatform subscriptions vs. prior year and lower print sales
Expect strong digital performance in 2017 as Professional continues to shift toward digital subscription solutions
0.7 1.0 1.6 2.00.8 1.0
0.80.9
1.11.3
0.3 0.41.5
2.02.7
3.3
1.21.5
2013 2014 2015 2016 YTD 2016 YTD 2017
K‐12 Higher Ed
2.22.6
3.0 3.3
1.2 1.4
2013 2014 2015 2016 YTD 2016 YTD 2017
CONTINUED STRIDES IN DIGITAL GROWTH
Adaptive products continue to gain traction among instructors and students
‐ 30M assignments submitted through Connect, up 12% Y/Y
‐ ~7.6B interactions (questions answered) on LearnSmart since 2009
‐ ~5.5B interactions (questions answered) on ALEKS since 2010
McGraw‐Hill Education Q1‐2017 Digital Ed Tech Highlights~13 Billion cumulative adaptive interactions
CONNECT/LEARNSMART PAID ACTIVATIONS (US HIGHER ED)
ALEKS UNIQUE USERS (GLOBAL HIGHER ED, K‐12)
8
(Millions)
ConnectED UNIQUE USERS (K‐12)
2.23.5
5.2
7.1
2.73.7
2013 2014 2015 2016 YTD 2016 YTD 2017
International Connect/LearnSmart Paid Activations of 156K not included in Connect/LearnSmart totals aboveInternational ALEKS Unique Users of 59K included within total ALEKS Unique Users above
+9%
+36%
+25%
34% 38% 45% 56% 63% 69%
66% 62% 55% 44% 37% 31%
2013 2014 2015 2016 YTD 2016 YTD 2017
Digital Print (Traditional + Custom)
$67
$105
$140$172
$63$77
2013 2014 2015 2016 YTD 2016 YTD 2017
DOUBLE‐DIGIT GROWTH IN DIRECT‐TO‐STUDENT E‐COMMERCE CONTINUES
Higher Ed digital Billings grew 600 bps Y/Y as a percentage of total Higher Ed Billings in Q1‐17 vs. Q1‐16
Direct‐to‐student e‐commerce remained the largest distribution channel for Higher Ed in the period
Direct‐to‐student e‐commerce sales were predominantly sales of back‐list digital solutions
‐ Connect/LearnSmart are increasingly sourced through the direct‐to‐student e‐commerce channel
‐ Business and economics related disciplines continue to comprise more than one‐third of e‐commerce net sales
McGraw‐Hill Education Higher Ed Digital BillingsSignificant quarter of direct‐to‐student e‐commerce sales
DIGITAL VS. PRINT BILLINGS MIX %
E‐COMMERCE NET SALES
9
+22%
($ in Millions)
$15 $10
31% 28%
$10 $9
44% 43%
$7 $7
17% 16%
$81 $90
63% 69%
$112 $116
47% 51%
10
McGraw‐Hill Education Digital Billings MixDigital exceeded 50% of MHE total Billings
($ in Millions)
MCGRAW‐HILL EDUCATION+3%
K‐12
YTD 16 YTD 17
HIGHER ED
YTD 16 YTD 17 YTD 16 YTD 17
PROFESSIONALINTERNATIONAL
YTD 16 YTD 17
% of TotalBillings
% of TotalBillings
% of TotalBillings
% of TotalBillings
% of TotalBillings
Strong digital growth in Higher Ed driven by direct‐to‐student e‐commerce sales
Digital in K‐12 impacted by product mix
‐ CA ELA adoption (more print oriented) will continue to influence the mix in 2017
+11%
YTD 16 YTD 17
(29%)
(7%)(10%)
Financial Review
$(81) $(91)
nm nm
$238 $229
MHE TOTAL BILLINGS
12
($ in Millions)
Adjusted EBITDAMHE ADJUSTED EBITDA
Digital %
(12%)
Margin %
(4%)
YTD 16 YTD 17
47% 51%
McGraw‐Hill Education Financial ReviewStrong digital growth in Higher Ed offset by timing in K‐12; key selling season ahead
Constant FX (4%) $230
Constant FX (12%) ($91)
McGraw‐Hill Education
YTD 16 YTD 17
SEASONALLY SMALL QUARTER NOT INDICATIVE OF FULL YEAR PERFORMANCE
Q1 MHE Billings declined Y/Y as timing in K‐12 more than offset strong growth in Higher Ed digital sales during the January back‐to‐school season
Actual returns continued to trend lower but the abatement of destocking and sell‐through of new front‐list titles in advance of the fall back‐to‐school season remains key for Higher Ed
K‐12 Billings were lower Y/Y but the shipping pipeline is exhibiting good momentum; 2017 new adoption market projected to be larger than 2016
Digital Billings exceeded 50% of total MHE Billings in Q1 as demand for digital continues to grow
ADJUSTED EBITDA IMPACTED BY INVESTMENT SPEND Adjusted EBITDA unfavorably impacted by lower Billings and
pre‐publication investment (including digital related investment, most notably in International)
Increase in pre‐publication investment is in advance of a new front‐list in Higher Ed and upcoming new adoption opportunities in K‐12
$7
$12
5% 9%
$127 $131
Higher Ed Financial ReviewStrong quarter of back‐to‐school digital sales; front‐list sales are critical for the fall
13
($ in Millions)
Adjusted EBITDA
HIGHER ED TOTAL BILLINGS
HIGHER ED ADJUSTED EBITDA
YTD 16 YTD 17
Digital %
3%
Margin %
63% 69%
STRONG DIGITAL GROWTH AND LOWER RETURNS Growth in digital Billings, driven by strong direct‐to‐student
e‐commerce sales, outpaced the decline in print
‐ Timing of digital sales continued to shift from Q4 to Q1 which is typically a seasonally strong digital quarter for Higher Ed (January back‐to‐school season)
‐ Initial sales of new front‐list print titles will occur in advance of the fall back‐to‐school season
Actual returns remained lower Y/Y irrespective of the tough comp vs. last year
‐ Lower returns translated into lower reserve rate for Q1
‐ Sell‐through of new front‐list titles and abatement of destocking, driven by the continuation of lower returns later in the year, remain important catalysts for full year 2017 performance
ADJUSTED EBITDA FAVORABLY IMPACTED BY BILLINGS GROWTH AND PRODUCT MIX
Adjusted EBITDA exceeded prior year as growth in digital Billings and the favorable margin associated with digital products offset the increase in pre‐publication investment
Pre‐publication investment increased Y/Y in advance of new front‐list titles
76%
Higher Education
YTD 16 YTD 17
$(74) $(84)
nm nm
$46 $37
K‐12 Financial ReviewSeasonally small quarter; early orders exhibit good momentum in competitive market
14
($ in Millions)
Adjusted EBITDA
K‐12 TOTAL BILLINGS
K‐12 ADJUSTED EBITDA
Digital %
(21%)
Margin %
25%
31% 28%34%
INITIAL ORDERS TRACKING WELL IN A LARGER MARKET Q1 traditionally small with minimal new product sales
‐ Decline in Billings Y/Y due to prior year non‐recurring adoption sales in TX, SC and UT
‐ CA sales grew in Q1 and pipeline of CA orders scheduled to ship in Q2 is growing
New adoption market expected to be larger in 2017 vs. 2016 primarily due to continued purchases of K‐8 English Language Arts (ELA) in CA and new K‐12 Social Studies purchases in FL
‐ CA ELA anticipated to be 50% larger vs. 2016 but likely to be offset by a more competitive market in year 2 as players (including niche players) modify selling tactics; core program offerings cannot be changed
‐ Positioned well in FL K‐12 social studies (second largest opportunity in 2017) against competition including niche players which are predominantly in K‐5
ADJUSTED EBITDA IMPACTED BY LOWER BILLINGS EBITDA unfavorably impacted by lower Billings and costs
associated with upcoming new adoptions
Pre‐publication investment increased Y/Y due to investment made ahead of upcoming opportunities
(14%)
K‐12
YTD 16 YTD 17
YTD 16 YTD 17
International
$(1) $(0)
nm
$(8)$(16)
nm nm
$22 $21 $43 $41
International & Professional Financial ReviewInvestment continues to impact near‐term performance
15
($ in Millions)
INTERNATIONAL TOTAL BILLINGS
INTERNATIONAL ADJUSTED EBITDA
Margin %
Digital % 12% 17% 16% 17%
PROFESSIONAL ADJUSTED EBITDA
PROFESSIONAL TOTAL BILLINGS
Q1 Billings declined Y/Y on constant FX as lower Higher Ed print sales in the APAC region offset growth of Higher Ed digital sales in Canada
UAE 7 year contract bills each September but margin adversely impacted by increase in pre‐publication investment
Digital %44% 43% 52%
Margin %
(3%)
Constant FX (2%) $42
(6%)
Constant FX (100%) ($16)
+84%(95%)
Q1 Billings decreased Y/Y due to the decline in print and eBook sales as well as timing of digital Access platform subscriptions
Margin favorably impacted by lower overall costs associated with product mix as the business continues to shift toward digital solutions
Professional
YTD 16 YTD 17 YTD 16 YTD 17
nm
YTD 16 YTD 17 YTD 16 YTD 17
Capital Structure and LiquidityStrong cash generation and a focus on de‐levering
Senior Secured Term Loan due 2022 $1,563Revolving Credit Facility due 2021 ($350M) 0 Total First Lien Indebtedness $1,563
Less: McGraw‐Hill Global Education Cash and Cash Equivalents (180)
Net First Lien Indebtedness $1,383Last Twelve Months Covenant EBITDA $411
Net First Lien Leverage Ratio 3.4x
Senior Unsecured Notes Due 2024 400Net Total Indebtedness $1,783
LeverageCash and Cash Equivalents
McGraw‐Hill Global Education Holdings $180MHGE Parent LLC / MHE Inc. 8Total McGraw‐Hill Education, Inc. $188
Available under Credit Facilities at Mar. 31, 2017 350
Total Liquidity $538
MCGRAW‐HILL EDUCATION INC. (MHE INC.) LIQUIDITY: 3/31/17
Notes˗ Net Total Indebtedness calculation excludes debt held at MHGE Parent LLC and
cash held at MHGE Parent LLC and MHE Inc.˗ Net First Lien Leverage covenant takes effect only if 30% of revolving line of credit
is drawn at quarter‐end. Usage was less than 30% at December 31, so covenant did not apply. Covenant level is 5.25x in Q2 and 4.8x in Q1, Q3 and Q4. 16
MCGRAW‐HILL GLOBAL EDUCATION HOLDINGS COVENANT LEVERAGE
Commenced 2017 with a strong liquidity position and Management’s ongoing commitment to de‐lever
Repurchased $49M of 8.5% 2019 PIK/Toggle Notes (HoldCo) in Q1 with $58M authorization remaining
‐ Debt repurchases will result in $2M+ of semi‐annual cash interest savings
‐ Repurchases were funded with $50M intercodividend in Q1; additional repurchases to be funded with $50M interco dividend made post‐Q1 and $7M of excess cash contributed from MHE Inc. (ultimate parent)
Term Loan Restricted Payment capacity was ~$150M at March 31, 2017 and will fluctuate with seasonality1
‐ Reflects the first $50M of interco dividends to fund repurchase
Hedged $500M of floating rate debt in Q1‐171 ~$150M at 3/31/17 includes $100M general RP basket
($ in Millions)
($ in Millions)
17
SummaryMcGraw‐Hill Education continues to advance in digital ahead of key selling season
A good start to digital growth in Higher Ed but Q1 is a seasonally small quarter and not indicative of full
year performance
Success in Higher Ed in 2017 continues to depend upon the growth in digital but also on sell‐through of
the larger front‐list for the fall semester (2017 and 2018 ©) and the abatement of channel destocking
Will continue to build the future front‐list as well as test various strategies to disintermediate used
and rental channels
Success in K‐12 in 2017 will be driven by a larger new adoption year vs. 2016 with key new adoptions in
CA K‐8 ELA (year 2) and FL K‐12 Social Studies
While still early in the season, initial order flow is trending favorably vs. prior year
While the new adoption market in CA is more competitive in year 2, we expect to maintain a
leading market share in the state even though share will be more normalized vs. 2016
MHE is a strong cash generating business with a focus on de‐levering and digital investment; will
evaluate continued debt repurchases against market conditions and seasonal cash needs
Appendix
Financial Terms and Acronyms
19
Financial Terms Description
Adjusted EBITDA
Non‐GAAP financial measure that includes adjustments required or permitted in calculating covenant compliance under our debt agreements. Adjusted EBITDA is a non‐GAAP financial measure defined as net income from continuing operations plus net interest, income taxes, depreciation and amortization (including amortization of pre‐publication investment cash costs) and adjusted to exclude unusual items and other adjustments required or permitted in calculating covenant compliance under our debt agreements less cash spent for pre‐publication investment in addition to the change in deferred revenue.
Billings (formerly referred to as AdjustedRevenue)
Non‐GAAP financial measure that we define as U.S. GAAP revenue plus the net change in deferred revenue excluding the impact of purchase accounting. Billings, a measure used by management to assess sales performance, is defined as the total amount of revenue that would have been recognized in a period if all revenue were recognized immediately at the time of sale.
Change in Deferred Revenue
The Company receives cash up‐front for most product sales but recognizes revenue (primarily related to digital sales) over time recording a liability for deferred revenue at the time of sale. This adjustment represents the net effect of converting deferred revenues to a cash basis assuming the collection of all receivable balances.
Change in Deferred Royalty
Royalty obligations are generally payable in the period incurred with limited recourse. This represents royalties primarily associated with digital sales which are deferred and amortized over the subscription period. It is the net effect of converting deferred royalties to a cash basis assuming the payment of all amounts owed in the period incurred.
Digital Billings (formerlyreferred to as Digital Adjusted Revenue)
Represents standalone digital sales and, where digital product is sold in a bundled arrangement, only the value attributed to the digital component(s) is included. The attribution of value in bundled arrangement is based on relative selling prices (inclusive of discounts).
EBITDA Earnings before interest (net), income tax, depreciation and amortization.
Front‐list and Back‐list Front‐list represents brand new titles and new revisions of existing titles previously published. For example, the 2016 front‐list represents 2017 and 2016copyrights sold in 2016. Back‐list represents copyrights from 2015 and prior sold in 2016.
Net Sales Gross sales less actual returns; net sales are not adjusted for the impact of accruals / net change in deferred revenue.
Pre‐publicationInvestment
Pre‐publication costs reflect the costs incurred in the development of instructional solutions, principally design and content creation. These costs are capitalized when the title is expected to generate future economic benefits and are amortized upon publication of the title over its estimated useful life of up to six years.
Sell‐Through Represents the percentage of net sales a new or revised title generates vs. prior editions of the same title.
KPI Terms Description
Paid Activation A user who accesses a purchased digital product for the first time. Access can be through a physical access card purchased from a bookstore or directly over MHE’s e‐commerce channel.
Unique User on a platform An individual who authenticates a product at least once during a given period of time.
Digital Product Offering Descriptions
20
Product Description Higher Education K‐12 International Professional
AccessDigital subscription platform that provides easily searchable and customizable digital content integrated with dynamic and functional workflow tools
ALEKS Adaptive learning technology for the K‐12 and Higher Education markets
Connect Open learning environment for students and instructors in the Higher Education market and K‐12 students taking AP courses
Connect2 Collaborative teaching and learning environment for the International Higher Education market
ConnectED Content delivery platform for the K‐12 market
ELLevate English Six level English Language Learning (ELL) course
EngradeDeveloper of an open digital platform for K‐12 education that unifies the data, curriculum and tools to drive student achievement and inform district educational strategy
LearnSmart Adaptive learning program which personalizes learning and designs targeted study paths for students
RedbirdA leading digital personalized learning company that offers courses in K‐12 math, language arts and writing, and virtual professional development programs for educators
SmartBookAdaptive reading product designed to help students understand and retain course material by guiding each student through a highly personal study experience
Supplemental Financial Disclosure
Billings and Adjusted EBITDA
22
Billings is a non‐GAAP sales performance measure that provides useful information in evaluating our period‐to‐period performance because it reflects the total amount of revenue that would have been recognized in a period if we recognized all print and digital revenue at the time of sale. We use Billings as a sales performance measure given that we typically collect full payment for our digital and print solutions at the time of sale or shortly thereafter, but recognize revenue from digital solutions and multi‐year deliverables ratably over the term of our customer contracts. As sales of our digital learning solutions have increased, so has the amount of revenue that is deferred in accordance with U.S. GAAP. Billings is a key metric we use to manage our business as it reflects the sales activity in a given period, provides comparability from period‐to‐period during this time of digital transition and is the basis for all sales incentive compensation. In the K‐12 market where customers typically pay for five to eight year contracts upfront and the ongoing costs to service any contractual obligation are limited, the impact of the change in deferred revenue is most significant. Billings is U.S. GAAP revenue plus the net change in deferred revenue.
EBITDA, a measure used by management to assess operating performance, is defined as net income from continuing operations plus net interest, income taxes, depreciation and amortization (including amortization of pre‐publication investment cash costs). Adjusted EBITDA is a non‐GAAP debt covenant compliance measure that is defined in accordance with our debt agreements. Adjusted EBITDA is a material term in our debt agreements and provides an understanding of our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in accordance with our debt agreements.
Each of the above described measures is not a recognized term under U.S. GAAP and does not purport to be an alternative to revenue, income from continuing operations, or any other measure derived in accordance with U.S. GAAP as a measure of operating performance, debt covenant compliance or to cash flows from operations as a measure of liquidity. Additionally, each such measure is not intended to be a measure of free cash flows available for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Such measures have limitations as analytical tools, and you should not consider any of such measures in isolation or as substitutes for our results as reported under U.S. GAAP. Management compensates for the limitations of using non‐GAAP financial measures by using them to supplement U.S. GAAP results to provide a more complete understanding of the factors and trends affecting the business than U.S. GAAP results alone. Because not all companies use identical calculations, our measures may not be comparable to other similarly titled measures of other companies.
Management believes Adjusted EBITDA is helpful in highlighting trends because Adjusted EBITDA excludes the results of decisions that are outside the control of operating management and can differ significantly from company to company depending on long‐term strategic decisions regarding capital structure, the tax rules in the jurisdictions in which companies operate, and capital investments. In addition, Billings and Adjusted EBITDA provides more comparability between the historical operating results and operating results that reflect purchase accounting and the new capital structure post the Founding Acquisition as well as the digital transformation that we are undertaking which requires different accounting treatment for digital and print solutions in accordance with U.S. GAAP.
Management believes that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about certain material non‐cash items and about unusual items that we do not expect to continue at the same level in the future as well as other items to assess our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in accordance with our debt agreements.
Note: In compliance with SEC interpretative guidance, we now refer to ‘Adjusted Revenue’ as ‘Billings’ throughout the presentation
MHE Higher Ed Front‐List / Back‐List Net Sales
23
($ in Millions)
Front‐list / Back‐list is on a net sales basis; refer to key financial terms in appendix
Twelve Months Ended December 31 Three Months Ended
2012 2013 2014 2015 2016 March 2016 March 2017
Digital Net Sales
Front‐list $100 $126 $132 $156 $149 $17 $15Back‐list 137 153 194 220 263 61 75
Total Digital Net Sales $237 $278 $326 $376 $411 $78 $90
Y/Y %
Front‐list (6.0%) 25.1% 5.2% 18.2% (4.7%) 6.1% (10.2%)
Back‐list 53.7% 11.8% 27.1% 13.4% 19.2% 23.8% 22.8%
Total Digital Net Sales 21.1% 17.4% 17.2% 15.3% 9.3% 19.6% 15.8%
Print Net Sales
Front‐list $317 $323 $291 $233 $149 ($1) $0Back‐list 205 215 233 178 152 (6) (1)
Total Print Net Sales $523 $538 $524 $411 $302 ($7) ($1)
Y/Y %Front‐list (23.9%) 1.9% (9.9%) (20.0%) (35.9%) nm nm
Back‐list 0.6% 4.7% 8.5% (23.6%) (14.6%) nm nm
Total Print Net Sales (15.9%) 3.0% (2.6%) (21.6%) (26.7%) nm nm
Total Net Sales
Front‐list $418 $449 $423 $389 $298 $16 $15Back‐list 342 368 427 398 415 55 74
Total Net Sales $760 $817 $851 $787 $713 $70 $89
Y/Y %Front‐list (20.3%) 7.5% (5.7%) (8.1%) (23.4%) (10.5%) (4.1%)
Back‐list 16.7% 7.5% 16.2% (6.8%) 4.1% 16.7% 35.3%Total Net Sales (7.0%) 7.5% 4.2% (7.4%) (9.5%) 9.3% 26.6%
Higher Ed Industry and MHE Higher Ed Sales Trend
24
($ in Millions)
2011 2012 2013 2014 2015 2016 March 2016 March 2017
Higher Ed Industry per Management Practice, Inc.1
Higher Ed Market Gross Sales $5,726 $5,420 $5,453 $5,465 $5,302 $4,695 $789 $799Returns 1,323 1,311 1,262 1,214 1,377 1,250 416 336
Net Sales $4,403 $4,110 $4,191 $4,251 $3,925 $3,446 $373 $462
Y/Y %Gross Sales n/a (5.3%) 0.6% 0.2% (3.0%) (11.4%) n/a 1.3%Returns n/a (0.9%) (3.7%) (3.8%) 13.5% (9.2%) n/a (19.2%)Net Sales n/a (6.7%) 2.0% 1.4% (7.7%) (12.2%) n/a 24.1%
McGraw‐Hill Education Return Detail
Actual Returns $263 $276 $257 $252 $277 $237 $97 $79Reserve for Returns Adjustment (3) (13) 9 16 (31) (23) (59) (41) Reported Returns $260 $263 $266 $268 $246 $215 $38 $38
Return Accrual % 24.4% 25.8% 25.1% 24.4% 23.4% 22.7% 22.1% 20.7%
Three Months Ended
Billings will not reconcile to M PI submission due to classification of revenue between K-12 and Higher Ed
(1) M PI data reflects gross and net sales on an actual returns basis and includes other adjustments, eg. advanced placement which is reported in K-12
Twelve Months Ended December 31
Amounts above may not sum due to rounding.
K‐12 Industry New Adoption Market Overview
25
2012 2013 2014 2015 2016 2017E 2018E 2019ELargest Adoption States
Reading Reading* Science
Math Social Studies Social Studies*
Reading (K‐5) Reading (6‐12)
Math (K‐5) Math (6‐12)
Math (K‐8) Math (9‐12)Science Social Studies
Science*All Other Adoption States
Alabama Math Reading Social Studies Science
Arkansas Math
Math*Reading
Idaho Science Reading Math Social Studies Reading
Indiana Reading Reading*
Math (K‐8)Social Studies
North Carolina Math Science Social Studies Reading
New Mexico Science Math Reading Social Studies Science
MathSocial Studies (6‐12)
MathSocial Studies
Social StudiesMath
(1) Excludes new state adoptions in non‐core discipl ines such as career and technical education, music, art, world languages, health, etc.*Disciplines reflect 2nd or 3rd year of major purchasingPurchases from AR and IN classified as open territory effective 2015
West Virginia
Mississippi
Oklahoma
Oregon
South Carolina
Tennessee
Virginia
Reading (9‐12) Reading (K‐6) Social Studies Math Science
Reading Science Math
Louisiana
New State Adoptions by Purchase Year1
California (K‐8)
Florida
Texas
Georgia
Science Reading (K‐8)
MathScienceSocial Studies
Math
Social Studies
Math* Reading Reading*
Social Studies
Reading
Social Studies
Social Studies (K‐5)Reading
Science
Science
Social StudiesScienceMathReading*ReadingSocial Studies
Reading Math (9‐12) Reading Social Studies
Social Studies Science Reading Math
Science
MathReading
Math Reading*
K‐12 Industry Adoption and Open Territory Market Net Sales
26
($ in Millions)
2012 2013 2014 2015 2016E 2017E 2018E 2019E
Historical Industry Net Sales Per AAP1 Projected Industry Net Sales (Mean) 2
Total Adoption Net Sales $1,311 $1,391 $1,860 $1,621 $1,296 $1,354 $1,443 $1,710
$1,175 ‐ $1,418 $1,207 ‐ $1,608 $1,400 ‐ $1,471 $1,530 ‐ $1,910
Total Open Territory Net Sales $1,423 $1,563 $1,425 $1,431 $1,474 $1,503 $1,557 $1,580
$1,450 ‐ $1,500 $1,475 ‐ $1,546 $1,500 ‐ $1,608 $1,500 ‐ $1,672
Total Adoption & Open Territory Net Sales $2,734 $2,954 $3,285 $3,052
$2,625 ‐ $2,918 $2,682 ‐ $3,154 $2,900 ‐ $3,079 $3,030 ‐ $3,582
(1) AAP total adoption and open territory net sales include front‐l ist and back‐l ist and is based on actual returns submitted by five publishers. AAP net sales reflect US sales only and includes sales of core and non‐core disciplines, AP products, software and platforms etc. Total adoption net saIes includes net sales from both new state adoptions and residual purchases (2) Reflects an arithmetic average of MHE estimates with estimates from three wall street firms(3) High and low of MHE estimates with estimates from three wall street firms
Projected Adoption & Open Territory Net Sales (Low/High) 3
*Projected industry net sales reflect an average of MHE estimates with estimates from three Wall Street firms
Projected Total Adoption Net Sales (Low/High) 3
Projected Total Open Territory Net Sales (Low/High) 3
Adoption and Open Territory Net Sales
*Data unchanged from Q4‐16 investor presentation issued in March 2017
K‐12 Industry and MHE K‐12 Sales Trend
27
($ in Millions)
Twelve Months Ended December 31 Three Months Ended
2012 2013 2014 2015 2016* March 2016 March 2017K‐12 Industry per Association of American Publishers (AAP)
AAP U.S. Net Sales 1
Total Adoption $1,311 $1,391 $1,860 $1,621 $110 $108Open Territory 1,423 1,563 1,425 1,431 132 133
Total Net Sales $2,734 $2,954 $3,285 $3,052 $243 $241
Y/Y %Total Adoption n/a 6.2% 33.6% (12.8%) n/a (1.9%)Open Territory n/a 9.8% (8.8%) 0.4% n/a 0.4%
Total Net Sales n/a 8.1% 11.2% (7.1%) n/a (0.7%)
McGraw‐Hill Education K‐12
McGraw‐Hill Education Billings 2
Total Adoption $320 $318 $366 $450 $411 $24 $18Open Territory / Other 378 359 369 348 348 22 18
Total K‐12 Billings $698 $677 $734 $798 $758 $46 $37
Y/Y %Total Adoption n/a (0.5%) 15.0% 23.0% (8.6%) 77.0% (22.7%)Open Territory / Other n/a (5.0%) 2.6% (5.7%) (0.1%) (31.0%) (18.8%)
Total K‐12 Billings n/a (3.0%) 8.5% 8.6% (4.9%) 26.4% (20.8%)
MHE Adoption Participation % 96% 79% 67% 76% 87% nm nm
(1) AAP annual data reflects unrestated net sales on an actual returns basis submitted by five publishers in each respective year; data reflects US sales only and includes sales o f AP products, software and platforms, etc.
AAP includes front-list and back-list net sales; annual data prior to 2015 has not been restated for the shift o f AR and IN from adoption to open territory
M onthly AAP data reflects net sales on an actual returns basis submitted by six - seven publishers; 2016 data has been restated
(2) M HE Billings reflect an accrued returns basis and will no t reconcile to AAP submission due to classification of revenue; Total adoption includes new adoption and residual
*Annual 2016 market data to be updated upon release of the annual 2016 report from AAP
Not available
Not available
Digital vs. Print Billings Detail
28Figures are represented on a cash basis inclusive of actual returns but excluding purchase accounting adjustments. Accrued returns are reflected in print revenue.
($ in Millions)
YTD March 2017 Billings Detail by Component
2015 2016 2017 2016 2015 2016 2017 2016 2015 2016 2017 2016
Higher Ed $68 $81 $90 11.5% $51 $47 $41 (12.5%) $119 $127 $131 2.7%K‐12 8 15 10 (29.0%) 29 32 26 (17.0%) 37 46 37 (20.8%)
International 5 7 7 (10.4%) 38 35 35 (1.5%) 43 43 41 (3.0%)Professional 9 10 9 (6.9%) 13 12 12 (5.4%) 22 22 21 (6.0%)
Other 1 0 0 N/M (0) 0 0 (99.8%) 1 0 0 (78.3%)
Total MHE $91 $112 $116 3.3% $130 $126 $113 (10.1%) $221 $238 $229 (3.8%)
% of TotalHigher Ed 57% 63% 69% 43% 37% 31% 100% 100% 100%
K‐12 21% 31% 28% 79% 69% 72% 100% 100% 100%International 11% 17% 16% 89% 83% 84% 100% 100% 100%Professional 42% 44% 43% 58% 56% 57% 100% 100% 100%
Total MHE 41% 47% 51% 59% 53% 49% 100% 100% 100%
% vs % vs % vsMar YTD Digital Billings Mar YTD Print Billings Mar YTD Total Billings
Free Cash Flow
29
($ in Millions)
Cash Flow Comparison 2016 2017 Y/Y $
Adjusted EBITDA (81) (91) (10)
∆ in Accounts Receivable, net 134 117 (17) AR: lower Q1 billings and timing of collections∆ in Inventories, net (24) (31) (7) Inventory: higher levels in advance of K‐12 opportunities∆ in Prepaid & Other Current Assets 8 4 (5) Prepaid: includes ~$25 million impact of royalty reclassification∆ in Accounts Payable and Accrued Expenses (188) (106) 82 in AP/Accrued offset by the timing of prepaid technology maintenance∆ in Other Current Liabilities 9 (4) (13) payments ($10M)
∆ in Reported Working Capital Accounts (60) (20) 40 AP / Accrued: Increased AP levels at YE 15 due to timing (~$40M), lower accrualsOperational Working Capital Adjustments1 (1) (8) (7) at YE 16 (compensation ~$15M) and impact of royalty
∆ in Adjusted Working Capital Accounts (61) (28) 33 reclassification offset in Prepaid (~$25M)Adjusted EBITDA less Adjusted ∆ in Working Capital Accounts (142) (119) 23 Other Current: timing of interest payments
Pre‐publication Investment3 13 25 12 Pre‐pub: driven by HE front‐list and timing of K‐12 new adoptionsRestructuring and Cost Savings Implementation Charges (3) (2) 1 Sponsor Fees (1) (1) ‐ Cash Interest (34) (41) (8) Cash Interest: driven by refinancing and timing of paymentsNet (loss) from Discontinued Operations (net of non cash adjustmen (1) (0) 0
∆ in Operating Assets and Liabilities2 1 (5) (6)
Operational Working Capital Adjustments1 1 8 7 Other (11) (4) 8
Cash (used for) provided by operating activities (177) (139) 38 1 ∆ in NWC including Operational WC Adjustments
2016 2017 Y/Y $Adjusted EBITDA less ∆ in Working Capital Accounts per above (142) (119) 23 ∆ in Accounts Receivable, net 135 115 (20)‐ Capital Expenditures & Payment of Capital Lease Obligations (7) (12) (6) ∆ in Inventories, net (24) (32) (8)
Operating Free Cash Flow2 (148) (131) 17 ∆ in Prepaid & Other Current Assets (14) (0) 14MEMO: Conversion n/m n/m n/m ∆ in AP and Accrued Expenses (163) (113) 51
∆ in Other Current Liabilities 6 1 (5)Total ∆ in Operational WC (61) (28) 33
Cash Balance at Beginning of Period 553 419 (134) 3Pre‐Publication Investment
Cash (used for) provided by operating activities (177) (139) 38 2016 2017 Y/Y $Dividends (5) (3) 3 Higher Education 4 8 4Net Debt Payments (2) (4) (2) K‐12 7 11 4Repurchase of MHGE PIK Toggle Notes ‐ (46) (46) International 1 5 4Pre‐publication Investment (13) (25) (12) Professional 1 2 0Capital Expenditures (7) (11) (4) Total 13 25 12 Investments, Acquisitions & Divestitures, net ‐ ‐ ‐ Payment of Capital Lease Obligations ‐ (1) (1)Other (2) (2) 0
Cash Balance at End of Period 347 188 (159)
Source: Consolidated Statement of Cash Flows or Adjusted EBITDA reconciliation1 includes the impact of certain non operational, Cash EBITDA or capital structure working capital items
(i.e., purchase accounting, accrued interest, deferred royalties, income taxes, available for sale assets, etc.)2 includes adjustment for long term deferred royalties included in calculation of Adjusted EBITDA
Three Months Ended March 31
Key Variance Drivers
Adjusted EBITDA Reconciliation
Amounts above may not sum due to rounding. 30
($ in Millions)
Twelve Months Ended LTMMarch 2016 March 2017 December 2016 March 2017
Net Income ($145) ($116) ($114) ($85)Interest (income) expense, net 48 43 200 195 Provision for (benefit from) taxes on income (0) (1) 9 8 Depreciation, amortization and pre‐publication investment amortization 48 49 202 204 EBITDA ($50) ($25) $296 $321
Change in deferred revenue (a) (26) (55) 156 127 Change in deferred royalties (b) 0 6 (17) (12) Restructuring and cost savings implementation charges (c) 3 2 17 16 Sponsor fees (d) 1 1 4 4 Loss on extinguishment of debt (e) ‐ ‐ 27 27 Other (f) 4 5 29 30 Pre‐publication investment cash costs (g) (13) (25) (90) (102)
Adjusted EBITDA ($81) ($91) $421 $411
Three Months Ended
Adjusted EBITDA Footnotes
31
(a) We receive cash up‐front for most sales but recognize revenue (primarily related to digital sales) over time recording a liability for deferred revenue at the time of sale. This adjustment represents the net effect of converting deferred revenues to a cash basis assuming the collection of all receivable balances.
(b) Royalty obligations are generally payable in the period incurred with limited recourse. This adjustment represents the net effect of converting deferred royalties to a cash basis assuming the payment of all amounts owed in the period incurred.
(c) Represents severance and other expenses associated with headcount reductions and other cost savings initiated as part of our formal restructuring initiatives to create a flatter and more agile organization.
(d) Beginning in 2014, $3.5 million of annual management fees was recorded and payable to Apollo.(e) This amount represents the write‐off of unamortized deferred financing fees, original debt discount and other fees and expenses associated with
the Company’s refinancing of its existing indebtedness on May 4, 2016.(f) For the three months ended March 31, 2017 the amount represents (i) non‐cash incentive compensation expense and (ii) other adjustments
required or permitted in calculating covenant compliance under our debt agreements.For the three months ended March 31, 2016, the amount represents (i) non‐cash incentive compensation expense and (ii) other adjustments required or permitted in calculating covenant compliance under our debt agreements.
(g) Represents the cash cost for pre‐publication investment during the period.
Revenue Bridge & Segment Detail
32
($ in Millions)
Amounts above may not sum due to rounding.
March 2016 March 2017Reported Revenue $265 $284Change in Deferred Revenues (26) (55) Billings $238 $229
Billings by segmentHigher Education $127 $131K ‐ 12 46 37 International 43 41 Professional 22 21 Other 0 0 Total Billings $238 $229
Adjusted EBITDAHigher Education $7 $12K ‐ 12 (74) (84) International (8) (16) Professional (1) (0) Other (4) (2) Total Adjusted EBITDA ($81) ($91)
Three Months Ended
33
($ in Millions)
Adjusted Operating Expenses Bridge
March 2016 March 2017Operating Expense BridgeTotal Reported Operating Expenses $302 $293Less: Depreciation & Amortization of intangibles (35) (34) Less: Amortization of pre‐publication costs (13) (16) Less: Restructuring and cost savings implementation charges (3) (2) Less: Other adjustments (4) (5) Adjusted Operating Expenses $247 $237
Three Months Ended
Amounts above may not sum due to rounding.