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 / 2
Agenda Welcome/Introductions Business Update Financial Overview Questions and Answers hmhco.com / 3
Business Update
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 hmhco.com / 5
More than 3,000 Solid conversion rate ; Expanded digital resources available at Positive user engagement offerings to extend the launch customer experiences hmhco.com / 6
Leveraging Unique Assets & Expanding in Adjacencies Leveraging content in the Seamless integration U.S. and internationally of Core and with three 10-year Intervention with Read Department of Defense 180 Universal , the next (DoD) contracts generation of our industry leading intervention platform Expand our core Enhance our education customer base, to content and expand grow in pre-K with relationship with Curious World; bestselling Trade author adding to our digital Randall Munroe to include library with new, exclusive content for HMH original content Science programs hmhco.com / 7
Bestselling Titles in Trade Publishing Over one million copies sold hmhco.com / 8
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 hmhco.com / 9
Financial Overview
First Quarter 2016 Highlights 1 $ in millions Billings 2 Net Sales • Billings increased 13% year-over- year to $168 million; Net sales $206 increased 27% year-over-year to $163 $37 $168 $206 million $148 $24 • Adjusted Cash EBITDA was a $169 $144 loss of $79 million vs. a loss of Q1 2015 Q1 2016 Q1 2015 Q1 2016 $67 million in Q1 FY15 EdTech HMH • Repurchase of over 1.5 million in Adjusted Cash Post Plate shares, approximately $31 million EBITDA 2 Adjusted Cash EBITDA 2 • Launched Read 180 Universal and HMH Marketplace and continued to demonstrate transformation into a leading ($67) ($85) educational media company ($79) ($112) Q1 2015 Q1 2016 Q1 2015 Q1 2016 1 Three months ended March 31, 2016. hmhco.com / 11 2 Please see appendix for a reconciliation of non-GAAP measures.
Financial Highlights $ in Millions Q1 2015 2016 Variance % Billings 1 148 168 13% Net Sales 163 206 27% Adjusted Cash EBITDA 1 (67) (79) (19%) Pre-publication costs (Plate) (18) (33) (80%) Post Plate Adjusted Cash EBITDA 1 (85) (112) (33%) Net Loss (160) (165) (3%) Cash and Short Term Investments 2 432 236 (45%) Free Cash Flow 1 (125) (170) (36%) Capital Expenditures 3 (32) (58) (78%) 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 $67.5M. 3 Capital expenditures include pre-publication costs and property, plant and equipment expenditures. hmhco.com / 12
Questions and Answers
Appendix
Non-GAAP Reconciliation – Adj EBITDA, Adj Cash EBITDA, Post Plate Adj Cash EBITDA 1 ($ in millions) Q1 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 Adjustments 2 0 2 Fees, Expenses or Charges for Equity Offerings, Debt or Acquisitions 3 0 Restructuring 0 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) 1 Details may not sum to total due to rounding. 2 Represents certain non-cash accounting adjustments, relating to deferred revenue. hmhco.com / 15
Non-GAAP Reconciliation – Free Cash Flow 1 $ 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) 1 Details may not sum to total due to rounding. hmhco.com / 16
Non-GAAP Reconciliation – Billings Q1 $ in millions 2015 2016 Net Sales 163 206 Change in Deferred Revenue (15) (38) Billings 148 168 hmhco.com / 17
Balance Sheet ($ in Millions) Unaudited Dec 31, 2015 Mar 31, 2016 Dec 31, 2015 Mar 31, 2016 Current Liabilities Current Assets Current portion of long-term debt $8 $8 Cash and cash equivalents $234 $169 Accounts payable 94 101 Short-term investments 198 68 Royalties payable 86 60 256 183 Accounts receivable less allowance Salaries, wages, and commissions 45 28 256 183 for bad debts and book returns payable Inventories 171 222 Deferred revenue 231 212 Severance and other charges 5 5 Prepaid expenses and other assets 23 25 Accrued postretirement benefits 2 2 883 667 Total current assets Other liabilities 35 38 507 454 Total current liabilities Property, plant, and equipment, net 150 160 Pre-publication costs, net 322 323 Long-term debt, net of discount and issuance costs 769 768 Royalty advances to authors, net 45 45 Long-term deferred revenue 441 422 Goodwill 783 783 Accrued pension benefits 24 23 Other intangible assets, net 913 889 Accrued postretirement benefits 24 23 Deferred income taxes 4 4 Deferred income taxes 140 173 Other assets 23 23 Other liabilities 20 25 3,122 2,895 Total assets 1,924 1,888 Total liabilities 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) 1,198 1,006 Total stockholder's equity 3,122 2,895 Total liabilities and stockholder's equity hmhco.com / 18 13
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