Houghton Mifflin Harcourt Announces Third Quarter 2017 Results

Global learning company Houghton Mifflin Harcourt (“HMH” or the “Company”) (NASDAQ: HMHC) today announced its financial results for the third quarter ended September 30, 2017.

“We had a productive third quarter as we continued to prepare for the large adoption opportunities beginning in 2018 and beyond,” said Jack Lynch, Chief Executive Officer of HMH. “We are focused on executing against our long-term strategy, and we remain confident this strategy will drive continued market leadership and create value for our customers and our shareholders.”

Joe Abbott, Chief Financial Officer of HMH added, “We remain on track to deliver net sales and billings consistent with the guidance for full-year 2017 we issued at the start of the year despite contraction in the open territory market in the third quarter. We also continue to make progress on our operating efficiency initiatives, positioning HMH as a leaner, more efficient company going forward.”

Third Quarter 2017 Financial Results:
Net Sales: Net Sales for the third quarter were $532 million, down 0.2% or $1 million, year over year. The net sales decrease was driven by a $6 million decrease in our Education segment, partially offset by a $5 million increase in our Trade Publishing segment. Within our Education segment, which includes our Basal business and our Extension businesses, the decline in year over year net sales was attributable to our Basal business, inclusive of international sales, which declined by $6 million from $301 million in 2016 to $295 million. The primary drivers of the decrease in our Basal business were lower net sales of Basal math and English Language Arts programs across adoption and open territory states. Our Extension businesses, which primarily consist of Heinemann, intervention, supplemental and assessment products as well as professional services, had net sales for the quarter of $186 million which were flat compared to 2016. There were higher Heinemann and supplemental net sales during the third quarter of 2017 primarily related to our Classroom Libraries offering along with the introduction of our Fountas & Pinnell Classroom product and sales of custom book bundles. Within our Extension businesses, lower net sales of intervention offset a portion of the above increases. Largely offsetting the net sales decrease in our Education segment was a $5 million increase in our Trade Publishing segment. Within our Trade Publishing segment, which includes our Trade business, the increase was primarily due to sales of frontlist and backlist print titles such as The Polar Express, Little Blue Truck series, and It Takes Two and strong eBook sales, such as The Handmaid’s Tale.

Billings: Billings for the third quarter of 2017 were $584 million, down 6% or $36 million compared with $620 million for the same period in 2016. The decrease was driven by a $41 million decrease in our Education segment billings, slightly offset by a $5 million increase in our Trade Publishing segment billings. Within our Education segment, the decline in year over year billings was attributable to our Basal business, inclusive of international sales, which declined by $27 million from $338 million in 2016 to $311 million. The primary drivers of the decrease in our Basal business billings were lower Basal math and English Language Arts program billings across open territory states. Additionally, billings in our Extension businesses decreased $14 million from $236 million in 2016 to $222 million primarily driven by lower billings of intervention and professional services. The decline in our Extension businesses billings was partially offset by higher Heinemann billings primarily related to our Classroom Libraries offering along with the introduction of our Fountas & Pinnell Classroom product, and supplemental billings related to custom book bundles. Further, slightly offsetting the billings decrease in our Education segment was a $5 million increase in our Trade Publishing segment billings. Within our Trade Publishing segment the increase was primarily due the same factors impacting net sales for this segment

Cost of Sales: Overall cost of sales decreased slightly to $254 million in the third quarter of 2017 from $255 million in the same period of 2016, primarily due to a $4 million reduction in amortization expense related to publishing rights and pre-publication assets. Our cost of sales, excluding publishing rights and pre-publication amortization, increased $4 million, as our cost of sales, excluding publishing rights and pre-publication amortization, as a percentage of net sales increased to 39.4% from 38.7% due to a product mix carrying higher costs.

Selling and Administrative Costs: Selling and administrative costs decreased by $7 million, primarily due to a reduction in internal and outside labor related costs of $5 million and a decrease in discretionary expenses, such as promotions, advertising, travel and entertainment, of $4 million, all due to actions taken under the 2017 Restructuring Plan. Additionally, variable expense such as samples, transportation and depository fees were $4 million lower in the current period. The decrease was partially offset by $8 million of higher commission expense and incentive compensation due to greater achievement to targeted levels than in the prior year period.

Operating Income: Operating income for the third quarter of 2017 was $90 million, $7 million higher than the $83 million operating income recorded in the same period of 2016 primarily due to the aforementioned changes in selling and administrative costs.

Net Income: Net income of $91 million in the third quarter of 2017 was slightly higher compared to a net income of $90 million in the same quarter of 2016, due primarily to the same factors impacting operating income offset by an unfavorable change in our income tax benefit of $5 million, from an income tax benefit of $16 million for the same period in 2016 to an income tax benefit of $11 million in 2017, primarily related to a change to our estimated annual effective tax rate during the prior year period. Further, interest expense increased by $1 million primarily due to net settlement payments on our interest rate derivatives during the current period and a slight increase in the interest rate of the term loan facility.

Adjusted EBITDA: Adjusted EBITDA for the third quarter of 2017 was $165 million, a decrease of $3 million from $168 million in the same quarter of 2016, primarily due to higher cost of sales, excluding publishing rights and pre-publication amortization, and lower net sales partially offset by lower selling and administrative costs.
more detail at:  http://www.hmhco.com/media-center/press-releases/2017/november/q3-2017-earnings-results

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