HMH Earnings Call Fourth Quarter and Full Year 2016

Transcription

1 February 23, 2017 HMH Earnings Call Fourth Quarter and Full Year 2016

2 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, including adjusted EBITDA margin and free cash flow; financial condition; pre-publication (or content development) costs and total capital expenditures; liquidity; EdTech integration timing and impact; 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 products and adjacent markets; efficiency and cost savings initiatives; the industry in which we operate; our transition to a new CEO; and potential business decisions. Those statements constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 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 February 23, 2017 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 (to the extent available without unreasonable efforts) is provided in the appendix to this presentation and in our news release issued on February 23, 2017, which are posted on hmhco.com under the Investor Relations section. hmhco.com / 2

3 Agenda Welcome/Introductions Business Update Financial Overview Questions and Answers hmhco.com / 3

4 Business Update

5 Fourth Quarter and Full Year 2016 Highlights Met revised year-end guidance for net sales of $1.37 billion; billings of $1.41 billion Focus on restoring growth to core business; making strategic investments to position HMH for long-term growth and profitability hmhco.com / 5

6 Investing in Our Core Education Products HMH Science Dimensions launched in October, first comprehensive K-12 science program specifically designed to meet NGSS HMH Social Studies, 6-12 launched in November HMH Kids Discover Social Studies launched this month, offers K-6 solution New programs effectively combine print and digital assets, including interactive tools like HMH Field Trips for Google Expeditions hmhco.com / 6

7 hmhco.com / 7

8 Expanding Upon Our Core Education Strength Strong opportunities to integrate intervention and core programs and products Strong performance with 11 consecutive years of sales growth in the Heinemann business Increase in the percentage of professional services within core product sales in 2016 Curious World receives industry awards and adds original content from celebrated partners hmhco.com / 8

9 Bestselling Titles in Trade hmhco.com / 9

10 Market Opportunity Outlook Opportunities hmhco.com / 10

11 Priorities for Invest in Core K-12 Product Development 2 Focus on Growing Adjacencies that Elevate and Enhance the Core 3 Implement Operating Efficiencies and Improvements 4 Maintain Leadership Position and Focus on Regaining Market Share hmhco.com / 11

12 Financial Overview

13 Fourth Quarter and Full Year 2016 Highlights 1 $ in millions Net Sales Billings 2 Net sales and Billings 2 decreased primarily due to smaller new adoption market and domestic education market share loss Adjusted EBITDA 3 lower due to decrease in net sales $1,541 $1,410 $1,416 $1,373 $166 $142 $221 $191 $298 $242 $1,274 $1,375 $1,182 $275 $1,189 $210 $42 $42 $36 $35 $256 $200 $239 $175 Q Q FY 2015 FY 2016 Q Q FY 2015 FY 2016 EdTech HMH Adjusted Net Income (Loss) EBITDA 3 $235 $183 ($97) ($181) ($134) $16 ($285) Q Q FY 2015 FY 2016 ($19) Q Q FY 2015 FY 2016 hmhco.com / 13 1 Fourth quarter and Full Year ending December 31, 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.

14 New State Adoptions to 2019 Texas State 2014A 2015A 2016A 2017E 2018E 2019E Science Mathematics California-SA Mathematics Mathematics Florida Alabama Reading/Language Arts Mathematics Social Studies Social Studies Mathematics Foreign Language Reading/Language Arts Reading/Language Arts Reading/Language Arts Reading/Language Arts ESL Social Studies Mathematics ESL Social Studies Science Reading/Language Arts Mathematics Reading/Language Arts Mathematics Social Studies Georgia Reading/Language Arts Mathematics Reading/Language Arts Science Science Social Studies Social Studies Science Mathematics Social Studies Mathematics Tennessee Social Studies Mathematics Science Social Studies South Carolina Reading/Language Arts Reading/Language Arts Mathematics Reading/Language Arts Louisiana Reading/Language Arts Mathematics Reading/Language Arts West Virginia Oklahoma New Mexico Oregon North Carolina Reading/Language Arts Reading/Language Arts Reading/Language Arts Mathematics Reading/Language Arts Science Mathematics Mathematics Virginia Social Studies Mathematics Mississippi Reading/Language Arts Reading/Language Arts Mathematics Source: States related education websites hmhco.com / 14

15 2017 Outlook 1 Guidance Billings Net Sales Content Development Spend Total Capital Expenditure $1,375 million to $1,455 million $1,325 million to $1,405 million $140 million to $160 million $190 million to $220 million Additional Insight Addressable Market Flat to slightly higher than 2016, ~$2.7B Market Share Consistent with 2016, ~ 39% Adjusted EBITDA Margin 2 3 Flat to slightly below 2016 Free Cash Flow 3 Negative at mid-point of billings guidance with potential to be break-even at top end 1 HMH s expectations as of February 23, Percentage of net sales. 3 Please see appendix for a reconciliation of non-gaap measures (to the extent available without unreasonable efforts). hmhco.com / 15

16 Questions and Answers

17 Appendix

18 Financial Highlights $ in Millions Q4 FY Variance % Variance % Net Sales $298 $242 (19%) $1,416 $1,373 (3%) Change in Deferred Revenue (23) (32) 39% (69%) Billings (24%) 1,541 1,410 (8%) Net Loss (97) (181) 87% (134) (285) 113% Adjusted EBITDA 2 16 (19) (219%) (22%) Cash and Short Term Investments (29%) Free Cash Flow (29%) 162 (86) (153%) Pre-publication Costs (25) (29) 19% (104) (124) 20% Capital Expenditures 4 $(58) $(44) (23%) $(187) $(230) 23% 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 December 31, 2016, it includes, cash and cash equivalents of $226.1M and short term investments of $80.8M. 4 Capital expenditures include pre-publication costs and property, plant and equipment expenditures. hmhco.com / 18

19 Non-GAAP Reconciliation Adjusted EBITDA 1 ($ in millions) Q4 FY Net Loss $(97) $(181) $(134) $(285) Interest Expense Provision (Benefit) for Income Taxes 10 (81) (20) (65) Depreciation Expense Amortization Expense Non-Cash Charges - Stock Compensation Non-Cash Charges- Loss on Derivative Instrument Non-Cash Charges- Asset Impairment Charges Purchase Accounting Adjustments Fees Expenses or Charges for Equity Offerings, Debt or Acquisitions Restructuring/Integration Severance, Separation Costs and Facility Closures Loss on Extinguishment of Debt Legal Settlement Adjusted EBITDA $16 $(19) $235 $183 1 Details may not sum to total due to rounding. hmhco.com / 19

20 Non-GAAP Reconciliation Free Cash Flow 1 $ in Millions Q4 FY Net Cash Used in Operating Activities $185 $134 $348 $144 Additions to Pre-publication Costs (25) (29) (104) (124) Additions to Property, Plant, and Equipment (33) (15) (83) (106) Free Cash Flow $127 $90 $162 $(86) 1 Details may not sum to total due to rounding. hmhco.com / 20

21 Billings 1 $ in millions Q4 FY Net Sales $298 $242 Net Sales $1,416 $1,373 Change in Deferred Revenue (23) (32) Change in Deferred Revenue Billings $275 $210 Billings $1,541 $1,410 1 Details may not sum to total due to rounding hmhco.com / 21

22 Forward Looking Non-GAAP Reconciliations Forward-Looking Adjusted EBITDA Margin and Free Cash Flow Management has presented certain forward-looking statements about the Company s expected future performance on a non-gaap basis, including adjusted EBITDA margin and free cash flow. Management is unable to present a quantitative reconciliation of these forward-looking non-gaap financial measures to their most directly comparable forward-looking GAAP financial measures of net income/loss margin and net cash provided by operating activities because management cannot reliably predict all of the necessary components of such GAAP measures on a forward-looking basis. The adjusted EBITDA component of adjusted EBITDA margin (which we calculate as adjusted EBITDA over net sales) is derived by excluding and/or including certain items required to be included in/excluded from the most directly comparable GAAP financial measure of net income/loss. The determination of the items excluded from/included in adjusted EBITDA is a matter of management judgment and depends upon, among other things, the nature of the underlying items recognized in a given period. Historically, management has excluded/included the following items from adjusted EBITDA (a component of adjusted EBITDA margin), and such items may also be excluded/included in future periods and could be significant in amount. Interest expense, tax benefit/expense, depreciation and amortization expense Non-cash charges related to stock compensation, asset impairments and unrealized gains and losses for derivative instruments Fees, expenses or charges related to the acquisition of other businesses, including purchase accounting adjustments, integration costs and transaction costs Fees, expenses or charges related to securities offerings and debt refinancings Charges associated with restructuring and cost saving initiatives, including severance, separation and facility closure costs Certain legal settlements or awards Non-routine charges or gains Our inability to present a quantitative reconciliation of adjusted EBITDA, and consequently adjusted EBITDA margin, to net income/loss and net income/loss margin, respectively, on a forward-looking basis also prevents us from being able to present a quantitative reconciliation of free cash flow to net cash provided by operating activities on a forward-looking basis. hmhco.com / 22

23 Balance Sheet ($ in Millions) Dec Dec Current Assets Cash and cash equivalents $234 $226 Short-term investments Accounts receivable less allowance for bad debts and book returns Inventories Prepaid expenses and other assets Total current assets Property, plant, and equipment, net Pre-publication costs, net Royalty advances to authors, net Goodwill Other intangible assets, net Deferred income taxes 4 3 Other assets Total assets $3,122 $2,731 Dec Dec Current Liabilities Current portion of long-term debt $8 $8 Accounts payable Royalties payable Salaries, wages, and commissions payable Deferred revenue Interest payable 0 0 Severance and other charges 5 9 Accrued postretirement benefits 2 2 Other liabilities Total current liabilities Long-term debt, net of discount and issuance costs Long-term deferred revenue Accrued pension benefits Accrued postretirement benefits Deferred income taxes Other liabilities Total liabilities 1,924 1,851 Stockholder's Equity Common stock 1 1 Treasury stock (463) (518) Capital in excess of par value 4,833 4,868 Retained earnings (accumulated deficit) (3,134) (3,418) Accumulated other comprehensive income (loss) (40) (53) Total stockholder's equity (deficit) 1, Total liability and stockholder's equity $3,122 $2,731 hmhco.com / 23

24 Income Statement ($ in Millions) Q4 FY Net Sales $298 $242 $1,416 $1,373 Costs and expenses Cost of sales, excluding publishing right and pre-publication amortization Publishing rights amortization Pre-publication amortization Cost of sales Selling and administrative (related parties of $10,489 for FY 2015) Impairment charge for intangible assets Other intangible asset amortization Severance and other charges Operating Income (Loss) (77) (251) (116) (311) Other Income (Expense) Interest expense (10) (10) (32) (39) Change in fair value of derivative instruments (0) (1) (2) (1) Loss on extinguishment of debt - - (3) - Income (Loss) before taxes (87) (262) (154) (350) Income tax expense (benefit) 10 (81) (20) (65) Net Income (Loss) (97) (181) (134) (285) hmhco.com / 24

25 Statement of Cash Flows ($ in Millions) Twelve Months Ended Dec Dec Cash flows from operating activities Net Loss $(134) $(285) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization expense Amortization of debt discount and deferred financing costs 7 4 Deferred income taxes 48 (68) Stock-based compensation expense Loss on extinguishment of debt 3 0 Impairment charge for intangible assets Change in fair value of derivative instruments 2 1 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable Inventories 26 9 Other Assets (3) 7 Accounts payable and accrued expenses 13 (24) Royalties, net 6 (13) Deferred revenue Interest payable 0 0 Severance and other charges (4) 4 Accrued pension and postretirement benefits (5) 4 Other liabilities (78) (21) Net cash provided by operating activities $348 $144 Twelve Months Ended Dec Dec Cash flows from investing activities Purchases of short-term investments $(199) $(81) Proceeds from sales and maturities of short-term investments Additions to pre-publication costs (104) (124) Additions to property, plant, and equipment (83) (106) Acquisition of business, net of cash acquired (578) - Investment in preferred stock - (1) Net cash used in investing activities (677) (114) Cash flows from financing activities Proceeds from term loan, net of discount Payments of long-term debt (247) (8) Payments of deferred financing fees (15) - Tax withholding payments related to net share settlements of restricted stock units (1) (2) Proceeds from stock option exercises Repurchases of common stock (related parties of $193,493 in 2015) (463) (55) Issuance of common stock under employee stock purchase plan - 2 Net cash provided by (used in) financing activities 106 (38) Cash and cash equivalents at beginning of period Net decrease in cash and cash equivalents (222) (8) Cash and cash equivalents at end of period $234 $226 hmhco.com / 25