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 and condition; liquidity; products and services, including for new adoptions; outlook for full year 2018; prospects; growth; markets and market share; strategies, including with respect to investing in our core solutions and extensions businesses and operational excellence; efficiency and cost savings initiatives; 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 2, 2018 and in the Special Note Regarding Forward-Looking Statements and Risk Factors in our most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. We undertake no obligation, and do not expect, to publicly update or 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, and operating measures, such as billings. 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) and a calculation of operating measures are provided in the appendix to this presentation and in our news release issued on August 2, 2018, which are posted on hmhco.com under the Investor Relations section. 2
3 Market Opportunity & Strategy
The HMH Business Intervention Trade 13% Extensions 45% Professional Learning Core Solutions 42% Supplemental Sources: 2017 HMH Billings Mix
13,000 Districts 3,000,000 Teachers 88,000 Schools 50,000,000 Students 650 Sales Representatives 42,000 Service Engagements 5
Classrooms consist of students with diverse academic ability, requiring different instructional needs Core Solutions Professional Services Supplemental Intervention English language development 6
Riverside Divestiture: Overview HMH to sell Riverside Clinical and Standardized Testing to Alpine Investors for $140 million in cash Riverside Portfolio was non-core to our 2020 strategy Divestiture sharpens focus and creates opportunity to accelerate investment in faster growing, high margin Extensions Riverside generated Billings of approximately $80 million in 2017 Approximately $135 million of net proceeds expected to be re-deployed in faster growing, high margin Extensions opportunities Year-to-date results and full year guidance will be adjusted to reflect the divestiture by the Q3 2018 earnings call 7
U.S. K 12 Market: Instructional Materials Spend $11B Magazines Video Trade Books Manipulative Print Supplements Digital Supplements State Level Tests Courseware Assessment Services Basal Curriculum $1.2B $.2B $1.4B Instructional Materials Spend 2017 HMH Education Billings 2017 HMH International & Trade Billings Total 2017 HMH Billings 8 Sources: 2017 HMH Billings
HMH Extensions: Market Opportunity Professional Learning $2.3b 3% Growth 4% Growth Supplemental $2.0b $6B 4% Growth Intervention $1.5b 9 Sources: Simba, Company Annual Reports, SEC, Oliver Wyman November 2014 Intervention Web Survey, Oliver Wyman analysis, RAND Corporation School Leadership Interventions Under ESSA report; as of 2017.
From K12 Publisher to Learning Company
HMH Strategy: Three Pillars Enhance & Extend the Core Develop Integrated Solutions Achieve Operational Excellence Provide highly differentiated products that leverage data analytics and learning science to personalize learning Expand into faster growing, higher margin extensions in Supplemental, Intervention Solutions and Professional Services Platform + advanced analytics + continuous delivery = efficacy engine Integrate offerings to unlock true value to customers designed to improve student outcomes Increase revenue through cross selling and upselling go-to-market initiatives Standardize IT infrastructure, streamline back office and standardize product catalog to eliminate unnecessary variation Move to Lean Agile Continuous Delivery model for Software development Improve processes and technology to elevate customer experience 11
HMH Differentiators Transforming from Publisher to Learning Company Submitted: English on April 6, 2018 Spanish on May 18, 2018
13 Financial Overview
Long-Term Billings 1 Growth Framework Business Line Billings Growth Framework Trade Publishing 13% Core Solutions Extensions Annual growth in line with market Long-term average growth in low single digits Low-to-mid single digits Extensions 45% Core Solutions 42% Trade Low single digits Billings Mix in 2017 14 1 An operating measure which we derive from net sales taking into account the change in deferred revenue. See appendix for a calculation of this measure.
2017 Cost Structure Our Adjusted Fixed Cost Structure Benefited From Restructuring Actions Taken in 2017- Targeting $70-80m in Run-Rate Cost Savings 47% 2017 Adjusted Fixed Costs Percent of Billings 1 38% 2017 Adjusted Variable Costs Percent of Billings 1 15 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 appendix for a reconciliation of non-gaap measures (to the extent available without unreasonable efforts).
Variability in Content Spend Driven by Major Adoptions $139 ($ in Millions) $127 Math $116 $124 ELA Program Development commences up to two years before major adoptions Math & Reading Social Studies $104 Reading Social Studies Science Higher spend associated with: Multiple major adoptions in upcoming two years Reading and Math programs Math & Science & Social Studies 2013 2014 2015 2016 2017 First Year of Adoption Reading CA Math FL Math, Reading TX Math, Science Social Studies TX Social Studies Science & Social Studies CA Reading Math CA Social Studies FL Science In 2017 the calendar includes adoptions in: California Social Studies (2018) Florida Science (2018) Texas Reading (2019) Florida Math (2019) California Science (2019) 16 Note: Amounts are as reported and do not include content spend of the Ed Tech business prior to the May 29, 2015 acquisition.
PP&E Capital Investment Supports Operating Model Transformation Major Components ($ in Millions) FACILITIES 4 office moves in 2016 (non recurring) Modest ongoing maintenance IT SYSTEMS New ERP implementation (planning) System updates (ongoing) Ongoing maintenance PLATFORM Ongoing Ed feature enhancements Maintenance of legacy platforms until sunset $60 $67 $83 $106 $58 2013 2014 2015 2016 2017 17 Note: Amounts are as reported and do not include PP&E spend of the Ed Tech business prior to the May 29, 2015 acquisition.
18 Looking Ahead
Understanding HMH Share of U.S. K-12 Market Total U.S. K 12 Market Instructional Materials Total AAP Market 6 Contributing Members Includes: o Basal Curriculum o Program-Based Services o Educational Assessment o Coursework Outside U.S. K 12 Market International Trade HMH Revenue HMH Share of Addressable AAP Market $11B Disciplines Include: Math Reading/Language Arts Science Social Studies World Languages Vocational Music Advanced Placement Outside AAP but within U.S. K 12 Market Practice-Based Services Clinical Assessment Extensions not included in AAP Market HMH s Addressable AAP Market Only includes opportunities where HMH has products (e.g., excludes Vocational, Music, and Advanced Placement) 19
HMH s AAP Addressable Market Open Territory Adoption PEAK-TO-PEAK ($ in Billions) TROUGH-TO-TROUGH ~$3.1 Projected Market Drivers Adoption States 2018 : FL Science (K 12) CA Social Studies (K-8) 2019 : TX English Language Arts (K-8) FL Math (K-12) CA Science (K-8) and Social Studies (K-8) (year 2) 2020 : TX English Language Arts (6-12) FL English Language Arts (K-12) CA Science (K-8) (year 2) Open Territory State education expenditure growth Common Core program replacement approaching 2013 2014 2015 2016 2017 2018P 2019P 2020P 1 1 1 2 2 2 44% 48% 42% 39% 38% HMH Share ($29m) $308m $162m ($86m) ($62m) Free Cash Flow 3 1 HMH s 2013, 2014 and 2015 AAP addressable market and market share are presented on a pro forma basis as if the Ed Tech acquisition had occurred on January 1, 2013. 20 2 HMH s 2018, 2019 and 2020 AAP addressable market assumptions are as of February 22, 2018. 3 Free Cash Flow amounts are as reported and do not include Free Cash Flow of the EdTech business prior to the May 29, 2015 acquisition.
How We Will Grow Free Cash Flow Increase market share in Core Solutions o Launch of next generation Reading & Math in 2019 o Progress on integrated solutions Grow our Extensions businesses o Invest for future growth (organically, partnerships and acquisition) Manage fixed costs to offset inflationary items o Process and systems re-engineering 21
Questions?
23 Appendix
2018 Billings 2 Calculation/ 2017 Billings 2 & Net Sales Reclassification 1 ($ in Millions) 2017 Reclassified 2018 Q1 Q2 Q3 Q4 Total Q1 Q2 Core Solutions Net Sales $65 $176 $277 76 595 $61 $152 Change in Deferred Revenue (19) 9 22 (21) (10) (25) 13 Billings $46 $185 $299 $55 $585 $36 $165 Extensions Net Sales $120 174 $204 134 632 $122 $187 Change in Deferred Revenue (18) (7) 31 (10) (5) (14) 1 Billings $102 $168 $234 $124 $628 $108 $188 Total Education $148 $353 $533 $179 $1,213 $145 $353 24 Trade Net Sales $37 $42 $51 50 181 $37 $36 Change in Deferred Revenue - - (1) - (1) - - Billings $36 $42 $50 $50 $180 $37 $36 Consolidated Net Sales $222 $393 $532 $261 $1,408 $220 $376 Change in Deferred Revenue (38) 2 52 (31) (15) (38) 14 Total HMH $184 $395 $584 $229 $1,392 $182 $389 1 The Company has recast prior results to report International net sales and billings in the Core Solutions and Extension categories of our Education segment, whereas previously all International net sales and billings were reported in the Core Solutions category. Further, certain other products and/or certain other products have been recast between the Core Solutions and Extension categories to better align with the manner that the businesses are now viewed and managed. Lastly, an elimination entry impacting each of our Education and Trade segments in the fourth quarter of 2017 has been recast to attribute certain revenue to the Education segment originally reported in the Trade segment to better align such sales to the segment selling to the end customer. The Company s first quarter 2018 quarterly report on Form 10-Q dated May 3, 2018 is the first to reflect the above changes on a comparative basis. 2 Details may not sum due to rounding.
Reconciliation of Free Cash Flow ($ in Millions) 2013 2014 2015 2016 2017 Cash Flows from operating activities Net cash provided by operating activities $157 $491 $348 $144 $135 Cash Flows from investing activities Additions to pre-publication costs (127) (116) (104) (124) (139) Additions to property, plant, and equipment (60) (67) (83) (106) (58) Free Cash Flow $(29) $308 $162 $(86) $(62) 25 Note: Details may not sum to total due to rounding.
Non-GAAP Reconciliation Adjusted Fixed and Adjusted Variable Costs $ in Millions Full Year 2016 2017 Cost of sales per Form 10-K $ 802 $ 790 Selling and administrative per Form 10-K 700 655 1,502 1,445 Less: Depreciation - cost of sales (41) (38) Depreciation - selling and administrative (39) (37) Publishing rights amortization - cost of sales (61) (46) Pre-publication amortization - cost of sales (130) (126) Stock-compensation - selling and administrative (11) (11) Restructuring/Integration (14) 0 Legal settlement (10) 4 Fees, expenses for debt/acquisition matters (1) (1) $ 1,194 $ 1,189 % of Billings 1 % of Billings 1 Fixed expenses $ 673 48% $ 657 47% Variable expenses 521 37% 532 38% $ 1,194 $ 1,189 Net sales $ 1,373 $ 1,408 Change in deferred revenue 38 (15) Billings 1 $ 1,410 $ 1,392 26 1 Details may not sum to total due to rounding. An operating measure which we derive from net sales taking into account the change in deferred revenue.
Forward-Looking Non-GAAP Reconciliation Adjusted Fixed and Variable Costs 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 fixed and variable costs 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 cost of sales and selling and administrative expense 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 fixed and variable costs are derived by excluding and/or including certain items required to be included in/excluded from the most directly comparable GAAP financial measures of cost of sales and selling and administrative expense. The determination of the items excluded from/included in adjusted fixed and variable costs is a matter of management judgment and depends upon, among other things, the nature of the underlying items recognized in a given period. Management excludes/includes the following items from adjusted fixed and variable costs and such items may also be excluded/included in future periods and could be significant in amount. Interest expense, interest income, 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 fixed and variable costs to cost of sales and selling and administrative expense 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. 27
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