Houghton Mifflin Harcourt Reports Record Billings Growth in Third Quarter; Re-Affirms 2019 Guidance

New Core Programs and Extensions Drive Growth Nationwide; Strong Third Quarter Cash Flow

News provided by

Oct 31, 2019, 07:00 ET

BOSTON, Oct. 31, 2019 /PRNewswire/ -- Learning company Houghton Mifflin Harcourt ("HMH" or the "Company") (Nasdaq: HMHC) today announced its financial results for the quarter ended September 30, 2019.

Operating Highlights:

Net sales growth of 10% in Q3 and 7% YTD
Record billings growth across the Company of 31% in Q3 and 26% YTD
Core Solutions billings growth of 50% in Q3 and 48% YTD
Extensions billings growth of 25% in Q3 and 14% YTD driven by strong Heinemann and Services
Net cash provided by operating activities of $393 million in Q3 and $127 million YTD
Generated free cash flow of $358 million in Q3 and $18 million YTD
Re-affirming guidance established at Investor Update Event on October 17, 2019

	Three Months Ended September 30,							Nine Months Ended September 30,
(in millions of dollars)	2019		2018 (1)		Change			2019		2018 (1)		Change
Net sales	$	566	$	516		9.6	%	$	1,149	$	1,073		7.1	%
Change in deferred revenue		181		55	NM				241		34	NM
Billings		747		571		30.7	%		1,390		1,108		25.5	%
Income (loss) from continuing operations		69		84		(17.5)	%		(89)		(51)		(73.7)	%
Adjusted EBITDA from continuing operations²		149		160		(6.9)	%		169		190		(10.7)	%
Pre-publication or content development costs		(26)		(33)		20.6	%		(82)		(92)		11.6	%
Net cash provided by operating activities	393		201			95.3	%		127		26	NM
Free cash flow²	358		150		NM				18		(108)	NM
________________

1	All amounts have been adjusted to eliminate the impact of the Riverside Standardized Testing business which has been removed from continuing operations and classified as discontinued operations.
2	Non-GAAP measure, please refer to Use of Non-GAAP measures for an explanation and reconciliation.
NM = not meaningful

"The third quarter represented the second consecutive record quarter of billings growth for HMH as a public company, and we raised our billings guidance at the recent investor update event in New York City on October 17, 2019 to reflect the strength we are seeing in 2019. Early success from our cross-selling initiatives provides compelling evidence that our integrated solutions approach will help us drive sustained, positive free cash flow into the future," said Jack Lynch, President and Chief Executive Officer of Houghton Mifflin Harcourt.

Joe Abbott, Chief Financial Officer of HMH added, "Momentum in both Core Solutions and Extensions is being driven by the new core programs we launched into the market this year, as well as growth in Heinemann and professional services. The strong cash flow generation in the third quarter puts us on track to generate 2019 free cash flow in a range of $100 to $120 million."

2019 Outlook

In light of stronger-than-expected year to date financial results, the Company revised its billings guidance, content development spend guidance and total capital expenditures guidance on October 17, 2019 at its investor update meeting. Additionally, the Company provided free cash flow guidance for the full year at the investor update meeting. Our guidance is as follows:

		2019 Guidance
Billings		$1,590 million to $1,620 million
Content Development Spend		$100 million to $110 million
Total Capital Expenditures		$150 million to $160 million
Free Cash Flow		$100 million to $120 million

Third Quarter 2019 Financial Results:

Net Sales: HMH reported net sales of $566 million for the third quarter of 2019, up 10% or $50 million compared to $516 million in the same quarter of 2018. The net sales increase was driven by a $68 million increase in our Education segment, offset by a $18 million decrease in our HMH Books & Media segment. Within our Education segment, the increase was due to higher net sales in Extensions, which primarily consist of our Heinemann brand, intervention and supplemental products as well as professional services, which increased by $38 million from $207 million in 2018 to $244 million. Within Extensions, Heinemann net sales continued to grow primarily driven by sales of the Fountas & Pinnell Classroom and Calkins products. Further, our net sales from Core Solutions increased by $30 million from $243 million in 2018 to $273 million. The primary driver of the increase in Core Solutions were net sales of Texas and national versions of the Into Reading and Into Literature programs. The HMH Books & Media net sales decrease was primarily due to 2018 licensing income of $16 million, pertaining to our classic backlist titles 1984 and Animal Farm, which did not repeat this year.

Billings: Billings for the third quarter of 2019 increased $175 million, or 31%, from the same period in 2018. The billings increase was driven by a $195 million increase in our Education segment, offset by a $19 million decrease in our HMH Books & Media segment. Within our Education segment, the increase was primarily due to higher Core Solutions billings, which increased by $138 million, driven by billings of the Texas and national versions of the Into Reading and Into Literature programs. Further, the billings from Extensions increased $57 million, driven by continued growth of Heinemann's Fountas & Pinnell Classroom and Calkins products. The HMH Books & Media billings decrease was primarily due to 2018 licensing income of $16 million, pertaining to our classic backlist titles 1984 and Animal Farm, which did not repeat this year.

Cost of Sales: Overall cost of sales increased by $54 million to $292 million in the third quarter of 2019 from $238 million in the same period in 2018, primarily due to higher billings volume and royalty costs associated with such billings, and an increase in pre-publication amortization expense related to the timing of 2019 major product releases.

Selling and Administrative Costs: Selling and administrative costs increased by $13 million in the third quarter of 2019, primarily due to increases in labor and variable costs due to $175 million of higher billings compared to the same period last year.

Operating Income: Operating income for the third quarter of 2019 was $78 million, a $14 million unfavorable change from the $92 million operating income recorded in the same period in 2018. The unfavorable change was primarily the result of higher cost of sales in the third quarter of 2019, coupled with an increase in selling and administrative expenses as noted herein.

Net Income: Net income of $69 million for the third quarter of 2019 was $17 million less than the net income of $86 million in the same quarter of 2018. Net income from continuing operations for the third quarter of 2019 was $69 million, a $15 million unfavorable change from the $84 million net income from continuing operations in the same quarter of 2018, due primarily to the same factors impacting operating loss, partially offset by income from a transition services agreement of $1 million that did not occur in the same period in 2018.

Adjusted EBITDA from Continuing Operations: Adjusted EBITDA from continuing operations for the third quarter of 2019 was $149 million, a $11 million unfavorable change from $160 million in the same quarter of 2018. Certain variable costs such as royalty, transportation and commissions were higher due to the increase in billings over the prior year.

Nine Months Ended September 30, 2019 Financial Results:

Net Sales: HMH reported net sales of $1,149 million for the first nine months of 2019, up 7% or $76 million compared to $1,073 million from the same period of 2018. The net sales increase was driven by a $87 million increase in our Education segment, offset by a $11 million decrease in our HMH Books & Media segment. Within our Education segment, the increase was due to higher net sales in Extensions, which increased by $50 million from $478 million in 2018 to $528 million. Within Extensions, Heinemann net sales continued to grow primarily driven by sales of the Fountas & Pinnell Classroom and Calkins products. Further, net sales from Core Solutions increased by $37 million from $456 million in 2018 to $493 million. The primary driver of the increase in Core Solutions were net sales of the Texas and national versions of the Into Reading and Into Literature programs.

Billings: Billings for the first nine months of 2019 increased $283 million, or 26%, from the same period in 2018. The billings increase was driven by a $296 million increase in our Education segment, offset by a $14 million decrease in our HMH Books & Media segment. Within our Education segment, the increase was primarily due to higher Core Solutions billings, driven by billings of the Texas and national versions of the Into Reading and Into Literature programs. Further, the billings from Extensions increased $67 million, driven by continued growth of Heinemann's Fountas & Pinnell Classroom and Calkins products. The HMH Books & Media billings decrease was primarily due to 2018 licensing income of $16 million, pertaining to our classic backlist titles 1984 and Animal Farm, which did not repeat this year.

Cost of Sales: Overall cost of sales increased by $94 million to $662 million in the first nine months of 2019 from $568 million in the same period in 2018, primarily due to higher billings volume and royalty costs associated with such billings, and an increase in pre-publication amortization expense related to the timing of 2019 major product releases.

Selling and Administrative Costs: Selling and administrative costs increased by $25 million in the first nine months of 2019, primarily due to increases in labor and variable costs due to $283 million of higher billings compared to the same period last year.

Operating Loss: Operating loss for the first nine months of 2019 was $54 million, a $38 million unfavorable change from the $16 million operating loss recorded in the same period in 2018. The unfavorable change was primarily the result of higher cost of sales coupled with an increase in selling and administrative expenses as noted herein.

Net Loss: Net loss of $89 million for the first nine months of 2019 was $50 million more than the net loss of $38 million in the same period of 2018. Net loss from continuing operations for the first nine months of 2019 was $89 million, a $38 million unfavorable change from the $51 million net loss from continuing operations in the same period of 2018, due primarily to the same factors impacting operating loss, slightly offset by income from a transition services agreement of $4 million that did not occur in 2018.

Adjusted EBITDA from Continuing Operations: Adjusted EBITDA from continuing operations for the nine months of 2019 was $169 million, a $20 million unfavorable change from $190 million in the same period of 2018. Certain variable costs such as royalty, transportation and commissions were higher due to the increase in billings over the prior year.

Cash Flows: Net cash provided by operating activities for the first nine months of 2019 was $127 million compared with $43 million in the same period of 2018. Net cash provided by operating activities from continuing operations was $127 million in the first nine months of 2019, an increase of $101 million compared to $26 million in the same period of 2018. Net cash provided by operating activities included $17 million of cash flow from discontinued operations in 2018. HMH's free cash flow, defined as net cash from operating activities minus capital expenditures, in the first nine months of 2019 was $18 million compared with a usage of $108 million in the same period of 2018. The primary driver of the favorable change in free cash flow was an increase in net working capital associated with the increased billings in the first nine months of 2019 of $283 million offset by growth in accounts receivables and inventory. As of September 30, 2019, no amounts were outstanding on the revolving credit facility.

Conference Call:

At 8:30 a.m. ET on Thursday, October 31, 2019, HMH will host a conference call to discuss these results and management's outlook with its investors. The call will be webcast live at ir.hmhco.com. The following information is provided for investors who would like to participate:

Toll Free: (844) 835-6565
International: (484) 653-6719
Passcode: 4496977
Moderator: Brian Shipman, Senior Vice President, Investor Relations
Webcast Link: https://edge.media-server.com/mmc/p/gosppfh2

An archived webcast with the accompanying slides will be available at ir.hmhco.com for one year for those unable to participate in the live event. An audio replay of this conference call will also be available until November 10, 2019 via the following telephone numbers: (855) 859-2056 in the United States and (404) 537-3406 internationally using passcode 4496977.

Use of Non-GAAP Financial Measures:

To supplement our financial statements presented in accordance with Generally Accepted Accounting Principles (GAAP) and to provide additional insights into our performance (for a completed period and/or on a forward-looking basis), we have presented adjusted EBITDA from continuing operations and free cash flow. These measures are not prepared in accordance with GAAP. This information should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. Management believes that the presentation of these non-GAAP measures provides useful information to investors regarding our results of operations and/or our expected results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business.

Management believes that the presentation of adjusted EBITDA from continuing operations provides useful information to our investors and management as an indicator of our performance that is not affected by: fluctuations in interest rates or effective tax rates; levels of depreciation or amortization; non-cash charges; fees, expenses or charges relating to acquisition-related activities, including purchase accounting adjustments, integration costs and transaction costs, as well as to securities offering- and debt refinancing-activities; charges associated with restructuring and cost saving initiatives, including severance, separation and facility closure costs; certain legal settlements and awards; and non-routine costs and gains. Accordingly, management believes that this measure is useful for comparing our performance from period to period and makes decisions based on it. In addition, targets in adjusted EBITDA (further adjusted to include the change in deferred revenue) are used as performance measures to determine certain incentive compensation of management. Management also believes that the presentation of free cash flow provides useful information to our investors because management regularly reviews free cash flow as an important indicator of how much cash is generated by general business operations, excluding capital expenditures, and makes decisions based on it.

Other companies may define these non-GAAP measures differently and, as a result, our use of these non-GAAP measures may not be directly comparable to adjusted EBITDA and free cash flow used by other companies. Although we use these non-GAAP measures as financial measures to assess our business, the use of 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. Adjusted EBITDA from continuing operations should be considered in addition to, and not as a substitute for, net income or loss prepared in accordance with GAAP as a measure of performance; and free cash flow should be considered in addition to, and not as a substitute for, net cash from operating activities prepared in accordance with GAAP. Adjusted EBITDA from continuing operations is not intended to be a measure of liquidity nor is free cash flow intended to be a measure of residual cash flow available for discretionary use. You are cautioned not to place undue reliance on these non-GAAP measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures (to the extent available without unreasonable efforts in the case of forward-looking measures) and related disclosure is provided in the appendix to this news release.

About Houghton Mifflin Harcourt

Houghton Mifflin Harcourt (Nasdaq: HMHC) is a global learning company committed to delivering integrated solutions that engage learners, empower educators and improve student outcomes. As a leading provider of K–12 core curriculum, supplemental and intervention solutions and professional learning services, HMH partners with educators and school districts to uncover solutions that unlock students' potential and extend teachers' capabilities. HMH serves more than 50 million students and 3 million educators in 150 countries, while its award-winning children's books, novels, non-fiction, and reference titles are enjoyed by readers throughout the world. For more information, visit www.hmhco.com

Follow HMH on Twitter, Facebook and YouTube.

Contact

Investors
Brian S. Shipman, CFA
SVP, Investor Relations
212-592-1177
[email protected]

Media
Bianca Olson
SVP, Corporate Affairs
617-351-3841
[email protected]

Forward-Looking Statements

The statements contained herein include forward-looking statements, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes," "estimates," "projects," "anticipates," "expects," "could," "intends," "may," "will," "should," "forecast," "intend," "plan," "potential," "project," "target" or, in each case, their negative, or other variations or comparable terminology. Forward-looking statements include all statements that are not statements of historical facts. They include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, including billings and net sales; financial performance, financial condition; liquidity; products and services, including for new adoptions; outlook for full year 2019; prospects; growth; markets and our positions therein; strategies, including with respect to investing in our Core Solutions and Extensions offerings and operational excellence; efficiency and cost savings initiatives, including actions thereunder and expected impact; the industry in which we operate; and potential business decisions. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this report.

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 may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results are consistent with the forward-looking statements contained herein, those results or developments may not be indicative of results or developments in subsequent periods.

Important factors that could cause our results to vary from expectations include, but are not limited to: changes in state and local education funding and/or related programs, legislation and procurement processes; changes in state academic standards; state acceptance of submitted programs and participation rates therefor; industry cycles and trends; the rate and state of technological change; state requirements related to digital instruction; changes in product distribution channels and concentration of retailer power; changes in our competitive environment, including free and low cost open educational resources; periods of operating and net losses; our ability to enforce our intellectual property and proprietary rights; risks based on information technology systems and potential breaches of those systems; dependence on a small number of print and paper vendors; third-party software and technology development; possible defects in digital products; our ability to identify, complete, or achieve the expected benefits of, acquisitions; unanticipated consequences of the disposition of our Riverside clinical and standardized testing business; our ability to execute on our long-term growth strategy; increases in our operating costs; exposure to litigation; major disasters or other external threats; contingent liabilities; risks related to our indebtedness; future impairment charges; changes in school district payment practices; a potential increase in the portion of our sales coming from digital sales; risks related to doing business abroad; changes in tax law or interpretations; management and other personnel changes; timing, higher costs and unintended consequences of our operational efficiency and cost-reduction initiatives, including our recently announced workforce reduction; and other factors discussed in the "Risk Factors" section of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other news releases we issue and filings we make with the SEC. In light of these risks, uncertainties and assumptions, the forward-looking events described herein may not occur.

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. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained herein.


Houghton Mifflin Harcourt Company
*Consolidated Balance Sheets*


(in thousands of dollars, except share information)	September 30, 2019 (Unaudited)		December 31, 2018
Assets
Current assets
Cash and cash equivalents	$	308,676	$	253,365
Short-term investments		—		49,833
Accounts receivable, net		434,903		203,574
Inventories		211,744		184,209
Prepaid expenses and other assets		18,728		15,297
Total current assets		974,051		706,278
Property, plant, and equipment, net		104,718		125,925
Pre-publication costs, net		290,356		323,641
Royalty advances to authors, net		48,124		47,993
Goodwill		716,977		716,073
Other intangible assets, net		486,356		520,892
Operating lease assets		135,298		—
Deferred income taxes		3,259		3,259
Deferred commissions		33,953		22,635
Other assets		31,698		28,428
Total assets	$	2,824,790	$	2,495,124
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt	$	8,000	$	8,000
Accounts payable		88,091		76,313
Royalties payable		68,189		66,893
Salaries, wages, and commissions payable		69,638		50,225
Deferred revenue		314,083		251,944
Interest payable		147		136
Severance and other charges		1,312		6,020
Accrued postretirement benefits		1,512		1,512
Operating lease liabilities		11,135		—
Other liabilities		34,473		26,649
Total current liabilities		596,580		487,692
Long-term debt, net of discount and issuance costs		752,241		755,649
Operating lease liabilities		137,375		—
Long-term deferred revenue		574,641		395,500
Accrued pension benefits		27,624		29,320
Accrued postretirement benefits		13,235		14,300
Deferred income taxes		29,655		27,075
Other liabilities		6,746		17,118
Total liabilities		2,138,097		1,726,654
Commitments and contingencies
Stockholders' equity
Preferred stock, $0.01 par value: 20,000,000 shares authorized; no shares issued and outstanding at September 30, 2019 and December 31, 2018		—		—
Common stock, $0.01 par value: 380,000,000 shares authorized; 148,907,955 and 148,164,854 shares issued at September 30, 2019 and December 31, 2018, respectively; 124,330,921 and 123,587,820 shares outstanding at September 30, 2019 and December 31, 2018, respectively		1,489		1,481
Treasury stock, 24,577,034 shares as of September 30, 2019 and December 31, 2018, respectively, at cost		(518,030)		(518,030)
Capital in excess of par value		4,903,422		4,893,174
Accumulated deficit		(3,650,874)		(3,562,971)
Accumulated other comprehensive loss		(49,314)		(45,184)
Total stockholders' equity		686,693		768,470
Total liabilities and stockholders' equity	$	2,824,790	$	2,495,124


Houghton Mifflin Harcourt Company
*Consolidated Statements of Operations (Unaudited)*


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands of dollars, except share and per share information)	2019		2018		2019		2018
Net sales	$	565,668	$	516,255	$	1,149,199	$	1,073,379
Costs and expenses
Cost of sales, excluding publishing rights and pre-publication amortization		246,527		201,748		533,413		461,539
Publishing rights amortization		6,341		8,238		20,217		26,476
Pre-publication amortization		39,319		28,094		108,140		80,047
Cost of sales		292,187		238,080		661,770		568,062
Selling and administrative		188,957		176,202		516,206		491,052
Other intangible asset amortization		6,383		6,696		19,519		20,238
Restructuring		—		3,077		—		3,077
Severance and other charges		270		362		5,921		6,380
Loss on sale of assets		—		—		—		384
Operating income (loss)		77,871		91,838		(54,217)		(15,814)
Other income (expense)
Retirement benefits non-service income		41		320		125		960
Interest expense		(11,597)		(11,627)		(35,142)		(34,035)
Interest income		509		277		1,698		900
Change in fair value of derivative instruments		(737)		(249)		(1,171)		(974)
Income from transition services agreement		571		—		4,248		—
Income (loss) from continuing operations before taxes		66,658		80,559		(84,459)		(48,963)
Income tax (benefit) expense for continuing operations		(2,602)		(3,349)		4,256		2,104
Income (loss) from continuing operations		69,260		83,908		(88,715)		(51,067)
Income from discontinued operations, net of tax		—		2,441		—		12,833
Net income (loss)	$	69,260	$	86,349	$	(88,715)	$	(38,234)
Net income (loss) per share attributable to common stockholders
Basic:
Continuing operations	$	0.56	$	0.68	$	(0.71)	$	(0.41)
Discontinued operations		—		0.02		—		0.10
Net income (loss)	$	0.56	$	0.70	$	(0.71)	$	(0.31)
Diluted:
Continuing operations	$	0.55	$	0.68	$	(0.71)	$	(0.41)
Discontinued operations		—		0.02		—		0.10
Net income (loss)	$	0.55	$	0.70	$	(0.71)	$	(0.31)
Weighted average shares outstanding
Basic		124,315,491		123,553,116		124,089,257		123,401,005
Diluted		124,807,488		123,870,380		124,089,257		123,401,005


Houghton Mifflin Harcourt Company
*Consolidated Statements of Cash Flows (Unaudited)*


	Nine Months Ended September 30,
(in thousands of dollars)	2019		2018
Cash flows from operating activities
Net loss	$	(88,715)	$	(38,234)
Adjustments to reconcile net loss to net cash provided by operating activities
Income from discontinued operations, net of tax		—		(12,833)
Loss on sale of assets		—		384
Depreciation and amortization expense		201,593		183,218
Amortization and impairments of operating lease assets		12,898		—
Amortization of debt discount and deferred financing costs		3,136		3,136
Deferred income taxes		2,580		2,597
Stock-based compensation expense		11,094		9,363
Change in fair value of derivative instruments		1,171		974
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable		(231,296)		(160,506)
Inventories		(27,535)		(19,317)
Other assets		(23,649)		(716)
Accounts payable and accrued expenses		37,488		15,471
Royalties payable and author advances, net		1,165		(5,165)
Deferred revenue		241,091		34,362
Interest payable		11		41
Severance and other charges		(464)		(481)
Accrued pension and postretirement benefits		(2,761)		(2,462)
Operating lease liabilities		(12,450)		—
Other liabilities		2,015		16,274
Net cash provided by operating activities – continuing operations		127,372		26,106
Net cash provided by operating activities – discontinued operations		—		17,361
Net cash provided by operating activities		127,372		43,467
Cash flows from investing activities
Proceeds from sales and maturities of short-term investments		50,000		86,539
Purchases of short-term investments		—		(29,708)
Additions to pre-publication costs		(81,532)		(92,202)
Additions to property, plant, and equipment		(27,350)		(41,488)
Proceeds from sale of assets		—		500
Acquisition of business, net of cash acquired		(5,447)		—
Investment in preferred stock		(750)		—
Net cash used in investing activities – continuing operations		(65,079)		(76,359)
Net cash used in investing activities – discontinued operations		—		(5,933)
Net cash used in investing activities		(65,079)		(82,292)
Cash flows from financing activities
Proceeds under revolving credit facility		60,000		50,000
Payments of revolving credit facility		(60,000)		(50,000)
Payments of long-term debt		(6,000)		(6,000)
Payments of deferred financing fees		(311)		—
Tax withholding payments related to net share settlements of restricted stock units and awards		(1,963)		(1,113)
Issuance of common stock under employee stock purchase plan		1,027		1,263
Net collections under transition services agreement		265		—
Net cash used in financing activities – continuing operations		(6,982)		(5,850)
Net increase (decrease) in cash and cash equivalents		55,311		(44,675)
Cash and cash equivalents at the beginning of the period		253,365		148,979
Cash and cash equivalents at the end of the period	$	308,676	$	104,304


Houghton Mifflin Harcourt Company
Non-GAAP Reconciliations (Unaudited)


Adjusted EBITDA from continuing operations

Consolidated
(in thousands of dollars)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net income (loss) from continuing operations	$	69,260	$	83,908	$	(88,715)	$	(51,067)
Interest expense		11,597		11,627		35,142		34,035
Interest income		(509)		(277)		(1,698)		(900)
Provision (benefit) for income taxes		(2,602)		(3,349)		4,256		2,104
Depreciation expense		13,901		17,701		46,945		56,457
Amortization expense – film asset		—		—		6,772		—
Amortization expense		52,043		43,028		147,876		126,761
Non-cash charges – stock compensation		3,835		3,302		11,094		9,363
Non-cash charges – loss on derivative instruments		737		249		1,171		974
Fees, expenses or charges for equity offerings, debt or acquisitions/dispositions		183		150		731		2,256
2017 Restructuring Plan		—		3,077		—		3,077
Severance, separation costs and facility closures		270		362		5,921		6,380
Loss on sale of assets		—		—		—		384
Adjusted EBITDA from continuing operations	$	148,715	$	159,778	$	169,495	$	189,824

Free Cash Flow

Consolidated
(in thousands of dollars)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018 ⁽¹⁾		2019		2018 ⁽¹⁾
Cash flows from operating activities
Net cash provided by operating activities	$	393,297	$	201,353	$	127,372	$	26,106
Cash flows from investing activities
Additions to pre-publication costs		(25,941)		(32,688)		(81,532)		(92,202)
Additions to property, plant, and equipment		(8,992)		(18,178)		(27,350)		(41,488)
Free Cash Flow	$	358,364	$	150,487	$	18,490	$	(107,584)

¹	All amounts have been adjusted to eliminate the impact of the Riverside Standardized Testing business which has been removed from continuing operations and classified as discontinued operations.

	Forward looking cash flow can only be provided on a non-GAAP basis without unreasonable efforts.


Houghton Mifflin Harcourt Company
Calculation of Billings (Unaudited)


Billings (in thousands of dollars)

Consolidated

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net sales	$	565,668	$	516,255	$	1,149,199	$	1,073,379
Change in deferred revenue		180,993		54,959		241,280		34,362
Billings (1)	$	746,661	$	571,214	$	1,390,479	$	1,107,741

Education

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Core Solutions net sales	$	273,262	$	243,130	$	493,273	$	456,335
Change in deferred revenue		138,697		30,736		211,570		18,687
Core Solutions Billings	$	411,959	$	273,866	$	704,843	$	475,022
Extensions net sales	$	244,352	$	206,506	$	527,986	$	477,600
Change in deferred revenue		42,322		23,605		30,565		14,428
Extensions Billings	$	286,674	$	230,111	$	558,551	$	492,028
Education Billings (1)	$	698,633	$	503,977	$	1,263,394	$	967,050

HMH Books & Media

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net sales	$	48,054	$	66,619	$	127,940	$	139,444
Change in deferred revenue		(26)		618		(855)		1,247
HMH Books & Media Billings	$	48,028	$	67,237	$	127,085	$	140,691

	Billings is an operating measure utilized by the Company derived as shown above.

¹	All amounts have been adjusted to eliminate the impact of the Riverside Standardized Testing business which has been removed from continuing operations and classified as discontinued operations.