PR Newswire | Nov 4, 2021 07:02AM EDT

22%; Raises Full Year Guidance Again

11/04 06:00 CDT

HMH Announces Strong Third Quarter 2021 Results; Delivers Billings Growth of 22%; Raises Full Year Guidance AgainContinued Execution of Digital First, Connected Strategy Drives Growth of 123% in Annualized Recurring Revenue and Net Retention Rate of 153% BOSTON, Nov. 4, 2021

BOSTON, Nov. 4, 2021 /PRNewswire/ -- HMH (Nasdaq: HMHC), a learning technology company, announced strong financial results for the third quarter which ended Sept. 30, 2021.

"Propelled by strong demand for our comprehensive portfolio of learning solutions, HMH delivered an impressive 22% year-over-year increase in third quarter billings. As a result of the continued momentum across our business, we are raising our full year guidance for the second time this year," said Jack Lynch, President and Chief Executive Officer of HMH. "In just the last two years, we dramatically transformed our business, strengthened our balance sheet and significantly lowered our cost structure to drive incredibly strong free cash flow while successfully executing our digital first, connected strategy-we plan to build on this success."

"HMH is now among the largest and fastest growing companies in the edtech market. Through execution of our digital first, connected strategy we have grown our connected billings substantially with ARR growing 123% to $120 million or 11% of trailing twelve-month billings," added Lynch.

Q3 2021 Financial Results and Headlines:

Three Months Ended September 30, Nine Months Ended September 30,

(in millions of dollars) 2021 ^1 2020 ^1 Change 2021 ^1 2020 ^1 Change

Net sales $ 417 $ 331 25.9 % $ 872 $ 699 24.7 %

Change in deferred revenue 130 119 9.2 % 106 106 (0.2) %

Billings ^2 548 451 21.5 % 978 806 21.4 %

Impairment charge for goodwill - - NM - 262 NM

Income (loss) from continuing operations 95 (12) NM 48 (382) NM

Adjusted EBITDA ^3 146 83 76.7 % 246 95 NM

Pre-publication or content development costs (13) (16) 23.5 % (42) (51) 17.3 %

Net cash provided by operating activities 288 257 11.9 % 193 66 NM

Free cash flow ^3 265 230 15.5 % 122 (20) NM

_______________

All amounts have been adjusted to eliminate the impact of the HMH Books & Media business which has been1 removed from continuing operations and classified as discontinued operations since the first quarter of 2021.

2 An operating measure. Please refer to "Operating Metrics" for an explanation.

A non-GAAP measure. Please refer to Use of Non-GAAP Financial Measures for an explanation and3 reconciliation. We are unable to reconcile forward looking unlevered free cash flow without unreasonable efforts.

NM = not meaningful

Highlights from the quarter include:

* Raising FY 2021 billings2 guidance to $1,075-$1,095 million, unlevered free cash flow guidance to 17-19% of billings and Annualized Recurring Revenue (ARR) 2 guidance to 12-15% of billings * Strong billings growth across the Company of 22% in Q3 and 21% YTD as demand for teaching and learning solutions continued as students returned to classrooms this fall and teachers further assessed instructional needs for the remainder of the school year * ARR2 growth accelerated to 123% bringing ARR to $120 million, or 11% of trailing twelve-month billings. Net Retention Rate (NRR)2 was 153% * Trailing twelve-month free cash flow3 of $137 million, an improvement of $36 million compared to the second quarter of 2021, reflecting strong operating leverage and the benefits of 2020 actions to align HMH's cost structure with its digital first, connected strategy * Gross leverage ratio of 1.4x, below HMH's target leverage ratio of 2.0x adjusted EBITDA

Joe Abbott, HMH's Chief Financial Officer said, "Our digital first, connected business exhibits high operating leverage, strong free cash flow and rapidly growing annual recurring revenue which fueled strong third quarter results. We expect that our transition to digital will continue, leading to a lower variable cost rate and additional opportunities to reduce fixed costs which in turn will lead to increased free cash flow."

2021 Outlook:

In light of strong year to date financial results in 2021, the Company is raising its billings, unlevered free cash flow and annualized recurring revenue guidance. Our updated guidance is as follows:

Estimate Outlook for Year ending December Outlook for Year ending December 31, 31, 2021 (Updated on August 5, 2021) 2021 (Updated on November 4, 2021)

Total Billings $980 to $1,020 million $1,075 to $1,095 million

Unlevered Free Cash Flow 12-14% of billings 17-19% of billings

Annualized Recurring Revenue 10-15% of billings 12-15% of billings

Third Quarter 2021 Financial Results:

Net Sales: HMH reported net sales of $417 million for the third quarter of 2021, up 26% compared to $331 million in 2020. The increase was primarily due to strong net sales in Extensions, consisting of our Heinemann brand, intervention and supplemental products as well as professional services, which increased by $58 million from $124 million in 2020 to $182 million. Within Extensions, net sales of our Heinemann products increased due to the return of in-person learning for most of our customers, as well as in supplemental and professional services due to strong customer demand. Further, net sales in Core Solutions increased by $28 million from $207 million in 2020 to $235 million, driven by strong open territory net sales as a result of the market recovery.

Billings2: Billings for 2021 increased $97 million, or 22%, from 2020. The billings increase was driven by an increase in Extensions, which increased by $82 million as billings of our Heinemann products increased due to the return of in-person learning for most of our customers, as well as in supplemental and professional services due to strong customer demand. Further, Core Solutions increased $15 million, driven by strong open territory billings as a result of the market recovery.

Cost of Sales: Overall cost of sales increased by $2 million to $183 million in 2021, primarily due to increased sales volume offset partially by lower print costs, increased virtual delivery of products and services along with a favorable inventory obsolescence.

Selling and Administrative Costs: Selling and administrative costs increased by $17 million in 2021, primarily due to higher variable expenses such as commissions and transportation due to higher billings. Further, there was an increase in incentive compensation compared to the prior year due to higher achievement of performance measures in 2021 compared to 2020.

Operating Income: Operating income for 2021 was $96 million, a $101 million favorable change from the $6 million operating loss in 2020, primarily due to an increase in net sales of $86 million, along with a $32 million decrease in restructuring/severance and other charges due to the timing of the 2020 restructuring plan.

Net Income: Net income of $95 million for 2021 was $108 million higher compared to a net loss of $13 million in the same period of 2020. Income from continuing operations for 2021 was $95 million, a $107 million improvement from the $12 million loss from continuing operations in the same period of 2020 due primarily to the same factors impacting operating income. Also, loss from discontinued operations, net of tax, was $1 million in 2020.

Adjusted EBITDA from continuing operations: Adjusted EBITDA from continuing operations for 2021 was $146 million, a $63 million favorable change from 2020.

Nine Months Ended September 30, 2021 Financial Results:

Net Sales: HMH reported net sales of $872 million for the first nine months of 2021, up 25% compared to $699 million in 2020. The increase was due to strong net sales in Extensions consisting of our Heinemann brand, intervention and supplemental products as well as professional services, which increased by $95 million from $308 million in 2020 to $403 million. Within Extensions, nets sales of our Heinemann products increased due to strong demand across most product portfolios. Further, net sales in Core Solutions increased by $78 million to $469 million, driven by strong open territory net sales as a result of market recovery in 2021.

Billings2: Billings for 2021 increased $172 million, or 21%, from 2020. The billings increase was driven by an increase in Extensions which increased by $132 million due to strong demand across all product portfolios. Billings of professional services increased due to the recovery of the in-person learning environment. Further, Core Solutions increased $40 million, driven by strong open territory billings as a result of market recovery.

Cost of Sales: Overall cost of sales increased by $7 million to $423 million in 2021, primarily due to increased sales volume offset partially by lower print costs, increased virtual delivery of products and services and lower amortization expense.

Selling and Administrative Costs: Selling and administrative costs slightly decreased, primarily due to the 2020 restructuring plan with reduced labor, professional fees and travel and marketing costs. Partially offsetting the aforementioned was an increase in variable expenses such as commissions and transportation due to higher billings along with an increase in incentive compensation.

Operating Income: Operating income for 2021 was $81 million, a $448 million favorable change from the $367 million operating loss in 2020 primarily due an impairment charge for goodwill in 2020 of $262 million that did not reoccur in 2021. This non-cash impairment was a direct result of the adverse impact that the COVID-19 pandemic had on the Company in 2020. The increase was further driven by an increase in net sales of $173 million and a $22 million favorable change in restructuring/severance and other charges.

Net Income: Net income of $262 million for 2021 was $659 million higher compared to a net loss of $397 million in the same period of 2020. Income from continuing operations for 2021 was $48 million, a $431 million improvement from the $382 million loss from continuing operations in the same period of 2020 due primarily to the same factors impacting operating income, along with a $13 million non-cash charge for the write off of unamortized deferred financing charges associated with our debt repayment in the second quarter of 2021. Income from discontinued operations, net of tax, also increased $228 million to $214 million from a loss of $14 million in 2020, due to the recognition of the gain on the sale of the HMH Books & Media business of $215 million during 2021.

Adjusted EBITDA from continuing operations: Adjusted EBITDA from continuing operations for 2021 was $246 million, a $151 million favorable change from $95 million in 2020.

Cash Flows and Liquidity:Net cash provided by operating activities for 2021 was $197 million compared to $75 million in 2020. Net cash provided by operating activities from continuing operations was $193 million in 2021, a $127 million increase compared to 2020. The improvement in net cash provided by operating activities from continuing operations resulted from an increase in operating profit, net of non-cash items, of $173 million. The improvement was partially offset by unfavorable changes in net operating assets and liabilities of $46 million. Net cash provided by operating activities included $4 million and $9 million of cash flow from discontinued operations in 2021 and 2020, respectively. HMH's free cash flow from continuing operations, defined as net cash from operating activities minus capital expenditures, favorably changed $142 million from a usage of $20 million in 2020 to cash flow of $122 million in 2021.

As of Nov. 4, 2021, there were no amounts outstanding under our revolving credit facility. We expect our net cash from operations combined with our cash and cash equivalents and borrowing availability under our revolving credit facility to provide sufficient liquidity to fund our current obligations, capital spending, debt service requirements and working capital requirements over at least the next twelve months.

Conference Call:

At 9:30 a.m. ET on Thursday, Nov. 4, 2021, HMH will host a conference call to discuss the results 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:4666615Moderator: Chris Symanoskie, Vice President, Investor Relations Webcast Link: https://edge.media-server.com/mmc/p/ybhqjui4

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 14, 2021 via the following telephone numbers: (855) 859-2056 in the United States and (404) 537-3406 internationally using passcode 4666615.

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 provides useful information to our investors and management as an indicator of our performance that is not affected by debt restructurings, fluctuations in interest rates or effective tax rates, gains or losses on investments, non-cash charges and impairment charges, levels of depreciation or amortization, and acquisition/disposition-related activity costs, legal settlement costs, restructuring costs and integration costs. 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 these metrics 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 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 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.

Operating Metrics:

Annualized Recurring Revenue (ARR) for a given period is the annualized revenues derived from termed subscription contracts existing at the end of the period. ARR excludes contracts that are one-time in nature. ARR is currently one of the key performance metrics being used by management to assess the health and trajectory of our business. ARR does not have a standardized definition and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of U.S. GAAP revenue, deferred revenue and unbilled revenue and is not intended to be combined with or to replace those items. ARR does not represent revenue for any particular period or remaining revenue that will be recognized in future periods. ARR is not a forecast and the active contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers.

Billings is an operating measure which we derive from net sales taking into account the change in deferred revenue. Billings for Core Solutions and Extensions is an operating measure based on invoiced sales adjusted for returns, other publishing income and change in deferred revenue.

Connected Salesare billings from the sale of core, intervention, supplemental, assessment and service offerings hosted on or transitioning to be hosted on our Ed Your Friend in Learning(r) teaching and learning platform.

Gross Leverage Ratiois the total amount of outstanding gross financial debt on a consolidated basis divided by the trailing twelve months Adjusted EBITDA from continuing operations.

Net Retention Rate(NRR) is the rate at which existing customers are renewing and expanding. The dollar-based net retention rate is calculated as of a period end by starting with the ARR from all customers as of the 12 months prior to such period end. The ARR is then calculated from these same customers as of the current period end, which includes customer renewals, upsells and expansion and is net of contraction or churn over the trailing 12 months, but excludes revenue from new customers in the current period. The dollar-based net retention rate is calculated by dividing the ARR from these customers as of the current period end by the ARR from these customers as of 12 months prior to such period end.

About HMH

Houghton Mifflin Harcourt (Nasdaq: HMHC) is a learning technology company committed to delivering connected 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. For more information, visit www.hmhco.com

Follow HMH on Twitter, Facebook,Instagram and YouTube.

Contact

Investor RelationsChris Symanoskie, IRC VP, Investor Relations 410-215-1405Chris.Symanoskie@hmhco.com

Media RelationsBianca OlsonSVP, Corporate Affairs 617-351-3841 Bianca.Olson@hmhco.com

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, including statements regarding our 2021 outlook, efforts to execute on our digital first, connected strategy, opportunities to reduce costs and our expected cash runway and free cash flow generation. They include statements regarding our intentions, beliefs or current expectations concerning, among other things, the impact of the actions described in this press release; our results of operations; financial condition; liquidity; prospects, growth and strategies; the expected impact of the COVID-19 pandemic; the timing, structure and expected impact of our operational efficiency and cost-reduction initiatives and the estimated savings and amounts expected to be incurred in connection therewith; 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. 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 actual results may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if actual 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 actual results to vary from expectations include, but are not limited to: the duration and severity of the COVID-19 pandemic and its impact on the federal, state and local economies and on K-12 schools; any disruption resulting from the completed sale of our HMH Books & Media business that adversely affects our businesses and business relationships, including with employees and suppliers; the rate and state of technological change; state requirements related to digital instructional materials; our ability to execute on our digital first, connected strategy; increases in our operating costs; management and personnel changes; timing, higher costs and unintended consequences of our operational efficiency and cost-reduction initiatives; and other factors discussed in our news releases, public statements and/or filings with the U.S. Securities and Exchange Commission, including our most recent Annual and Quarterly Reports on Form 10-K and Form 10-Q. 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 (Unaudited)

September 30, December 31,

(in thousands of dollars, except share information) 2021 2020

Assets

Current assets

Cash and cash equivalents $ 420,318 $ 281,200

Accounts receivable, net 299,413 88,830

Inventories 96,471 145,553

Prepaid expenses and other assets 26,193 19,276

Assets of discontinued operations - 160,053

Total current assets 842,395 694,912

Property, plant, and equipment, net 80,978 88,801

Pre-publication costs, net 163,255 202,820

Royalty advances to authors, net 1,581 2,425

Goodwill 437,977 437,977

Other intangible assets, net 370,047 402,484

Operating lease assets 117,410 126,850

Deferred income taxes 2,415 2,415

Deferred commissions 37,309 30,659

Other assets 32,980 31,783

Total assets $ 2,086,347 $ 2,021,126

Liabilities and Stockholders' Equity

Current liabilities

Current portion of long-term debt $ - $ 19,000

Accounts payable 49,736 38,751

Royalties payable 44,766 34,765

Salaries, wages, and commissions payable 61,133 21,723

Deferred revenue 386,431 342,605

Interest payable 4,260 11,017

Severance and other charges 1,283 19,590

Accrued pension benefits 118 1,593

Accrued postretirement benefits 1,555 1,555

Operating lease liabilities 10,506 9,669

Other liabilities 40,273 22,912

Liabilities of discontinued operations - 30,662

Total current liabilities 600,061 553,842

Long-term debt, net of discount and issuance costs 317,095 624,692

Operating lease liabilities 131,582 132,014

Long-term deferred revenue 624,953 562,679

Accrued pension benefits 15,021 24,061

Accrued postretirement benefits 15,338 16,566

Deferred income taxes 11,885 16,411

Other liabilities 215 398

Total liabilities 1,716,150 1,930,663

Commitments and contingencies

Stockholders' equity

Preferred stock, $0.01 par value: 20,000,000 shares authorized; no sharesissued - -and outstanding at September 30, 2021 and December 31, 2020

Common stock, $0.01 par value: 380,000,000 shares authorized; 152,257,784and 150,459,034 shares issued at September 30, 2021 and December 31, 2020, 1,523 1,505respectively; 127,680,750 and 125,882,000 shares outstanding at September 30,2021 and December 31, 2020, respectively

Treasury stock, 24,577,034 shares as of September 30, 2021 and December 31, (518,030) (518,030)2020, respectively, at cost

Capital in excess of par value 4,927,934 4,918,542

Accumulated deficit (3,993,826) (4,255,830)

Accumulated other comprehensive loss (47,404) (55,724)

Total stockholders' equity 370,197 90,463

Total liabilities and stockholders' equity $ 2,086,347 $ 2,021,126

Houghton Mifflin Harcourt Company

Consolidated Statements of Operations (Unaudited)

Three Months Ended Nine Months Ended

September 30, September 30,

(in thousands of dollars, except share and per share information) 2021 2020 2021 2020

Net sales $ 417,130 $ 331,205 $ 871,997 $ 699,287

Costs and expenses

Cost of sales, excluding publishing rights and pre-publication 152,893 146,155 335,390 310,351 amortization

Publishing rights amortization 2,516 3,469 8,171 11,332

Pre-publication amortization 27,620 31,570 79,177 93,791

Cost of sales 183,029 181,194 422,738 415,474

Selling and administrative 134,951 118,275 338,953 339,815

Other intangible assets amortization 7,241 5,857 23,016 17,568

Impairment charge for goodwill - - - 262,000

Restructuring/severance and other charges 33 31,776 9,880 31,776

Gain on sale of assets (3,661) - (3,661) -

Operating income (loss) 95,537 (5,897) 81,071 (367,346)

Other income (expense)

Retirement benefits non-service income (expense) 214 61 (12) 183

Interest expense (8,239) (9,311) (26,788) (29,178)

Interest income 18 32 52 873

Change in fair value of derivative instruments (368) 432 (915) 172

Gain on investments 606 1,738 1,442 1,738

Income from transition services agreement 1,399 - 2,253 -

Loss on extinguishment of debt - - (12,505) -

Income (loss) from continuing operations before taxes 89,167 (12,945) 44,598 (393,558)

Income tax benefit for continuing operations (6,192) (1,060) (3,891) (11,210)

Income (loss) from continuing operations 95,359 (11,885) 48,489 (382,348)

Loss from discontinued operations, net of tax - (667) (1,005) (14,345)

Gain on sale of discontinued operations, net of tax - - 214,520 -

(Loss) income from discontinued operations, net of tax - (667) 213,515 (14,345)

Net income (loss) $ 95,359 $ (12,552) $ 262,004 $ (396,693)

Net income (loss) per share attributable to common stockholders

Basic:

Continuing operations $ 0.75 $ (0.09) $ 0.38 $ (3.05)

Discontinued operations - (0.01) 1.68 (0.12)

Net income (loss) $ 0.75 $ (0.10) $ 2.06 $ (3.17)

Diluted:

Continuing operations $ 0.72 $ (0.09) $ 0.37 $ (3.05)

Discontinued operations - (0.01) 1.64 (0.12)

Net income (loss) $ 0.72 $ (0.10) $ 2.01 $ (3.17)

Weighted average shares outstanding

Basic 127,674,513 125,799,018 127,220,429 125,317,284

Diluted 131,652,417 125,799,018 130,667,785 125,317,284

Houghton Mifflin Harcourt Company

Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended

September 30,

(in thousands of dollars) 2021 2020

Cash flows from operating activities

Net income (loss) $ 262,004 $ (396,693)

Adjustments to reconcile net income (loss) to net cash provided by operatingactivities

Loss from discontinued operations, net of tax 1,005 14,345

Gain on sale of discontinued operations, net of tax (214,520) -

Gain on sale of assets (3,661) -

Depreciation and amortization expense 144,698 160,073

Operating lease assets, amortization and impairments 9,411 9,565

Amortization of debt discount and deferred financing costs 2,096 1,979

Gain on investments (1,442) (1,738)

Deferred income taxes (4,526) (12,084)

Stock-based compensation expense 8,727 8,295

Write-off of property, plant, and equipment 1,606 -

Loss on extinguishment of debt 12,505 -

Impairment charge for goodwill - 262,000

Change in fair value of derivative instruments 915 (172)

Changes in operating assets and liabilities

Accounts receivable (200,632) (106,852)

Inventories 49,081 38,566

Other assets (13,767) (10,663)

Accounts payable and accrued expenses 53,878 4,764

Royalties payable and author advances, net 12,467 (21,169)

Deferred revenue 106,100 105,347

Interest payable (6,757) 155

Severance and other charges (18,307) 22,494

Accrued pension and postretirement benefits (2,656) (5,532)

Operating lease liabilities 436 (7,598)

Other liabilities (5,964) 935

Net cash provided by operating activities - continuing operations 192,697 66,017

Net cash provided by operating activities - discontinued operations 3,880 9,149

Net cash provided by operating activities 196,577 75,166

Cash flows from investing activities

Additions to pre-publication costs (42,104) (50,919)

Additions to property, plant, and equipment (28,672) (35,275)

Proceeds from sale of business 349,000 -

Proceeds from sale of assets 5,000 -

Net cash provided by (used in) investing activities - continuing operations 283,224 (86,194)

Net cash used in investing activities - discontinued operations (647) (402)

Net cash provided by (used in) investing activities 282,577 (86,596)

Cash flows from financing activities

Borrowings under revolving credit facility - 150,000

Payments of revolving credit facility - (150,000)

Payments of long-term debt (342,031) (14,250)

Tax withholding payments related to net share settlements of restricted stock - (48)units

Issuance of common stock under employee stock purchase plan 410 918

Net collections under transition services agreement 1,585 -

Net cash used in financing activities - continuing operations (340,036) (13,380)

Net increase (decrease) in cash and cash equivalents 139,118 (24,810)

Cash and cash equivalents at beginning of the period 281,200 296,353

Cash and cash equivalents at end of the period $ 420,318 $ 271,543

Houghton Mifflin Harcourt Company

Non-GAAP Reconciliations (Unaudited)

Adjusted EBITDA ^1

(in thousands of dollars)

Three Months Ended Nine Months Ended September 30, September 30,

2021 2020 2021 2020

Net income (loss) from continuing operations $ 95,359 $ (11,885) $ 48,489 $ (382,348)

Interest expense 8,239 9,311 26,788 29,178

Interest income (18) (32) (52) (873)

Provision (benefit) for income taxes (6,192) (1,060) (3,891) (11,210)

Depreciation expense 11,063 12,358 34,334 37,382

Amortization expense 37,377 40,896 110,364 122,691

Non-cash charges - goodwill impairment - - - 262,000

Non-cash charges - stock compensation 3,177 2,971 8,727 8,295

Non-cash charges - (gain) loss on derivative instruments 368 (432) 915 (172)

Fees, expenses or charges for equity offerings, debt or 676 339 866 366 acquisitions/dispositions

Gain on investments (606) (1,738) (1,442) (1,738)

Gain on sale of assets (3,661) - (3,661) -

Loss on debt extinguishment - - 12,505 -

Legal settlement - - 2,470 -

Restructuring/severance and other charges 33 31,776 9,880 31,776

Adjusted EBITDA from continuing operations $ 145,815 $ 82,504 $ 246,292 $ 95,347

Free Cash Flow ^1

(in thousands of dollars)

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Cash flows from operating activities

Net cash provided by operating activities $ 287,630 $ 257,084 $ 192,697 $ 66,017

Cash flows from investing activities

Additions to pre-publication costs (12,563) (16,423) (42,104) (50,919)

Additions to property, plant, and equipment (9,614) (10,917) (28,672) (35,275)

Free Cash Flow $ 265,453 $ 229,744 $ 121,921 $ (20,177)

Trailing Twelve Months Ended September 30, 2021

Cash flows from operating activities

Net cash provided by operating activities $ 233,165

Cash flows from investing activities

Additions to pre-publication costs (52,057)

Additions to property, plant, and equipment (44,337)

Free Cash Flow $ 136,771

All amounts have been adjusted to eliminate the impact of the HMH Books & Media1 business which has been removed from continuing operations and classified as discontinued operations.

We are unable to reconcile forward looking free cash flow (both before and after interest payments) and related margin without unreasonable efforts. Unlevered free cash flow margin is the ratio of free cash flow before interest payments to billings.

Houghton Mifflin Harcourt Company

Calculation of Billings and Gross Leverage Ratio (Unaudited)

Billings ^1

(in thousands of dollars)

Three Months Ended Nine Months Ended

September 30, September 30,

2021 2020 2021 2020

Net sales $ 417,130 $ 331,205 $ 871,997 $ 699,287

Change in deferred revenue 130,419 119,426 106,100 106,347

Billings $ 547,549 $ 450,631 $ 978,097 $ 805,634

Trailing Twelve Months Ended September 30, 2021

Net sales $ 1,013,164

Change in deferred revenue 57,931

Billings $ 1,071,095

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

Gross Leverage Ratio ^1

(in thousands of dollars)

September 30, 2021

Gross debt $ 324,969

Trailing twelve months Adjusted EBITDA $ 239,610

Gross leverage ratio 1.4

Trailing Twelve Months Ended September 30, 2021

Net loss from continuing operations $ (39,853)

Interest expense 35,541

Interest income (78)

Provision (benefit) for income taxes (5,138)

Depreciation expense 46,826

Amortization expense 152,228

Non-cash charges - goodwill impairment 17,000

Non-cash charges - stock compensation 11,592

Non-cash charges - (gain) loss on derivative instruments 415

Fees, expenses or charges for equity offerings, debt or 1,580acquisitions/dispositions

Gain on investments (1,795)

Gain on sale of assets (3,661)

Loss on debt extinguishment 12,505

Legal settlement 2,470

Restructuring/severance and other charges 9,978

Adjusted EBITDA from continuing operations $ 239,610

Gross leverage ratio is an operating measure utilized by the Company derived asshown above.

All amounts have been adjusted to eliminate the impact of the HMH Books & Media1 business which has been removed from continuing operations and classified as discontinued operations.

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SOURCE Houghton Mifflin Harcourt