EDGAR 10-K Filing

Company CIK: 1580156
Filing Year: 2022
Filename: 1580156_10-K_2022_0001564590-22-006489.json

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ITEM 1. BUSINESS
Item 1. Business
As used in this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “HMH” and the “Company” refer to Houghton Mifflin Harcourt Company, formerly known as HMH Holdings (Delaware), Inc., and its consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires.
Our Company
We are a learning technology company committed to delivering connected solutions that engage learners, empower educators and improve student outcomes. As a leading provider of Kindergarten through 12th grade (“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 estimates that it serves more than 50 million students and three million educators in 150 countries.
We focus on the K-12 market and, in the United States, we are a market leader. We specialize in comprehensive core curriculum, supplemental and intervention solutions, and we provide ongoing support in professional learning and coaching for educators and administrators. Our offerings are rooted in learning science, and we work with research partners, universities and third-party organizations as we design, build, implement and iterate our offerings to maximize their effectiveness. We are purposeful about innovation, leveraging technology to create engaging and immersive experiences designed to deepen learning experiences for students and to extend teachers’ capabilities so that they can focus on making meaningful connections with their students.
On May 10, 2021, we completed the sale of all of the assets and liabilities used primarily in the HMH Books & Media segment, our consumer publishing business. The divestiture enables HMH to focus singularly on K-12 education and accelerate growth momentum in digital sales, annual recurring revenue and free cash flow while paying down a significant portion of our debt.
Our diverse portfolio enables us to help ensure that every student and teacher has the tools needed for success. We are able to build deep partnerships with school districts and leverage the scope of our offerings to provide holistic solutions at scale with the support of our far-reaching sales force and talented field-based specialists and consultants. We provide print, digital, and blended print/digital solutions that are tailored to a district’s needs, goals and technological readiness.
On February 21, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Harbor Holding Corp., a Delaware corporation (the “Parent”), and Harbor Purchaser Inc., a Delaware corporation and a wholly owned subsidiary of the Parent (the “Purchaser”) providing for the acquisition of us by the Parent through a cash tender offer (the “Offer”) by the Purchaser for all of our outstanding shares of common stock, at a price of $21.00 per share of common stock (the “Offer Price”). The Parent and the Purchaser are beneficially owned by The Veritas Capital Fund VII, L.P. The completion of the Offer will be conditioned on at least a majority of the shares of our outstanding common stock having been validly tendered into the Offer, receipt of certain regulatory approvals and other customary conditions. Following the completion of the Offer, the Purchaser will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of the Parent, pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law, without any additional stockholder approvals. We currently expect the transaction to close in the second quarter of 2022. If the transaction is completed, it is expected that our common stock will be removed from listing on the Nasdaq Stock Market and from registration under Section 12(b) of the Securities Exchange Act of 1934, as amended. See Part I, Item 1A, “Risk Factors,” Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 20 of the Notes to Consolidated Financial Statements included in this report for additional information regarding this transaction.
Market Overview
We operate predominantly within the U.S. K-12 education market, which represents over $750 billion of total spending annually. Specifically, we focus on the U.S. market for K-12 instructional materials and services, which we estimate to be approximately $10.0+ billion in size.
The U.S. Education market comprises approximately 13,500 K-12 public school districts, 130,000 public and private schools, 3.7 million teachers and 56.4 million total enrolled students across public, private and charter schools. From Fall 2022 to Fall 2029, total elementary and secondary school enrollment, an important driver of long-term growth in the K-12 Education market, is projected to increase by 0.7% to 56.8 million students, according to the National Center for Education Statistics.
The primary sources of funding for public schools in the U.S. are state and local tax collections, with Federal funding historically accounting for approximately 8% of public education spending nationally. Consequently, general or localized economic conditions as well as legislative and political decisions which affect the ability of state and school districts to raise revenue through tax collections can have a significant impact on spending and growth in the K-12 Education market. The COVID-19 pandemic has had an adverse impact on tax revenues and other financial resources in some states, which could adversely affect state and local spending on public schools, although it is expected that federal pandemic relief funding will help to mitigate those impacts. The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021, and the American Rescue Plan Act collectively provided over $263.0 billion in one-time emergency support for education through an Education Stabilization Fund, including $189.5 billion exclusively designated for public K-12 education. Public K-12 education has been, and remains, a high priority for political leaders, historically accounting for more than one-fifth of all state and local government spending.
Education policy and curriculum choices have traditionally been local prerogatives in the U.S., but Federal law and policy also play an important role. The Elementary and Secondary Education Act (“ESEA”), reauthorized in 2015 by the Every Student Succeeds Act (“ESSA”), requires that states, as a condition to receiving Federal education funds, adopt challenging academic content standards, administer annual student tests aligned to those standards, develop systems of accountability tied to specific goals for student achievement, and take measures to identify and support low performing schools. ESSA gives states more flexibility than they had under prior law, but still requires standards-based, largely assessment-driven accountability with a focus on the achievement of students in all demographic subgroups.
Title I, the largest program within ESEA, and other ESEA programs provide targeted funding for specific activities, such as early childhood education, school improvement, dropout prevention, and before- and after-school programs. The Individuals with Disabilities Education Act (“IDEA”) governs how states and public agencies provide early intervention, special education and related services to children with disabilities. Generally, school districts are permitted to spend ESEA funds on instructional materials, including core and supplemental materials, computer software, digital media, digital courseware, and online services.
Academic content standards, which are grade-level expectations for student learning, are established at the state level. States generally review and revise standards in each of the various subject areas every six to eight years, and the revision or adoption of new standards typically gives rise to the need for new instructional materials and services aligned to the new or revised standards. Content standards in English language arts and reading in many states are modeled to varying degrees after Common Core State Standards (“CCSS”) and in science after the Next Generation Science Standards (“NGSS”). Both the CCSS and NGSS are products of state-led collaborations. The promulgation of these model standards has led to greater consistency among states’ content standards but has not eliminated differences and the need for customized state-specific instructional materials.
Internationally, we export and sell K-12 English language education products to premium private schools that utilize the U.S. curriculum, who are located primarily in Asia, the Pacific, the Middle East, Latin America, the Caribbean and Africa.
Education net sales and billings are derived from Core Solutions and Extensions. Core Solutions products address the core curriculum market with grade-level, educational standards-aligned materials. Extensions products address the markets for supplemental programs, intervention programs, and professional learning.
Market Segments
Core Curriculum
Our core curriculum offerings cover state-level educational standards within a subject and include a comprehensive offering of teacher and student materials necessary to conduct grade-level instruction throughout the entire school year. Products and services include students’ print and digital resources and a variety of supporting materials such as teacher’s editions, formative assessments, whole group instruction materials, practice aids and ancillary materials.
Core curriculum programs traditionally have been the primary resource for classroom instruction in most K-12 academic subjects, and as a result, enrollment trends are a major driver of industry growth. Although economic cycles may affect short-term buying patterns, school enrollments, a driver of growth in the educational content industry, are highly predictable and are expected to trend upward over the longer term.
Demand for core curriculum programs is also affected by changes in state curriculum standards, which drive instruction, assessment, and accountability in each state. A significant change in state curriculum standards requires that assessments, teacher training programs, and instructional materials be revised or replaced to align to the new standards, which historically has driven demand for new comprehensive curriculum programs.
In the U.S., core curriculum is typically selected and purchased at the school district level and, in some cases, at the individual school level. In 19 states, before districts make their selections, programs are first evaluated at the state level for alignment to state academic standards and other criteria. These states are commonly referred to as “adoption states,” while states that do not have a state level review process are called “open states” or “open territory states.” The National Center for Education Statistics estimated the student population in adoption states represented approximately half of the U.S. public school elementary and secondary school-age population in 2021. In some adoption states, districts are required to select materials from the state-adopted list; in other adoption states, the state list serves as a recommendation, and districts are free to purchase and use any materials they choose, whether or not adopted by the state. Adoption states typically review materials in the various subject areas on a six- to eight-year cycle. School districts in those states tend to follow the state review cycle and replace core programs in the year or years immediately following state adoption. In open territory states, each individual school or school district evaluates and purchases materials independently, typically according to a five- to ten-year cycle. As a result, in individual adoption states, purchases of core instructional materials in a particular subject area tend to be clustered in a window of one to three years, while in individual open territory states they may occur over several years.
Supplemental
Supplemental resources encompass a wide variety of targeted solutions that enrich learning and support student achievement beyond core curriculum. Supplemental resources can be print and/or digital, and can include software, workbooks, test-prep materials, formative assessment, games, and apps. Newer technologies, such as artificial intelligence and machine learning, combined with more sophisticated algorithms are also driving the rise in supplemental computer-adaptive practice solutions that can both support teachers who are often time and bandwidth constrained, as well as improve personalization of learning for students.
Many teachers augment their core curriculum with supplemental resources for additional practice and personalized instruction around particular areas of need, such as Math, Reading, Writing, or Vocabulary. Supplemental materials are purchased by districts, schools, or individual teachers. These purchases are typically not tied to adoption schedules and leverage funding from local, state and federal sources. We estimate this market to be approximately $2.5 billion per year.
Intervention
Intervention solutions are generally purchased by individual schools or districts. Demand for intervention materials is significant and growing in the United States. We estimate this market to be $1.5 billion per year. In the latest National Assessment of Educational Progress assessments conducted in 2019, more than 60 percent of public school students tested below proficiency in most grade levels in both literacy and mathematics. These students are strong candidates for intervention programs that are focused on improving outcomes and ensuring students perform at grade level. As demand for digital content and personalized learning solutions is growing, traditional distinctions between core, supplemental and intervention materials and assessments are blurring.
Intervention products and services are funded through state and local funding as well as Title I and other federal funding allocations pursuant to the ESEA and IDEA. Title I provides funding to schools and school districts with high concentrations of students from low income families and is often used to purchase intervention products and services.
Professional Learning
The professional learning market includes consulting and support services to assist individual schools and school districts in raising student achievement, implementing new programs and technology effectively, developing effective teachers, principals and leaders, as well as school and school-district turnaround and improvement solutions. We believe all districts and schools contract for some level of professional services. These services may include support for up-front training, in-classroom coaching, institutes, author workshops, professional learning communities, leadership development, technical support and maintenance, and program management.
One important source of funding for professional learning in the K-12 market is Title II, Part A of ESEA, Supporting Effective Instruction. Title II, Part A focuses on the role of the profession in improving student achievement and requires that funds be used to support professional development that is sustained, job-embedded, data-driven, and personalized. There are also significant funding opportunities for professional learning as part of state programs, especially in states that have consolidated program funding and want solutions that are evidence-based.
The professional learning market, which is relatively fragmented in the United States, is expected to grow as the transition to digital learning in classrooms increases the need for technology training and implementation support for educators. We currently estimate the professional learning market to be approximately $3.5 billion per year. We believe that the use of interim data, differentiation, teacher content knowledge (in mathematics) and the use of technology in the classroom are the areas in which teachers and leaders are most seeking support. Also, demand for teacher training and professional development opportunities tied to the implementation of new or revised standards at the state level is expected to continue. In addition, the need for new teacher development over the next several years is expected to grow as we continue to see the “greening” of the teaching force, with approximately 345,000 new teachers hired every year along with an approximately 16% annual teacher turnover rate, a trend that may continue or accelerate as a result of the COVID-19 pandemic.
Our Products and Services
We are a learning technology company committed to delivering connected solutions that engage learners, empower educators and improve student outcomes. The principal customers for our Education products are K-12 school districts, which purchase core curriculum, supplemental and intervention solutions and professional learning services.
Our net sales were $1,050.8 million, $840.5 million and $1,211.8 million for the years ended December 31, 2021, 2020 and 2019, respectively, with our 2020 financial results being adversely impacted by the COVID-19 pandemic. Our offerings consist of the following:
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Core Solutions: Our core curriculum offerings include education programs in disciplines including Reading, Literature, Math, Science and Social Studies that serve as primary sources of classroom
instruction and represented 52% and 55% of our net sales for the years ended December 31, 2021 and 2020, respectively.
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Our core programs are developed based on extensive hours of research, including educator input. Educators are the centerpiece of the classroom, but count on comprehensive core curriculum to be the backbone of their instruction. Our core solutions are created to provide educators with the resources needed to align with state standards and support students in their mastery of grade-level subject matter.
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Between 2016-2018, we launched our next generation of core programs for each of the major subject areas: English Language Arts (Reading and Literature), Mathematics, Science and Social Studies. Our Into Reading and Into Literature national programs, our Into Math national offerings for grades 3-5 and 6-8 along with the K-8 Florida version all received top “all green” scores from EdReports.org. Science Dimensions, which was co-authored by Dr. Cary Sneider, a writer of the Next Generation Science Standards, was approved by the State Board of Education of California in 2018. HMH Social Studies, our next generation social studies program for grades 6-12, incorporates innovative technology like Google Expeditions to offer curriculum-aligned virtual reality field trips.
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Extensions: Our extensions offerings include supplemental solutions, intervention solutions, professional services, and our Heinemann brand that provides professional resources and educational services for teachers. Our extensions offerings collectively accounted for 48% and 45% of our net sales for the years ended December 31, 2021 and 2020, respectively.
The extensions category represents a notable growth opportunity. We estimate this category accounts for about $7.5 billion in market opportunity.
Extensions Market Opportunity
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Through our Heinemann brand, we provide professional books, supplemental and intervention curricular resources, and professional services for teachers. Heinemann is a leading professional publisher for educators, and features well-known, respected authors and thought leaders such as Irene Fountas, Gay Su Pinnell, Lucy Calkins, and Jennifer Serravallo, who support the practice of teachers through books, videos, workshops, online courses, and curricular resources.
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Our intervention solutions also include: READ 180 Universal, one of a select number of programs that the independent, government-run What Works Clearing House has awarded its highest effectiveness ratings for improving comprehension and literacy achievement; MATH 180, a math intervention program focusing on deep understanding and mastery of essential skills and concepts enabling access to algebra and advanced mathematics; and System 44, a stand-alone program with a holistic, blended learning model that delivers just-in-time intensive intervention for the most challenged readers in grades 3-12. These solutions are called upon to help students with unique needs, such as the growing population of English language learners.
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Our professional services offerings bring together world-renowned authors and education experts to work directly with K-12 educators and administrators to build instructional excellence, cultivate leadership and provide school districts with the comprehensive support they need to raise student achievement. These offerings include ongoing curriculum support and expertise in professional development, coaching, and strategic consulting from trusted names like the International Center for Leadership in Education, Literacy Solutions, and Math Solutions.
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Our supplemental solutions include award-winning solutions like Waggle (which won the CODiE award for “Best Learning Capacity-Building Solution”), as well as artificial intelligence and state-of-the-art speech recognition-driven Amira Assessment and writing-enhancing online tool Writable that we offer through strategic partnerships. We also offer HMH Classroom Libraries, which provide individually curated collections of “just-right” books to strengthen literacy development and foster independent reading.
By leveraging our leading position in the U.S. instructional materials market, we aim to engage our customers with solutions addressing the variety of instructional needs across the educational achievement spectrum. We believe that by integrating our solutions on a single platform, which uses a common student dataset, and by developing ongoing connections with the teachers who use our solutions, we will be well positioned to increase and sustain market share and grow our revenues.
Seasonality
Schools typically conduct the majority of their purchases in the second and third quarters of the calendar year in preparation for the beginning of the school year. Thus, over the latest three completed fiscal years, approximately 69% of our consolidated net sales were realized in the second and third quarters. Sales of K-12 instructional materials are also cyclical, with some years offering more sales opportunities than others based on the state adoptions calendar. The amount of funding available at the state level for educational materials also has a significant effect on year-to-year net sales. Although the loss of a single customer would not have a material adverse effect on our business, schedules of school adoptions and market acceptance of our products can materially affect year-to-year net sales performance.
Competition
We sell our products in highly competitive markets. In these markets, product quality, innovation and customer service are major differentiating factors between companies. Other factors affecting competition include: (i) competitive pricing, sampling and gratis costs; (ii) digitization and innovative delivery; and (iii) educational effectiveness of the program. In addition to national curriculum publishers, we also compete with a variety of specialized or regional publishers that focus on select disciplines and/or geographic regions in the K-12 market. There are also multiple competitors in the supplemental and assessment markets offering content that school districts increasingly are using as part of their core classroom instructional materials. In addition, school districts in many states are able to spend educational funds on “instructional materials” that include core and supplemental materials, computer software, digital media, digital courseware, and online services. Our larger competitors include Savvas Learning Co. (formerly Pearson Education, Inc.), McGraw Hill Education, Stride Inc. (formerly K-12 Inc.), Cengage Learning, Inc., Scholastic Corporation, John Wiley & Sons, Inc., Curriculum Associates, LLC, Benchmark Education, LLC, Accelerate Learning, Inc., and Amplify Education, Inc. Also competing in our market as a substitute are open educational resources. These resources are free, digital solutions that range from supplemental resources to full Core Solutions programs.
Printing and Binding; Raw Materials
We outsource the printing and binding of our products, with approximately 35% of our printing requirements handled by a small group of suppliers. We have procurement agreements that provide volume and scheduling flexibility and price predictability. We have a longstanding relationship with these parties. Approximately 16% of our printed materials (consisting primarily of teacher’s editions and other ancillary components) are printed outside of the U.S. and approximately 84% of our printed materials (including most student editions) are printed within the U.S. Paper is one of our principal raw materials. We purchase our paper primarily through one paper merchant and also directly through suppliers for limited product types. We maintain various agreements that protect against supply availability and unbound price increases. We manage our paper supply concentration by having primary and secondary sources and staying ahead of dramatic market changes.
Distribution
We operate distribution facilities in Geneva, Illinois and Troy, Missouri from which we coordinate our own distribution process. We also utilize select suppliers to assist us with coordinating the distribution process for a limited number of product types. Additionally, some states require us to use in-state textbook depositories for educational materials sold in that particular state. We utilize various delivery firms, such as United Parcel Service Inc., FedEx Freight, etc., to facilitate the principally ground transportation of products.
Human Capital
As of December 31, 2021, we had approximately 2,300 full-time, part-time and temporary employees, none of whom were covered by collective bargaining agreements. We consider our relationship with our employees generally to be good.
Health and Safety: The health and safety of our employees is one of our highest priorities, and this is consistent with our operating philosophy. Following Occupational Safety and Health Administration best practices in our distribution centers, we measure, document and post incident rates for safety transparency; host local employee safety committees at each distribution center; and hold quarterly distribution center safety committee meetings for cross-location collaboration. In response to the ongoing COVID-19 pandemic, we have implemented and continue to implement additional safety measures in all our offices and facilities including: monitoring vaccine status and screening for symptoms indicative of COVID-19; requiring staff and visitors to wear masks if their vaccine status is unverified in order to seek to prevent community spread of COVID-19; continuing work from home flexibility; adjusting attendance policies and allowing occasional absence time to encourage those who are sick to stay home; increasing cleaning protocols across all locations; initiating regular communication regarding impacts of the ongoing COVID-19 pandemic, including health and safety protocols and procedures; requiring temperature screening of employees at our distribution facilities and twice-weekly testing for all unvaccinated employees at our distribution facilities; requiring physical distancing for employees who need to be onsite; providing additional personal protective equipment and cleaning supplies; modifying work spaces with plexiglass dividers and touchless faucets; and implementing protocols to address actual and suspected COVID-19 cases and potential exposure. As of December 31, 2021, all HMH corporate offices were open on a voluntary basis and our distribution centers were open and operating at full capacity.
Talent and Development: Successful execution of our strategy is dependent on attracting, developing and retaining key employees and members of our management team. The skills, experience and industry knowledge of our employees significantly benefit our operations and performance. We continuously evaluate, modify, and enhance our internal processes and technologies to increase employee engagement, productivity, and efficiency. In 2021, we provided a company-wide employee engagement survey to all regular employees. We outperformed benchmarked peer companies, with engagement among our employees landing in the 86th percentile for all companies using Gallup’s Q12 Engagement Index, and in the 89th percentile among our peers. We additionally continue to provide all of our employees with a variety of training and development opportunities. All regular employees have access to Knowledge Network, HMH’s online learning management system offering over 13,500 on demand training courses and programs, live webinars and in-person training opportunities. More than 2,400 employees participated in training programs in 2021, including Unconscious Bias, Cybersecurity, Sales, Product and Change Management, with more than 42,500 courses completed across the Company for approximately 16,000 total
hours of completed course content. In 2021, we created a new Finance Enrichment Academy, focusing on accelerating the transformation of Finance talent through seven distinct curricula, and the expansion of the HMH Leadership Academy, offering four-month and six-month programs focused on developing critical leadership competencies and skills.
Diversity and Inclusion: We embrace the diversity of our employees, customers and stakeholders, including their unique backgrounds, experiences, thoughts and talents. Everyone is valued and appreciated for their distinct contributions to the growth and sustainability of our business. We strive to cultivate a culture and vision that supports and enhances our ability to recruit, develop and retain diverse talent at every level. We take direct actions to attract, hire, and retain more diverse talent, nurture an inclusive workplace, and create opportunities for meaningful conversations about diversity. We aim to increase the diversity of our employee base by growing our diverse talent pipeline, including partnerships with organizations like SV Academy, HBCU Lifestyle, Handshake, HackerX, Circa, and Teach for America. We have a goal to build a highly engaged team by increasing retention year over year. As of December 31, 2021, we have established Diversity, Equity and Inclusion (“DEI”) goals regarding recruitment, engagement and retention of our employees who identify as people of color. As of December 31, 2021 and 2020, our domestic workforce was approximately 67% female and approximately 77% white, approximately 9% Hispanic or Latinx, approximately 8% Black or African American, approximately 5% Asian American, and approximately 1% two or more races or other. Additionally, as of December 31, 2021, approximately 38% of executive management roles were held by women and our executive management team was approximately 77% white, approximately 15% Black or African American, and approximately 8% Hispanic or Latinx. In 2021, we also conducted an optional company-wide employee survey regarding members and allies of the Lesbian, Gay, Bisexual, Transgender and/or Queer (LGBTQ+) community, and of the 2,030 employees who responded 7% consider themselves a member of the LGBTQ+ community. In addition, in 2021 approximately 1% of our domestic workforce includes a protected veteran population and approximately 1% of employees have voluntarily noted that they have a disability or previously had a disability.
As a learning technology company, we are committed to ongoing opportunities for education and growth. This includes formal and informal opportunities for meaningful conversations-from roundtable discussions to company-wide unconscious bias training. Learning and unlearning are lifelong practices that we must actively foster-in our schools, communities, and workplaces. Our cross-functional DEI Council’s work centers around four pillars-leadership, talent, culture, and business-and promotes social justice through Employee Resource Groups (“ERGs”), DEI trainings, and discussions on how to build an antiracist community. We have ERGs to support Black and African American, Latinx and Hispanic, LGBTQ+, Asian, disabled and neurodiverse, and female employees, in addition to ERGs focused on mental health and wellness. The ERGs hosted virtual activities throughout 2021.
Intellectual property
Our principal intellectual property assets consist of our trademarks and copyrights in our content. Substantially all of our publications are protected by copyright, whether registered or unregistered, either in our name as the author of a work made for hire or the assignee of copyright, or in the name of an author who has licensed us to publish the work. Ownership of such copyrights secures the exclusive right to publish the work in the United States and in many countries abroad for specified periods: in the United States, in most cases, either 95 years from publication or for the author’s life plus 70 years, but in any event a minimum of 28 years for works published prior to 1978 and 35 years for works published thereafter. In most cases, the authors who retain ownership of their copyright have licensed to us exclusive rights for the full term of copyright. Under U.S. copyright law, for licenses granted by an author during or after 1978, such exclusive licenses are subject to termination by the author or certain of the author’s heirs for a five-year period beginning at the end of 35 years after the date of publication of the work or 40 years after the date of the license grant, whichever term ends earlier.
We do not own any material patents, franchises or concessions, but we have registered certain trademarks and service marks in connection with our publishing businesses. We believe we have taken, and take in the ordinary course of business, appropriate available legal steps to reasonably protect our intellectual property in all material jurisdictions.
Environmental matters
We generally contract with independent printers and binders for their services, and our operations are generally not otherwise affected by environmental laws and regulations. However, as the owner and lessee of real property, we are subject to environmental laws and regulations, including those relating to the discharge of hazardous materials into the environment, the remediation of contaminated sites and the handling and disposal of wastes. It is possible that we could face liability, regardless of fault, and can be held jointly or severally liable, if contamination were to be discovered on the properties that we own or lease or on properties that we have formerly owned or leased. We are currently unaware of any material environmental liabilities or other material environmental issues relating to our properties or operations and anticipate no material expenditures for compliance with environmental laws or regulations.
Environmental, Social and Governance (ESG)
As a corporate citizen, we accept and promote a community responsibility to minimize our impact on the environment to ensure that we will be able to serve teachers, students and all readers for years to come. As such, we seek to make environmentally responsible choices in our business practices. We set objectives for continual improvement of our environmental and sustainability management procedures. In 2021, we made progress against our sustainability goals, and we strive to continually improve our efforts moving forward. Looking ahead, we are expanding our company-wide sustainability efforts, setting additional goals and measuring progress in other areas material to our business.
Responsible Paper Usage
One of our on-going sustainability focus areas is our approach to how we source, use and dispose of paper related to our products. In 2019, we strengthened and updated our Paper Sourcing and Usage Policy that reflects our continuing commitments to our environment and surroundings. Key 2021 progress highlights were: 98% of HMH purchased paper for education products was manufactured with no less than 10% recycled fiber.
Transportation
A major aspect of our business involves the transportation of our products, and we work to promote environmentally friendly modes of such transportation. In 2021, HMH estimates that it saved 725,321 pounds of CO2 emissions by managing our carbon footprint by using intentional transportation methods, including consolidating shipments and shipping directly from vendors to end recipients when possible.
HMH participates in the Environmental Protection Agency’s (“EPA”) SmartWay program. The EPA’s SmartWay program helps companies advance supply chain sustainability by measuring, benchmarking, and improving freight transportation efficiency. Through this program, HMH partners with the EPA to improve our shipping operations to achieve a more sustainable transportation process that directly facilitates a reduction in our carbon footprint. In 2021, HMH estimates that it saved 187,393 pounds of CO2 emissions by participating in the SmartWay program.
Waste Management and Recycling
Whenever possible, we recycle our excess product and waste generated at our distribution centers and warehouses to avoid sending recyclable products and other waste to landfills.
• Donation is HMH’s preferred method of disposal for excess books and materials (rather than destruction), and prior to the divestiture of HMH Books & Media, HMH donated more than 161,400 books, including children and adult titles, to 45 nonprofit organizations during 2021.
• 95% of the waste generated at HMH’s distribution centers and warehouses is recycled.
In our corporate offices, each employee has a recycling and a garbage bin. We work to increase employee awareness regarding waste management and recycling with bins and signage.
Energy Use
We continue to strive to reduce energy consumption at our HMH distribution centers, warehouses and related offices through:
• Conversion to high efficiency fluorescent bulbs
• Conference rooms with motion sensor lighting
• Energy-efficient HVAC and heating units
• LED light fixtures in parking lots
In addition, the building in Boston, Massachusetts that houses HMH’s headquarters has received the LEED® (Leadership in Energy and Environmental Design) Gold Certification for Existing Buildings™, which is the second highest LEED Certification level attainable.
Human Rights & Conduct
Our values guide every aspect of our work. We believe that respecting and protecting human rights is fundamental to our work as a responsible company. We align with the United Nations Universal Declaration of Human Rights and other international human rights laws and standards and strive to embody these values in our culture. Our purpose-driven mission is strongly aligned with the UN Sustainable Development Goal 4 to “ensure inclusive and equitable quality education and promote lifelong learning opportunities for all.” We recognize the importance of evaluating and improving how our company, including our products and services, can contribute to education access and improved outcomes for learners. We also seek to embed respect for human rights across our business and with vendors and suppliers with whom we do business as set forth in our Supplier Code of Conduct.
Diversity, Equity and Inclusion
At HMH, we believe in social justice. The critical work to improve DEI is an inward and outward process-we are constantly seeking new ways to better our own culture as we strive to better our world. We aim to create and cultivate an employee community, company culture and business strategy that reflects the diverse demographics and perspectives of our customers and employees. Further, we embrace the diversity of our employees, customers and stakeholders, including their unique backgrounds, experiences, thoughts and talents. We strive to cultivate a culture and vision that supports and enhances our ability to recruit, develop and retain diverse talent at every level. We take direct actions to nurture an inclusive workplace.
Our DEI Council is made up of a cross-functional, diverse group of employees that works and focuses on short-term and long-term initiatives with three main priorities in 2021: people manager training, mentoring opportunities, and building HMH as a model anti-racist company. The DEI Council supports our company-wide DEI efforts and takes actionable steps toward reaching our DEI goals. The council supports HMH’s ERGs, DEI trainings, and discussions on how to build HMH as a model antiracist community. In 2021, we launched HMH Mentoring, our re-imagined mentoring program, including the addition of group mentoring and the ability to choose to become a member of ERGs, in an effort to connect those with shared backgrounds and experiences. Last year, we also provided opportunities for education and growth, including formal and informal opportunities for meaningful conversations - namely, continued antiracism roundtable discussions and company-wide unconscious bias training for the majority of our employees. In addition, in support of growing our internal talent pipeline, in February 2021 we launched the Connected Leadership Engagement and Development Rotation Program (LEAD Connected), aimed at providing employees from historically marginalized backgrounds with growth and advancement opportunities.
As a learning technology company focused on empowering students and teachers, we believe it is our responsibility to build content and provide services and resources that foster a holistic understanding of our world and honor the diverse communities we serve. As an organization, we too are always learning and growing, and we will continue to be intentional about improvements we make as part of our continuous evolution. To that end, our Content Review Panel - a cross-disciplinary internal advisory board that focuses on equity, inclusion, and diversity in our solutions - reviews our content, striving for equitable, nonbiased, and sensitive treatment and representation for all individuals, communities, and experiences across all HMH programs, services, and platforms. In 2021, the Content Review Panel reviewed over 150,000 pieces of content. During 2021, we also established our Equity Advisory Council for Learning that partners with leading education scholars, practitioners, and advocates with HMH employees, forming a community of experts focused on the continuous improvement of our K-12 curriculum and materials in this area.
As outlined in our Content, Equity, Inclusion and Diversity pledge available on our website at https://www.hmhco.com/diversity-equity-inclusion/our-world, we are committed to producing curriculum in which all students can see themselves and the possibilities for their future success. Our programs are strongest when they resonate with learners, inspire connections and spark dialogue, and honor the unique qualities and experiences of every learner.
In 2020, a cross-functional Supplier Diversity Council was formed to drive HMH’s Supplier Diversity Program forward. The council is focused on fostering meaningful partnerships with diverse suppliers in all areas of HMH’s business - aiming to establish new partnerships with small and diverse suppliers while also deepening relationships with diverse suppliers that HMH already works with. In 2021, this initiative continued to take shape with further definition of the diverse supplier categories in our program, the creation of a supplier portal where current and prospective suppliers can share their diverse certification(s) and the creation of a webpage on our company website available at https://www.hmhco.com/hmh-supplier-diversity. As part of our commitment to supplier diversity, HMH is a member of the National Minority Supplier Development Council and the Women’s Business Enterprise National Council.
Additional information
We are headquartered in Boston, Massachusetts. Our corporate website is www.hmhco.com. We make available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, as well as other information, free of charge through our corporate website under the “Financial Information” link located at: ir.hmhco.com, as soon as reasonably practicable after being filed with or furnished to the Securities and Exchange Commission (the “SEC”). The information found on our website or any other website we refer to in this Annual Report on Form 10-K is not part of this Annual Report on Form 10-K or any other report we file with or furnish to the SEC.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Risks Related to Pending Transaction with Veritas
We may not complete the pending transaction with entities owned by Veritas within the time frame we anticipate or at all, which could have an adverse effect on our business, financial results and/or operations.
On February 21, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among us, Harbor Holding Corp., a Delaware corporation (the “Parent”), and Harbor Purchaser Inc., a Delaware corporation and a wholly owned subsidiary of the Parent (the “Purchaser”). The Parent and the Purchaser are beneficially owned by The Veritas Capital Fund VII, L.P. (“Veritas”). The Merger Agreement provides for the acquisition of us by the Parent through a cash tender offer (the “Offer”) by the Purchaser for all of the Company’s outstanding shares of common stock at a price of $21.00 per share of common stock. Following the completion of the Offer, subject to the absence of injunctions or other legal restraints preventing the consummation of the Merger, the Purchaser will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of the Parent (the “Merger”), pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law, without any additional stockholder approvals. We currently expect the Offer and the Merger to be completed in the second quarter of 2022.
If the transaction is not completed within the expected time frame or at all, we may be subject to a number of material risks. The price of our common stock may decline to the extent that current market prices of our common stock reflect a market assumption that the Merger will be completed. We could be required to pay Veritas a termination fee of $65 million if the Merger Agreement is terminated under specific circumstances described in the Merger Agreement. The failure to complete the transaction also may result in negative publicity and negatively affect our relationship with our stockholders, employees, strategic partners, customers, suppliers and other business partners. We may also be required to devote significant time and resources to litigation related to any failure to complete the Merger or related to any enforcement proceeding commenced against us to perform our obligations under the Merger Agreement.
The Company’s ability to complete the Merger is subject to certain closing conditions and the receipt of consents and approvals from government entities which may impose conditions that could adversely affect the Company or cause the Merger to be abandoned.
The Merger Agreement contains certain closing conditions, including, among others, that the number of shares of common stock validly tendered and not validly withdrawn, together with any shares of common stock beneficially owned by the Parent or any subsidiary of the Parent, equals at least a majority of all shares of common stock then outstanding, the absence of any legal impediment that has the effect of enjoining, restraining, preventing or prohibiting or prohibiting the consummation of the Offer or making the Offer or the Merger illegal, that, since the date of the Merger Agreement, there shall not have occurred any material adverse effect with respect to the Company, and other conditions as specified in the Merger Agreement. The Company cannot provide any assurance that the conditions to the consummation of the Merger will be satisfied or waived, or will not result in the abandonment or delay of the Merger.
In addition, the Merger is conditioned on the expiration or termination of any waiting period applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The granting of these regulatory approvals could involve the imposition of additional conditions on the closing of the Merger. The imposition of such conditions or the failure or delay to obtain regulatory approvals could have the effect of delaying completion of the Merger or of imposing additional costs or limitations on the Company or may result in the failure to close the Merger. The regulatory approvals may not be received at all, may not be received in a timely fashion, or may contain conditions on the completion of the Merger.
The pendency of the transaction with Veritas could adversely affect our business, financial results and/or operations.
Our efforts to complete the Merger could cause substantial disruptions in, and create uncertainty surrounding, our business, which may materially adversely affect our results of operation and our business. Uncertainty as to
whether the transaction will be completed may affect our ability to recruit prospective employees or to retain and motivate existing employees. Employee retention may be particularly challenging while the transaction is pending because employees may experience uncertainty about their roles following consummation of the transaction. A substantial amount of our management’s and employees’ attention is being directed toward the completion of the transaction and thus is being diverted from our day-to-day operations. Uncertainty as to our future could adversely affect our business and our relationship with strategic partners, customers, suppliers, school districts and other business partners. Changes to or termination of existing business relationships could adversely affect our results of operations and financial condition, as well as the market price of our common stock. The adverse effects of the pendency of the Merger could be exacerbated by any delays in completion of the transaction or termination of the Merger Agreement.
While the Merger Agreement is in effect, we are subject to restrictions on our business activities.
While the Merger Agreement is in effect, we are subject to restrictions on our business activities, generally requiring us and our subsidiaries (i) to conduct business and operations in the ordinary course and in accordance in all material respects with past practice, (ii) not to engage in specified types of transactions during the pendency of the Merger and (iii) not to solicit proposals or, subject to certain exceptions, engage in discussions relating to alternative acquisition proposals or change the recommendation of our Board of Directors to our stockholders regarding the Merger Agreement. These restrictions could prevent us from pursuing strategic business opportunities, taking actions with respect to our business that we may consider advantageous and responding effectively and/or timely to competitive pressures and industry developments, and may as a result materially and adversely affect our business, results of operations and financial condition.
In certain instances, the Merger Agreement requires us to pay a termination fee to Veritas, which could require us to use available cash that would have otherwise been available for general corporate purposes.
Under the terms of the Merger Agreement, we may be required to pay Veritas a termination fee of $65 million if the Merger Agreement is terminated under specific circumstances described in the Merger Agreement, including, but not limited to, our entry into an agreement with respect to a superior proposal or a change in the recommendation of our Board of Directors. If the Merger Agreement is terminated under such circumstances, the termination fee we may be required to pay under the Merger Agreement may require us to use available cash that would have otherwise been available for general corporate purposes and other uses. For these and other reasons, termination of the Merger Agreement could materially and adversely affect our business operations and financial condition, which in turn would materially and adversely affect the price of our common stock.
We have incurred, and will continue to incur, direct and indirect costs as a result of the pending transaction with Veritas.
We have incurred, and will continue to incur, significant costs and expenses, including fees for professional services and other transaction costs, in connection with the pending transaction. We must pay substantially all of these costs and expenses whether or not the transaction is completed. There are a number of factors beyond our control that could affect the total amount or the timing of these costs and expenses.
Risks Related to the COVID-19 Pandemic
The ongoing COVID-19 pandemic has had, and may continue to have, material adverse effects on our business, financial position, results of operations and cash flows.
Our business and financial results has been negatively impacted by the current COVID-19 pandemic which has had, and may continue to have, negative impacts on our business, including causing significant volatility in demand for our products, our ability to service our customers, changes in consumer behavior and preference, disruptions in our supply chain operations and warehousing operations, limitations on our employees’ ability to work and travel, adverse impacts on third parties upon which we rely, our liquidity, declines in state revenues and related impacts on educational budgets, and significant changes in the economic or political conditions in markets in which we operate, both near-term and potentially long-term. We continue to experience ongoing supply chain disruption both nationally and globally related to the continuing impact of COVID-19 on labor shortages, raw
material supply and transportation challenges, and manufacturing and warehousing capacity, particularly in markets where COVID-19 case levels are elevated. Moreover, significant uncertainties continue to exist regarding the format and other safety procedures schools may follow at various points during the school year. The decisions various schools make with regards to in-person and/or remote learning and whether to deviate from a chosen format due to outbreaks will impact demand for our products and services in ways that we cannot predict and may be challenging for us to respond to. Despite our efforts to manage these risks, their ultimate impact will depend on factors that may be beyond our knowledge or control, including the administration rates and effectiveness of vaccines, the severity and containment of certain COVID-19 variants, the continued duration and severity of the current pandemic and the effectiveness of actions taken to contain its spread and mitigate its public health effects and how quickly and to what extent normal economic and operating conditions can resume.
Risks Related to Our Industry and Operations
Our business and results of operations may be adversely affected by changes in federal, state and local education funding, and changes in legislation and public policy.
A majority of our sales are to public school districts in the United States, most of which rely primarily on a combination of local tax revenues and state legislative appropriations for general operating funds and to pay for purchases of goods and services, including instructional materials. Funding for public schools at both the state and local levels can be affected by tax collections, which are typically sensitive to general economic conditions, and by political and policy choices made by state and local governments. A reduction in funding levels, whether due to an economic downturn or legislative action, or a failure of projected funding increases to materialize, can constrain resources available to school districts for making purchases of instructional materials and adversely affect our business and results of operations. The economic slowdown resulting from the COVID-19 pandemic has had a negative impact on tax revenues and other financial resources in some states and localities, which could adversely affect public school finances and spending in those places, including for instructional materials and professional learning services.
Some states, including most adoption states, provide dedicated state funding for the purchase of instructional content and/or classroom technology, and expenditures for instructional materials in those states tend to be highly dependent on appropriation of those funds. If dedicated funding is not appropriated, or if the amount is substantially less than anticipated or legislative action is taken to lift restrictions on the use of those funds, then purchases of instructional materials may be significantly reduced and our net sales may be adversely impacted.
In addition, many school districts, including most large urban districts, receive substantial federal funding through the Elementary and Secondary Education Act (“ESEA”), the Individuals with Disabilities Act (“IDEA”), and other federal education programs. These funds supplement state and local funding and are used primarily to serve specific populations, such as low-income students and families, students with disabilities, and English language learners as well as to support programs to improve the quality of instruction, including educator professional learning. The funding of these programs is subject to Congressional appropriation. A significant reduction in appropriation levels could have an adverse effect on our sales, particularly sales of intervention, supplemental and professional learning products and services.
Federal and state legislative and policy changes can also affect our business. At the federal level, ESEA governs to a significant degree how states approach assessment and accountability, support and improvement of low performing schools, and take into account evidence of effectiveness in adopting strategies and selecting educational products and services paid for with federal funds. Changes in ESEA and/or state legislation and administrative policy decisions on matters such as assessment and accountability, curriculum and intervention could affect demand for our products.
State instructional materials adoptions, which account for a significant portion of our net sales of K-12 instructional materials, are highly cyclical and pose significant inherent risks that could materially impact our results of operations.
Due to the revolving and staggered nature of state adoption schedules, sales of K-12 instructional materials have traditionally been cyclical, with some years offering more and/or larger sales opportunities than others. Since a large portion of our sales are derived from state adoptions, our overall results can be materially affected from year to year by the adoption schedule, particularly in large adoption states. Our failure to secure approval for our programs
or perform according to our expectations in larger new adoption opportunities could materially and adversely affect our net sales for the year of the adoption and in subsequent years.
In any state adoption, there is the inherent risk that one or more of our programs will not be approved by a particular state board of education or other adopting authority. While school districts in most adoption states are not precluded from purchasing materials that have not been approved by the state, in many cases, exclusion of a program on the state-adopted list can materially and adversely impact our ability to compete effectively at the school district level. Moreover, even if our program is approved by the state, we face significant competition and there is no guarantee that school districts will select our program or that we will be able to capture a meaningful share of the sales in such state.
State adoptions can be delayed, postponed or cancelled-sometimes with little or no warning and after we have made significant investments in anticipation of the adoption-due to various reasons, such as funding shortfalls, delays in development and approval of state academic standards and specifications, competing priorities or school readiness. In addition, individual school districts may decline to purchase new programs in accordance with the state’s adoption schedule. A substantial delay, postponement or cancellation of a large adoption opportunity can adversely affect the amount and timing of our net sales return on investment for the affected product, our business and our results of operations.
Further, the timing of the legislative appropriations process in most states is such that it is often impossible to know with certainty whether implementation of an adoption will be funded until after products have been submitted for review. By that time, investments have been made for product development and substantial expenses incurred for sales, marketing and other costs. If the legislature in a state that provides dedicated funding for instructional materials decides not to appropriate those funds or appropriates substantially less than anticipated, due to a revenue shortfall or other reasons, or if the legislature lifts restrictions on use of those funds, then implementation of that adoption could be substantially compromised or delayed and our net sales and return on investment could be adversely affected.
Changes in state academic standards could affect our market and require investment in development of new programs or modifications to our existing programs and any delays or controversies in the implementation of such standards could impact our results of operations.
States may adopt new academic standards or revise existing standards, which may affect our market and require investment in the development of new programs or modifications to our existing programs offered for sale in states that adopt such changes. Delays or controversies in the implementation of the adoption of new or revised academic standards may result in insufficient lead time before the deadline to submit instructional materials for an adoption. As a result, we have in the past and may again have to invest more than planned in order to complete product development or make the modifications in the compressed timeframe to bring our program into alignment with the new or revised standards, adversely affecting our return on investment. Alternatively, we may determine that completing product development or making the modifications within the available timeframe is not practicable, and elect not to participate in the adoption, forgoing what might have been a significant sales opportunity which could materially and adversely affect our net sales for the year of the adoption and subsequent years.
We operate in a highly competitive environment where the risks from competition are intensified due to rapid changes in our markets and industry; as a result, we must continue to adapt to remain competitive.
We operate in highly competitive markets. The risks of competition are intensified in the current environment where investment in new technology is ongoing and there are rapid changes in the products and services our customers are seeking and our competitors are offering, as well as new technologies, sales and distribution channels. In addition to national curriculum publishers, we compete with a variety of specialized or regional publishers that focus on select disciplines and/or geographic regions in the K-12 market. Our larger competitors include Savvas Learning Co. (formerly Pearson Education, Inc.), McGraw Hill Education, Stride Inc. (formerly K-12 Inc.), Cengage Learning, Inc., Scholastic Corporation, John Wiley & Sons, Inc., Curriculum Associates, LLC, Benchmark Education, LLC, Accelerate Learning, Inc., and Amplify Education, Inc. Some of these established competitors may have greater resources and less debt than us and, therefore, may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and
sale of their products and services than we can. Also competing in our market as a substitute are open source educational resources. In addition, the market shift toward digital education solutions has induced both established technology companies and new start-up companies to enter certain parts of our market. These new competitors have the possible advantage of not needing to transition from a print business to a digital business. In addition, many established technology companies have substantial resources that they could devote to developing or acquiring digital educational products and/or content and, distributing their own and/or aggregated educational content to the K-12 market, which could negatively affect our business, financial condition and results of operations. There is also a risk of further disintermediation, which is the occurrence of state, district and other customers contracting directly with technology companies, enabling technology companies to develop direct relationships with our customers, and accordingly, have significant influence over access to and, pricing and distribution of, digital and print education materials. We may not be able to adapt as needed to remain competitive in the market given the foregoing factors.
The availability of free and low-cost open education resources could adversely affect our net sales and exert downward pressure on prices for our education products.
In the K-12 market, we face growing competition from free, openly licensed content, often referred to as open education resources (“OER”). Free or low-cost OER content is typically delivered via the internet, and in some cases print versions and related services are available for purchase. A number of states support the use of OER by providing curated resources and others, including New York, Louisiana, Michigan, Tennessee, and Texas, are funding development of OER or have done so in the past. In addition, not-for-profit organizations such as the Gates Foundation and the Hewlett Foundation have supported the development of open source educational content that can be made available to educational institutions for free or at nominal costs. The increased availability of free and low-cost OER could negatively affect our customers’ perception of the value of our content, reduce demand for our educational products, and/or exert downward pressure on prices for our products, and adversely impact our net sales.
If we fail to maintain strong relationships with our authors, illustrators and other creative talent, as well as to develop relationships with new creative talent, our net sales and results of operations could be adversely affected.
Certain aspects of our K-12 business are highly dependent on maintaining strong relationships with the authors, illustrators and other creative talent who produce books and other products sold to our customers. We operate in a highly visible industry where there is intense competition for successful authors, illustrators and other creative talent. Any overall weakening of these relationships, or the failure to develop successful new relationships, could have an adverse effect on our net sales and results of operations.
If we are unable to attract, retain and focus a strong leadership team, a dynamic sales force, software engineers and other key personnel, it could have an adverse effect on our business and ability to remain competitive, financial condition and results from operations.
Our success depends, in part, on our ability to continue to attract, focus and retain a strong leadership team, a dynamic sales force, software engineers and other key personnel at economically reasonable compensation levels. We operate in highly competitive industry that continue to change to adapt to customer needs and technological advances and in which there is intense competition for experienced and highly effective personnel. If we are unable to timely attract and retain key personnel with relevant skills it could adversely affect our business, financial condition and results of operations and our ability to remain competitive.
In addition, our business results depend largely upon the experience and knowledge of local market dynamics and long-standing customer relationships of our sales personnel. Our inability to attract, retain and focus effective sales and other key personnel at economically reasonable compensation levels could materially and adversely affect our ability to operate profitably and grow our business.
Risks Related to Operations and Strategic Plans
We may not be able to execute on our long-term growth strategy or achieve expected benefits from actions taken in furtherance of our strategy, which could materially and adversely affect our business, financial condition and results of operations and/or our growth.
If we are not able to execute on our long-term growth strategy or achieve expected benefits from our actions in furtherance of our strategy, it could materially and adversely affect our business, financial condition and results of operations and/or our growth. In any event, actions taken in furtherance of our strategy, such as transitioning to new business models or entering into new market segments could adversely impact our cash flow and our business in unforeseen ways.
Our investments in new products, service offerings, platforms and/or technologies could impact our profitability.
We operate in highly competitive markets that continue to change to adapt to customer needs. These needs include an increasing demand for integrated learning solutions. In order to address these needs, we are investing in new products, new technology and infrastructure, and a new common platform to integrate our products, services and solutions. These investments may be less profitable than what we have experienced historically, may consume substantial financial resources and/or may divert management’s attention from existing operations, all of which could materially and adversely affect our business, results of operations and financial condition.
We rely on third-party software and technology development as part of our digital platform.
We rely on third parties for some of our software and technology development. For example, some of the technologies and software that compose our instruction and assessment technologies are developed by third parties. We rely on those third parties for the development of future components and modules. Thus, we face risks associated with technology and software product development and the ability of those third parties to meet our needs and their obligations under our contracts with them. In addition, we rely on third parties for our internet-based product hosting. The loss of one or more of these third-party partners, a material disruption in their business or their failure to otherwise perform in the expected manner could cause disruptions in our business that may materially and adversely affect our results of operations and financial condition.
Defects in our digital products and platforms could cause financial loss and reputational damage.
In the fast-changing digital marketplace, demand for innovative technology has generally resulted in short lead times for producing products that meet customer needs. Growing demand for innovation and additional functionality in digital products increases the risk that our digital products and platforms may contain flaws or corrupted data that may only become apparent after product launch, particularly for new products and platforms and new features for existing products and platforms that are developed and brought to market under tight time constraints. Problems with the performance of our digital products and platforms could result in liability, loss of revenue or harm to our reputation.
We are dependent on a small number of third parties to print and bind our products and to supply paper, a principal material for our products. If we were to lose our relationship with our key print vendor and/or paper merchant, our business and results of operations may be materially and adversely affected.
We outsource the printing and binding of our products and currently rely on a small group of vendors that handle approximately 35% of our printing requirements, and we expect a small number of print vendors will continue to account for a substantial portion of our printing requirements for the foreseeable future. The loss of, or a significant adverse change in our relationship with our key print vendor could have a material adverse effect on our business and cost of sales.
In addition, we purchase paper, a principal raw material for our print products, primarily through one paper merchant. Further, paper merchants, including our paper merchant, rely on paper mills to produce the paper that they broker. There can be no assurance that our relationships with our print vendor and/or paper merchant will continue or that their business or operations will not be affected by disruptions in the industries that they rely on, including a
disruption in the paper mill industry, labor shortages, major disasters or other external factors. The loss of our key print vendor and/or paper merchant, a material change in our relationship with them, a material disruption in their business or their failure to otherwise perform in the expected manner could cause disruptions in our business that may materially and adversely affect our results of operations and financial condition.
Prolonged inflation could result in higher costs and decreased margins and earnings.
Recent inflationary pressures have resulted in increased raw material, labor, energy, freight and logistics expenses and other costs. We may not be able to fully offset such higher costs through price increases or other cost saving actions. If our costs are subject to continuing significant inflationary pressures, our inability to offset such costs could have an adverse impact on our results of operations resulting in lower margins, earnings and cash flows.
Operational disruption to our business caused by a major disaster or other external threats could restrict our ability to supply products and services to our customers.
Across our business, we manage complex operational and logistical arrangements including distribution centers, data centers and large office facilities. Failure to recover from a major disaster (such as fires, floods, adverse weather events (including those brought about by climate change) or other natural disasters) or other external threat (such as terrorist attacks, strikes, weather, outbreaks of pandemic or contagious diseases, or political unrest or other external factors) at a key center or facility could affect our business and employees, disrupt our daily business activities and/or restrict our ability to supply products and services to our customers.
Risks Related to Information Technology Systems and Cybersecurity
We are subject to risks based on information technology systems. A major breach in security or information technology system failure could interrupt the availability of our internet-based products and services, result in corruption and/or loss of data, cause liability or reputational damage to our brands and business and/or result in financial loss.
Our business is dependent on information technology systems to support our complex operational and logistical arrangements across our business. We provide software and/or internet-based products and services to our customers. We also use complex information technology systems and products to support our business activities, particularly in infrastructure and as we move our products and services to an increasingly digital delivery platform.
We face several technological risks associated with software and/or internet-based product and service delivery in our educational businesses, including with respect to information technology capability, reliability and security, enterprise resource planning, system implementations and upgrades. Failures of our information technology systems and products (including because of operational failure, natural disaster, computer virus or hacker attacks) could interrupt the availability of our internet-based products and services, result in corruption or loss of data or breach in security and result in liability, reputational damage to our brands and/or adversely impact our operating results.
While we have policies, processes, internal controls and cybersecurity mechanisms in place intended to maintain the stability of our information technology, provide security from unauthorized access to our systems and maintain business continuity, no mechanisms are entirely free from the risk of failure and we have no guarantee that our security mechanisms will be adequate to prevent all security threats. Our brand, reputation, especially in the K-12 market, and consequently our operating results may be adversely impacted by unanticipated system failures, corruption, loss of data and/or breaches in security.
Failure to prevent or detect a malicious cyber-attack on our information technology systems could result in liability, reputational damage, loss of revenue and/or financial loss.
Cyber-attacks and hackers are becoming more sophisticated and pervasive. Our business is dependent on information technology systems to support our complex operational and logistical arrangements across our business. We provide software and/or internet-based products and services to our customers. We also use complex information technology systems and products to support our business activities, particularly in infrastructure and as we move our products and services to an increasingly digital delivery platform. Across our business we hold large volumes of personal data, including that of employees, customers and students.
Efforts to prevent cyber-attacks and hackers from entering our systems are expensive to implement and may limit the functionality of our systems. Individuals try to gain unauthorized access to our systems and data for malicious purposes, and our security measures may fail to prevent such unauthorized access. Cyber-attacks and/or intentional hacking of our systems could adversely affect the performance or availability of our products, result in loss of customer data, adversely affect our ability to conduct business, or result in theft of our funds or proprietary information, the occurrence of which could result in liability, reputational damage, loss of revenue and/or financial loss.
Risks Related to Financial Condition, Credit Facilities and Liquidity
Our operating results fluctuate on a seasonal and quarterly basis and our business has historically been dependent on our results of operations for the third quarter.
Our business is seasonal. Purchases of K-12 products are typically made in the second and third quarters of the calendar year in preparation for the beginning of the school year. We typically realize a significant portion of net sales during the third quarter, making third-quarter results material to full-year performance. This sales seasonality affects operating cash flow from quarter to quarter. We typically incur a net cash deficit from all of our activities into the third quarter of the year. We cannot be sure that our second and third quarter net sales will continue to be sufficient to fund our business and meet our obligations or that they will be higher than our net sales for our other quarters or in the prior-year periods. In the event that we do not derive sufficient net sales for the second and third quarter, we may have a liquidity shortfall and be unable to fund our business and/or meet our debt service requirements and other obligations.
Our net sales, operating profit or loss and net cash provided or used by operations are impacted by the inherent seasonality of the academic calendar. As purchases of K-12 products are typically made in the second and third quarters of a given calendar year, changes in our customers’ ordering patterns may impact the comparison of results between a quarter and the same quarter of the prior year, between a quarter and the prior consecutive quarter or between a fiscal year and the prior fiscal year, which can make it difficult for us to forecast the timing of customer purchases and assess our financial performance until late in the year.
Our history of operations includes periods of operating and net losses, and we may incur operating and net losses in the future. Such losses may impact our liquidity.
Although we generated operating income and net income for the year ended December 31, 2021, for the years ended December 31, 2020 and 2019, we generated operating losses of $447.9 million and $168.9 million, respectively, and net losses of $479.8 million and $213.8 million, respectively. If we revert to suffering operating and net losses, our liquidity may suffer and we may not be able to fund our business and/or meet our debt service requirements and other obligations. Furthermore, the market price of our common stock may decline significantly.
Our major operating costs and expenses include employee compensation as well as paper, printing and binding costs and expenses for product-related manufacturing, and a significant increase in such costs and expenses could have a material adverse effect on our profitability.
Our major operating costs and expenses include employee compensation as well as paper, printing and binding costs for product-related manufacturing.
We offer competitive salary and benefit packages in order to attract and retain the employees required to grow and expand our business. Compensation costs are influenced by general economic and business factors, including those affecting the cost of health insurance, payout of commissions and incentive compensation and post-retirement benefits, as well as trends specific to the employee skillsets we require.
Paper is one of our principal raw materials. Paper prices fluctuate based on the worldwide demand for and supply of paper in general and for the specific types of paper we use. The price of paper may fluctuate significantly in the future, and changes in the market supply of, or demand for paper, could affect delivery times and prices. Paper mills and other suppliers may consolidate or there may be disruptions in their industry and as a result, there may be future shortfalls in quality and quantity supplies necessary to meet the demands of the entire marketplace, including our demands. As a result, we may need to find alternative sources for paper from time to time. In addition, we have extensive printing and binding requirements. We outsource the printing and binding of our books, workbooks and other printed products to third parties, typically under multi-year contracts. Increases in any of these operating costs and expenses could materially and adversely affect our business, profitability, financial condition and results of operations. Further, higher energy costs and other factors affecting the cost of publishing, transporting and distributing our products could adversely affect our financial results.
We also have other significant operating costs, and unanticipated increases in these costs could adversely affect our operating margins. Our inability to absorb the impact of increases in paper, printing and binding costs and other costs of publishing, transporting and distributing our products or any strategic determination not to pass on all or a portion of these increases to our customers could adversely affect our business, financial condition and results of operations.
We are subject to contingent liabilities that may affect liquidity and our ability to meet our obligations.
In the ordinary course of business, we issue performance-related surety bonds and letters of credit posted as security for our operating activities, some of which obligate us to make payments if we fail to perform under certain contracts in connection with the sale of instructional materials and assessment programs. The surety bonds are partially backstopped by letters of credit. As of December 31, 2021, our contingent liability for all letters of credit was approximately $16.1 million, of which $0.5 million were issued to backstop $1.1 million of surety bonds. The letters of credit reduce the borrowing availability on our revolving credit facility, which could affect liquidity and, therefore, our ability to meet our obligations. We may increase the number and amount of contracts that require the use of letters of credit, which may further restrict liquidity and, therefore, our ability to meet our obligations in the future.
Our level of indebtedness could adversely affect our financial condition and results of operations.
As of December 31, 2021, we had approximately $325.0 million ($317.6 million, net of discount and issuance costs) of total indebtedness outstanding, comprised of $21.7 million of term loans and $303.3 million of senior secured notes. Our outstanding indebtedness could have important consequences, including the following:
•
our level of indebtedness could make it more difficult for us to satisfy our obligations;
•
our level of indebtedness could adversely impact our credit rating;
•
the restrictions imposed on the operation of our business under the agreements governing such indebtedness may hinder our ability to take advantage of strategic opportunities to grow our business and to make attractive investments;
•
our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, restructuring, acquisitions or general corporate purposes may be impaired, which could be exacerbated by volatility in the credit markets;
•
we must use a portion of our cash flow from operations to pay principal and interest on our indebtedness, which will reduce the funds available to us for operations, working capital, capital expenditures and other purposes;
•
our level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt;
•
our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited;
•
our failure to satisfy our obligations under the agreements governing our indebtedness could result in an event of default, which could result in all of our debt becoming immediately due and payable and could permit our secured lenders to foreclose on our assets securing such indebtedness;
•
our level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business and industry; and
•
we may be vulnerable to interest rate increases, as certain of our borrowings bear interest at variable rates. A 1% increase or decrease in the interest rate will change our interest expense by approximately $0.2 million on an annual basis for our term loan facility and $2.5 million on an annual basis for our revolving credit facility, assuming it is fully drawn.
Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our obligations. In addition, we may incur substantial additional indebtedness in the future. The terms of the agreements governing our existing indebtedness do not, and any future debt may not, fully prohibit us from doing so. If new indebtedness is added to our current indebtedness levels, the related risks that we now face could substantially intensify.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments or to refinance our debt obligations and to fund planned capital expenditures and other growth initiatives depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flow from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including our senior secured notes, or to fund our other liquidity needs.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. Our senior secured term loan and revolving credit facilities have certain restrictions on our ability to use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair and proceeds that we do receive may not be adequate to meet any debt service obligations then due.
We may record future goodwill or additional indefinite-lived intangibles impairment charges which could have a material adverse impact on our results of operations.
We test our goodwill and indefinite-lived intangibles asset balances for impairment during the fourth quarter of each year, or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. In evaluating the potential for impairment of goodwill and indefinite-lived intangible assets, we make assumptions regarding estimated net sales projections, growth rates, cash flows and discount rates. Although we use consistent methodologies in developing the assumptions and estimates underlying the fair value calculations used in our impairment tests, these estimates are uncertain by nature and can vary from actual results. Declines in the future performance and cash flows of the business or small changes in other key assumptions may result in future impairment charges, which could have a material adverse impact on our results of operations. We had goodwill and indefinite-lived intangible assets of approximately $438.0 million and $161.0 million as of December 31, 2021 and 2020, respectively. There was a goodwill impairment charge of $279.0 million for the year ended December 31, 2020. There were no goodwill impairment charges for the years ended December 31, 2021 and 2019. There were also no impairment charges for indefinite-lived intangible assets for the years ended December 31, 2021, 2020 and 2019.
A change from up-front payment by school districts for multi-year programs and actions taken in furtherance of our long-term growth strategy could adversely affect our cash flow.
In keeping with the past practice of payments, school districts typically pay up-front when buying multi-year programs. If school districts changed their payment practices to spread their payments to us over the term of a program, our cash flow could be adversely affected. Further, as we execute on our long-term growth strategy, actions taken in furtherance of our strategy, such as transitioning to new business models could adversely impact our cash flow and our business in unforeseen ways.
The shift to sales of greater digital content or an increase in consumable print core programs may affect the comparability of our revenue to prior periods and cause increases or decreases in our sales to be reflected in our results of operations on a delayed basis.
Our customers typically pay for purchased products up-front; however, we recognize a significant portion of our time-based digital sales over their respective terms, as required by Generally Accepted Accounting Principles in the United States. As a result, an increase in the portion of our sales coming from digital sales may impact the comparison of our revenue results for a period with the same prior-year or consecutive period. Further, sales of consumable print core programs typically result in net sales being recognized over longer periods similar to time-based digital products. As more product offerings move to a consumable print format, more revenue will be deferred and recognized over a longer period of time.
Another effect of recognizing revenue from digital and consumable print core program sales over their respective terms is that any increases or decreases in sales during a particular period may not translate into proportional increases or decreases in revenue during that period. Consequently, deteriorating sales activity may be less immediately observable in our results of operations.
Risks Related to Laws and Regulations
Our ability to enforce our intellectual property and proprietary rights may be limited, which may harm our competitive position and materially and adversely affect our business and results of operations.
Our products are largely comprised of intellectual property content delivered through a variety of media, including print, digital and web-based media. We rely on a combination of copyright, trademark and other intellectual property laws and rights as well as employee agreements and other contracts to establish and protect our proprietary rights in our products and technology. However, our efforts to protect our intellectual property and proprietary rights may not be sufficient and we cannot make assurances that our proprietary rights will not be challenged, invalidated or circumvented. Moreover, we conduct business in certain other countries where the extent of effective legal protection for intellectual property rights is uncertain. It is possible we could be involved in expensive and time-consuming litigation to maintain, defend or enforce our intellectual property.
Furthermore, despite the existence of copyright and trademark protection under applicable laws, third parties may nonetheless violate our intellectual property rights, and our ability to remedy such violations, including in certain foreign countries where we conduct or seek to conduct business, may be limited. In addition, the copying and distribution of content over the Internet creates additional challenges for us in protecting our proprietary rights. If we are unable to adequately protect and enforce our intellectual property and proprietary rights, our competitive position may be harmed, and our business and financial results could be materially and adversely affected.
Failure to comply with privacy laws or adequately protect personal data could cause financial loss and reputational damage.
Across our businesses we hold large volumes of personal data, including that of employees, customers and students. We are subject to a wide array of different privacy laws, rules, regulations and standards in the U.S. as well as in foreign jurisdictions where we conduct business, including, but not limited to (i) the Children’s Online Privacy Protection Act and state student data privacy laws in connection with personally identifiable information of students, (ii) the Payment Card Industry Data Security Standards in connection with collection of credit card information from customers, and (iii) various EU data protection and privacy laws, including a comprehensive General Data Privacy Regulation that became effective in May 2018.
There has been increased public attention regarding the use of personal information and data transfer, accompanied by legislation and regulations intended to strengthen data protection, information security and consumer and personal privacy. The law in these areas continues to develop and the changing nature of privacy laws in the U.S., the European Union and elsewhere could impact our processing of personal and sensitive information of our employees, vendors and customers.
Continued privacy concerns may result in new or amended laws and regulations. Our brands and customer relationships are important assets. Future laws and regulations with respect to the collection, compilation, use, and publication of information and data privacy could result in limitations on our operations, increased compliance or litigation expense, adverse publicity, reputational damage to our brands and customer relationships, potential cancellation of existing business and diminished ability to compete for future business. It is also possible that we could be prohibited from collecting or disseminating certain types of data, which could affect our ability to meet our customers’ needs.
Changes in U.S. federal, state and local or foreign tax law, interpretations of existing tax law, or adverse determinations by tax authorities, could increase our tax burden or otherwise adversely affect our financial condition or results of operations.
We are subject to taxation at the federal, state or provincial and local levels in the U.S. and various other countries and jurisdictions. Any new tax legislative initiatives or tax reforms may result in further changes in tax laws and related regulations, our financial results could be materially impacted. Given the unpredictability of these possible changes, it is very difficult to assess whether the overall effect of such potential tax changes would be cumulatively positive or negative for our earnings and cash flow, but such changes could adversely impact our financial results.
Other Risks Related to Our Business
We may not be able to identify and complete any future acquisitions or achieve the expected benefits from any future acquisitions, which could materially and adversely affect our business, financial condition and results of operations and/or our growth.
We have at times used acquisitions as a means of expanding our business and technologies and expect that we will continue to do so in the future as part of our capital allocation strategy. We may be unable to identify suitable acquisition opportunities and, even if we were able to do so, we may not be able to finance or complete any such future acquisition on terms satisfactory to us. Further, we may not be able to successfully integrate acquisitions into our existing business, achieve anticipated operating advantages and/or realize anticipated cost savings or other synergies. The acquisition and integration of businesses involve a number of risks, including: use of available cash, issuance of equity or debt securities, incurrence of new indebtedness or borrowings under our revolving credit facility to consummate the acquisition and/or integrate the acquired business; diversion of management’s attention from operations of our existing businesses and those of the acquired business to the integration; integration of complex systems, technologies and networks into our existing systems; difficulties in the assimilation and retention of employees; unexpected costs, delays or other risks related to transition support services provided under any transition services agreement that may be executed as part of the acquisition. These transactions may create multiple and overlapping product lines that are offered, priced and supported differently, which could cause customer confusion and delays in service. The demands on our management related to the increase in our size after an acquisition also may have potential adverse effects on our operating results.
If we are unable to finance or complete any future acquisition on terms satisfactory to us (or at all) and/or we are unable to successfully integrate any acquisitions into our existing business, achieve anticipated operating advantages and/or realize anticipated cost savings or other synergies from any such acquired business, it could materially and adversely affect our business, financial condition and results of operations.
Exposure to litigation could have a material effect on our financial position and results of operations.
In the ordinary course of business, we are involved in legal actions, claims, litigation, investigations and other matters arising from our business operations and face the risk that additional actions and claims will be filed in the future.
Litigation alleging infringement of copyrights and other intellectual property rights, particularly with respect to proprietary photographs and images, is common in the educational publishing industry. While management does not expect any of the existing legal actions and claims arising from our business operations to have a material adverse effect on our results of operations, financial position or cash flows, due to the inherent uncertainty of the litigation process, the costs of pursuing or defending against any particular legal proceeding, or the resolution of any particular legal proceeding could have a material effect on our financial position and results of operations.
We have insurance in such amounts and with such coverage and deductibles as management believes is reasonable. However, our coverage for certain product lines has been exhausted and there can be no assurance that our liability insurance for other product lines will cover all events or that the limits of such coverage will be sufficient to fully cover all potential liabilities thereunder.
We face risks of doing business abroad.
We conduct business in a number of regions outside of the U.S., including emerging markets in South America, Asia, Africa and the Middle East. Accordingly, we face exposure to the risks of doing business abroad, including, but not limited to, longer customer payment terms in certain countries; increased credit risk; difficulties in protecting intellectual property, enforcing or terminating agreements and collecting receivables under certain foreign legal systems; compliance under local privacy laws, rules, regulations and standards; the need to comply with U.S. Foreign Corrupt Practices Act and local laws, rules and regulations; and in some countries, a higher risk of political instability, economic volatility, terrorism, corruption, and social and ethnic unrest.
Although we are committed to conducting business in a legal and ethical manner in compliance with local and international statutory requirements and standards applicable to our business, there is a risk that our management, employees or representatives may take actions that violate applicable laws and regulations prohibiting the making of improper payments for the purposes of obtaining or keeping business, including laws such as the U.S. Foreign Corrupt Practices Act or the U.K. Bribery Act. Responding to investigations is costly and requires a significant amount of management’s time and attention. In addition, investigations may adversely impact our reputation, or lead to litigation and financial impacts.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
Our principal executive office is located at 125 High Street, Boston, Massachusetts 02110. The following table describes the approximate building areas in square feet, principal uses and the years of expiration on leased premises of our significant operating properties as of December 31, 2021. We believe that these properties are suitable and adequate for our present and anticipated business needs, satisfactory for the uses to which each is put, and, in general, fully utilized.
Expiration
Approximate
Principal use
Location
year
area
of space
Owned Premises:
Troy, Missouri
Owned
575,000
Office and warehouse
Leased Premises:
Boston, Massachusetts (Corporate office)
196,689
Office
Orlando, Florida
111,073
Office
Evanston, Illinois
60,522
Office
Geneva, Illinois
513,512
Office and warehouse
Portsmouth, New Hampshire
40,032
Office
New York, New York
101,421
Office
Austin, Texas
87,570
Office
Dublin, Ireland
28,994
Office
Orlando, Florida
25,400
Warehouse
St Charles, Illinois
26,029
Office
In addition, we lease several other offices that are not material to our operations and, in some instances, are partially or fully subleased. Portions of certain properties listed above are also subleased.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
We are involved in legal actions, claims, litigation and other matters incidental to our business. Litigation alleging infringement of copyrights and other intellectual property rights, particularly with respect to proprietary photographs and images, is common in the educational publishing industry.
While management believes there is a reasonable possibility we may incur a loss associated with the existing legal actions, claims and litigation, we are not able to estimate such amount, but we do not expect any of these matters to have a material adverse effect on our results of operations, financial position or cash flows. We have insurance in such amounts and with such coverage and deductibles as management believes is reasonable. However, there can be no assurance that our liability insurance will cover all events or that the limits of such coverage will be sufficient to fully cover all potential liabilities thereunder. Refer to Note 14 of the Consolidated Financial Statements included in Item 8. for a discussion of such matters.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market information. Our common stock is listed on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “HMHC”.
Holders. As of February 1, 2022, there were approximately six stockholders of record of our common stock, one of which was Cede & Co., a nominee for The Depository Trust Company. All of our common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are considered to be held of record by Cede & Co., who is considered to be one stockholder of record. A substantially greater number of holders of our common stock are “street name” or beneficial holders, whose shares of common stock are held of record by banks, brokers and other financial institutions. Because such shares of common stock are held on behalf of stockholders, and not by the stockholders directly, and because a stockholder can have multiple positions with different brokerage firms, banks and other financial institutions, we are unable to determine the total number of stockholders we have.
Dividends. We have never paid or declared any cash dividends on our common stock. At present, we intend to retain our future earnings, if any, to fund operations and the growth of our business. Our future decisions concerning the payment of dividends on our common stock will depend upon our results of operations, financial condition and capital expenditure plans, as well as other factors as our board of directors, in its discretion, may consider relevant, and the extent to which the declaration or payment of dividends may be limited by agreements we have entered into or cause us to lose the benefits of certain of our agreements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
Performance Graph. The graph below matches the cumulative return of holders of the Company’s common stock with the cumulative returns of the Nasdaq Composite index, the Russell 2000 index, and a Peer Group index of certain public companies in the educational space, comprised of Pearson PLC, Scholastic Corporation, Stride Inc. (formerly K-12 Inc.), and John Wiley & Sons, Inc. The graph assumes that the value of the investment in the Company’s common stock, in each index (including reinvestment of dividends) was $100 on December 31, 2016 and tracks it through February 1, 2022. All prices reflect closing prices on the last day of trading at the end of each period. Notwithstanding any general incorporation by reference of this Annual Report on Form 10-K into any other document, the information contained in the graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act of 1934, as amended (the “Exchange Act”) or to the liabilities of Section 18 of the Exchange Act, except: (i) as expressly required by applicable law or regulation; or (ii) to the extent that the Company specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act of 1933, as amended, or the Exchange Act.
The stock price performance shown on the graph is not necessarily indicative of future price performance. Information used in the graph was obtained from a source we believe to be reliable, but we do not assume responsibility for any errors or omissions in such information.
Recent sales of unregistered securities. There have been no sales of unregistered securities by the Company in the three-year period ended December 31, 2021.
Issuer Purchases of Equity Securities
There were no purchases of equity securities in the fourth quarter of 2021 and for the year ended December 31, 2021.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Reserved

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to facilitate an understanding of our results of operations and financial condition and should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion and analysis of our financial condition and results of operations contains forward-looking statements about our business, operations and industry that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations and intentions. Actual results and the timing of events may differ materially from those expressed or implied in such forward-looking statements due to a number of factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. See “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”
Overview
We are 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, we partner with educators and school districts to uncover solutions that unlock students’ potential and extend teachers’ capabilities. We estimate that we serve more than 50 million students and three million educators in 150 countries.
Recent Developments
Acquisition by Veritas
On February 21, 2022, we entered into a merger agreement which provides for the acquisition of our company by entities beneficially owned by The Veritas Capital Fund VII, L.P. at a price of $21.00 per share of our common stock. The transaction is expected to close in the second quarter of 2022. See Note 20 - Acquisition by Entities Beneficially Owned by Veritas for additional information related to this pending transaction.
HMH Books & Media Consumer Publishing Business and Discontinued Operations
On May 10, 2021, we completed the sale of all of the assets and liabilities used primarily in the HMH Books & Media segment, our consumer publishing business, for cash consideration of $349.0 million, subject to a customary working capital adjustment resulting in a payment to the purchaser of $8.4 million, and the purchaser’s assumption of all liabilities relating to the HMH Books & Media business subject to specified exceptions (collectively, the “Transaction”). Total net cash proceeds after the payment of transaction costs and exclusive of working capital adjustment, were approximately $337.0 million, which we used to pay down debt. The divestiture enables HMH to focus singularly on K-12 education and accelerate growth momentum in digital sales, annual recurring revenue and free cash flow while paying down a significant portion of our debt. As part of the agreement, all HMH Books & Media business employees joined the acquiring company.
Upon entering into the asset purchase agreement on March 26, 2021 and qualifying as held-for-sale, the HMH Books & Media business was classified as a discontinued operation due to its relative size and strategic rationale, and accordingly, all results of the HMH Books & Media business have been removed from continuing operations for all periods presented, including from discussions of total net sales and other results of operations. Included within the years ended December 31, 2021, 2020 and 2019 discontinued operations financial results is interest expense of $9.4 million, $28.3 million and $19.3 million, respectively, based on our required repayment of the Company’s debt with the net proceeds from the sale. On the balance sheet, all assets and liabilities that transferred to the acquirer have been classified as Assets of discontinued operations or Liabilities of discontinued operations. The results of the HMH Books & Media business were previously reported in its own reportable segment. We currently report our revenues and financial results from continuing operations under one reportable segment.
Unless otherwise indicated, all financial information refers to continuing operations.
COVID-19
Over the past two years, we implemented a number of measures intended to help protect our shareholders, employees, and customers amid the COVID-19 pandemic. We also took actions to help mitigate some of the adverse impact of COVID-19 to our profitability and cash flow including, but not limited to, furloughs, salary reductions, spending freezes, and proactive outreach to schools to support them through this period of disruption with virtual learning resources.
2020 Restructuring Plan
We revised our cost structure amid the COVID-19 pandemic to further align our cost structure to our net sales and long-term strategy. As part of this effort, on September 4, 2020, we finalized a voluntary retirement incentive program, which was offered to all U.S. based employees at least 55 years of age with at least five years of service. Of the eligible employees, 165 elected to participate representing approximately 5% of our workforce. The majority of the employees voluntarily retired as of September 4, 2020 with select employees leaving later in the year. Each of the employees received separation payments in accordance with our severance policy.
On September 30, 2020, our Board of Directors committed to a restructuring program, including a reduction in force, as part of the ongoing assessment of our cost structure amid the COVID-19 pandemic. The reduction in force resulted in a 22% reduction in our workforce, including positions eliminated as part of the voluntary retirement incentive program mentioned above, and net of newly created positions to support our digital-first operations. The reduction in force resulted in the departure of approximately 525 employees and was completed in October 2020. Each of the employees received separation payments in accordance with our severance policy. The total one-time, non-recurring cost incurred in connection with the 2020 restructuring program, inclusive of the voluntary retirement incentive program (collectively the “2020 Restructuring Plan”), all of which represented cash expenditures, was approximately $30.9 million. These actions streamlined the cost structure of the Company.
Strategic Transformation Plan
On October 15, 2019, our Board of Directors approved changes connected with our ongoing strategic transformation to simplify our business model and accelerate growth. This includes new product development and go-to-market capabilities, as well as the streamlining of operations company-wide for greater efficiency. These actions, which we refer to as our 2019 Restructuring Plan, resulted in the net elimination of approximately 10% of our workforce, after taking into account new strategy-aligned positions that are expected to be added, and additional operating and capitalized cost reductions, including an approximately 20% reduction in previously planned content development expenditures over the next three years. These steps were intended to further simplify our business model while delivering increased value to customers, teachers and students. The workforce reductions were completed during the first quarter of 2020.
After considering additional headcount actions, implementation of the planned actions resulted in total charges of $15.8 million which was recorded in the fourth quarter of 2019. With respect to each major type of cost associated with such activities, substantially all costs were severance and other termination benefit costs and resulted in cash expenditures.
Further, as part of the strategic transformation plan, we recorded an incremental $9.8 million inventory obsolescence charge in the fourth quarter of 2019 which was recorded in cost of sales in the statement of operations.
Key Aspects and Trends of Our Operations
Net Sales
We derive revenue primarily from the sale of print and digital content and instructional materials, multimedia instructional programs, software and services, consulting and training. We primarily sell to customers in the United States. Our net sales are driven primarily as a function of volume and, to a certain extent, changes in price. Our net sales consist of our invoices for products and services, less revenue that will be deferred until future recognition
along with the transaction price allocation adjusted to reflect the estimated returns for the arrangement. Deferred revenues primarily derive from online interactive digital content, digital and online learning components along with undelivered work-texts, workbooks and services. The work-texts, workbooks and services are deferred until control is transferred to the customer, which often extends over the life of the contract, and our hosted online and digital content is typically recognized ratably over the life of the contract. The digitalization of education content and delivery is driving a shift in the education market. As the K-12 educational market transitions to purchasing more digital, personalized education solutions, we believe our ability now or in the future to offer embedded assessments, adaptive learning, real-time interaction and student specific personalization of educational content in a platform- and device-agnostic manner will provide new opportunities for growth. An increasing number of schools are utilizing digital content in their classrooms and implementing online or blended learning environments, which is altering the historical mix of print and digital educational materials in the classroom. As a result, our business model includes integrated solutions comprised of both print and digital offerings/products to address the needs of the education marketplace. The level of revenues being deferred can fluctuate depending upon the mix of product offering between digital and non-digital products, the length of programs and the mix of product delivered immediately or over time.
Core curriculum programs, which historically represent the most significant portion of our net sales, cover curriculum standards in a particular K-12 academic subject and include a comprehensive offering of teacher and student materials required to conduct the class throughout the school year. Products and services in these programs include print and digital offerings for students and a variety of supporting materials such as teacher’s editions, formative assessments, supplemental materials, whole group instruction materials, practice aids, educational games and professional services. The process through which materials and curricula are selected and procured for classroom use varies throughout the United States. Currently, 19 states, known as adoption states, review and approve new programs usually every six to eight years on a state-wide basis. School districts in those states typically select and purchase materials from the state-approved list. The remaining states are known as open states or open territory states. In those states, materials are not reviewed at the state level, and each individual school or school district is free to procure materials at any time, although most follow a five-to-ten year replacement cycle. The student population in adoption states represents approximately 50% of the U.S. elementary and secondary school-age population. Some adoption states provide “categorical funding” for instructional materials, which means that those state funds cannot be used for any other purpose. Our core curriculum programs typically have higher deferred sales than other parts of the business. The higher deferred sales are primarily due to the length of time that our programs are being delivered, along with greater component and digital product offerings. A significant portion of our net sales is dependent upon our ability to maintain residual sales, which are subsequent sales after the year of the original adoption, and our ability to continue to generate new business by developing new programs that meet our customers’ evolving needs. In addition, our market is affected by changes in state curriculum standards, which drive instruction, assessment and accountability in each state. Changes in state curriculum standards require that instructional materials be revised or replaced to align to the new standards, which historically has driven demand for core curriculum programs.
We also derive our net sales from supplemental and intervention products that target struggling learners through comprehensive intervention solutions aimed at raising student achievement by providing solutions that combine technology, content and other educational products, as well as consulting and professional development services. We also offer products targeted at assisting English language learners.
Further, we also derive net sales from the delivery of services to K-12 educators and administrators to build instructional excellence, cultivate leadership and provide school districts with the comprehensive support they need to raise student achievement. These offerings include ongoing curriculum support and expertise in professional development, coaching, and strategic consulting.
In international markets, we predominantly export and sell K-12 books to premium private schools that utilize the U.S. curriculum, which are located primarily in Asia, the Pacific, the Middle East, Latin America, the Caribbean and Africa. Our international sales team utilizes a global network of distributors in local markets around the world.
Factors affecting our net sales include:
•
general economic conditions at the federal and state level;
•
state and school district per student funding levels;
•
federal funding levels;
•
the cyclicality of the purchasing schedule for adoption states;
•
student enrollments;
•
adoption of new academic standards;
•
state acceptance of submitted programs and participation rates for accepted programs;
•
technological advancement and the introduction of new content and products that meet the needs of students, teachers and consumers, including through strategic agreements pertaining to content development and distribution; and
•
the amount of net sales subject to deferrals which is impacted by the mix of product offering between digital and non-digital products, the length of programs and the mix of product delivered immediately or over time.
State and district per-student funding levels, which closely correlate with state and local receipts from income, sales and property taxes, impact our sales as institutional customers are affected by funding cycles. Most public school districts, the primary customers for K-12 products and services, are largely dependent on state and local funding to purchase materials.
We monitor the purchasing cycles for specific disciplines in the adoption states in order to manage our product development and to plan sales campaigns. Our sales may be materially impacted during the years that major adoption states, such as Florida, California and Texas, are or are not scheduled to make significant purchases. For example, Texas adopted Reading/English Language Arts materials in 2018 for purchase in 2019 and 2020 and will call in 2022 for K-12 Science materials for purchase in 2024. California adopted history and social science materials in 2017 for purchase in 2018 through 2020 and adopted Science materials in 2018 for purchase in 2019 and continuing through 2021. Florida called for K-12 English Language Arts materials in 2020 for purchase beginning in 2021 and called for K-12 Mathematics for review in 2021 and purchase beginning in 2022. Both Florida and Texas, along with several other adoption states, provide dedicated state funding for instructional materials and classroom technology, with funding typically appropriated by the legislature in the first half of the year in which materials are to be purchased. Texas has a two-year budget cycle, and in the 2021 legislative session appropriated funds for purchases in 2021 and 2022. California funds instructional materials in part with a dedicated portion of state lottery proceeds and in part out of general formula funds, with the minimum overall level of school funding determined according to the Proposition 98 funding guarantee. There is no guarantee that our programs will be approved for purchase in future instructional materials adoptions in these states.
Long-term growth in the U.S. K-12 market is positively correlated with student enrollments, which is a driver of growth in the educational publishing industry. Although economic cycles may affect short-term buying patterns, school enrollments are highly predictable and are expected to trend upward over the longer term. From 2018 to 2029, total public school enrollment, a major long-term driver of growth in the K-12 Education market, is projected to increase by 0.8% to 51.1 million students, according to the National Center for Education Statistics.
As the K-12 educational market purchases more digital solutions, we believe our ability to offer embedded assessments, adaptive learning, real-time interaction and student specific personalized learning and educational content in a platform- and device-agnostic manner will provide new opportunities for growth.
We employ different pricing models to serve various customers, including institutions, government agencies, consumers and other third parties. In addition to traditional pricing models where a customer receives a product in return for a payment at the time of product receipt, we currently use the following pricing models:
•
Pay-up-front: Customer makes a fixed payment at time of purchase and we provide a specific product/service in return; and
•
Pre-pay Subscription: Customer makes a one-time payment at time of purchase, but receives a stream of goods/services over a defined time horizon; for example, we currently provide customers the option to purchase a multi-year subscription to textbooks where for a one-time charge, a new copy of the work text is delivered to the customer each year for a defined time period. Pre-pay subscriptions to online textbooks are another example where the customer receives access to an online book for a specific period of time.
Cost of sales, excluding publishing rights and pre-publication amortization
Cost of sales, excluding publishing rights and pre-publication amortization, include expenses directly attributable to the production of our products and services, including the non-capitalizable costs associated with our content and platform development group. The expenses within cost of sales include variable costs such as paper, printing and binding costs of our print materials, royalty expenses paid to our authors, gratis costs or products provided at no charge as part of the sales transaction, and inventory obsolescence. Also included in cost of sales are labor costs related to professional services and the non-capitalized costs associated with our content and platform development group. We also include amortization expense associated with our customer-facing software platforms. Certain products carry higher royalty costs; conversely, digital offerings usually have a lower cost of sales due to lower costs associated with their production. Also, sales to adoption states usually contain higher cost of sales. A change in the sales mix of our products or services can impact consolidated profitability.
Publishing rights and Pre-publication amortization
A publishing right is an acquired right that allows us to publish and republish existing and future works as well as create new works based on previously published materials. As part of our March 9, 2010 restructuring, we recorded an intangible asset for publishing rights and amortize such asset on an accelerated basis over the useful lives of the various copyrights involved. This amortization will continue to decrease approximately 25% annually through March of 2023.
We capitalize the art, prepress, manuscript and other costs incurred in the creation of the master copy of our content, known as the pre-publication costs. Pre-publication costs are primarily amortized from the year of sale over five years using the sum-of-the-years-digits method, which is an accelerated method for calculating an asset’s amortization. Under this method, the amortization expense recorded for a pre-publication cost asset is approximately 33% (year 1), 27% (year 2), 20% (year 3), 13% (year 4) and 7% (year 5). We utilize this policy for all pre-publication costs, except the content of certain intervention products acquired in 2015, which we amortize over 7 years using an accelerated amortization method. The amortization methods and periods chosen best reflect the pattern of expected sales generated from individual titles or programs. We periodically evaluate the remaining lives and recoverability of capitalized pre-publication costs, which are often dependent upon program acceptance by state adoption authorities.
Selling and administrative expenses
Our selling and administrative expenses include the salaries, benefits and related costs of employees engaged in sales and marketing, fulfillment and administrative functions. Also included within selling and administrative expenses are variable costs such as commission expense, outbound transportation costs (approximately $27.9 million for the year ended December 31, 2021) and depository fees, which are fees paid to state-mandated depositories that fulfill centralized ordering and warehousing functions for specific states. Additionally, significant fixed and discretionary costs include facilities, telecommunications, professional fees, promotions, sampling and advertising along with depreciation.
Other intangible assets amortization
Our other intangible assets amortization expense primarily includes the amortization of acquired intangible assets consisting of tradenames, customer relationships, content rights and licenses. The tradenames, customer relationships, content rights and licenses are amortized over varying periods of 5 to 25 years. The expense for the year ended December 31, 2021 was $30.3 million.
Interest expense
Our interest expense includes interest accrued on the outstanding balances of our $306.0 million in aggregate principal amount of 9.0% Senior Secured Notes due 2025 (“notes”), our $380.0 million term loan credit facility (“term loan facility”), most of which was repaid with proceeds from the Transaction, and, to a lesser extent, our revolving credit facility, the amortization of any deferred financing fees and loan discounts, and payments in connection with interest rate hedging agreements. Our interest expense for the year ended December 31, 2021 was $35.0 million.
Results of Operations
Consolidated Operating Results for the Years Ended December 31, 2021 and 2020
Year Ended
Year Ended
December 31,
December 31,
Dollar
Percent
(dollars in thousands)
change
Change
Net sales
$
1,050,802
$
840,454
$
210,348
25.0
%
Costs and expenses:
Cost of sales, excluding publishing rights and
pre-publication amortization
398,706
370,586
28,120
7.6
%
Publishing rights amortization
10,688
14,800
(4,112
)
(27.8
)%
Pre-publication amortization
108,621
125,838
(17,217
)
(13.7
)%
Cost of sales
518,015
511,224
6,791
1.3
%
Selling and administrative
445,660
442,355
3,305
0.7
%
Other intangible asset amortization
30,257
23,917
6,340
26.5
%
Impairment charge for goodwill
-
279,000
(279,000
)
NM
Restructuring/severance and other charges
12,349
31,874
(19,525
)
(61.3
)%
Gain on sale of assets
(3,661
)
-
(3,661
)
NM
Operating income (loss)
48,182
(447,916
)
496,098
NM
Other income (expense):
Retirement benefits non-service income (expense)
(856
)
NM
Interest expense
(34,998
)
(37,931
)
2,933
7.7
%
Interest income
(822
)
(91.4
)%
Change in fair value of derivative instruments
(1,221
)
(1,893
)
NM
Gain on investments
1,442
2,091
(649
)
(31.0
)%
Income from transition services agreement
3,664
-
3,664
NM
Loss on extinguishment of debt
(12,505
)
-
(12,505
)
NM
Income (loss) from continuing operations before taxes
4,746
(483,041
)
487,787
NM
Income tax expense (benefit) for continuing operations
2,686
(12,351
)
15,037
NM
Income (loss) from continuing operations, net of tax
2,060
(470,690
)
472,750
NM
Loss from discontinued operations, net of tax
(1,005
)
(9,148
)
8,143
89.0
%
Gain on sale of discontinued operations, net of tax
212,523
-
212,523
NM
Income (loss) from discontinued operations, net of tax
211,518
(9,148
)
220,666
NM
Net income (loss)
$
213,578
$
(479,838
)
$
693,416
NM
NM = not meaningful
Net sales for the year ended December 31, 2021 increased $210.3 million, or 25.0%, from $840.5 million in 2020 to $1,050.8 million. Core Solutions increased by $91.0 million from $459.0 million in 2020 to $550.0 million, driven by strong open territory demand resulting from the strength of our connected solutions and the continued market recovery, as well as the success of our digital first, connected strategy. Further, net sales in Extensions, consisting of our Heinemann brand, intervention and supplemental products as well as professional services, increased by $120.0 million from $381.0 million in 2020 to $501.0 million. Within Extensions, net sales of our Heinemann products increased due to strong demand across most product portfolios.
Operating income (loss) for the year ended December 31, 2021 favorably changed from a loss of $447.9 million in 2020 to income of $48.2 million, due primarily to the following:
•
An impairment charge for goodwill in 2020 of $279.0 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 and its stock price in 2020;
•
A $210.3 million increase in net sales;
•
A $19.5 million decrease in restructuring/severance and other charges. In 2021, there were $12.3 million of non-cash restructuring/severance and other charges primarily related to vacated office space formerly utilized by employees of the HMH Books & Media business, of which $11.7 million is reflected as a reduction in operating lease assets and $1.6 million as a reduction in property, plant, and equipment. In 2020, there were $31.9 million of severance costs associated with the 2020 Restructuring Plan;
•
A $15.0 million decrease in net amortization expense related to publishing rights, pre-publication and other intangible assets, primarily due to a decrease in pre-publication amortization attributed to a streamlining of capital spend and, to a lesser extent, our use of accelerated amortization methods for publishing rights amortization, partially offset by the amortization of certain other intangible assets due to product life cycle reductions; and
•
A $3.7 million gain on sale of assets in 2021 from the sale of intellectual property, including the copyrights and trademarks, of certain product titles.
Partially offset by:
•
A $28.1 million increase in our cost of sales, excluding publishing rights and pre-publication amortization, from $370.6 million in 2020 to $398.7 million, primarily due to an increase in sales volume, partially offset by lower print costs, product mix, increased virtual delivery of products and services along with favorable inventory obsolescence due to strong net sales. Our cost of sales, excluding publishing rights and pre-publication amortization, as a percentage of sales, decreased to 38.0% from 44.1%; and
•
A slight increase in selling and administrative expenses, primarily due to an increase in variable expenses such as sales commissions and transportation due to higher billings along with an increase in incentive compensation. Partially offsetting the aforementioned was reduced labor, professional fees and travel and marketing costs.
Retirement benefits non-service (expense) income for the year ended December 31, 2021 changed favorably by $1.0 million due to lower interest cost related to the pension plan during 2021.
Interest expense for the year ended December 31, 2021 decreased $2.9 million from $37.9 million in 2020 to $35.0 million, primarily due to net settlement payments on our interest rate derivative instruments during 2020, which did not repeat in 2021, and to a lesser extent lower term loan facility interest expense driven by lower LIBOR rates.
Interest income for the year ended December 31, 2021 decreased $0.8 million due to lower interest rates on our money market funds in 2021.
Change in fair value of derivative instruments for the year ended December 31, 2021 unfavorably changed by $1.9 million due to foreign exchange forward contracts executed on the Euro that were unfavorably impacted by the strengthening of the U.S. dollar against the Euro.
Gain on investments for the year ended December 31, 2021 decreased $0.6 million from $2.1 million in 2020 to $1.4 million and was related to the fair value change in our equity interests in educational technology private companies.
Income from transition services agreement for the year ended December 31, 2021 was $3.7 million and was related to transition service fees under the transition services agreement with the purchaser of our HMH Books & Media business. We had no transition services agreement during 2020.
Loss on extinguishment of debt for the year ended December 31, 2021 consisted of a $10.0 million write-off of the remaining balance of the debt discount associated with the term loan facility and a $2.5 million write-off related to unamortized deferred financing fees associated with the term loan facility. The total write-off of $12.5 million was proportional to the pay down in term loan debt in connection with the Transaction.
Income tax benefit for continuing operations for the year ended December 31, 2021 decreased $15.0 million, from a benefit of $12.4 million in 2020 to an expense of $2.7 million in 2021. For both periods income tax expense (benefit) was primarily attributed to movement in the deferred tax liability associated with tax amortization on indefinite-lived intangibles, state and foreign taxes, as well as the impact of certain discrete tax items including the accrual of potential interest and penalties on uncertain tax positions. The effective tax rate was 56.6% and 2.6% for the years ended December 31, 2021 and 2020, respectively.
Income (loss) from discontinued operations, net of tax for the year ended December 31, 2021 favorably changed by $220.7 million from a loss of $9.1 million in 2020, to income of $211.5 million primarily due to the gain on sale of our HMH Books & Media business, which has been accounted for as a discontinued operation whereby the direct results of its operations were removed from the results from continuing operations for the periods presented. Included within the income (loss) is interest expense of $9.4 million and $28.3 million, for 2021 and 2020, respectively, based on the repayment of debt with the net proceeds from the sale, which was required by our debt facilities, as we did not reinvest such amounts in the business.
Consolidated Operating Results for the Years Ended December 31, 2020 and 2019
Year Ended
Year Ended
December 31,
December 31,
Dollar
Percent
(dollars in thousands)
change
Change
Net sales
$
840,454
$
1,211,790
$
(371,336
)
(30.6
)%
Costs and expenses:
Cost of sales, excluding publishing rights and
pre-publication amortization
370,586
549,886
(179,300
)
(32.6
)%
Publishing rights amortization
14,800
20,611
(5,811
)
(28.2
)%
Pre-publication amortization
125,838
149,298
(23,460
)
(15.7
)%
Cost of sales
511,224
719,795
(208,571
)
(29.0
)%
Selling and administrative
442,355
619,811
(177,456
)
(28.6
)%
Other intangible asset amortization
23,917
20,353
3,564
17.5
%
Impairment charge for goodwill
279,000
-
279,000
NM
Restructuring/severance and other charges
31,874
20,692
11,182
54.0
%
Operating loss
(447,916
)
(168,861
)
(279,055
)
(165.3
)%
Other income (expense):
Retirement benefits non-service (expense) income
(856
)
(1,023
)
NM
Interest expense
(37,931
)
(29,770
)
(8,161
)
(27.4
)%
Interest income
3,157
(2,258
)
(71.5
)%
Change in fair value of derivative instruments
(899
)
1,571
NM
Gain on investments
2,091
-
2,091
NM
Income from transition services agreement
-
4,248
(4,248
)
NM
Loss on extinguishment of debt
-
(4,363
)
4,363
NM
Loss from continuing operations before taxes
(483,041
)
(196,321
)
(286,720
)
NM
Income tax (benefit) expense for continuing operations
(12,351
)
3,854
(16,205
)
NM
Loss from continuing operations, net of tax
(470,690
)
(200,175
)
(270,515
)
NM
Loss from discontinued operations, net of tax
(9,148
)
(13,658
)
4,510
33.0
%
Net loss
$
(479,838
)
$
(213,833
)
$
(266,005
)
NM
Net sales for the year ended December 31, 2020 decreased $371.3 million, or 30.6%, from $1,211.8 million in 2019 to $840.5 million. The decrease was primarily due to lower net sales in Extensions, which primarily consist of our Heinemann brand, intervention and supplemental products as well as professional services, which decreased by $253.0 million from $634.0 million in 2019 to $381.0 million. Within Extensions, net sales decreased due to lower sales of the Heinemann’s Fountas & Pinnell Classroom, Calkins and LLI Leveled Literacy products due to a difficult comparison to prior year Texas K-6 sales coupled with the impact of the COVID-19 pandemic in 2020. Also, contributing to the decrease was lower professional services with the decline of the in-person learning environment as a result of the COVID-19 pandemic. Further, there were lower net sales from Core Solutions which decreased by $119.0 million from $578.0 million in 2019 to $459.0 million, primarily due to the smaller new adoption market opportunity in Texas ELA, along with impacts of the COVID-19 pandemic.
Operating loss for the year ended December 31, 2020 unfavorably changed from a loss of $168.9 million in 2019 to a loss of $447.9 million, due primarily to the following:
•
A $371.3 million decrease in net sales;
•
An impairment charge for goodwill in 2020 of $279.0 million. This non-cash impairment is a direct result of the adverse impact that the COVID-19 pandemic has had on the Company and its stock price; and
•
A $11.2 million increase in costs associated with our restructuring/severance and other charges due to $31.9 million of severance costs associated with the 2020 Restructuring Plan,
Partially offset by:
•
A $177.5 million decrease in selling and administrative expenses, primarily due to lower labor costs, resulting from cost savings associated with our employee furlough initiative, which began in April and ceased at the end of July, in response to COVID-19, our 2020 Restructuring Plan and a freeze on hiring. Also, there was a decrease of variable expenses such as commissions and transportation due to lower billings. Further, there were lower discretionary costs primarily related to travel and expense reduction measures and marketing along with lower depreciation expense;
•
A $179.3 million decrease in our cost of sales, excluding publishing rights and pre-publication amortization, from $549.9 million in 2019 to $370.6 million, primarily due to lower billings. Our cost of sales, excluding publishing rights and pre-publication amortization, as a percentage of sales, decreased to 44.1% from 45.4%; and
•
A $25.7 million decrease in net amortization expense related to publishing rights, pre-publication and other intangible assets, primarily due to a decrease in pre-publication amortization attributed to the timing and large amount of 2019 major product releases coupled with our streamlining of capital spend.
Retirement benefits non-service (expense) income for the year ended December 31, 2020 changed unfavorably by $1.0 million due to the recognition of a $1.1 million settlement charge related to the pension plan during 2020.
Interest expense for the year ended December 31, 2020 increased $8.2 million from $29.8 million in 2019 to $37.9 million, primarily due to our 2019 debt refinancing during the fourth quarter of 2019. Further, there was an increase of $2.4 million of net settlement payments on our interest rate derivative instruments during 2020.
Interest income for the year ended December 31, 2020 decreased $2.3 million from $3.2 million in 2019 to $0.9 million, primarily due to lower interest rates on our money market funds in 2020.
Change in fair value of derivative instruments for the year ended December 31, 2020 favorably changed by $1.6 million due to foreign exchange forward contracts executed on the Euro that were favorably impacted by the weakening of the U.S. dollar against the Euro.
Gain on investments for the year ended December 31, 2020 was $2.1 million and was related to the fair value change in our equity interests in educational technology private companies.
Income from transition services agreement for the year ended December 31, 2019 was $4.2 million and was related to transition service fees under the transition services agreement with the purchaser of our Riverside Business pursuant to which we performed certain support functions through September 30, 2019. We had no income from transition services agreement for the year ended December 31, 2020.
Loss on extinguishment of debt for the year ended December 31, 2019 consisted of a $3.4 million write-off related to unamortized deferred financing fees associated with the portion of our previous term loan facility that was accounted for as an extinguishment. Further, there was a $1.0 million write off of the remaining balance of the debt discount associated with the previous term loan facility. We had no loss on extinguishment of debt for the year ended December 31, 2020.
Income tax (benefit) expense for continuing operations for the year ended December 31, 2020 decreased $16.2 million, from an expense of $3.9 million in 2019, to a benefit of $12.4 million. The change was due to an income tax benefit primarily due to the impairment charge on goodwill, which reduced related deferred tax liabilities. The effective tax rate was 2.6% and (2.0%) for the years ended December 31, 2020 and 2019, respectively.
Loss from discontinued operations, net of tax for the year ended December 31, 2020 favorably changed by $4.5 million from a loss of $13.7 million in 2019, to a loss of $9.1 million primarily due to higher net sales. The HMH Books & Media business has been accounted for as a discontinued operation whereby the direct results of its
operations were removed from the results from continuing operations for the periods presented due to the sale in 2021. Included within the loss is interest expense of $28.3 million and $19.3 million for 2020 and 2019, respectively, based on the repayment of debt with the net proceeds from the sale, which was required by our debt facilities, as we did not reinvest such amounts in the business.
Adjusted EBITDA from Continuing Operations
To supplement our financial statements presented in accordance with GAAP, we have presented Adjusted EBITDA from continuing operations, which is 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 Adjusted EBITDA provides useful information to investors regarding our results of operations because it assists both investors and management in analyzing and benchmarking the performance and value of our business. Adjusted EBITDA provides an indicator of general economic 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 along with costs such as severance, separation and facility closure costs, inventory obsolescence related to our strategic transformation plan, gain on sale of assets, legal settlements, acquisition/disposition-related activity costs, restructuring costs and integration costs. Accordingly, our management believes that this measurement is useful for comparing general operating performance from period to period. In addition, targets in Adjusted EBITDA (further adjusted to include changes in deferred revenue) are used as performance measures to determine certain compensation of management, and Adjusted EBITDA is used as the base for calculations relating to incurrence covenants in our debt agreements. Other companies may define Adjusted EBITDA differently and, as a result, our measure of Adjusted EBITDA may not be directly comparable to Adjusted EBITDA of other companies. Although we use Adjusted EBITDA as a financial measure to assess the performance of our business, the use of Adjusted EBITDA is limited because it does not include certain material costs, such as interest and taxes, necessary to operate our business. Adjusted EBITDA should be considered in addition to, and not as a substitute for, net loss/income in accordance with GAAP as a measure of performance. Adjusted EBITDA is not intended to be a measure of liquidity or free cash flow for discretionary use. You are cautioned not to place undue reliance on Adjusted EBITDA.
Below is a reconciliation of our net loss to Adjusted EBITDA from continuing operations for the years ended December 31, 2021, 2020 and 2019:
Years Ended December 31,
Net income (loss) from continuing operations
$
2,060
$
(470,690
)
$
(200,175
)
Interest expense
34,998
37,931
29,770
Interest income
(77
)
(899
)
(3,157
)
Provision (benefit) for income taxes
2,686
(12,457
)
3,854
Depreciation expense
44,867
49,874
60,708
Amortization expense
149,566
164,555
190,262
Non-cash charges-goodwill impairment
-
279,000
-
Non-cash charges-stock-compensation
12,217
11,160
13,196
Non-cash charges- (gain) loss on derivative instruments
1,221
(672
)
Inventory obsolescence related to strategic transformation plan
-
-
9,758
Fees, expenses or charges for equity offerings,
debt or acquisitions/dispositions
1,080
6,327
Gain on investments
(1,942
)
(2,091
)
-
Gain on sale of assets
(3,661
)
-
-
Loss on extinguishment of debt
12,505
-
4,363
Legal settlement
2,470
-
-
Restructuring/severance and other charges
12,349
31,874
20,692
Adjusted EBITDA from continuing operations
$
270,154
$
88,665
$
136,497
Seasonality and Comparability
Our net sales, operating profit or loss and net cash provided by or used in operations are impacted by the inherent seasonality of the academic calendar, which typically results in a cash flow usage in the first half of the year and a cash flow generation in the second half of the year. Consequently, the performance of our business may not be comparable quarter to consecutive quarter and should be considered on the basis of results for the whole year or by comparing results in a quarter with results in the same quarter for the previous year.
Schools typically conduct the majority of their purchases in the second and third quarters of the calendar year in preparation for the beginning of the school year. Thus, over the past three completed fiscal years, approximately 69% of our consolidated net sales were realized in the second and third quarters. Sales of K-12 instructional materials are also cyclical, with some years offering more sales opportunities than others based on the state adoption calendar. The amount of funding available at the state level for educational materials also has a significant effect on year-to-year net sales. Although the loss of a single customer would not have a material adverse effect on our business, schedules of school adoptions and market acceptance of our products can materially affect year-to-year net sales performance.
The following table is indicative of the seasonality of our business and the related results:
Quarterly Results of Continuing Operations
First
Second
Third
Fourth
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
Quarter
(in thousands)
Net sales
$
151,843
$
216,239
$
331,205
$
141,167
$
146,195
$
308,672
$
417,130
$
178,805
Costs and expenses:
Cost of sales, excluding publishing rights and
pre-publication amortization
63,652
100,544
146,155
60,235
58,137
124,360
152,893
63,316
Publishing rights amortization
4,432
3,431
3,469
3,468
3,166
2,489
2,516
2,517
Pre-publication amortization
30,562
31,659
31,570
32,047
25,051
26,506
27,620
29,444
Cost of sales
98,646
135,634
181,194
95,750
86,354
153,355
183,029
95,277
Selling and administrative
123,341
98,199
118,275
102,540
89,235
114,767
134,951
106,707
Other intangible assets amortization
5,856
5,855
5,857
6,349
7,906
7,869
7,241
7,241
Impairment charge for goodwill
262,000
-
-
17,000
-
-
-
-
Restructuring/severance and other charges
-
-
31,776
-
9,847
2,469
Gain on sale of assets
-
-
-
-
-
-
(3,661
)
-
Operating (loss) income
(338,000
)
(23,449
)
(5,897
)
(80,570
)
(37,300
)
22,834
95,537
(32,889
)
Other income (expense):
Retirement benefits non-service (expense) income
(1,039
)
(200
)
(26
)
Interest expense
(9,253
)
(10,614
)
(9,311
)
(8,753
)
(8,564
)
(9,985
)
(8,239
)
(8,210
)
Interest income
Change in fair value of derivative instruments
(380
)
(674
)
(368
)
(306
)
Gain on investments
-
-
1,738
-
-
Income from transition services agreement
-
-
-
-
-
1,399
1,411
Loss on extinguishment of debt
-
-
-
-
-
(12,505
)
-
-
(Loss) income from continuing operations before taxes
(346,806
)
(33,807
)
(12,945
)
(89,483
)
(46,718
)
2,149
89,167
(39,852
)
Income tax (benefit) expense for continuing operations
(8,780
)
(1,370
)
(1,060
)
(1,141
)
2,310
(9
)
(6,192
)
6,577
(Loss) income from continuing operations
(338,026
)
(32,437
)
(11,885
)
(88,342
)
(49,028
)
2,158
95,359
(46,429
)
(Loss) income from discontinued operations, net of tax
(7,947
)
(5,731
)
(667
)
5,197
(2,955
)
1,950
-
-
Gain (loss) on sale of discontinued operations, net of tax
-
-
-
-
-
214,520
-
(1,997
)
(Loss) income from discontinued operations, net of tax
(7,947
)
(5,731
)
(667
)
5,197
(2,955
)
216,470
-
(1,997
)
Net (loss) income
$
(345,973
)
$
(38,168
)
$
(12,552
)
$
(83,145
)
$
(51,983
)
$
218,628
$
95,359
$
(48,426
)
During the fourth quarter of 2020, we recorded an adjustment of $17.0 million and $1.0 million to increase both the goodwill impairment charge and income tax benefit recorded, respectively, to correct an error of the previously recorded goodwill impairment of $262.0 million and related income tax benefit in the first quarter of 2020. Management believes these adjustments are not material to the prior period financial statements.
Liquidity and Capital Resources
December 31,
(in thousands)
Cash and cash equivalents
$
463,131
$
281,200
$
296,353
Current portion of long-term debt
-
19,000
19,000
Long-term debt, net of discount and issuance costs
317,579
624,692
638,187
Revolving credit facility
-
-
-
Borrowing availability under revolving credit facility
64,922
104,806
161,961
Years ended December 31,
Net cash provided by operating activities - continuing operations
$
263,789
$
106,485
$
248,540
Net cash provided by (used in) investing activities - continuing operations
250,290
(111,812
)
(95,486
)
Net cash used in financing activities - continuing operations
(335,381
)
(18,130
)
(115,667
)
Operating activities
Net cash provided by operating activities from continuing operations was $263.8 million for the year ended December 31, 2021, a $157.3 million favorable change from the $106.5 million of net cash provided by operating activities from continuing operations for the year ended December 31, 2020. The $157.3 million improvement in cash provided by operating activities from continuing operations was primarily due to an increase in operating profit, net of non-cash items, of $215.0 million. The improvement was partially offset by unfavorable cash flow changes in net operating assets and liabilities of $57.7 million primarily due to unfavorable changes in accounts receivable of $61.3 million related to higher billings and the timing of collections, changes in severance and other charges of $26.4 million mainly attributable to the 2020 Restructuring Plan, changes in other operating assets and liabilities of $26.0 million, period over period inventory changes of $14.9 million and changes in interest payable of $7.0 million due to the timing of payments and changes in pension and postretirement benefits of $6.4 million, offset by favorable cash flow changes in accounts payable of $52.8 million due to timing of disbursements and favorable changes in royalties and author advances of $31.3 million.
Net cash provided by operating activities from continuing operations was $106.5 million for the year ended December 31, 2020, a $142.1 million decrease from the $248.5 million of net cash provided by operating activities from continuing operations for the year ended December 31, 2020. The decrease in cash provided by operating activities was primarily driven by unfavorable changes in net operating assets and liabilities of $74.3 million primarily due to changes in deferred revenue of $143.3 million and $25.0 million of royalties related to greater billings in 2019, accounts payable of $18.7 million related to timing of disbursements and severance and other charges of $3.4 million due to the 2020 Restructuring Plan, offset by period over period inventory changes of $72.4 million, changes in accounts receivable of $10.5 million, an increase in operating lease liabilities of $15.3 million, pension and postretirement benefits of $8.2 million, interest payable of $3.5 million due to the timing of our 2019 Refinancing and other assets and liabilities of $6.2 million. Additionally, operating profit, net of non-cash items, decreased by $67.7 million.
Investing activities
Net cash provided by investing activities from continuing operations was $250.3 million for the year ended December 31, 2021, an increase of $362.1 million from the $(111.8) million of net cash used in investing activities from continuing operations for the year ended December 31, 2020. The increase in cash provided by investing activities was primarily due to proceeds from the sale of our HMH Books & Media business of $340.6 million and from the sale of assets of $5.0 million during 2021 and to a lesser extent, lower capital investing expenditures related to pre-publication costs and property, plant, and equipment of $16.5 million in connection with planned reductions in content development.
Net cash used in investing activities from continuing operations was $(111.8) million for the year ended December 31, 2020, an increase of $16.3 million from the year ended December 31, 2019. The increase in cash used in investing activities was primarily due to lower net proceeds from sales and maturities of short-term
investments of $50.0 million compared to 2019, offset by lower capital investing expenditures related to pre-publication costs and property, plant, and equipment of $27.5 million in connection with previously planned reductions in content development, and by the acquisition of a business for $5.4 million along with an investment in preferred stock of $0.8 million in 2019.
Financing activities
Net cash used in financing activities, which is all continuing operations, was $335.4 million for the year ended December 31, 2021, an increase of $317.3 million from the $18.1 million used in financing activities for the year ended December 31, 2020. The increase in cash used in financing activities was primarily due to a net increase in our debt repayments of $323.0 million primarily from the proceeds of the sale of our HMH Books & Media business. Partially offsetting the increase was net collections under the transition services agreement of $6.2 million in 2021.
Net cash used in financing activities, which is all continuing operations, was $18.1 million for the year ended December 31, 2020, a decrease of $97.5 million from the year ended December 31, 2019. The decrease in cash used in financing activities was primarily due to a reduction in net debt principal repayments of $88.3 million in connection with the 2019 Refinancing along with payments of financing fees of $8.5 million related to our notes offering, term loan facility and revolving credit facility amendments in 2019. Additionally, there was a decrease in tax withholding payments related to net share settlements of restricted stock units of $2.0 million partially offset by lower net collections under the transition services agreement of $1.1 million.
Debt
Under each of the notes, the term loan facility and the revolving credit facility, Houghton Mifflin Harcourt Publishers Inc., Houghton Mifflin Harcourt Publishing Company and HMH Publishers LLC are the borrowers (collectively, the “Borrowers”), and Citibank, N.A. acts as both the administrative agent and the collateral agent.
The obligations under the senior secured notes, the term loan facility and the revolving credit facility are guaranteed by the Company and each of its direct and indirect for-profit domestic subsidiaries (other than the Borrowers) (collectively, the “Guarantors”) and are secured by all capital stock and other equity interests of the Borrowers and the Guarantors and substantially all of the other tangible and intangible assets of the Borrowers and the Guarantors, including, without limitation, receivables, inventory, equipment, contract rights, securities, patents, trademarks, other intellectual property, cash, bank accounts and securities accounts and owned real estate. The revolving credit facility is secured by first priority liens on receivables, inventory, deposit accounts, securities accounts, instruments, chattel paper and other assets related to the foregoing (the “Revolving First Lien Collateral”), and second priority liens on the collateral which secures the term loan facility on a first priority basis. The term loan facility is secured by first priority liens on the capital stock and other equity interests of the Borrowers and the Guarantors, equipment, owned real estate, trademarks and other intellectual property, general intangibles that are not Revolving First Lien Collateral and other assets related to the foregoing, and second priority liens on the Revolving First Lien Collateral.
Senior Secured Notes
On November 22, 2019, we completed the sale of $306.0 million in aggregate principal amount of 9.0% Senior Secured Notes due 2025 (the “notes”) in a private placement to qualified institutional buyers under Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to persons outside the United States pursuant to Regulation S under the Securities Act. The notes mature on February 15, 2025 and bear interest at a rate of 9.0% per annum. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2020. As of December 31, 2021, we had $303.3 million ($296.6 million, net of discount and issuance costs) outstanding under the notes.
We may redeem all or a portion of the notes at redemption prices as described in the notes. We redeemed $2.7 million of the notes during the second quarter of 2021 utilizing proceeds from the sale of the HMH Books & Media business.
The notes do not require us to comply with financial maintenance covenants. We are currently required to meet certain incurrence based financial covenants as defined under the notes.
The notes are subject to customary events of default. If an event of default occurs and is continuing, the administrative agent may, or at the request of certain required lenders shall, accelerate the obligations outstanding under the notes.
Term Loan Facility
On November 22, 2019, we entered into a second amended and restated term loan credit agreement for an aggregate principal amount of $380.0 million (the “term loan facility”). As of December 31, 2021, we had $21.7 million ($21.0 million, net of discount and issuance costs) outstanding under the term loan facility.
The term loan facility matures on November 22, 2024 and the interest rate per annum is equal to, at the option of the Company, either (a) LIBOR plus a margin of 6.25% or (b) an alternate base rate plus a margin of 5.25%. As of December 31, 2021, the interest rate on the term loan facility was 7.25%.
The term loan facility was required to be repaid in quarterly installments of approximately $4.8 million with the balance being payable on the maturity date. We repaid $334.6 million of the term loan facility during the second quarter of 2021 utilizing proceeds from the sale of the HMH Books & Media business. There are no future quarterly repayment installments required and the balance is payable on the maturity date; however, we are not prohibited from continuing to make debt payments and may elect to do so.
The term loan facility does not require us to comply with financial maintenance covenants. We are currently required to meet certain incurrence based financial covenants as defined under our term loan facility.
The term loan facility contains customary mandatory prepayment requirements, including with respect to excess cash flow, proceeds from certain asset sales or dispositions of property, and proceeds from certain incurrences of indebtedness. The term loan facility permits the Company to voluntarily prepay outstanding amounts at any time without premium or penalty, other than customary breakage costs with respect to LIBOR loans.
The term loan facility is subject to usual and customary conditions, representations, warranties and covenants, including restrictions on additional indebtedness, liens, investments, mergers, acquisitions, asset dispositions, dividends to stockholders, repurchase or redemption of our stock, transactions with affiliates and other matters. The term loan facility is subject to customary events of default. If an event of default occurs and is continuing, the administrative agent may, or at the request of certain required lenders shall, accelerate the obligations outstanding under the term loan facility.
We are subject to an excess cash flow provision under our term loan facility which is predicated upon our leverage ratio and cash flow.
Revolving Credit Facility
On November 22, 2019, we entered into a second amended and restated revolving credit agreement that provides borrowing availability in an amount equal to the lesser of either $250.0 million or a borrowing base that is computed monthly or weekly and comprised of the Borrowers’ and the Guarantors’ eligible inventory and receivables (the “revolving credit facility”).
The revolving credit facility includes a letter of credit subfacility of $50.0 million, a swingline subfacility of $20.0 million and the option to expand the facility by up to $100.0 million in the aggregate under certain specified conditions. The amount of any outstanding letters of credit reduces borrowing availability under the revolving credit facility on a dollar-for-dollar basis. As of December 31, 2021, there were no amounts outstanding on the revolving credit facility. As of December 31, 2021, we had approximately $16.1 million of outstanding letters of credit and approximately $64.9 million of borrowing availability under the revolving credit facility. As of February 24, 2022, there were no amounts outstanding under the revolving credit facility.
The revolving credit facility has a five-year term and matures on November 22, 2024. The interest rate applicable to borrowings under the facility is based, at our election, on LIBOR plus a margin between 1.50% and 2.00% or an alternative base rate plus a margin between 0.50% and 1.00%, which margins are based on average daily availability. The revolving credit facility may be prepaid, in whole or in part, at any time, without premium.
The revolving credit facility requires us to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 on a trailing four-quarter basis for periods in which excess availability under the revolving credit facility is less than the greater of $25.0 million and 12.5% of the lesser of the total commitment and the borrowing base then in effect, or less than $20.0 million if certain conditions are met. The minimum fixed charge coverage ratio was not applicable under the facility as of December 31, 2021, due to our level of borrowing availability.
The revolving credit facility is subject to usual and customary conditions, representations, warranties and covenants, including restrictions on additional indebtedness, liens, investments, mergers, acquisitions, asset dispositions, dividends to stockholders, repurchase or redemption of our stock, transactions with affiliates and other matters. The revolving credit facility is subject to customary events of default. If an event of default occurs and is continuing, the administrative agent may, or at the request of certain required lenders shall, accelerate the obligations outstanding under the revolving credit facility.
General
We had $463.1 million of cash and cash equivalents and no short-term investments at December 31, 2021. We had $281.2 million of cash and cash equivalents and no short-term investments at December 31, 2020.
Our business is impacted by the inherent seasonality of the academic calendar, which typically results in a cash flow usage in the first half of the year and a cash flow generation in the second half of the year. We expect our net cash provided by 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. Our primary credit facilities do not require us to comply with financial maintenance covenants.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates, assumptions and judgments by management that affect the reported amounts of assets, liabilities, net sales, expenses and related disclosure of contingent assets and liabilities in the amounts reported in the financial statements and accompanying notes. On an on-going basis, we evaluate our estimates and assumptions, including, but not limited to, book returns and variable consideration, deferred revenue and related standalone selling price estimates, allowance for bad debts, recoverability of advances to authors, valuation of inventory, financial instruments valuation, income taxes, pensions and other postretirement benefits obligations, contingencies, litigation, depreciation and amortization periods, and the recoverability of long-term assets such as property, plant and equipment, capitalized pre-publication costs, other identified intangibles, and goodwill. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. For a complete description of our significant accounting policies, see Note 3 to the consolidated financial statements. The following policies and account descriptions include those identified as critical to our business operations and the understanding of our results of operations.
The critical accounting estimates used in the preparation of the Company’s consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results may differ from these estimates due to the uncertainty around the magnitude and duration of the COVID-19 pandemic, as well as other factors.
The following are the critical accounting policies and estimates:
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of the new revenue recognition accounting standard, we perform the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services to a customer. To the extent the transaction price includes variable consideration, which generally reflects estimated future product returns, we estimate the amount of variable consideration that should be included in the transaction price utilizing the expected value method to which we expect to be entitled. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based largely on all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
We estimate the collectability of contracts upon execution. For contracts with rights of return, the transaction price is adjusted to reflect the estimated returns for the arrangement on these sales and is made at the time of sale based on historical experience by product line or customer. The transaction prices allocated are adjusted to reflect expected returns and are based on historical return rates and sales patterns. Shipping and handling fees charged to customers are included in net sales.
When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. We do not assess whether a significant financing component exists if the period between when we perform our obligations under the contract and when the customer pays is one year or less. Significant financing components’ income is included in interest income.
Contracts are sometimes modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Generally, contract modifications are for products or services that are not distinct from the existing contract due to the inability to use, consume or sell the products or services on their own to generate economic benefits and are accounted for as if they were part of that existing contract. The effect of such a contract modification on the transaction price and measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
Physical product revenue is recognized when the customer obtains control of our product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Revenues from static digital content commence upon delivery to the customer of the digital entitlement that is required to access and download the content and is typically recognized at a point in time. Revenues from subscription software licenses, related hosting services and product support are recognized evenly over the license term as we believe this best represents the pattern of transfer to the customer. The perpetual software licenses provide the customer with a functional license to our products and their related revenues are recognized when the customer receives entitlement to the software. Revenue associated with the digital content hosting services related to perpetual licenses is recognized evenly over the contract term. The delivery/start date is the date access to the hosted content is granted. For the technical services provided to customers in connection with the software license, we
recognize revenue upon delivery of the services. As the invoices are based on each day of service, this is directly linked to the transfer of benefit to the customer.
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. We enter into certain contracts that have multiple performance obligations, one or more of which may be delivered subsequent to the delivery of other performance obligations. These performance obligations may include print and digital media, professional development services, training, software licenses, access to hosted content, and various services related to the software including but not limited to hosting, maintenance and support, and implementation. We allocate the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. We determine standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions and internally approved standard pricing discounts related to the performance obligations. Generally, our performance obligations include print and digital textbooks and instructional materials, formative assessment materials and multimedia instructional programs; access to hosted content; and services including professional development, consulting and training. Our contracts may also contain software performance obligations including perpetual and subscription-based licenses and software maintenance and support services.
Deferred Revenue
Our contract liabilities consist of advance payments and billings in excess of revenue recognized and are classified as deferred revenue on our consolidated balance sheets. Our contract assets and liabilities are accounted for and presented on a net basis as either a contract asset or contract liability at the end of each reporting period. We classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that balance. If additional advances are received on those contracts in subsequent periods, we assume all revenue recognized in the reporting period first applies to the beginning contract liability as opposed to a portion applying to the new advances for the period.
Allowance for Doubtful Accounts and Reserves for Book Returns
Accounts receivable include amounts billed and currently due from customers and are recorded net of allowances for doubtful accounts and reserves for book returns. In the normal course of business, we extend credit to customers that satisfy predefined criteria. We estimate the collectability of our receivables and develop those estimates to reflect the risk of credit loss. Allowances for doubtful accounts are established through the evaluation of accounts receivable aging, prior collection experience, current conditions and reasonable and supportable forecasts of the economic conditions that will exist through the contractual life of the financial asset. We monitor our ongoing credit exposure through an active review of collection trends and specific facts and circumstances. Our activities include monitoring the timeliness of payment collection and performing timely account reconciliations. At the time we determine that a receivable balance, or any portion thereof, is deemed to be permanently uncollectible, the balance is written off. Reserves for book returns are based on historical return rates and sales patterns. We determine the required reserves by segregating our returns into the applicable product or sales channel pools. Returns in the K-12 market have been historically low. We have experienced higher returns with respect to sales to resellers and international sales, which all result in a greater degree of risk and subjectivity when establishing the appropriate level of reserves for this customer base. We estimate the amount of returns using the expected value method to reduce transaction price at the time of the sale. The allowance for doubtful accounts and reserve for returns are reported as reductions of the accounts receivable balance and amounted to $3.5 million and $4.1 million, and $3.8 million and $4.6 million as of December 31, 2021 and 2020, respectively.
Inventories
Inventories are substantially stated at the lower of weighted average cost or net realizable value. The level of obsolete and excess inventory is estimated on a program or title-level basis by comparing the number of units in stock with the expected future demand. The expected future demand of a program or title is determined by the copyright year, recent sales history, the future sales forecast, known forward-looking trends including our development cycle to replace the title or program and competing titles or programs. A change in sales trends, or
strategic direction of our product development, could affect the estimated reserve. The reserve for excess or obsolete inventory is reported as a reduction of the inventories balance and amounted to $58.6 million and $61.2 million as of December 31, 2021 and 2020, respectively.
Pre-publication Costs
Pre-publication costs are capitalized and are primarily amortized from the year of sale over five years using the sum-of-the-years-digits method, which is an accelerated method for calculating an asset’s amortization. Under this method, the amortization expense recorded for a pre-publication cost asset is approximately 33% (year 1), 27% (year 2), 20% (year 3), 13% (year 4) and 7% (year 5). We utilize this policy for all pre-publication costs, except the content of certain intervention products acquired in 2015, which we amortize over 7 years using an accelerated amortization method. The amortization methods and periods chosen best reflects the pattern of expected sales generated from individual titles or programs. We periodically evaluate the remaining lives and recoverability of capitalized pre-publication costs, which are often dependent upon program acceptance by state adoption authorities.
Amortization expense related to pre-publication costs for the years ended December 31, 2021, 2020 and 2019 were $108.6 million, $125.8 million and $149.3 million, respectively.
For the years ended December 31, 2021, 2020 and 2019, no pre-publication costs were deemed to be impaired.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets (certain tradenames) are not amortized, but are reviewed at least annually for impairment or earlier, if an indication of impairment exists. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions may include various valuation techniques including an evaluation of our market capitalization and peer company multiples depending on the best approximation of fair value in the current social and economic environment, net sales growth rates and operating margins, risk-adjusted discount rates, future economic and market conditions, the determination of appropriate market comparables as well as the fair value of certain individual assets and liabilities.
We have the option of first assessing qualitative factors to determine whether it is necessary to perform a quantitative impairment test for goodwill or we can perform the quantitative impairment test without performing the qualitative assessment. In performing the qualitative assessment, we consider certain events and circumstances specific to the reporting unit and to the entity as a whole, such as macroeconomic conditions, industry and market considerations, overall financial performance and cost factors when evaluating whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount.
If the results of the quantitative test indicate the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, goodwill is deemed impaired and is written down to the extent of the difference between the fair value of the reporting unit and the carrying value.
We estimate the total fair value of the reporting unit by using one or more various valuation techniques including an evaluation of our market capitalization and peer company multiples depending on the best approximation of fair value of the reporting unit in the current social and economic environment. With regard to indefinite-lived intangible assets, which includes only the Houghton Mifflin Harcourt tradename, the recoverability is evaluated using a one-step process whereby we determine the fair value by asset and then compare it to its carrying value to determine if the asset is impaired. We estimate the fair value by preparing a relief-from-royalty discounted cash flow analysis using forward looking revenue projections. The significant assumptions used in discounted cash flow analysis include: future net sales, a long-term growth rate, a royalty rate and a discount rate used to present value future cash flows. The discount rate is based on the weighted-average cost of capital method at the date of the evaluation. Adverse changes in our market capitalization could give rise to an impairment.
We completed our annual goodwill impairment tests as of October 1, 2021 and 2020. For October 1, 2021, we assessed qualitative factors and determined it was not necessary to perform a quantitative impairment test for goodwill. The fair value of the reporting unit was in excess of its carrying value by approximately 18% as of October 1, 2020. There was no goodwill impairment for the years ended December 31, 2021 and 2019. We will continue to monitor and evaluate the carrying value of goodwill. If market and economic conditions or business performance deteriorate, this could increase the likelihood of us recording an impairment charge.
We recorded a goodwill impairment charge of $279.0 million for the year ended December 31, 2020. Refer to Note 2 of the consolidated financial statements for a discussion of the factors and circumstances leading to the goodwill impairment.
We completed our annual indefinite-lived asset impairment tests as of October 1, 2021 and 2020. No indefinite-lived intangible assets were deemed to be impaired for the years ended December 31, 2021, 2020 and 2019. The fair value significantly exceeded its carrying value as of October 1, 2021 and was in excess of its carrying value by approximately 18% as of October 1, 2020.
Impact of Inflation and Changing Prices
We believe that inflation has not had a material impact on our results of operations during the years ended December 31, 2021, 2020 and 2019. We cannot be sure that future inflation will not have an adverse impact on our operating results and financial condition in future periods. Our ability to adjust selling prices has always been limited by competitive factors and long-term contractual arrangements which either prohibit price increases or limit the amount by which prices may be increased. Further, a weak domestic economy at a time of low inflation could cause lower tax receipts at the state and local level, and the funding and buying patterns for textbooks and other educational materials could be adversely affected.
Covenant Compliance
As of December 31, 2021, we were in compliance with all of our debt covenants and we expect to be in compliance over the next twelve months.
We are currently required to meet certain incurrence-based financial covenants as defined under our term loan facility, notes and revolving credit facility. We have incurrence based financial covenants primarily pertaining to a maximum leverage ratio and fixed charge coverage ratio. A breach of any of these covenants, ratios, tests or restrictions, as applicable, for which a waiver is not obtained could result in an event of default, in which case our lenders could elect to declare all amounts outstanding to be immediately due and payable and result in a cross-default under other arrangements containing such provisions. A default would permit lenders to accelerate the maturity for the debt under these agreements and to foreclose upon any collateral securing the debt owed to these lenders and to terminate any commitments of these lenders to lend to us. If the lenders accelerate the payment of the indebtedness, our assets may not be sufficient to repay in full the indebtedness and any other indebtedness that would become due as a result of any acceleration. Further, in such an event, the lenders would not be required to make further loans to us, and assuming similar facilities were not established and we are unable to obtain replacement financing, it would materially affect our liquidity and results of operations.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from foreign currency exchange rates and interest rates, which could affect operating results, financial position and cash flows. We manage exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments. These derivative financial instruments are utilized to hedge economic exposures as well as reduce our earnings and cash flow volatility resulting from shifts in market rates. As permitted, we may designate certain of these derivative contracts for hedge accounting treatment in accordance with authoritative guidance regarding accounting for derivative instruments and hedging activities. However, certain of these instruments may not qualify for, or we may choose not to elect, hedge accounting treatment and, accordingly, the results of our operations may be exposed to some level of volatility. Volatility in our results of operations will vary with the type and amount of derivative hedges outstanding, as well as fluctuations in the currency and interest rate market during the period. Periodically, we may enter into derivative contracts, including interest rate swap agreements and interest rate caps and collars to manage interest rate exposures, and foreign currency spot, forward, swap and option contracts to manage foreign currency exposures. The fair market values of all of these derivative contracts change with fluctuations in interest rates and/or currency rates and are designed so that any changes in their values are offset by changes in the values of the underlying exposures. Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes.
By their nature, all derivative instruments involve, to varying degrees, elements of market and credit risk not recognized in our financial statements. The market risk associated with these instruments resulting from currency exchange and interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. Our policy is to deal with counterparties having a single A or better credit rating at the time of the execution. We manage our exposure to counterparty risk of derivative instruments by entering into contracts with a diversified group of major financial institutions and by actively monitoring outstanding positions.
We continue to review liquidity sufficiency by performing various stress test scenarios, such as cash flow forecasting, which considers hypothetical interest rate movements. Furthermore, we continue to closely monitor current events and the financial institutions that support our credit facility, including monitoring their credit ratings and outlooks, credit default swap levels, capital raising and merger activity.
As of December 31, 2021, we had $21.7 million ($21.0 million, net of discount and issuance costs) of aggregate principal amount indebtedness outstanding under our term loan facility that bears interest at a variable rate. An increase or decrease of 1% in the interest rate will change our interest expense by approximately $0.2 million on an annual basis. We also have up to $250.0 million of borrowing availability, subject to borrowing base availability, under our revolving credit facility, and borrowings under the revolving credit facility bear interest at a variable rate. As of December 31, 2021, there were no amounts outstanding on the revolving credit facility. Assuming that the revolving credit facility is fully drawn, an increase or decrease of 1% in the interest rate will change our interest expense associated with the revolving credit facility by $2.5 million on an annual basis.
Our interest rate risk relates primarily to U.S. dollar borrowings partially offset by U.S. dollar cash investments. We have historically used interest rate derivative instruments to manage our earnings and cash flow exposure to changes in interest rates. On August 17, 2015, we entered into interest rate derivative contracts with various financial institutions having an aggregate notional amount of $400.0 million to convert floating rate debt into fixed rate debt, which we designated as cash flow hedges. These contracts were effective beginning September 30, 2016 and matured on July 22, 2020. We have no outstanding interest rate derivative contracts as of December 31, 2021.
We conduct various digital development activities in Ireland, and as such, our cash flows and costs are subject to fluctuations from changes in foreign currency exchange rates. We manage our exposures to this market risk through the use of short-term foreign exchange forward and option contracts, when deemed appropriate, which were not significant as of December 31, 2021 and 2020. We do not enter into derivative transactions or use other financial instruments for trading or speculative purposes.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
Auditor Firm Id:
Auditor Name:
PricewaterhouseCoopers LLP
Auditor Location:
Boston, MA, USA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Houghton Mifflin Harcourt Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Houghton Mifflin Harcourt Company and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Indefinite-Lived Intangible Asset Impairment Analysis - Trademarks and Tradenames
As described in Notes 2, 3, and 6 to the consolidated financial statements, as of December 31, 2021, the Company’s indefinite-lived intangible asset balance was $161.0 million and relates to trademarks and tradenames. Management performs an impairment test to assess the carrying value of indefinite-lived intangible assets on an annual basis (as of October 1) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. The recoverability was evaluated using a one-step process whereby management determined the fair value by asset and then compared it to its carrying value to determine if the asset was impaired. Management estimated the fair value by preparing a relief-from-royalty discounted cash flow analysis using forward looking revenue projections. The significant assumptions used in the discounted cash flow analysis included: future net sales, a long-term growth rate, a royalty rate, and a discount rate.
The principal considerations for our determination that performing procedures relating to the indefinite-lived intangible asset impairment analysis for trademarks and tradenames is a critical audit matter are the significant judgment by management when developing the fair value estimates of the trademarks and tradenames, which in turn led to significant auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s significant assumptions related to future net sales, the long-term growth rate, the royalty rate, and the discount rate. Also, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s trademarks and tradenames impairment analysis, including controls over the valuation of the trademarks and tradenames. These procedures also included, among others, testing management’s process to develop the fair value of trademarks and tradenames by (i) assessing the appropriateness of management’s relief-from-royalty discounted cash flow analysis for estimating fair value of the trademarks and tradenames, (ii) testing the completeness and accuracy of the underlying data used in the analysis, and (iii) evaluating the significant assumptions used by management related to future net sales, the long-term growth rate, the royalty rate, and the discount rate. Evaluating management’s assumptions related to future net sales and the long-term growth rate involved evaluating whether the assumptions used by management were reasonable considering the past performance of the business, relevant market data, and whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the Company’s discounted cash flow analysis and significant assumptions related to the royalty rate and the discount rate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 24, 2022
We have served as the Company’s auditor since 2003.
Houghton Mifflin Harcourt Company
Consolidated Balance Sheets
December 31,
(in thousands of dollars, except share information)
Assets
Current assets
Cash and cash equivalents
$
463,131
$
281,200
Accounts receivable, net of allowances for bad debts and book returns of
$7.5 million and $8.4 million, respectively
135,495
88,830
Inventories
117,469
145,553
Prepaid expenses and other assets
43,339
19,276
Assets of discontinued operations
-
160,053
Total current assets
759,434
694,912
Property, plant, and equipment, net
80,445
88,801
Pre-publication costs, net
150,652
202,820
Goodwill
437,977
437,977
Other intangible assets, net
360,290
402,484
Operating lease assets
110,572
126,850
Deferred income taxes
4,997
2,415
Deferred commissions
35,083
30,659
Other assets
34,830
34,208
Total assets
$
1,974,280
$
2,021,126
Liabilities and Stockholders’ Equity
Current liabilities
Current portion of long-term debt
$
-
$
19,000
Accounts payable
37,449
38,751
Royalties payable
45,166
34,765
Salaries, wages, and commissions payable
41,253
21,723
Deferred revenue
357,864
342,605
Interest payable
11,235
11,017
Severance and other charges
19,590
Accrued pension benefits
1,593
Accrued postretirement benefits
1,618
1,555
Operating lease liabilities
7,539
9,669
Other liabilities
43,297
22,912
Liabilities of discontinued operations
-
30,662
Total current liabilities
546,011
553,842
Long-term debt, net of discount and issuance costs
317,579
624,692
Operating lease liabilities
127,426
132,014
Long-term deferred revenue
606,811
562,679
Accrued pension benefits
8,484
24,061
Accrued postretirement benefits
15,940
16,566
Deferred income taxes
21,393
16,411
Other liabilities
Total liabilities
1,643,856
1,930,663
Commitments and contingencies (Note 14)
Stockholders’ equity
Preferred stock, $0.01 par value: 20,000,000 shares authorized; no shares issued
and outstanding at December 31, 2021 and 2020
-
-
Common stock, $0.01 par value: 380,000,000 shares authorized; 152,267,951 and
150,459,034 shares issued at December 31, 2021 and 2020, respectively; 127,690,917 and 125,882,000 shares outstanding at December 31, 2021 and 2020, respectively
1,523
1,505
Treasury stock, 24,577,034 shares as of December 31, 2021 and 2020, respectively, at cost
(518,030
)
(518,030
)
Capital in excess of par value
4,931,357
4,918,542
Accumulated deficit
(4,042,252
)
(4,255,830
)
Accumulated other comprehensive loss
(42,174
)
(55,724
)
Total stockholders’ equity
330,424
90,463
Total liabilities and stockholders’ equity
$
1,974,280
$
2,021,126
The accompanying notes are an integral part of these consolidated financial statements.
Houghton Mifflin Harcourt Company
Consolidated Statements of Operations
Years Ended December 31,
(in thousands of dollars, except share and per share data)
Net sales
$
1,050,802
$
840,454
$
1,211,790
Costs and expenses
Cost of sales, excluding publishing rights and pre-publication amortization
398,706
370,586
549,886
Publishing rights amortization
10,688
14,800
20,611
Pre-publication amortization
108,621
125,838
149,298
Cost of sales
518,015
511,224
719,795
Selling and administrative
445,660
442,355
619,811
Other intangible assets amortization
30,257
23,917
20,353
Impairment charge for goodwill
-
279,000
-
Restructuring/severance and other charges
12,349
31,874
20,692
Gain on sale of assets
(3,661
)
-
-
Operating income (loss)
48,182
(447,916
)
(168,861
)
Other income (expense)
Retirement benefits non-service income (expense)
(856
)
Interest expense
(34,998
)
(37,931
)
(29,770
)
Interest income
3,157
Change in fair value of derivative instruments
(1,221
)
(899
)
Gain on investments
1,442
2,091
-
Income from transition services agreement
3,664
-
4,248
Loss on extinguishment of debt
(12,505
)
-
(4,363
)
Income (loss) from continuing operations before taxes
4,746
(483,041
)
(196,321
)
Income tax expense (benefit) for continuing operations
2,686
(12,351
)
3,854
Income (loss) from continuing operations
2,060
(470,690
)
(200,175
)
Loss from discontinued operations, net of tax
(1,005
)
(9,148
)
(13,658
)
Gain on sale of discontinued operations, net of tax
212,523
-
-
Income (loss) from discontinued operations, net of tax
211,518
(9,148
)
(13,658
)
Net income (loss)
$
213,578
$
(479,838
)
$
(213,833
)
Net income (loss) per share attributable to common stockholders
Basic:
Continuing operations
$
0.02
$
(3.75
)
$
(1.61
)
Discontinued operations
1.66
(0.07
)
(0.11
)
Net income (loss)
$
1.68
$
(3.82
)
$
(1.72
)
Diluted:
Continuing operations
$
0.02
$
(3.75
)
$
(1.61
)
Discontinued operations
1.61
(0.07
)
(0.11
)
Net income (loss)
$
1.63
$
(3.82
)
$
(1.72
)
Weighted average shares outstanding
Basic
127,337,815
125,455,487
124,152,984
Diluted
131,402,866
125,455,487
124,152,984
The accompanying notes are an integral part of these consolidated financial statements.
Houghton Mifflin Harcourt Company
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31,
(in thousands of dollars)
Net income (loss)
$
213,578
$
(479,838
)
$
(213,833
)
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments, net of tax
(1,050
)
(230
)
(511
)
Net change in pension and benefit plan liabilities, net of tax
14,600
(9,209
)
1,800
Unrealized gain on short-term investments, net of tax
-
-
Net change in unrealized gain (loss) on derivative financial
instruments, net of tax
-
(3,386
)
Other comprehensive income (loss), net of taxes
13,550
(8,452
)
(2,088
)
Comprehensive income (loss)
$
227,128
$
(488,290
)
$
(215,921
)
The accompanying notes are an integral part of these consolidated financial statements.
Houghton Mifflin Harcourt Company
Consolidated Statements of Cash Flows
Years Ended December 31,
(in thousands of dollars)
Cash flows from operating activities
Net income (loss)
$
213,578
$
(479,838
)
$
(213,833
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Loss from discontinued operations, net of tax
1,005
9,148
13,658
Gain on sale of discontinued operations, net of tax
(212,523
)
-
-
Gain on sale of assets
(3,661
)
-
-
Depreciation and amortization expense
194,433
214,429
250,970
Operating lease assets, amortization and impairments
16,249
5,397
15,949
Amortization of debt discount and deferred financing costs
2,705
2,636
2,814
Gain on investments
(1,942
)
(2,091
)
-
Deferred income taxes
2,400
(14,355
)
4,535
Stock-based compensation expense
12,217
11,160
13,196
Write-off of property, plant, and equipment
1,606
-
-
Loss on extinguishment of debt
12,505
-
4,363
Impairment charge for goodwill
-
279,000
-
Change in fair value of derivative instruments
1,221
(672
)
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable
(28,928
)
32,369
21,856
Inventories
28,083
42,936
(29,509
)
Other assets
(28,895
)
(4,860
)
(14,189
)
Accounts payable and accrued expenses
18,788
(34,039
)
(15,354
)
Royalties payable and author advances, net
13,247
(18,095
)
6,873
Deferred revenue
59,391
57,178
200,473
Interest payable
7,191
3,690
Severance and other charges
(19,185
)
7,183
10,631
Accrued pension and postretirement benefits
(2,946
)
3,443
(4,800
)
Operating lease liabilities
(6,687
)
(1,996
)
(17,281
)
Other liabilities
(9,090
)
(9,639
)
(6,401
)
Net cash provided by operating activities - continuing operations
263,789
106,485
248,540
Net cash provided by operating activities - discontinued operations
3,880
8,763
6,435
Net cash provided by operating activities
267,669
115,248
254,975
Cash flows from investing activities
Proceeds from sales and maturities of short-term investments
-
-
50,000
Additions to pre-publication costs
(56,210
)
(60,872
)
(102,457
)
Additions to property, plant, and equipment
(39,093
)
(50,940
)
(36,832
)
Proceeds from sale of business
340,593
-
-
Acquisition of business, net of cash acquired
-
-
(5,447
)
Investment in preferred stock
-
-
(750
)
Proceeds from sale of assets
5,000
-
-
Net cash provided by (used in) investing activities - continuing operations
250,290
(111,812
)
(95,486
)
Net cash used in investing activities - discontinued operations
(647
)
(459
)
(834
)
Net cash provided by (used in) investing activities
249,643
(112,271
)
(96,320
)
Cash flows from financing activities
Proceeds from term loan, net of discount
-
-
364,800
Proceeds from senior secured notes, net of discount
-
-
299,880
Borrowings under revolving credit facility
-
150,000
60,000
Payments of revolving credit facility
-
(150,000
)
(60,000
)
Payments of long-term debt
(342,031
)
(19,000
)
(772,000
)
Payments of deferred financing fees
-
-
(8,493
)
Tax withholding payments related to net share settlements of restricted stock units
-
(48
)
(2,018
)
Issuance of common stock under employee stock purchase plan
1,028
Net collections under transition services agreement
6,240
-
1,136
Net cash used in financing activities - continuing operations
(335,381
)
(18,130
)
(115,667
)
Net increase (decrease) in cash and cash equivalents
181,931
(15,153
)
42,988
Cash and cash equivalents at beginning of the period
281,200
296,353
253,365
Cash and cash equivalents at end of the period
$
463,131
$
281,200
$
296,353
Supplemental disclosure of cash flow information
Interest paid - continuing operations
$
31,148
$
27,385
$
23,884
Interest paid - discontinued operations
9,143
25,557
17,175
Income taxes paid
1,571
1,883
Operating lease assets obtained in exchange for operating lease liabilities
7,911
6,889
Non-cash investing activities
Pre-publication costs included in accounts payable and accruals
$
5,556
$
5,282
$
5,480
Property, plant, and equipment included in accounts payable and accruals
1,025
2,002
3,039
The accompanying notes are an integral part of these consolidated financial statements.
Houghton Mifflin Harcourt Company
Consolidated Statements of Stockholders’ Equity
Capital
Accumulated
Common Stock
in excess
Other
(in thousands of dollars, except share
Shares
of Par
Accumulated
Comprehensive
information)
Issued
Par Value
Treasury Stock
Value
Deficit
Loss
Total
Balance at December 31, 2018
148,164,854
$
1,481
$
(518,030
)
$
4,893,174
$
(3,562,971
)
$
(45,184
)
$
768,470
Net loss
-
-
-
-
(213,833
)
-
(213,833
)
Other comprehensive loss, net of
tax
-
-
-
-
-
(2,088
)
(2,088
)
Effects of adoption of new lease accounting standard
-
-
-
-
-
Issuance of common stock for
employee purchase plan
186,114
-
1,436
-
-
1,438
Issuance of common stock for
vesting of restricted stock units
577,360
-
(6
)
-
-
-
Stock withheld to cover tax
withholdings requirements upon
vesting of restricted stock units
-
-
-
(2,018
)
-
-
(2,018
)
Stock-based compensation expense
-
-
-
13,579
-
-
13,579
Balance at December 31, 2019
148,928,328
$
1,489
$
(518,030
)
$
4,906,165
$
(3,775,992
)
$
(47,272
)
$
566,360
Net loss
-
-
-
-
(479,838
)
-
(479,838
)
Other comprehensive loss, net of
tax
-
-
-
-
-
(8,452
)
(8,452
)
Issuance of common stock for
employee purchase plan
380,757
-
1,243
-
-
1,247
Issuance of common stock for
vesting of restricted stock units
1,149,949
-
(12
)
-
-
-
Stock withheld to cover tax
withholdings requirements upon
vesting of restricted stock units
-
-
-
(48
)
-
-
(48
)
Stock-based compensation expense
-
-
-
11,194
-
-
11,194
Balance at December 31, 2020
150,459,034
$
1,505
$
(518,030
)
$
4,918,542
$
(4,255,830
)
$
(55,724
)
$
90,463
Net income
-
-
-
-
213,578
-
213,578
Other comprehensive income, net of
tax
-
-
-
-
-
13,550
13,550
Issuance of common stock for
employee purchase plan
239,144
-
-
-
Issuance of common stock for
vesting of restricted stock units
1,569,773
-
(16
)
-
-
-
Stock-based compensation expense
-
-
-
12,185
-
-
12,185
Balance at December 31, 2021
152,267,951
$
1,523
$
(518,030
)
$
4,931,357
$
(4,042,252
)
$
(42,174
)
$
330,424
The accompanying notes are an integral part of these consolidated financial statements.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
1.
Basis of Presentation
Houghton Mifflin Harcourt Company (“HMH,” “Houghton Mifflin Harcourt,” “we,” “us,” “our,” or the “Company”) is a learning technology company, committed to delivering connected solutions that engage learners, empower educators and improve student outcomes. As a leading provider of Kindergarten through 12th grade (“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 estimates that it serves more than 50 million students and three million educators in 150 countries.
We focus on the K-12 market and, in the United States, we are a market leader. We specialize in comprehensive core curriculum, supplemental and intervention solutions, and we provide ongoing support in professional learning and coaching for educators and administrators. Our offerings are rooted in learning science, and we work with research partners, universities and third-party organizations as we design, build, implement and iterate our offerings to maximize their effectiveness. We are purposeful about innovation, leveraging technology to create engaging and immersive experiences designed to deepen learning experiences for students and to extend teachers’ capabilities so that they can focus on making meaningful connections with their students.
Our diverse portfolio enables us to help ensure that every student and teacher has the tools needed for success. We are able to build deep partnerships with school districts and leverage the scope of our offerings to provide holistic solutions at scale with the support of our far-reaching sales force and talented field-based specialists and consultants. We provide print, digital, and blended print/digital solutions that are tailored to a district’s needs, goals and technological readiness.
The consolidated financial statements of HMH include the accounts of all of our wholly-owned subsidiaries as of December 31, 2021 and 2020 and for the periods ended December 31, 2021, 2020 and 2019.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our accompanying consolidated financial statements include the results of operations of the Company and our wholly-owned subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.
On May 10, 2021, we completed the sale of all of the assets and liabilities used primarily in our HMH Books & Media segment, our consumer publishing business. We determined that the HMH Books & Media business met the “held for sale” criteria and the “discontinued operations” criteria in accordance with Financial Accounting Standard Boards (“FASB”) Accounting Standards Codification (“ASC”) 205, Presentation of Financial Statements (“FASB ASC 205”) as of March 31, 2021 due to its relative size and strategic rationale. The Consolidated Balance Sheets, Consolidated Statements of Operations and Cash Flows, and the notes to the Consolidated Financial Statements were restated for all periods presented to reflect the discontinuation of the HMH Books & Media business, in accordance with FASB ASC 205. The discussion in the notes to these Consolidated Financial Statements, unless otherwise noted, relate solely to our continuing operations.
Subsequent to the sale of the HMH Books & Media business, we operate in a single segment focusing on the K-12 education market. Our Chief Executive Officer (“CEO”), who has been identified as the chief operating decision maker, manages and allocates resources at the global corporate level. Managing and allocating resources at the global corporate level enables the CEO to assess both the overall level of resources available and how to best deploy these resources across functions in line with our overarching long-term corporate-wide strategic goals, rather than on a product basis. The determination of a single segment is consistent with the financial information regularly reviewed by the CEO for purposes of evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting future periods.
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Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The ability of the Company to fund planned operations is based on assumptions which involve judgment and estimates of future revenues, capital spend and other operating costs. After reviewing our ability to meet future financial obligations over the next twelve months, we have concluded our net cash from operations combined with our cash and cash equivalents and borrowing availability under our revolving credit facility provide sufficient liquidity to fund our current obligations, capital spending, debt service requirements and working capital requirements over at least the next twelve months. Our primary credit facilities do not require us to comply with financial maintenance covenants.
Seasonality and Comparability
Our net sales, operating profit or loss and net cash provided by or used in operations are impacted by the inherent seasonality of the academic calendar, which typically results in a cash flow usage in the first half of the year and a cash flow generation in the second half of the year. Consequently, the performance of our business may not be comparable quarter to consecutive quarter and should be considered on the basis of results for the whole year or by comparing results in a quarter with results in the same quarter for the previous year.
Schools typically conduct the majority of their purchases in the second and third quarters of the calendar year in preparation for the beginning of the school year. Thus, for the years ended December 31, 2021, 2020 and 2019, approximately 69% of our consolidated net sales were realized in the second and third quarters. Sales of K-12 instructional materials and customized testing products are also cyclical with some years offering more sales opportunities than others in light of the state adoption calendar. The amount of funding available at the state level for educational materials also has a significant effect on year-to-year net sales. Although the loss of a single customer would not have a material adverse effect on our business, schedules of school adoptions and market acceptance of our products can materially affect year-to-year net sales performance.
2.
Impact of the COVID-19 Pandemic
The unprecedented and rapid spread of COVID-19 and the resulting social distancing measures, including business and school closures implemented by federal, state and local authorities, significantly reduced customer demand for our solutions and services, disrupted portions of our supply chain and warehousing operations and also disrupted our ability to deliver our educational solutions and services in 2020. In response to these developments, we implemented a number of measures intended to help protect our shareholders, employees, and customers amid the COVID-19 pandemic and to help mitigate its impact on our financial position, profitability and cash flow. These measures included, but were not limited to furloughs, salary reductions, spending freezes, and proactive outreach to schools to support them through this period of disruption with virtual learning resources. We continue to monitor indicators of demand, including our sales pipeline, customer orders and product shipments and our supply chain, as well as observe the impact to state revenues and related educational budgets.
2020 Restructuring Plan
On September 4, 2020, we completed a voluntary retirement incentive program, which was offered to all U.S. based employees at least 55 years of age with at least five years of service. Of the eligible employees, 165 elected to participate representing approximately 5% of our workforce. The majority of the employees voluntarily retired as of September 4, 2020 with select employees leaving later in the year. Each of the employees received separation payments in accordance with our severance policy.
On September 30, 2020, we undertook a restructuring program, including a reduction in force, as part of the ongoing assessment of our cost structure amid the COVID-19 pandemic. The reduction in force resulted in a 22% reduction in our workforce, including positions eliminated as part of the voluntary retirement incentive program mentioned above, and net of newly created positions to support our digital first operations. The reduction in force resulted in the departure of approximately 525 employees and was completed in October 2020. Each of the employees received separation payments in accordance with our severance policy. The total one-time, non-recurring cost incurred in connection with the restructuring program, inclusive of the voluntary retirement incentive program (collectively the “2020 Restructuring Plan”), all of which represented cash expenditures, was approximately $30.9 million.
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Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Valuation of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets
Subsequent to the sale of the HMH Books & Media segment during the second quarter of 2021, we operate as one operating segment with one reportable segment and have only one reporting unit. We perform an impairment test to assess the carrying value of goodwill and indefinite-lived intangible assets on an annual basis (as of October 1) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis.
During the three months ended March 31, 2020, our stock price declined to historical lows since our 2013 initial public offering. We determined that the significant decline in our market capitalization and broader economic downturn arising from the COVID-19 pandemic was a triggering event. We concluded that quantitative analyses were required to be performed due to the triggering event occurring during the first quarter of 2020.
Goodwill as of the first quarter of 2020 was allocated entirely to our Education reporting unit. We utilized an implied market value method under the market approach to calculate the fair value of the Education reporting unit as of March 31, 2020, which we determined was the best approximation of fair value of the Education reporting unit in the current social and economic environment. This method included the determination of the Company's overall enterprise value, from which the fair value of the HMH Books & Media reporting unit was deducted to derive the fair value of the Education reporting unit. The relevant inputs and assumptions used in the valuation of the Education reporting unit included our market capitalization, selection of a control premium, and the determination of an appropriate market multiple to value the HMH Books & Media reporting unit, as well as the fair value of individual assets and liabilities. Based on our interim impairment assessment, we concluded that our goodwill was impaired and, accordingly, recorded a goodwill impairment charge of $279.0 million in 2020.
Additionally, as a result of the triggering event identified in the first quarter of 2020, we performed quantitative impairment analyses over our indefinite-lived intangible assets and long-lived assets. With regards to indefinite-lived intangible assets, which includes the Houghton Mifflin Harcourt tradename, the recoverability was evaluated using a one-step process whereby we determined the fair value by asset and then compared it to its carrying value to determine if the asset was impaired. We estimated the fair value by preparing a relief-from-royalty discounted cash flow analysis using forward looking revenue projections. The significant assumptions used in discounted cash flow analysis included: future net sales, a long-term growth rate, a royalty rate and a discount rate used to present value future cash flows. The discount rate was based on the weighted-average cost of capital method at the date of the evaluation. The fair value of the indefinite-lived intangible assets was in excess of its carrying value by approximately 12% as of March 31, 2020. We also performed an impairment test on our long-lived assets using an undiscounted cash flow model in determining the fair value, which was then compared to book value of the asset groups evaluated. Estimates and significant assumptions included in the long-lived asset impairment analysis included identification of the primary asset in each asset group and undiscounted cash flow projections. We concluded that our indefinite-lived intangible assets and long-lived assets were not impaired based on the results of the quantitative analyses performed.
3.
Significant Accounting Policies and Recent Accounting Standards
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates, assumptions and judgments by management that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities in the amounts reported in the financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates and assumptions including, but not limited to, book returns, deferred revenue and related standalone selling price estimates, allowance for bad debts, recoverability of advances to authors, valuation of inventory, financial instruments valuation, income taxes, pensions and other postretirement benefits obligations, contingencies, litigation, depreciation and amortization periods, and the recoverability of long-term assets such as property, plant, and equipment, capitalized pre-publication costs, other identified intangibles and goodwill, and operating lease assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets, liabilities and equity and the amount of revenues and expenses. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend
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Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat it, as well as the economic impact on local, regional, national and international customers and markets. Actual results may differ from those estimates.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of the new revenue recognition accounting standard, we perform the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services to a customer. To the extent the transaction price includes variable consideration, which generally reflects estimated future product returns, we estimate the amount of variable consideration that should be included in the transaction price utilizing the expected value method to which we expect to be entitled. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and the determination of whether to include estimated amounts in the transaction price are based largely on all information (historical, current and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
We estimate the collectability of contracts upon execution. For contracts with rights of return, the transaction price is adjusted to reflect the estimated returns for the arrangement on these sales and is made at the time of sale based on historical experience by product line or customer. The transaction prices allocated are adjusted to reflect expected returns and are based on historical return rates and sales patterns. Shipping and handling fees charged to customers are included in net sales.
When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. We do not assess whether a significant financing component exists if the period between when we perform our obligations under the contract and when the customer pays is one year or less. Significant financing components’ income is included in interest income.
Contracts are sometimes modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new, or changes the existing, enforceable rights and obligations. In instances where contract modifications are for products or services that are not distinct from the existing contract due to the inability to use, consume or sell the products or services on their own to generate economic benefits and are accounted for as if they were part of that existing contract. The effect of such a contract modification on the transaction price and measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
Physical product revenue is recognized when the customer obtains control of our product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Revenues from static digital content commence upon delivery to the customer of the digital entitlement that is required to access and download the content and is typically recognized at a point in time. Revenues from subscription software licenses, related hosting services and product support are recognized evenly over the license term as we believe this best represents the pattern of transfer to the customer. The perpetual software licenses provide the customer with a functional license to our products and their related revenues are recognized when the customer receives entitlement to the software. For the technical services provided to customers in connection with
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Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
the software license, including hosting services related to perpetual licenses, we recognize revenue upon delivery of the services. As the invoices are based on each day of service, this is directly linked to the transfer of benefit to the customer.
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. We enter into certain contracts that have multiple performance obligations, one or more of which may be delivered subsequent to the delivery of other performance obligations. These performance obligations may include print and digital media, professional development services, training, software licenses, access to hosted content, and various services related to the software including, but not limited to hosting, maintenance and support, and implementation. We allocate the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. We determine standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions and internally approved standard pricing discounts related to the performance obligations. Generally, our performance obligations include print and digital textbooks and instructional materials, formative assessment materials and multimedia instructional programs; access to hosted content; and services including professional development, consulting and training. Our contracts may also contain software performance obligations including perpetual and subscription-based licenses and software maintenance and support services.
Accounts Receivable
Accounts receivable include amounts billed and currently due from customers and are recorded net of allowances for doubtful accounts and reserves for returns. In the normal course of business, we extend credit to customers that satisfy predefined criteria. We estimate the collectability of our receivables and develop those estimates to reflect the risk of credit loss. Allowances for doubtful accounts are established through the evaluation of accounts receivable aging, prior collection experience, current conditions and reasonable and supportable forecasts of the economic conditions that will exist through the contractual life of the financial asset. We monitor our ongoing credit exposure through an active review of collection trends and specific facts and circumstances. Our activities include monitoring the timeliness of payment collection and performing timely customer account reconciliations.
Contract Assets
Contract assets include unbilled amounts where revenue is recognized over time as the services are delivered to the customer based on the extent of progress towards completion and revenue recognized exceeds the amount billed to the customer, and right of payment is not subject to the passage of time. Amounts may not exceed their net realizable value. Contract assets are included in prepaid expenses and other assets on our consolidated balance sheets.
Deferred Commissions
Our incremental direct costs of obtaining a contract, which consist primarily of sales commissions, are deferred and amortized over the period of contract performance. Applying the practical expedient, we recognize sales commission expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. Amortization expense is included in selling and administrative expenses.
Deferred Revenue
Our contract liabilities consist of advance payments and billings in excess of revenue recognized and are classified as deferred revenue on our consolidated balance sheets. Our contract assets and liabilities are accounted for and presented on a net basis as either a contract asset or contract liability at the end of each reporting period. We classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that balance. If additional advances are received on those contracts in subsequent periods, we assume all revenue recognized in the reporting period first applies to the beginning contract liability as opposed to a portion applying to the new advances for the period.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Advertising Costs and Sample Expenses
Advertising costs are charged to selling and administrative expenses as incurred. Advertising costs were $0.7 million, $1.1 million and $1.3 million for the years ended December 31, 2021, 2020 and 2019, respectively. Sample expenses are charged to selling and administrative expenses when the samples are shipped.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of cash in banks and highly liquid investment securities that have maturities of three months or less when purchased. The carrying amount of cash equivalents approximates fair value because of the short-term maturity of these investments.
Accounts Receivable
Accounts receivable are recorded net of allowances for doubtful accounts and reserves for returns. In the normal course of business, we extend credit to customers that satisfy predefined criteria. We estimate the collectability of our receivables. Allowances for doubtful accounts are established through the evaluation of accounts receivable aging and prior collection experience to estimate the ultimate collectability of these receivables. Reserves for returns are based on historical return rates and sales patterns.
Inventories
Inventories are stated at the lower of weighted-average cost or net realizable value. The level of obsolete and excess inventory is estimated on a program or title level-basis (at a SKU level) by comparing the number of units in stock with past usage and the expected future demand. The expected future demand of a program or title is determined by the copyright year, recent sales history, the future sales forecast, and known forward-looking trends including our development cycle to replace the title or program and competing titles or programs.
Property, Plant, and Equipment, inclusive of Capitalized Internal-Use Software and Software Development Costs
Property, plant, and equipment are stated at cost, or in the case of assets acquired in business combinations, at fair value as of the acquisition date, less accumulated depreciation. Maintenance and repair costs are charged to expense as incurred, and renewals and improvements that extend the useful life of the assets are capitalized. Depreciation on property, plant, and equipment is calculated using the straight-line method over the estimated useful lives of the assets or, in the case of assets acquired in business combinations, over their remaining lives. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. Estimated useful lives of property, plant, and equipment are as follows:
Estimated Useful Life
Building and building equipment
10 to 35 years
Machinery and equipment
2 to 15 years
Capitalized software and internal-use software
3 to 5 years
Leasehold improvements
Lesser of useful life or lease term
Capitalized internal-use software and software is included in property, plant and equipment on the consolidated balance sheets.
We capitalize certain costs related to obtaining or developing computer software for internal use including external customer-facing websites. Costs incurred during the application development stage, including external direct costs of materials and services, and payroll and payroll related costs for employees who are directly associated with the internal-use software project, are capitalized and amortized on a straight-line basis over the expected useful life of the related software. The application development stage includes design of chosen path, software configuration and integration, coding, hardware installation and testing. Costs incurred during the preliminary
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Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
project stage, as well as maintenance, training and upgrades that do not result in additional functionality subsequent to general release are expensed as incurred.
Certain computer software development costs for software that is to be sold or marketed are capitalized in the consolidated balance sheets. Capitalization of computer software development costs begins upon the establishment of technological feasibility. We define the establishment of technological feasibility as a working model. Amortization of capitalized computer software development costs is provided on a product-by-product basis using the straight-line method, beginning upon commercial release of the product and continuing over the remaining estimated economic life of the product. The carrying amounts of computer software development costs are annually compared to net realizable value and impairment charges are recorded, as appropriate, when amounts expected to be realized are lower.
We review internal-use software and software development costs for impairment. For the years ended December 31, 2021, 2020 and 2019, there was no impairment of internal-use software and software developments costs.
Pre-publication Costs
We capitalize the art, prepress, manuscript and other costs incurred in the creation of the master copy of a book or other media (the “pre-publication costs”). Pre-publication costs are primarily amortized from the year of sale over five years using the sum-of-the-years-digits method, which is an accelerated method for calculating an asset’s amortization. Under this method, the amortization expense recorded for a pre-publication cost asset is approximately 33% (year 1), 27% (year 2), 20% (year 3), 13% (year 4) and 7% (year 5). Pre-publication costs recorded in connection with the acquisition of the EdTech business are amortized over 7 years on a projected sales pattern. The amortization methods and periods chosen best reflects the pattern of expected sales generated from individual titles or programs. We periodically evaluate the remaining lives and recoverability of capitalized pre-publication costs, which are often dependent upon program acceptance by state adoption authorities. Amortization expense related to pre-publication costs for the years ended December 31, 2021, 2020 and 2019 were $108.6 million, $125.8 million and $149.3 million, respectively.
We review pre-publication costs for impairment. For the years ended December 31, 2021, 2020 and 2019, there was no impairment of pre-publication costs.
Goodwill and Indefinite-lived Intangible Assets
Goodwill is the excess of the purchase price paid over the fair value of the net assets of the business acquired. Other intangible assets principally consist of branded trademarks and trade names, acquired publishing rights and customer relationships. Goodwill and indefinite-lived intangible assets (certain trademarks and tradenames) are not amortized, but are reviewed at least annually for impairment or earlier, if an indication of impairment exists. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include our market capitalization, and selection of a control premium.
We have the option of first assessing qualitative factors to determine whether it is necessary to perform a quantitative impairment test for goodwill or we can perform the quantitative impairment test. In performing the qualitative assessment, events and circumstances specific to the reporting unit and to the entity as a whole, such as macroeconomic conditions, industry and market considerations, overall financial performance and cost factors are considered when evaluating whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount.
If we perform the quantitative impairment test and the fair value of a reporting unit exceeds the carrying value of the net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value of the net assets assigned to a reporting unit exceeds the fair value of a reporting unit, goodwill
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Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
is deemed impaired and is written down to the extent of the difference between the fair value of the reporting unit and the carrying value.
We estimate the total fair value by using one or more of various valuation techniques including an evaluation of our market capitalization and peer company multiples depending on the best approximation of fair value in the current social and economic environment. With regard to indefinite-lived intangible assets, which includes only the Houghton Mifflin Harcourt tradename, the recoverability is evaluated using a one-step process whereby we determine the fair value by asset and then compare it to its carrying value to determine if the asset is impaired. We estimate the fair value by preparing a relief-from-royalty discounted cash flow analysis using forward looking revenue projections. The significant assumptions used in discounted cash flow analysis include: future net sales, a long-term growth rate, a royalty rate and a discount rate used to present value future cash flows and the terminal value of the reporting unit. The discount rate is based on the weighted-average cost of capital method at the date of the evaluation. Adverse changes in our market capitalization or peer company multiples by an equivalent amount could give rise to an impairment.
We test goodwill for impairment on an annual basis, as of October 31, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We have concluded that we have one reporting unit and that our chief operating decision maker is our chief executive officer. We have assigned the entire balance of goodwill to our one reporting unit. We completed our annual goodwill impairment test as of October 1, 2021 and 2020 and did not identify an impairment. For October 1, 2021, we assessed qualitative factors and determined it was not necessary to perform a quantitative impairment test for goodwill. Our qualitative assessment included company-specific (e.g., financial performance and long-range plans), industry, and macroeconomic factors, as well as consideration of the fair value of the reporting unit relative to its carrying value at the last valuation date. Based on our qualitative assessment, we believe it is more likely than not that the fair value of our reporting unit exceeded its carrying value and no further impairment testing is required. Through December 31, 2021, there were no events or changes in circumstances that indicated that the carrying value of goodwill may not be recoverable. For October 1, 2020, we performed a quantitative analysis using consistent methodologies and assumptions. The fair value of the Education reporting unit exceeded its carrying value by approximately 18% as of October 1, 2020. We recorded a goodwill impairment charge of $279.0 million for the year ended December 31, 2020. Refer to Note 2 for a discussion of the factors and circumstances leading to the goodwill impairment in the first quarter of 2020. There was no goodwill impairment for the year ended December 31, 2019. We will continue to monitor and evaluate the carrying value of goodwill. If market and economic conditions or business performance deteriorate, this could increase the likelihood of us recording an impairment charge.
We completed our annual indefinite-lived asset impairment tests as of October 1, 2021 and 2020. No indefinite-lived intangible assets were deemed to be impaired for the years ended December 31, 2021, 2020 and 2019. The fair value significantly exceeded its carrying value as of October 1, 2021 and was in excess of its carrying value by approximately 18% as of October 1, 2020.
Due to the HMH Books & Media segment being classified as held for sale as of March 31, 2021, we performed an impairment analysis over the HMH Books & Media long-lived asset group during the first quarter of 2021. As the sale price was in excess of the carrying value of the asset group, no impairment was identified. Additionally, we considered the impacts of the HMH Books & Media sale and related segment change on our Education reporting unit, to which goodwill and indefinite-lived intangibles are entirely allocated, and noted no impact to its valuation.
Publishing Rights
A publishing right is an acquired right that allows us to publish and republish existing and future works as well as create new works based on previously published materials. We determined the fair market value of the publishing rights arising from business combinations by discounting the after-tax cash flows projected to be derived from the publishing rights and titles to their net present value using a rate of return that accounts for the time value of money and the appropriate degree of risk. The useful life of the publishing rights is based on the lives of the various copyrights involved. We calculate amortization using the percentage of the projected operating income before taxes derived from the titles in the current year as a percentage of the total estimated operating income before
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Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
taxes over the remaining useful life. Acquired publication rights, as well as customer-related intangibles with definitive lives, are primarily amortized on an accelerated basis over periods ranging from 3 to 20 years. We review our publishing rights for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. No publishing rights were deemed to be impaired for the years ended December 31, 2021, 2020 and 2019.
Impairment of Other Long-lived Assets
We review our other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If the future undiscounted cash flows are less than their book value, impairment exists. The impairment is measured as the difference between the book value and the fair value of the underlying asset. Fair value is normally determined using a discounted cash flow model.
Severance
We accrue postemployment benefits if the obligation is attributable to services already rendered, rights to those benefits accumulate, payment of benefits is probable, and amount of benefit is reasonably estimated. Postemployment benefits include severance benefits.
Subsequent to recording such accrued severance liabilities, changes in market or other conditions may result in changes to assumptions upon which the original liabilities were recorded that could result in an adjustment to the liabilities.
Leases
On January 1, 2019, we adopted the new lease accounting standard using the modified retrospective method. We applied the guidance to each lease as of January 1, 2019 with a cumulative effect adjustment to the opening balance of accumulated deficit as of that date. The standard requires lessees to recognize a lease liability and a right of use asset on the balance sheet for operating leases. Right of use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Right of use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. Accounting for finance leases is substantially unchanged. Prior comparative periods were not adjusted.
We elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed us to not reassess whether any expired or existing contracts are or contain leases, carry forward the historical lease classification and to not reassess initial direct costs for any existing leases. We did not elect the hindsight practical expedient to determine the lease term for existing leases. Upon implementation of the new guidance, we have elected the practical expedients to combine lease and non-lease components, and to not recognize right of use assets and lease liabilities for short-term leases. The adoption of this guidance impacted our consolidated balance sheets due to the recognition of the lease rights and obligations related to our office space, automobile fleet and office equipment leases as assets and liabilities of approximately $148.0 million and $161.0 million, respectively. The adjustment to accumulated deficit of approximately $0.8 million related to a previously recorded deferred gain on the sale leaseback of a warehouse. The impact on our results of operations and cash flows was not material.
Under the new lease accounting standard, we determine if an arrangement is a lease at inception. Right of use assets and lease liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, we consider only payments that are fixed and determinable at the time of commencement. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate is a hypothetical rate based on our understanding of what our credit rating would be. The right of use asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise such options. When determining the probability of exercising such options, we consider
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Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
contract-based, asset-based, entity-based, and market-based factors. Our lease agreements may contain variable costs such as common area maintenance, insurance, real estate taxes or other costs. Variable lease costs are expensed as incurred on our consolidated statements of operations. Our lease agreements generally do not contain any residual value guarantees or restrictive covenants.
Operating leases are included in operating lease assets and operating lease liabilities on our consolidated balance sheets.
Income Taxes
We record income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax basis, and operating loss and tax credit carryforwards. Our consolidated financial statements contain certain deferred tax assets which have arisen primarily as a result of interest expense limitations, as well as other temporary differences between financial and tax accounting. We establish a valuation allowance if the likelihood of realization of the deferred tax assets is reduced based on an evaluation of objectively verifiable evidence. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against those deferred tax assets. We evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized.
We also evaluate any uncertain tax positions and only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon settlement. We record a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Any change in judgment related to the expected ultimate resolution of uncertain tax positions is recognized in earnings in the period in which such change occurs. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense.
Stock-Based Compensation
Certain employees and directors have been granted stock options and restricted stock units in our common stock. Stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date and recognized over the relevant service period. We estimate the fair value of each stock-based award on the measurement date using the current market price based on the target value of the award for restricted stock units, the Monte Carlo simulation for market-based restricted stock units and the Black-Scholes valuation model for stock options. We recognize stock-based compensation expense over the awards requisite service period on a straight-line basis for time-based stock options and restricted stock units, and on a graded basis for restricted stock units that are contingent on the achievement of performance conditions.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as changes in the equity of an enterprise except those resulting from stockholder transactions. The amounts shown on the consolidated statements of stockholders’ equity and comprehensive income (loss) relate to the cumulative effect of changes in pension and postretirement liabilities, foreign currency translation gain and loss adjustments, unrealized gains and losses on short-term investments and gains and losses on derivative instruments.
Foreign Currency Translation
The functional currency for each of our subsidiaries is the currency of the primary economic environment in which the subsidiary operates, generally defined as the currency in which the entity generates and expends cash. Foreign currency denominated assets and liabilities are translated into United States dollars at current rates as of the balance sheet date and the revenue, costs and expenses are translated at the average rates established during each reporting period. Cumulative translation gains or losses are recorded in equity as an element of accumulated other comprehensive income (loss).
Financial Instruments
Derivative financial instruments are employed to manage risks associated with interest rate exposures and are not used for trading or speculative purposes. We recognize all derivative instruments in our consolidated balance sheets at fair value. Changes in the fair value of derivatives are recognized periodically either in earnings or in stockholders’ equity as a component of accumulated other comprehensive income (loss), depending on whether the derivative financial instrument qualifies for hedge accounting and, if so, whether it qualifies as a fair value hedge or a cash flow hedge. Gains and losses on derivatives designated as hedges, to the extent they are effective, are recorded in other comprehensive income (loss), and subsequently reclassified to earnings to offset the impact of the hedged items when they occur. Changes in the fair value of derivatives not qualifying as hedges are reported in earnings. During 2020 and 2019, our interest rate swaps were designated as hedges and the majority qualified for hedge accounting. The interest rate derivative contracts matured on July 22, 2020. We recorded an unrealized loss of $3.4 million in our statements of comprehensive income (loss) to account for the changes in fair value of these derivatives during the period ended December 31, 2019. Our foreign exchange forward contracts did not qualify for hedge accounting because we did not contemporaneously document our hedging strategy upon entering into the hedging arrangements.
Treasury Stock
We account for treasury stock under the cost method. When shares are reissued or retired from treasury stock they are accounted for at an average price. Upon retirement the excess over par value is charged against capital in excess of par value.
Net Income (Loss) per Share
Basic net income (loss) per share attributable to common stockholders is computed by dividing net income (loss) attributable to common stockholders by the weighted-average common shares outstanding during the period. Except where the result would be anti-dilutive, net income (loss) per share is computed using the treasury stock method for the exercise of stock options. For periods in which the Company has reported net losses, diluted net income (loss) per share attributable to common stockholders is the same as basic net income (loss) per share attributable to common stockholders, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. Diluted net income (loss) per share attributable to common stockholders is the same as basic net income (loss) per share attributable to common stockholders for the years ended December 31, 2020 and 2019.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Reclassifications
Certain 2020 amounts within the long-term assets section of the balance sheet have been reclassified to conform to the current year presentation.
Recent Accounting Standards
Recent accounting pronouncements, not included below, are not expected to have a material impact on our consolidated financial position or results of operations.
Recently Issued Accounting Standards
In October 2021, the Financial Accounting Standards Board (“FASB”) issued amended guidance on accounting for contract assets and contract liabilities from contracts with customers in a business combination. The guidance is intended to address inconsistency related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized. At the acquisition date, an entity should account for the related revenue contracts in accordance with existing revenue recognition guidance generally by assessing how the acquiree applied recognition and measurement in their financial statements. The amended guidance is effective January 1, 2023 on a prospective approach. Early adoption is permitted.
Recently Adopted Accounting Standards
In December 2019, the FASB issued new guidance to simplify the accounting for income taxes by removing certain exceptions to the general principles, including simplification of areas such as franchise taxes, step-up in tax basis of goodwill, intraperiod allocations, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. We adopted the guidance on January 1, 2021. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued new guidance on a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor (i.e., a service contract). Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement to develop or obtain internal use software. Accordingly, the guidance requires a customer to determine the stage of a project that the implementation activity relates to and the nature of the associated costs in order to determine whether those costs should be expensed as incurred or capitalized. The guidance also requires the customer to amortize the capitalized implementation costs as an expense over the term of the hosting arrangement. We adopted the guidance on January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In January 2017, the FASB issued updated guidance to simplify the test for goodwill impairment by the elimination of Step 2 in the determination on whether goodwill should be considered impaired. The annual assessments are still required to be completed. We adopted the guidance on January 1, 2020.
In June 2016, the FASB issued new guidance that requires credit losses on financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, not based on incurred losses, as well as additional disclosures. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. We adopted the guidance on January 1, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In February 2016, the FASB issued guidance that primarily requires lessees to recognize most leases on their balance sheets but record expenses on their income statements in a manner similar to current accounting. We adopted the guidance on January 1, 2019 using the modified retrospective method and did not adjust comparative periods or modify disclosures in those comparative periods.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
4.
Discontinued Operations
On May 10, 2021, we completed the sale of all of the assets and liabilities used primarily in the HMH Books & Media segment, our consumer publishing business, for cash consideration of $349.0 million, subject to a customary working capital adjustment resulting in a payment to the purchaser of $8.4 million, and the purchaser’s assumption of all liabilities relating to the HMH Books & Media business, subject to specified exceptions. Upon closing of the transaction, all HMH Books & Media employees became employees of the purchaser. Net proceeds from the sale after the payment of transaction costs and exclusive of working capital adjustment, were approximately $337.0 million, all of which we used to pay down debt. In connection with the sale of HMH Books & Media, we entered into a Transition Services Agreement (“TSA”) with the purchaser whereby we will perform certain support functions for a period of up to 12 months. Upon the signing of the asset purchase agreement on March 26, 2021, the HMH Books & Media business qualified as a discontinued operation and accordingly, all results of the HMH Books & Media business have been removed from continuing operations for all periods presented. The results of the HMH Books & Media business were previously reported in its own reportable segment. We currently report our revenues and financial results from continuing operations under one reportable segment.
Selected financial information of the HMH Books & Media business included in discontinued operations is below. Included within the loss from discontinued operations is interest expense which was allocated to the HMH Books & Media business as we used the proceeds from the sale to pay down debt, which was required by our debt facilities, as we did not reinvest such amounts in the business.
For the Year Ended December 31,
Net sales
$
63,047
$
190,838
$
178,884
Costs
53,119
164,522
161,788
Amortization
1,413
7,266
11,120
Interest expense
9,430
28,251
19,287
Loss from discontinued operations before taxes
$
(915
)
$
(9,201
)
$
(13,311
)
Income tax expense (benefit)
(53
)
Loss from discontinued operations, net of tax
$
(1,005
)
$
(9,148
)
$
(13,658
)
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
As of December 31, 2020, the assets and liabilities of the HMH Books & Media business have been classified as assets of discontinued operations and liabilities of discontinued operations on our consolidated balance sheets. The major categories of assets and liabilities of the HMH Books & Media business included in assets of discontinued operations and liabilities of discontinued operations are as follows:
December 31,
Accounts receivable, net
$
64,002
Inventories
21,410
Prepaid expenses and other assets
Property, plant, and equipment, net
4,401
Pre-publication costs, net
Royalty advances to authors, net
40,060
Other intangible assets, net
26,100
Other assets
3,096
Total assets of discontinued operations
$
160,053
Accounts payable
10,353
Royalties payable
17,628
Salaries and wages payable
Other liabilities
2,460
Total liabilities of discontinued operations
$
30,662
5.
Balance Sheet Information
Account Receivable
Accounts receivable at December 31, 2021 and 2020 consisted of the following:
Accounts receivable
$
143,023
$
97,197
Allowance for bad debt
(3,459
)
(3,790
)
Reserve for book returns
(4,069
)
(4,577
)
$
135,495
$
88,830
As of December 31, 2021 and 2020, no one individual customer comprised more than 10% of our accounts receivable, net balance. We believe that our accounts receivable credit risk exposure is limited and we have not experienced significant write-downs in our accounts receivable balances.
We are exposed to credit losses primarily through our accounts receivable. We develop estimates to reflect the risk of credit loss which are based on an evaluation of accounts receivable aging, prior collection experience, current conditions and reasonable and supportable forecasts of the economic conditions that will exist through the contractual life of the financial asset. We write off the asset when it is no longer deemed collectible. We monitor our ongoing credit exposure through an active review of collection trends. Our activities include monitoring the timeliness of payment collection and performing timely customer account reconciliations. As of December 31, 2021, we reported allowances for doubtful accounts of $3.5 million, compared to $3.8 million at December 31, 2020, reflecting a decrease of $0.3 million for the year ended December 31, 2021.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Inventories
Inventories at December 31, 2021 and 2020 consisted of the following:
Finished goods
$
109,893
$
135,385
Raw materials
7,576
10,168
Inventories
$
117,469
$
145,553
Property, Plant, and Equipment
Balances of major classes of assets and accumulated depreciation and amortization at December 31, 2021 and 2020 were as follows:
Land and land improvements
$
2,840
$
2,840
Building and building equipment
3,201
3,221
Machinery and equipment
10,687
9,909
Capitalized software and internal-use software
664,489
641,027
Leasehold improvements
23,192
24,266
704,409
681,263
Less: Accumulated depreciation and amortization
(623,964
)
(592,462
)
Property, plant, and equipment, net
$
80,445
$
88,801
For the years ended December 31, 2021, 2020 and 2019, depreciation and amortization expense related to property, plant, and equipment were $44.9 million, $49.9 million and $60.7 million, respectively.
Substantially all property, plant, and equipment are pledged as collateral under our term loan and revolving credit facility.
The following represents long-lived assets (property, plant, and equipment and operating lease assets) outside of the United States, which are substantially in Ireland. All other long-lived assets are located in the United States.
(in thousands)
Long-lived assets-International
$
5,088
$
6,487
Contract Assets and Liabilities, Contract Costs and Net Sales
Contract assets consist of unbilled amounts at the reporting date and are transferred to accounts receivable when the rights become unconditional. Contract assets are included in prepaid expenses and other assets on our consolidated balance sheets. Contract liabilities consist of deferred revenue (current and long-term). The following table presents changes in contract assets and contract liabilities during the year ended December 31, 2021:
December 31,
December 31,
$ Change
% Change
Contract assets
$
$
$
30.5
%
Contract liabilities (deferred revenue)
$
964,675
$
905,284
$
59,391
6.6
%
The $59.4 million increase in our contract liabilities from December 31, 2020 to December 31, 2021 was primarily due to higher billings in the period attributed to the growth during a period of recovery during the COVID-19 pandemic, which materially impacted 2020, exceeding the satisfaction of performance obligations related to physical and digital products, and services during the period.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
We capitalize incremental commissions paid to sales representatives for obtaining product sales as well as service contracts unless the capitalization and amortization of such costs are not expected to have a material impact on the financial statements. Applying the practical expedient within the accounting guidance, we recognize sales commission expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. We had deferred commissions in the amount of $35.1 million and $30.7 million at December 31, 2021 and 2020, respectively, and amortized $18.1 million, $12.9 million and $13.2 million during the years ended December 31, 2021, 2020 and 2019, respectively. The amortization is included in selling and administrative expenses.
Costs to fulfill a contract are directly related to a contract that will be used to satisfy a performance obligation in the future and are expected to be recovered. These costs are amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. Our assets associated with incremental costs to fulfill a contract were $22.5 million and $14.7 million at December 31, 2021 and 2020, respectively, and are included within prepaid expenses and other assets (current) and other assets (long term) on our consolidated balance sheet. We recorded amortization of $6.0 million, $3.8 million and $4.6 million during the years ended December 31, 2021, 2020 and 2019, respectively. The amortization is included in cost of sales, excluding publishing rights and pre-publication amortization.
During the years ended December 31, 2021, 2020 and 2019, we recognized the following net sales as a result of changes in the contract assets and contract liabilities balances:
Year Ended
Year Ended
Year Ended
December 31,
December 31,
December 31,
Net sales recognized in the period from:
Amounts included in contract liabilities at the beginning of the period
$320,453
$295,675
$229,557
As of December 31, 2021, the aggregate amount of the transaction price allocated to the remaining performance obligations, which includes deferred revenue and open orders, was $1.1 billion, and we will recognize approximately 75% to net sales over the next 1 to 3 years.
The following table disaggregates our net sales by major source:
December 31,
Core solutions (1)
$
550,300
$
459,350
$
578,675
Extensions (2)
500,502
381,104
633,115
Net sales
$
1,050,802
$
840,454
$
1,211,790
(1) Comprehensive solutions primarily for reading, math, science and social studies programs.
(2) Primarily consists of our Heinemann brand, intervention, supplemental, and formative assessment products as well as professional services.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The following is a schedule of net sales by geographic region:
(in thousands)
Year Ended December 31, 2021
Net sales-U.S.
$
1,009,225
Net sales-International
41,577
Total net sales
$
1,050,802
Year Ended December 31, 2020
Net sales-U.S.
$
805,229
Net sales-International
35,225
Total net sales
$
840,454
Year Ended December 31, 2019
Net sales-U.S.
$
1,149,527
Net sales-International
62,263
Total net sales
$
1,211,790
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
6. Goodwill and Other Intangible Assets
There were no changes in the carrying amount of goodwill of $438.0 million for the year ended December 31, 2021. In accordance with the provisions of the accounting standard for goodwill and other intangible assets, goodwill and certain indefinite-lived tradenames are not amortized but rather are assessed for impairment on an annual basis. Accumulated impairment losses on goodwill as of December 31, 2021 was $279.0 million. Refer to Note 2 for a discussion of the valuation of goodwill, indefinite-lived intangible assets and long-lived assets along with the triggering event which resulted in a goodwill impairment of $279.0 million during the year ended December 31, 2020. There was no impairment charge recorded in the years ended December 31, 2021 and 2019.
Other intangible assets consisted of the following:
December 31, 2021
December 31, 2020
Accumulated
Accumulated
Cost
Amortization
Total
Cost
Amortization
Total
Trademarks and tradenames: indefinite-
lived
$
161,000
$
-
$
161,000
$
161,000
$
-
$
161,000
Trademarks and tradenames: definite-
lived
130,730
(64,094
)
66,636
133,330
(46,810
)
86,520
Publishing rights
1,050,000
(1,041,125
)
8,875
1,050,000
(1,030,437
)
19,563
Customer related and other
424,140
(300,361
)
123,779
427,140
(291,739
)
135,401
Other intangible assets, net
$
1,765,870
$
(1,405,580
)
$
360,290
$
1,771,470
$
(1,368,986
)
$
402,484
On July 8, 2021, we sold the intellectual property, including the copyrights and trademarks, of certain product titles for total cash proceeds of $5.0 million. We had approximately $1.3 million of other intangible assets at the time of sale and we recorded a gain on sale of $3.7 million, net of tax, during the year ended December 31, 2021.
Amortization expense for definite-lived intangible assets, publishing rights and customer related and other intangibles were $40.9 million, $38.7 million and $41.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Estimated aggregate amortization expense expected for each of the next five years related to intangibles subject to amortization is as follows:
Trademarks
Other
and
Publishing
Intangible
Tradenames
Rights
Assets
13,300
7,568
9,940
4,226
1,307
9,761
4,044
-
8,310
4,044
-
8,121
4,044
-
7,979
Thereafter
36,978
-
79,668
$
66,636
$
8,875
$
123,779
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
7.
Debt
Our debt consisted of the following:
December 31,
December 31,
$380,000 term loan due November 22, 2024, interest
payable quarterly (net of discount and issuance costs)
$
20,996
$
346,091
$306,000 senior secured notes due February 15, 2025,
interest payable semi-annually (net of discount and
issuance costs)
$
296,583
$
297,601
317,579
643,692
Less: Current portion of long-term debt
-
(19,000
)
Total long-term debt, net of discount and issuance costs
$
317,579
$
624,692
Revolving credit facility
$
-
$
-
Long-term debt repayments due in each of the next five years and thereafter is as follows:
Year
-
-
21,695
303,274
-
$
324,969
Senior Secured Notes
On November 22, 2019, we completed the sale of $306.0 million in aggregate principal amount of 9.0% Senior Secured Notes due 2025 (the “notes”) in a private placement to qualified institutional buyers under Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to persons outside the United States pursuant to Regulation S under the Securities Act. The notes mature on February 15, 2025 and bear interest at a rate of 9.0% per annum. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2020.
The notes were issued at a discount equal to 2.0% of the outstanding borrowing commitment.
The transaction was accounted for under the guidance for debt modifications and extinguishments. We incurred approximately $5.4 million of third-party fees for the transaction, of which approximately $4.1 million were capitalized as deferred financing fees and approximately $1.3 million was recorded to expense and included in the selling and administrative line item in our consolidated statements of operations for the year ended December 31, 2019.
We may redeem all or a portion of the notes at redemption prices as described in the notes. We redeemed $2.7 million of the notes during the second quarter of 2021 utilizing proceeds from the sale of the HMH Books & Media business.
The notes do not require us to comply with financial maintenance covenants. We are currently required to meet certain incurrence based financial covenants as defined under our notes. The notes are subject to restrictions on our ability to incur additional indebtedness, issue certain preferred stock, redeem, purchase or retire subordinated debt, make certain investments, pay dividends or other amounts, enter into certain transactions with affiliates, merge or consolidate with another person, sell or otherwise dispose of all or substantially all of our assets, sell certain assets, including capital stock, designate our subsidiaries as unrestricted subsidiaries, redeem or repurchase capital
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
stock or make other restricted payments, and incur certain liens. The notes are subject to customary events of default. If an event of default occurs and is continuing, the administrative agent may, or at the request of certain required lenders shall, accelerate the obligations outstanding under the notes.
Term Loan Facility
On November 22, 2019, we entered into a second amended and restated term loan credit agreement for an aggregate principal amount of $380.0 million (the “term loan facility”). The term loan facility matures on November 22, 2024 and the interest rate per annum is equal to, at the option of the Company, either (a) LIBOR plus a margin of 6.25% or (b) an alternate base rate plus a margin of 5.25%. As of December 31, 2021, the interest rate on the term loan facility was 7.25%. We repaid $334.6 million of the term loan facility during the second quarter of 2021 utilizing proceeds from the sale of the HMH Books & Media business. We were required to repay debt under the term loan facility as we did not intend to reinvest the proceeds from the sale in the business. There are no future quarterly repayment installments required and the balance is payable on the maturity date. In connection with the repayment, we recorded a loss on extinguishment of debt totaling $12.5 million relating to the pro rata write-off of a portion of the unamortized deferred financing costs and discount.
On July 27, 2017, the U.K. Financial Conduct Authority (the “FCA”) announced that it will no longer require banks to submit rates for the calculation of LIBOR after 2021. Our term loan facility provides that the administrative agent may determine that (i) adequate and reasonable means do not exist for ascertaining the LIBOR rate or (ii) the FCA or the government authority having jurisdiction over the administrative agent has made a public statement identifying a specific date after which the LIBOR rate shall no longer be used for determining interest rates for loans. If the administrative agent determines that (i) or (ii) above is unlikely to be temporary then the administrative agent and the Company will agree to transition to an alternate base rate or amend the term loan facility to establish an alternate rate of interest to LIBOR that gives due consideration to the then-prevailing market convention for determining a rate of interest for syndicated loans in the United States at such time.
The term loan facility was issued at a discount equal to 4.0% of the outstanding borrowing commitment.
The transaction was accounted for under the guidance for debt modifications and extinguishments. We incurred approximately $7.2 million of third-party fees for the transaction, of which approximately $2.9 million were capitalized as deferred financing fees and approximately $4.3 million was recorded to expense and included in the selling and administrative line item in our consolidated statements of operations for the year ended December 31, 2019.
The term loan facility contains customary mandatory prepayment requirements, including with respect to excess cash flow, proceeds from certain asset sales or dispositions of property, and proceeds from certain incurrences of indebtedness. The term loan facility permits the Company to voluntarily prepay outstanding amounts at any time without premium or penalty, other than customary breakage costs with respect to LIBOR loans.
The term loan facility does not require us to comply with financial maintenance covenants. We are currently required to meet certain incurrence based financial covenants as defined under our term loan facility. The term loan facility is subject to usual and customary conditions, representations, warranties and covenants, including restrictions on additional indebtedness, liens, investments, mergers, acquisitions, asset dispositions, dividends to stockholders, repurchase or redemption of our stock, transactions with affiliates and other matters. The term loan facility is subject to customary events of default. If an event of default occurs and is continuing, the administrative agent may, or at the request of certain required lenders shall, accelerate the obligations outstanding under the term loan facility.
We are subject to an excess cash flow provision under our term loan facility which is predicated upon our leverage ratio and cash flow.
On November 22, 2019, in connection with the notes and term loan facility described above, we paid off the remaining outstanding balance of our previous $800.0 million term loan facility. The transaction was accounted for under the guidance for debt modifications and extinguishments. We incurred a loss on extinguishment of debt of
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
approximately $4.4 million related to the write off of the portion of the unamortized deferred financing fees and discount associated with the portion of the previous term loan accounted for as an extinguishment.
Interest Rate Hedging
On August 17, 2015, we entered into interest rate derivative contracts with various financial institutions having an aggregate notional amount of $400.0 million to convert floating rate debt into fixed rate debt. We assessed at inception, and re-assess on an ongoing basis, whether the interest rate derivative contracts are highly effective in offsetting changes in the fair value of the hedged variable rate debt. The interest rate derivative contracts matured on July 22, 2020.
These interest rate swaps were designated as cash flow hedges and qualified for hedge accounting under the accounting guidance related to derivatives and hedging. Accordingly, we recorded an unrealized loss of $3.4 million in our statements of comprehensive income (loss) to account for the changes in fair value of these derivatives during the year ended December 31, 2019. We reclassified $1.9 million from other comprehensive income (loss) to earnings during the year ended December 31, 2020. We had no interest rate derivative contracts outstanding as of December 31, 2021.
Revolving Credit Facility
On November 22, 2019, we entered into a second amended and restated revolving credit agreement that provides borrowing availability in an amount equal to the lesser of either $250.0 million or a borrowing base that is computed monthly or weekly and comprised of the Borrowers’ and the Guarantors’ (as such terms are defined below) eligible inventory and receivables (the “revolving credit facility”). The revolving credit facility includes a letter of credit subfacility of $50.0 million, a swingline subfacility of $20.0 million and the option to expand the facility by up to $100.0 million in the aggregate under certain specified conditions. The revolving credit facility may be prepaid, in whole or in part, at any time, without premium. The transaction was accounted for under the accounting guidance for modifications to or exchanges of revolving debt arrangements. We incurred approximately $1.1 million of creditor and third-party fees which were capitalized as deferred financing fees.
The revolving credit facility requires the Company to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 on a trailing four-quarter basis only during certain periods commencing when excess availability under the revolving credit facility is less than certain limits prescribed by the terms of the revolving credit facility. The revolving credit facility is subject to usual and customary conditions, representations, warranties and covenants, including restrictions on additional indebtedness, liens, investments, mergers, acquisitions, asset dispositions, dividends to stockholders, repurchase or redemption of our stock, transactions with affiliates and other matters. The revolving credit facility is subject to customary events of default. If an event of default occurs and is continuing, the administrative agent may, or at the request of certain required lenders shall, accelerate the obligations outstanding under the revolving credit facility. As of December 31, 2021, no amounts are outstanding under the revolving credit facility.
As of December 31, 2021, the minimum fixed charge coverage ratio covenant under our revolving credit facility was not applicable, due to our level of borrowing availability. The minimum fixed charge coverage ratio, which is only tested in limited situations, is 1.0 to 1.0 through the end of the facility.
Guarantees
Under each of the notes, the term loan facility and the revolving credit facility, Houghton Mifflin Harcourt Publishers Inc., Houghton Mifflin Harcourt Publishing Company and HMH Publishers LLC are the borrowers (collectively, the “Borrowers”), and Citibank, N.A. acts as both the administrative agent and the collateral agent.
The obligations under the notes, the term loan facility and the revolving credit facility are guaranteed by the Company and each of its direct and indirect for-profit domestic subsidiaries (other than the Borrowers) (collectively, the “Guarantors”) and are secured by all capital stock and other equity interests of the Borrowers and the Guarantors and substantially all of the other tangible and intangible assets of the Borrowers and the Guarantors, including, without limitation, receivables, inventory, equipment, contract rights, securities, patents, trademarks, other intellectual property, cash, bank accounts and securities accounts and owned real estate. The revolving credit facility
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
is secured by first priority liens on receivables, inventory, deposit accounts, securities accounts, instruments, chattel paper and other assets related to the foregoing (the “Revolving First Lien Collateral”), and second priority liens on the collateral which secures the term loan facility on a first priority basis. The term loan facility is secured by first priority liens on the capital stock and other equity interests of the Borrowers and the Guarantors, equipment, owned real estate, trademarks and other intellectual property, general intangibles that are not Revolving First Lien Collateral and other assets related to the foregoing, and second priority liens on the Revolving First Lien Collateral.
8.
Leases
We lease property and equipment under finance and operating leases. We have operating leases for various office space and facilities, warehouse equipment, automobile fleet and office equipment that expire at various dates through 2033. For leases with terms greater than 12 months, we record the related asset and obligation at the present value of lease payments over the lease term. Many of our leases include rental escalation clauses, renewal options and/or termination options that are factored into our determination of lease payments when appropriate. For leases beginning in 2019 and later, we account for lease components (e.g., fixed payments including rent) as combined with the non-lease components (e.g., common-area maintenance costs). Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We sublease certain real estate office space to third parties. Our sublease portfolio consists of operating leases.
When available, we use the rate implicit in the lease to discount lease payments to present value; however, most of our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate to discount the lease payments based on information available at lease commencement. We give consideration to our recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates.
Lease Position as of December 31, 2021 and 2020
The table below presents the lease assets and liabilities recorded on the balance sheet.
Leases
Classification
December 31, 2021
December 31, 2020
Assets
Operating lease assets
Operating lease assets
$
110,572
$
126,850
Total leased assets
$
110,572
$
126,850
Liabilities
Current
Operating
Operating lease liabilities
$
7,539
$
9,669
Noncurrent
Operating
Operating lease liabilities
127,426
132,014
Total lease liabilities
$
134,965
$
141,683
Weighted average remaining lease term Operating leases
8.1 Years
8.2 Years
Weighted average discount rate Operating leases (1)
12.41
%
12.56
%
(1)
Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Lease costs
Operating lease cost and sublease income totaled $35.0 million and $3.2 million, $34.9 million and $2.1 million, and $39.9 million and $2.3 million for the years ended December 31, 2021, 2020 and 2019, respectively. The net lease cost of $31.8 million, $32.8 million and $37.6 million for years ended December 31, 2021, 2020 and 2019, respectively, is included in the selling and administrative line item in our consolidated statements of operations. Operating lease cost includes short term leases and variable lease costs, which are not material.
Undiscounted Cash Flows
The table below reconciles the undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease liabilities recorded on the balance sheet.
Operating
Maturity of Lease Liabilities
Leases
19,874
28,780
29,996
29,413
24,800
Thereafter
92,597
Total lease payments
$
225,460
Less: interest
(90,495
)
Present value of lease liabilities
$
134,965
Other Information
The table below presents supplemental cash flow information related to leases during the years ended December 31, 2021, 2020 and 2019.
Cash paid for amounts included in the measurement of
lease liabilities
Operating cash flows for operating leases - 2021
$
32,302
Operating cash flows for operating leases - 2020
$
28,639
Operating cash flows for operating leases - 2019
$
31,245
9. Restructuring, Severance and Other Charges
During the year ended December 31, 2021, we recorded an asset impairment in the amount of $13.3 million for real estate consolidation costs relating to vacated office space primarily for certain floors in connection with the sale of our HMH Books & Media business, of which $11.7 million is reflected as a reduction in operating lease assets and $1.6 million as a reduction in property, plant, and equipment in our consolidated balance sheet as of December 31, 2021. The fair value of the asset group was determined using a discounted cash flow model, which required the use of estimates, including projected cash flows for the related assets, the selection of discount rate used in the model, and regional real estate industry data. The fair value of the asset group was allocated to the operating lease asset and fixed assets based on their relative carrying values.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
2020 Restructuring Plan
On September 4, 2020, we finalized a voluntary retirement incentive program, which was offered to all U.S. based employees at least 55 years of age with at least five years of service. Of the eligible employees, 165 elected to participate representing approximately 5% of our workforce. The majority of the employees voluntarily retired as of September 4, 2020 with select employees leaving later in the year. Each of the employees received separation payments in accordance with our severance policy.
On September 30, 2020, we undertook a restructuring program, including a reduction in force, as part of the ongoing assessment of our cost structure amid the COVID-19 pandemic and in line with our strategic transformation plan. The reduction in force resulted in a 22% reduction in our workforce, including positions eliminated as part of the voluntary retirement incentive program mentioned above, and net of newly created positions to support our digital first operations. The reduction in force resulted in the departure of approximately 525 employees and was completed in October 2020. Each of the employees received separation payments in accordance with our severance policy. The total one-time, non-recurring cost incurred in connection with the restructuring program, inclusive of the voluntary retirement incentive program, (collectively the “2020 Restructuring Plan”) all of which represented cash expenditures, was approximately $30.9 million.
The following table provides a summary of our total costs associated with the 2020 Restructuring Plan, included in the restructuring/severance and other charges line item within our consolidated statements of operations, by major type of cost:
Year Ended
Year Ended
Total Amount
December 31,
December 31,
Incurred
Type of Cost
to Date
Restructuring charges:
Severance and termination benefits
$
31,874
$
(951
)
$
30,923
$
31,874
$
(951
)
$
30,923
Our restructuring liabilities are comprised of accruals for severance and termination benefits. The following is a rollforward of our liabilities associated with the 2020 Restructuring Plan:
Restructuring
Restructuring
accruals at
accruals at
December 31,
Cash
December 31,
Charges
payments
Severance and termination benefits
$
19,311
$
(951
)
$
(17,955
)
$
$
19,311
$
(951
)
$
(17,955
)
$
Restructuring
Restructuring
accruals at
accruals at
December 31,
Cash
December 31,
Charges (1)
payments
Severance and termination benefits
$
-
$
33,643
$
(14,332
)
$
19,311
$
-
$
33,643
$
(14,332
)
$
19,311
(1)
Charges during 2020 is inclusive of $1,769 of discontinued operations.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
2019 Restructuring Plan
On October 15, 2019, our Board of Directors approved changes connected with our ongoing strategic transformation to simplify our business model and accelerate growth. This includes new product development and go-to-market capabilities, as well as the streamlining of operations company-wide for greater efficiency. These actions (the “2019 Restructuring Plan”) resulted in the net elimination of approximately 10% of our workforce, after taking into account new strategy-aligned positions that are expected to be added, and additional operating and capitalized cost reductions, including an approximately 20% reduction in previously planned content development expenditures over the next three years. These steps were intended to further simplify our business model while delivering increased value to customers, teachers and students. The workforce reductions were completed in the first quarter of 2020.
After considering additional headcount actions, implementation of the planned actions resulted in total charges of $15.8 million which was recorded in the fourth quarter of 2019. With respect to each major type of cost associated with such activities, substantially all costs were severance and other termination benefit costs and resulted in cash expenditures.
Further, as part of the strategic transformation plan, we recorded an incremental $9.8 million inventory obsolescence charge which was recorded in cost of sales in the statement of operations.
The following table provides a summary of our total costs associated with the 2019 Restructuring Plan, included in the restructuring/severance and other charges line item within our consolidated statements of operations, by major type of cost:
Year Ended
Total Amount
December 31,
Incurred
Type of Cost
to Date
Restructuring charges:
Severance and termination benefits
$
15,820
$
15,820
$
15,820
$
15,820
Our restructuring liabilities are primarily comprised of accruals for severance and termination benefits. The following is a rollforward of our liabilities associated with the 2019 Restructuring Plan:
Restructuring
Restructuring
accruals at
accruals at
December 31,
Cash
December 31,
Charges
payments
Severance and termination benefits
$
$
-
$
(279
)
$
-
$
$
-
$
(279
)
$
-
Restructuring
Restructuring
accruals at
accruals at
December 31,
Cash
December 31,
Charges
payments
Severance and termination benefits
$
11,649
$
-
$
(11,370
)
$
$
11,649
$
-
$
(11,370
)
$
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Severance and Other Charges
Exclusive of the 2020 Restructuring Plan and the 2019 Restructuring Plan, during the year ended December 31, 2020, $0.8 million of severance payments were made to employees whose employment ended in 2019 and prior years.
A summary of the significant components of the severance costs is as follows:
Severance/
Severance/
other
other
accruals at
Severance/
accruals at
December 31,
other
Cash
December 31,
expense
payments
Severance costs
$
$
-
$
(758
)
$
-
$
$
-
$
(758
)
$
-
Exclusive of the 2019 Restructuring Plan, during the year ended December 31, 2019, $3.2 million of severance payments were made to employees whose employment ended in 2019 and prior years, and we recorded an expense in the amount of $2.5 million to reflect costs for severance. We also recorded an expense in the amount of $3.4 million for real estate consolidation costs, which is reflected as a reduction in operating lease assets in our consolidated balance sheet as of December 31, 2019.
Severance/
Severance/
other
other
accruals at
Severance/
accruals at
December 31,
other
Cash
December 31,
expense
payments
Severance costs
$
1,420
$
2,534
$
(3,196
)
$
$
1,420
$
2,534
$
(3,196
)
$
(1)
Severance/other expense during 2019 is inclusive of $1,050 of discontinued operations.
The current portion of the severance and other charges was $0.4 million and $19.6 million (inclusive of the 2019 Restructuring Plan and 2020 Restructuring Plan) as of December 31, 2021 and 2020, respectively.
10. Income Taxes
The components of income (loss) from continuing operations before taxes by jurisdiction are as follows:
For
For
For
the Year
the Year
the Year
Ended
Ended
Ended
December 31,
December 31,
December 31,
U.S.
$
$
(485,255
)
$
(200,231
)
Foreign
4,703
2,214
3,910
Income (loss) before taxes
$
4,746
$
(483,041
)
$
(196,321
)
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Total income taxes by jurisdiction are as follows:
For
For
For
the Year
the Year
the Year
Ended
Ended
Ended
December 31,
December 31,
December 31,
Income tax expense (benefit)
U.S.
$
5,052
$
(12,723
)
$
4,245
Foreign
(2,366
)
(391
)
$
2,686
$
(12,351
)
$
3,854
Significant components of the expense (benefit) for income taxes attributable to income (loss) from continuing operations consist of the following:
For the
For the
For the
Year Ended
Year Ended
Year Ended
December 31,
December 31,
December 31,
Current
Foreign
$
(42
)
$
$
(1,048
)
U.S.-Federal
-
-
U.S.-State and other
1,737
Total current
2,004
(681
)
Deferred
Foreign
(2,324
)
U.S.-Federal
2,330
(5,505
)
1,908
U.S.-State and other
2,389
(8,955
)
1,969
Total deferred
2,395
(14,355
)
4,535
Income tax expense (benefit)
$
2,686
$
(12,351
)
$
3,854
The reconciliation of the income tax rate computed at the statutory tax rate to the reported income tax expense (benefit) attributable to continuing operations is as follows:
For the
For the
For the
Year Ended
Year Ended
Year Ended
December 31,
December 31,
December 31,
Statutory rate
21.0
%
21.0
%
21.0
%
Permanent items
76.1
(0.9
)
(3.9
)
Foreign rate differential
(0.4
)
-
-
State and local taxes
(246.2
)
2.0
(8.8
)
Cancellation of debt income
-
-
(1.4
)
Increase (decrease) in valuation allowance
101.5
(15.4
)
(8.9
)
Tax credits
104.6
(0.1
)
(0.2
)
Goodwill impairment
-
(4.0
)
-
Effective tax rate
56.6
%
2.6
%
(2.0
)%
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The significant components of the net deferred tax assets and liabilities are shown in the following table:
Tax assets related to
Net operating loss and other carryforwards
$
290,695
$
326,504
Returns reserve/inventory expense
27,475
39,095
Pension benefits
2,655
6,879
Postretirement benefits
4,644
4,480
Deferred interest (1)
209,155
226,227
Deferred revenue
153,899
141,775
Stock-based compensation
2,570
2,806
Deferred compensation
5,836
6,525
Research and development
14,475
12,435
Operating lease liabilities
33,485
33,963
Other, net
4,558
8,263
Valuation allowance
(610,252
)
(662,569
)
$
139,195
$
146,383
Tax liabilities related to
Indefinite-lived intangible assets
(68,169
)
(53,400
)
Definite-lived intangible assets
(14,063
)
(21,578
)
Depreciation and amortization expense
(36,000
)
(45,279
)
Operating lease assets
(27,219
)
(30,245
)
Other, net
(10,140
)
(9,877
)
(155,591
)
(160,379
)
Net deferred tax liabilities
$
(16,396
)
$
(13,996
)
(1)
The deferred interest tax asset represents disallowed interest deductions under Section 163(j) (Limitation on Deduction for interest on Certain Indebtedness) of the Internal Revenue Code of 1986, as amended (“IRC”) for the current and prior years. At December 31, 2021 and 2020, we had gross deferred interest deductions totaling $812.5 million and $900.2 million, respectively. The disallowed interest is able to be carried forward indefinitely and utilized in future years pursuant to IRC Section 163(j). A full valuation allowance has been provided against deferred tax assets, excluding $5.0 million of foreign deferred tax assets which are expected to be realized, net of deferred tax liabilities resulting from indefinite-lived intangibles.
The net deferred tax liability balance is stated at prevailing statutory income tax rates. Deferred tax assets and liabilities are reflected on our consolidated balance sheets as follows:
Non-current deferred tax assets
$
4,997
$
2,415
Non-current deferred tax liabilities
(21,393
)
(16,411
)
$
(16,396
)
$
(13,996
)
The gross amount of unrecognized tax benefits, excluding accrued interest and penalties, is $15.7 million. There has been no reductions or additions based on tax positions related to the prior year in 2021, 2020 and 2019.
We are currently open for audit under the statute of limitation for Federal, state and foreign jurisdictions for years 2018 to 2021. However, carryforward attributes from prior years may still be adjusted upon examination by tax authorities if they are used in a future period.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
We report penalties and tax-related interest expense on unrecognized tax benefits as a component of the provision for income taxes in the accompanying consolidated statement of operations. At December 31, 2021 and 2020, accrued interest and penalties in the accompanying consolidated balance sheet and interest and penalties included in the provision for income taxes for the years ended December 31, 2021, 2020 and 2019 were immaterial.
As of December 31, 2021, we have approximately $923.0 million of Federal tax loss carryforwards, of which $476.3 million will expire between 2034 and 2037. The Company has approximately $446.7 million of post-tax reform Federal tax loss carryforwards which have an indefinite life, though are limited in their use by 80% of taxable income. The Company has approximately $1,345.2 million of state tax loss carryforwards, which will expire between 2022 and 2041. In addition, we have foreign tax credit carryforwards of $2.3 million and research and development credit carryforwards of $4.2 million, which will expire between 2022 and 2036. The Company’s Irish net operating losses of $141.2 million, which are reduced by a reserve for uncertain tax positions of $123.6 million, are not subject to expiration. The Canadian Federal losses of $0.1 million will expire between 2033 and 2037. The Puerto Rico alternative minimum tax credit carryforwards of $2.8 million are not subject to expiration.
Under Section 382 of the IRC, substantial changes in the Company’s ownership may limit the amount of net operating loss and Section 163(j) carryforwards that could be utilized annually in the future to offset taxable income. Specifically, this limitation may arise in the event of a cumulative change in ownership of the Company of more than 50% within a three-year period. Any such annual limitation may significantly reduce the utilization of net operating loss carryforwards before they expire. The Company performed an analysis through December 31, 2020, and determined any potential ownership change under Section 382 prior to 2021 would not have a material impact on the future utilization of U.S. net operating losses and tax credits. However, future transactions in the Company’s common stock could trigger an ownership change for purposes of Section 382, which could limit the amount of net operating loss carryforwards and other attributes that could be utilized annually in the future to offset taxable income, if any. Any such limitation, whether as the result of sales of common stock by our existing stockholders or sales of common stock by the Company, could have a material adverse effect on results of operations in future years.
U.S. income taxes on the undistributed earnings of the Company’s non-U.S. subsidiaries have not been provided for as the Company currently plans to indefinitely reinvest these amounts and has the ability to do so.
Based on our assessment of historical pre-tax losses and the fact that we did not anticipate sufficient future taxable income in the near term to assure utilization of certain deferred tax assets, the Company recorded a valuation allowance at December 31, 2021 and 2020 of $610.3 million and $662.6 million, respectively. We have decreased our valuation allowance by $(52.3) million in 2021 with $(53.7) million as a component of discontinued operations and $4.8 million increase as a component of continuing operations and $(3.4) million decrease as a component of other comprehensive income.
11.
Retirement and Postretirement Benefit Plans
Retirement Plan
We have a noncontributory, qualified defined benefit pension plan (the “Retirement Plan”), which covers certain employees. The Retirement Plan is a cash balance plan, which accrues benefits based on pay, length of service, and interest. The funding policy is to contribute amounts subject to minimum funding standards set forth by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. The Retirement Plan’s assets consist principally of common stocks, fixed income securities, investments in registered investment companies, and cash and cash equivalents. We also have a nonqualified defined benefit plan, or nonqualified plan, that previously covered employees who earned over the qualified pay limit as determined by the Internal Revenue Service. The nonqualified plan accrues benefits for the participants based on the cash balance plan calculation. The nonqualified plan is not funded. We use a December 31 date to measure the pension and postretirement liabilities. In 2007, both the qualified and nonqualified pension plans eliminated participation in the plans for new employees hired after October 31, 2007.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
We recognize the funded status of defined benefit pension and other postretirement plans as an asset or liability in the balance sheet and recognize actuarial gains and losses and prior service costs and credits in other comprehensive income (loss) and subsequently amortize those items in the statement of operations.
The following table summarizes the Accumulated Benefit Obligations (“ABO”), the change in Projected Benefit Obligation (“PBO”), and the funded status of our plans as of and for the financial statement period ended December 31, 2021 and 2020:
ABO at end of period
$
160,178
$
179,408
Change in PBO
PBO at beginning of period
$
179,408
$
169,364
Interest cost on PBO
2,999
4,388
Plan settlements
(6,636
)
(4,990
)
Actuarial loss (gain)
(7,860
)
18,447
Benefits paid
(7,733
)
(7,801
)
PBO at end of period
$
160,178
$
179,408
Change in plan assets
Fair market value at beginning of period
$
153,754
$
145,716
Actual return
10,948
16,060
Company contribution
1,176
4,769
Plan settlements
(6,636
)
(4,990
)
Benefits paid
(7,733
)
(7,801
)
Fair market value at end of period
$
151,509
$
153,754
Unfunded status
$
(8,669
)
$
(25,654
)
Amounts recognized in the consolidated balance sheets at December 31, 2021 and 2020 consist of:
Current liabilities
$
(185
)
$
(1,593
)
Noncurrent liabilities
(8,484
)
(24,061
)
Net amount recognized
$
(8,669
)
$
(25,654
)
Additional year-end information for pension plans with ABO in excess of plan assets at December 31, 2021 and 2020 consist of:
PBO
$
160,178
$
179,408
ABO
160,178
179,408
Fair value of plan assets
151,509
153,754
Weighted average assumptions used to determine the benefit obligations (both PBO and ABO) at December 31, 2021 and 2020 are:
Discount rate
2.7
%
2.2
%
Increase in future compensation
N/A
N/A
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Net periodic pension (income) cost includes the following components:
For the
For the
For the
Year Ended
Year Ended
Year Ended
December 31,
December 31,
December 31,
Interest cost on projected benefit obligation
$
2,999
$
4,388
$
6,045
Expected return on plan assets
(7,476
)
(7,419
)
(7,659
)
Amortization of net loss
2,734
2,325
1,028
Settlement loss recognized
1,326
1,100
-
Net pension (income) expense recognized for the period
$
(417
)
$
$
(586
)
Significant actuarial assumptions used to determine net periodic pension cost at December 31, 2021, 2020 and 2019 are:
Discount rate
2.2
%
3.1
%
4.2
%
Increase in future compensation
N/A
N/A
N/A
Expected long-term rate of return on assets
5.5
%
5.5
%
5.5
%
Assumptions on Expected Long-Term Rate of Return as Investment Strategies
We employ a building block approach in determining the long-term rate of return for plan assets. Historical markets are studied and long-term relationships between equities and fixed income are preserved congruent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return is established via a building block approach and proper consideration of diversification and rebalancing. Peer data and historical returns are reviewed for reasonability and appropriateness. We regularly review the actual asset allocation and periodically rebalances investments to a targeted allocation when appropriate. The current targeted asset allocation is 34% with equity managers, 56% with fixed income managers, 5% with real-estate investment trust managers and 5% with hedge fund managers. For 2022, we will use a 5.50% long-term rate of return for the Retirement Plan. We will continue to evaluate the expected rate of return assumption, at least annually, and will adjust as necessary.
Plan Assets
Plan assets for the U.S. tax qualified plans consist of a diversified portfolio of fixed income securities, equity securities, real estate, and cash equivalents. Plan assets do not include any of our securities. The U.S. pension plan assets are invested in a variety of funds within a Collective Trust (“Trust”). The Trust is a group trust designed to permit qualified trusts to comingle their assets for investment purposes on a tax-exempt basis.
Investment Policy and Investment Targets
The tax qualified plans consist of the U.S. pension plan. We fund amounts for our qualified pension plans at least sufficient to meet minimum requirements of local benefit and tax laws. The investment objectives of our pension plan asset investments are to provide long-term total growth and return, which includes capital appreciation and current income. The nonqualified noncontributory defined benefit pension plan is generally not funded. Assets were invested among several asset classes.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The percentage of assets invested in each asset class at December 31, 2021 and 2020 is shown below.
Percentage
Percentage
in Each
in Each
Asset Class
Asset Class
Asset Class
Equity
33.2
%
33.5
%
Fixed income
54.1
52.7
Real estate investment trust
6.4
7.0
Other
6.3
6.8
100.0
%
100.0
%
Fair Value Measurements
The fair value of our pension plan assets by asset category at December 31 were as follows:
December 31,
Not subject
to leveling (1)
Cash and cash equivalents
$
$
Equity securities
U.S. equity
28,347
28,347
Non-US equity
14,494
14,494
Emerging markets equity
7,499
7,499
Fixed income
Government bonds
30,771
30,771
Corporate bonds
46,172
46,172
Mortgage-backed securities
Asset-backed securities
1,066
1,066
International fixed income
3,352
3,352
Alternatives
Real estate
9,676
9,676
Hedge funds
8,882
8,882
Other
$
151,509
$
151,509
(1)
Investments that are valued using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
December 31,
Not subject
to leveling (1)
Cash and cash equivalents
$
1,914
$
1,914
Equity securities
U.S. equity
27,765
27,765
Non-US equity
15,544
15,544
Emerging markets equity
8,259
8,259
Fixed income
Government bonds
28,855
28,855
Corporate bonds
46,228
46,228
Mortgage-backed securities
Asset-backed securities
Commercial mortgage-backed securities
International fixed income
4,485
4,485
Alternatives
Real estate
10,689
10,689
Hedge funds
8,228
8,228
Other
$
153,754
$
153,754
We recognize that risk and volatility are present to some degree with all types of investments. However, high levels of risk are minimized through diversification by asset class, and by style of each fund.
Estimated Future Benefit Payments
The following benefit payments are expected to be paid.
Fiscal Year Ended
Pension
$
11,574
11,635
11,670
11,883
11,953
2027-2031
56,698
Expected Contributions
We expect to contribute $3.0 million in 2022.
Postretirement Benefit Plan
We also provide postretirement medical benefits to retired full-time, nonunion employees hired before April 1, 1992, who have provided a minimum of five years of service and attained age 55.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The following table summarizes the Accumulated Postretirement Benefit Obligation (“APBO”), the changes in plan assets, and the funded status of our plan as of and for the financial statement periods ended December 31, 2021 and 2020.
Change in APBO
APBO at beginning of period
$
18,121
$
16,684
Service cost (benefits earned during the period)
Interest cost on APBO
Employee contributions
Actuarial loss (gain)
2,857
Benefits paid
(1,785
)
(2,097
)
APBO at end of period
$
17,558
$
18,121
Change in plan assets
Fair market value at beginning of period
$
-
$
-
Company contributions
1,713
1,913
Employee contributions
Benefits paid
(1,827
)
(2,097
)
Fair market value at end of period
$
-
$
-
Unfunded status
$
(17,558
)
$
(18,121
)
Amounts for postretirement benefits accrued in the consolidated balance sheets at December 31, 2021 and 2020 consist of:
Current liabilities
$
(1,618
)
$
(1,555
)
Noncurrent liabilities
(15,940
)
(16,566
)
Net amount recognized
$
(17,558
)
$
(18,121
)
Amounts not yet reflected in net periodic benefit cost and recognized in accumulated other comprehensive income (loss) at December 31, 2021 and 2020 consist of:
Net (loss) gain
$
(1,813
)
$
(1,050
)
Prior service cost
(341
)
(384
)
Accumulated other comprehensive (loss) income
$
(2,154
)
$
(1,434
)
Weighted average actuarial assumptions used to determine APBO at year-end December 31, 2021 and 2020 are:
Discount rate
2.7
%
2.2
%
Health care cost trend rate assumed for next year
5.3
%
5.5
%
Rate to which the cost trend rate is assumed to
decline (ultimate trend rate)
4.0
%
4.5
%
Year that the rate reaches the ultimate trend rate
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Net periodic postretirement benefit cost included the following components:
Service cost
$
$
$
Interest cost on APBO
Amortization of unrecognized prior service cost
Amortization of net (gain) loss
-
(7
)
(164
)
Net periodic postretirement benefit expense
$
$
$
Significant actuarial assumptions used to determine postretirement benefit cost at December 31, 2021, 2020 and 2019 are:
Discount rate
2.2
%
3.1
%
4.2
%
Health care cost trend rate assumed for next year
5.5
%
5.8
%
6.1
%
Rate to which the cost trend rate is assumed to
decline (ultimate trend rate)
4.5
%
4.5
%
4.5
%
Year that the rate reaches the ultimate trend rate
Assumed health care trend rates can have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects on the expense recorded in 2021 and 2020 for the postretirement medical plan:
One-percentage-point increase
Effect on total of service and interest cost
components
$
$
Effect on postretirement benefit obligation
One-percentage-point decrease
Effect on total of service and interest cost
components
(2
)
(2
)
Effect on postretirement benefit obligation
(86
)
(77
)
The following table presents the change in other comprehensive loss for the year ended December 31, 2021 related to our pension and postretirement obligations.
Pension
Postretirement
Plans
Benefit Plan
Total
Sources of change in accumulated other
comprehensive income (loss)
Net gain (loss) arising during the period
$
12,628
$
(762
)
$
11,866
Amortization of net gain
2,734
-
2,734
Total accumulated other comprehensive
income (loss) recognized during the period
$
15,362
$
(762
)
$
14,600
Estimated amounts that will be amortized from accumulated other comprehensive income (loss) over the next fiscal year.
Pension
Postretirement
Plans
Benefit Plan
Prior service credit (cost)
$
-
$
(42
)
Net gain (loss)
(2,064
)
(4
)
$
(2,064
)
$
(46
)
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Amounts not yet reflected in net periodic benefit cost for pension plans and postretirement plan and recognized in accumulated other comprehensive income (loss) at December 31, 2021 and 2020 consist of:
Net actuarial loss
$
(29,619
)
$
(44,219
)
Accumulated other comprehensive loss
$
(29,619
)
$
(44,219
)
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, are expected to be paid:
Postretirement
Fiscal Year Ended
Benefit Plan
$
1,618
1,568
1,507
1,417
1,340
2027-2031
5,623
Expected Contribution
We expect to contribute approximately $1.6 million in 2022.
Defined Contribution Retirement Plan
We maintain a defined contribution retirement plan, the Houghton Mifflin 401(k) Savings Plan, which conforms to Section 401(k) of the IRC and covers substantially all of our eligible employees. Participants may elect to contribute up to 50.0% of their compensation subject to an annual limit. We provide a matching contribution in amounts up to 3.0% of employee contributions. The 401(k) contribution expense amounted to $5.5 million, $6.8 million and $7.4 million for the years ended December 31, 2021, 2020 and 2019, respectively. We did not make any additional discretionary contributions in 2021, 2020 and 2019.
12.
Stock-Based Compensation
Total compensation expense related to grants of stock options, restricted stock units, and purchases under the employee stock purchase plan recorded in the years ended December 31, 2021, 2020 and 2019 was approximately $12.2 million, $11.2 million and $13.2 million, respectively, and is included in selling and administrative expense.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
2015 Omnibus Incentive Plan
Our Board of Directors adopted the 2015 Omnibus Incentive Plan (“Plan”) in February 2015, which became effective on May 19, 2015 following stockholder approval. The Plan initially provided to grant up to an aggregate of 4,000,000 shares of our common stock plus 2,615,476 shares of our common stock that were reserved for issuance under the 2012 Management Incentive Plan (“2012 MIP”) as of May 19, 2015 but were not issuable pursuant to any outstanding awards. There were 10,604,071 additional shares underlying outstanding awards under the 2012 MIP as of May 19, 2015 that could have otherwise become available again for grants under the 2012 MIP in the future (by potential forfeiture, withholding or otherwise) which will instead become reserved for issuance under the Plan in the event such shares become available for future grants. On December 13, 2019, our Board of Directors approved an amendment to the Plan to allow employees to have the share withholding increased from the minimum statutory rate to a higher rate, not to exceed the maximum statutory rate. On May 19, 2020, our shareholders approved an amended and restated Plan which increased the authorization of the number of shares available for grant under the Plan by 3,630,000 shares of our common stock.
Our Compensation Committee may grant awards of nonqualified stock options, incentive (qualified) stock options or cash, stock appreciation rights, restricted stock awards, restricted stock units, performance compensation awards, other stock-based awards or any combination of the foregoing. Certain employees, directors, officers, consultants or advisors who have been selected by the Compensation Committee and who enter into an award agreement with respect to an award granted to them under the Plan are eligible for awards under the 2015 Omnibus Incentive Plan. The stock option awards will be granted at a strike price equal to or greater than the fair value per share of common stock as of the date of grant. The stock related to award forfeitures and stock withheld to cover tax withholding requirements upon vesting of restricted stock units remains outstanding and may be reallocated to new recipients. The purpose of the Plan is to help us attract and retain key personnel by providing them the opportunity to acquire an equity interest in our Company.
As of December 31, 2021, there were 5,715,174 shares authorized and available for future issuance under the Plan. The vesting terms for equity awards generally range from 1 to 4 years over equal annual installments and generally expire seven years after the date of grant.
Stock Options
The following table summarizes option activity for certain employees in our stock options:
Weighted
Number of
Average
Shares
Exercise Price
Balance at December 31, 2020
1,897,212
$
12.95
Forfeited
(60,000
)
21.36
Balance at December 31, 2021
1,837,212
$
12.68
Vested and expected to vest at December 31, 2021
1,837,212
$
12.68
Exercisable at December 31, 2021
1,802,871
$
12.82
As of December 31, 2021, the range of exercise prices is $5.25 to $18.57 with a weighted average remaining contractual life of 2.4 years for options outstanding. The weighted average remaining contractual life for options vested and expected to vest and exercisable was 2.4 years and 2.3 years, respectively. The intrinsic value of a stock option is the amount by which the current market value of the underlying stock exceeds the exercise price of the option as of the balance sheet date. The intrinsic value of options outstanding, options vested and expected to vest, and options exercisable was $7.4 million, $7.4 million and $7.1 million at December 31, 2021, respectively. The intrinsic value of options outstanding, options vested and expected to vest, and options exercisable was zero at December 31, 2020.
As of December 31, 2021, there remained no unearned compensation expense related to unvested stock options.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Restricted Stock Units
The following table summarizes restricted stock activity for grants to certain employees and independent members of the board of directors in our restricted stock units:
Restricted Stock Units
Weighted
Average
Numbers of
Grant Date
Units
Fair Value
Balance at December 31, 2020
5,689,809
$
5.34
Granted
2,177,453
6.74
Vested
(1,569,773
)
5.49
Forfeited
(836,337
)
6.12
Balance at December 31, 2021
5,461,152
$
5.73
During 2021 and 2020, we granted market-based restricted stock units to certain members of our senior management team. The number of shares ultimately issued to the recipient is based on the total shareholder return (“TSR”) of our common stock as compared to the TSR of the common stock of a peer group comprised of each member of the Russell 2000 Small Cap Market Index over a three-year performance measurement period. In addition, award recipients must remain employed by us throughout the three-year performance measurement period to attain the full amount of the market-based units that satisfy the market performance criteria. We determined the fair value of the 2021 and 2020 market-based restricted stock units to be approximately $2.7 million and $2.9 million, respectively. We determined the fair value based on a Monte-Carlo simulation as of the date of grant, utilizing the following assumptions: the stock price on the date of grant of $6.03 for 2021 and $4.21 for 2020, a three-year performance measurement period, and a risk-free rate of 0.24% and 0.40% for 2021 and 2020, respectively. We recognize the expense on these awards on a straight-line basis over the three-year performance measurement period.
As of December 31, 2021, there remained approximately $13.8 million of unearned compensation expense related to unvested restricted stock units to be recognized over a weighted average term of 1.4 years. The restricted stock units include a combination of time-based and performance-based vesting.
Employee Stock Purchase Plan
Our Board of Directors adopted an Employee Stock Purchase Plan (“ESPP”) in February 2015, which became effective on May 19, 2015 following stockholder approval. The ESPP provides for sale of shares of our common stock under the plan to eligible employees. At the beginning of each six-month offering period under the ESPP each participant is deemed to have been granted an option to purchase shares of our common stock equal to the amount of their payroll deductions during the period, but in any event not more than five percent of the employee’s eligible compensation, subject to certain limitations. Such options may be exercised only to the extent of accumulated payroll deductions at the end of the offering period, at a purchase price per share equal to 85% of the fair market value of our common stock at the beginning or end of each offering period, whichever is less. On May 14, 2021, our shareholders approved an amended and restated ESPP which increased the authorization of the number of shares available for sale under the ESPP by 2,400,000 shares of our common stock. As of December 31, 2021, there were 2,363,041 shares available for future issuance under the ESPP.
Information related to shares issued or to be issued in connection with the ESPP based on employee contributions and the range of purchase prices is as follows:
December 31,
December 31,
Shares issued or to be issued
37,094
516,563
Range of purchase prices
$9.24
$1.54 -$1.56
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
We record stock-based compensation expense related to the discount provided to participants. Also, we use the Black-Scholes option-pricing model to calculate the grant-date fair value of shares issued under the employee stock purchase plan. We recognize expense related to shares purchased through the employee stock purchase plan ratably over the offering period. We recognized $0.1 million and $0.4 million in expense associated with our ESPP for each of the years ended December 31, 2021 and 2020, respectively.
13. Fair Value Measurements
The accounting standard for fair value measurements, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. The accounting standard establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
Level 1
Observable input such as quoted prices in active markets for identical assets or liabilities;
Level 2
Observable inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value are based on one or more of three valuation techniques identified in the tables below. Where more than one technique is noted, individual assets or liabilities were valued using one or more of the noted techniques. The valuation techniques are as follows:
(a)
Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities;
(b)
Cost approach: Amount that would be currently required to replace the service capacity of an asset (current replacement cost); and
(c)
Income approach: Valuation techniques to convert future amounts to a single present amount based on market expectations (including present value techniques).
On a recurring basis, we measure certain financial assets and liabilities at fair value, including our money market funds and foreign exchange forward contracts. The accounting standard for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty and its credit risk in its assessment of fair value.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Financial Assets and Liabilities
The following tables present our financial assets and liabilities measured at fair value on a recurring basis at December 31, 2021 and 2020:
Quoted Prices
Significant
in Active
Other
Markets for
Observable
Identical Assets
Inputs
Valuation
(Level 1)
(Level 2)
Technique
Financial assets
Money market funds
$
441,131
$
441,131
$
-
(a)
$
441,131
$
441,131
$
-
Financial liabilities
Foreign exchange derivatives
$
$
-
$
(a)
$
$
-
$
Quoted Prices
Significant
in Active
Other
Markets for
Observable
Identical Assets
Inputs
Valuation
(Level 1)
(Level 2)
Technique
Financial assets
Money market funds
$
262,135
$
262,135
$
-
(a)
Foreign exchange derivatives
-
(a)
$
262,601
$
262,135
$
Our money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices in active markets for identical instruments. In addition to $441.1 million and $262.1 million invested in money market funds as of December 31, 2021 and 2020, respectively, we had $22.0 million and $19.1 million of cash invested in bank accounts as of December 31, 2021 and 2020, respectively.
Our foreign exchange derivatives consist of forward contracts and are classified within Level 2 of the fair value hierarchy because they are valued based on observable inputs and are available for substantially the full term of our derivative instruments. We use foreign exchange forward contracts to fix the functional currency value of forecasted commitments, payments and receipts. The aggregate notional amount of the outstanding foreign exchange forward contracts was $12.6 million and $14.9 million at December 31, 2021 and 2020, respectively. Our foreign exchange forward contracts contain netting provisions to mitigate credit risk in the event of counterparty default, including payment default and cross default. At December 31, 2021 and 2020, the fair value of our counterparty default exposure was less than $1.0 million and spread across several highly rated counterparties.
Non-Financial Assets and Liabilities
Our non-financial assets, which include goodwill, other intangible assets, property, plant, and equipment, pre-publication costs and operating lease assets, are not required to be measured at fair value on a recurring basis. However, if certain trigger events occur, or if an annual impairment test is required, we evaluate the non-financial assets for impairment. If an impairment did occur, the asset is required to be recorded at the estimated fair value. An impairment analysis was performed for the preparation of the 2020 first quarter report, as there was a triggering event for the three months ended March 31, 2020 related to the decline in our stock price attributed to the market environment, which resulted in a goodwill impairment. There were no non-financial liabilities that were required to be measured at fair value on a nonrecurring basis during 2021, 2020 and 2019.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
The following table presents our non-financial assets measured at fair value on a nonrecurring basis during 2020:
Significant
Unobservable
Inputs
Total
Valuation
December 31, 2020
(Level 3)
Impairment
Technique
Non-financial assets
Goodwill
$
437,977
$
437,977
$
279,000
(c)
$
437,977
$
437,977
$
279,000
In evaluating goodwill for impairment, we first compare our reporting unit’s fair value to its carrying value. We estimate the fair values of our reporting unit by considering our market capitalization and other judgements. Impairment recorded for goodwill for the year ended December 31, 2020 was $279.0 million. There was no impairment recorded for goodwill for the years ended December 31, 2021 and 2019.
We perform an impairment test for our other intangible assets by comparing the assets fair value to its carrying value. Fair value is estimated based on recent market transactions, where available, and projected discounted cash flows, if reasonably estimable. There was no impairment of other intangible assets for the years ended December 31, 2021, 2020 and 2019.
We test our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable or that it may exceed its fair value. During the year ended December 31, 2021, we recorded an impairment of our operating lease assets in the amount of $11.7 million for real estate consolidation costs primarily relating to vacated office space formerly utilized by employees of the HMH Books & Media business. The fair value of the operating lease assets was determined based on the income approach, with level 3 inputs utilizing certain market participant assumptions. These inputs included forecasted cash inflows from estimated subleases and a discount rate. The remaining carrying value was $2.0 million. In connection with the real estate consolidation costs, we also recorded an impairment of property, plant, and equipment, of $1.6 million during the year ended December 31, 2021 using the income approach with level 3 inputs. This was primarily related to leasehold improvements on the vacated office space, and has a remaining carrying value of $0.3 million.
Non-Marketable Investments
At December 31, 2021 and 2020, the carrying value of our non-marketable investments, which were comprised of equity interests in educational technology private companies, was $6.3 million and $4.4 million, respectively. The amounts are included in other assets in our consolidated balance sheets. Our non-marketable investments are accounted for using the cost method and are adjusted for observable transactions as appropriate. Gains from non-marketable investments were $1.9 million for the year ended December 31, 2021, of which $1.4 million was included in gain on investments and $0.5 million was included as a reduction of cost of sales in our consolidated statements of operations.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
Fair Value of Debt
The following table presents the carrying amounts and estimated fair market values of our debt at December 31, 2021 and 2020. The fair value of debt is deemed to be the amount at which the instrument could be exchanged in an orderly transaction between market participants at the measurement date.
December 31, 2021
December 31, 2020
Carrying
Estimated
Carrying
Estimated
Amount
Fair Value
Amount
Fair Value
$380,000 Term loan
$
20,996
$
20,970
$
346,091
$
331,382
$306,000 Senior secured notes
$
296,583
$
309,929
$
297,601
$
304,297
The fair market values of our debt were estimated based on quoted market prices on a private exchange for those instruments that are traded and are classified as Level 2 within the fair value hierarchy at December 31, 2021 and 2020. The fair market values require varying degrees of management judgment. The factors used to estimate these values may not be valid on any subsequent date. Accordingly, the fair market values of the debt presented may not be indicative of their future values.
14.
Commitments and Contingencies
We are involved in ordinary and routine litigation and matters incidental to our business, including claims alleging breach of contract and seeking royalty payments. Litigation alleging infringement of copyrights and other intellectual property rights is also common in the educational publishing industry. There have been various settled, pending and threatened litigation that allege we exceeded the print run limitation or other restrictions in licenses granted to us to reproduce photographs in our textbooks.
While we may incur a loss associated with certain pending or threatened litigation, we are not able to estimate such amount, if any, but we do not expect any of these matters to have a material adverse effect on our results of operations, financial position or cash flows. We have insurance over such amounts and with coverage and deductibles as management believes is reasonable. There can be no assurance that our liability insurance will cover all events or that the limits of coverage will be sufficient to fully cover all liabilities.
We were contingently liable for $1.1 million and $1.4 million of performance-related surety bonds for our operating activities as of December 31, 2021 and 2020, respectively. An aggregate of $16.1 million and $18.8 million of letters of credit existed each year at December 31, 2021 and 2020, respectively, of which $0.5 million and $1.1 million backed the aforementioned performance-related surety bonds each year in 2021 and 2020, respectively.
We routinely enter into standard indemnification provisions as part of license agreements involving use of our intellectual property. These provisions typically require us to indemnify and hold harmless licensees in connection with any infringement claim by a third-party relating to the intellectual property covered by the license agreement. Although the term of these provisions and the maximum potential amounts of future payments we could be required to make is not limited, we have never incurred any costs to defend or settle claims related to these types of indemnification provisions. We therefore believe the estimated fair value of these provisions is inconsequential and have no liabilities recorded for them as of December 31, 2021 and 2020.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
15.
Stockholders’ Equity
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consisted of the following at December 31, 2021, 2020 and 2019:
Net change in pension and benefit plan liabilities
$
(34,366
)
$
(48,966
)
$
(39,757
)
Foreign currency translation adjustments
(7,700
)
(6,650
)
(6,420
)
Unrealized loss on short-term investments
(90
)
(90
)
(90
)
Net change in unrealized loss on derivative
Instruments
(18
)
(18
)
(1,005
)
$
(42,174
)
$
(55,724
)
$
(47,272
)
Amounts reclassified from accumulated other comprehensive income (loss) for the years ended December 31, 2021, 2020 and 2019 relating to the amortization of defined benefit pension and postretirement benefit plans totaled approximately $(2.8) million, $(2.4) million and $(0.9) million, respectively, and affected the selling and administrative line item in the consolidated statement of operations. These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost.
16.
Related Party Transactions
There were no related party transactions during 2021 and 2020.
In November 2019, Anchorage Capital Group, L.L.C. (“Anchorage”), a significant stockholder in the Company at the time and a former partner of which was serving on the Company’s board of directors, participated as a lender in the refinancing of the Company’s debt, acquiring $20.0 million out of the $306.0 million in aggregate principal amount of 9.000% Senior Secured Notes due 2025 (the “Notes”) issued by the Company and becoming a lender under the Company’s second amended and restated term loan credit agreement (the “Term Loan Credit Agreement”) with a commitment of $15.0 million out of the $380.0 million in initial principal amount of the term loan. As of December 10, 2020, Anchorage no longer had an ownership interest in the Company. Anchorage’s participation in the refinancing was on the same terms as all the other lenders. Refer to Note 7 for additional information about the Notes and the Term Loan Credit Agreement.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
17.
Net Income (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings per share (“EPS”):
For the Year
For the Year
For the Year
Ended
Ended
Ended
December 31,
December 31,
December 31,
Numerator
Income (loss) from continuing operations
$
2,060
$
(470,690
)
$
(200,175
)
Loss from discontinued operations, net of tax
(1,005
)
(9,148
)
(13,658
)
Gain on sale of discontinued operations, net of tax
212,523
-
-
Income (loss) from discontinued operations, net of tax
211,518
(9,148
)
(13,658
)
Net income (loss) attributable to common stockholders
$
213,578
$
(479,838
)
$
(213,833
)
Denominator
Weighted average shares outstanding
Basic
127,337,815
125,455,487
124,152,984
Diluted
131,402,866
125,455,487
124,152,984
Net income (loss) per share attributable to common
stockholders
Basic:
Continuing operations
$
0.02
$
(3.75
)
$
(1.61
)
Discontinued operations
1.66
(0.07
)
(0.11
)
Net income (loss)
$
1.68
$
(3.82
)
$
(1.72
)
Diluted:
Continuing operations
$
0.02
$
(3.75
)
$
(1.61
)
Discontinued operations
1.61
(0.07
)
(0.11
)
Net income (loss)
$
1.63
$
(3.82
)
$
(1.72
)
As we incurred a net loss in each of the years ended December 31, 2020 and 2019 presented above, all outstanding stock options and restricted stock units for those periods have an anti-dilutive effect and therefore are excluded from the computation of diluted weighted average shares outstanding. Accordingly, basic and diluted weighted average shares outstanding are equal for such periods.
The following table summarizes our weighted average outstanding common stock equivalents that were anti-dilutive attributable to common stockholders during the periods, and therefore excluded from the computation of diluted EPS:
For the Year
For the Year
For the Year
Ended
Ended
Ended
December 31,
December 31,
December 31,
Stock options
1,076,060
1,897,212
2,765,826
Restricted stock units
1,739
4,133,531
3,342,923
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
18.
Valuation and Qualifying Accounts
Balance at
Balance at
Beginning
Utilization of
End
of Year
Net Charges
Allowances
of Year
Allowance for doubtful accounts
$
3,790
$
(73
)
$
(258
)
$
3,459
Reserve for returns
4,577
23,976
(24,484
)
4,069
Reserve for royalty advances
7,309
(20
)
7,882
Deferred tax valuation allowance
662,568
(46,601
)
(5,715
)
610,252
Allowance for doubtful accounts
$
2,834
$
1,335
$
(379
)
$
3,790
Reserve for returns
6,303
17,489
(19,215
)
4,577
Reserve for royalty advances
7,094
3,145
(2,930
)
7,309
Deferred tax valuation allowance
583,505
81,475
(2,412
)
662,568
Allowance for doubtful accounts
$
1,972
$
2,034
$
(1,172
)
$
2,834
Reserve for returns
8,355
22,651
(24,703
)
6,303
Reserve for royalty advances
6,629
(35
)
7,094
Deferred tax valuation allowance
562,392
23,707
(2,594
)
583,505
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
19.
Quarterly Results of Operations (Unaudited)
Three Months Ended
March 31,
June 30,
September 30,
December 31,
2021:
Net sales
$
146,195
$
308,672
$
417,130
$
178,805
Gross profit
59,841
155,317
234,101
83,528
Operating (loss) income
(37,300
)
22,834
95,537
(32,889
)
(Loss) income from continuing operations
(49,028
)
2,158
95,359
(46,429
)
(Loss) income from discontinued operations, net of tax
(2,955
)
1,950
-
-
Gain (loss) on sale of discontinued operations, net of tax
-
214,520
-
(1,997
)
Net (loss) income
(51,983
)
218,628
95,359
(48,426
)
Net (loss) income per share attributable to
common stockholders
Basic:
Continuing operations
$
(0.39
)
$
0.01
$
0.75
$
(0.36
)
Discontinued operations
(0.02
)
1.70
-
(0.02
)
Net (loss) income
$
(0.41
)
$
1.71
$
0.75
$
(0.38
)
Diluted:
Continuing operations
$
(0.39
)
$
0.02
$
0.72
$
(0.36
)
Discontinued operations
(0.02
)
1.66
-
(0.02
)
Net (loss) income
$
(0.41
)
$
1.68
$
0.72
$
(0.38
)
2020:
Net sales
$
151,843
$
216,239
$
331,205
$
141,167
Gross profit
53,197
80,605
150,011
45,417
Operating loss
(338,000
)
(23,449
)
(5,897
)
(80,570
)
Loss from continuing operations
(338,026
)
(32,437
)
(11,885
)
(88,342
)
(Loss) income from discontinued operations, net of tax
(7,947
)
(5,731
)
(667
)
5,197
Net loss
(345,973
)
(38,168
)
(12,552
)
(83,145
)
Net loss per share attributable to
common stockholders
Basic and diluted:
Continuing operations
$
(2.71
)
$
(0.25
)
$
(0.09
)
$
(0.70
)
Discontinued operations
(0.06
)
(0.05
)
(0.01
)
0.04
Net loss
$
(2.77
)
$
(0.30
)
$
(0.10
)
$
(0.66
)
Our net sales, operating profit or loss and net cash provided by or used in operations are impacted by the inherent seasonality of the academic calendar. Consequently, the performance of our business may not be comparable quarter to consecutive quarter and should be considered on the basis of results for the whole year or by comparing results in a quarter with results in the same quarter for the previous year.
During the fourth quarter of 2020, we recorded an adjustment of $17.0 million and $1.0 million to increase both the goodwill impairment charge and income tax benefit recorded, respectively, to correct an error of the previously recorded goodwill impairment of $262.0 million and related income tax benefit in the first quarter of 2020. Management believes these adjustments are not material to the current period financial statements or any prior periods.
Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements
(in thousands of dollars, except share and per share information)
20. Subsequent Events
Acquisition by Entities Beneficially Owned by Veritas
On February 21, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Harbor Holding Corp., a Delaware corporation (the “Parent”), and Harbor Purchaser Inc., a Delaware corporation and a wholly owned subsidiary of the Parent (the “Purchaser”). The Merger Agreement provides for the acquisition of the Company by the Parent through a cash tender offer (the “Offer”) by the Purchaser for all of the Company’s outstanding shares of common stock at a price of $21.00 per share of common stock (the “Offer Price”). The Parent and the Purchaser are beneficially owned by The Veritas Capital Fund VII, L.P.
The Company’s Board of Directors (the “Board”) has unanimously approved the Merger Agreement and the transactions contemplated thereby, including the Merger (as defined below) and recommended that the stockholders of the Company accept the Offer and tender their shares of common stock pursuant to the Offer. Under the Merger Agreement, the Purchaser is required, as soon as practicable, and in any event within ten Business Days after the date of the Merger Agreement, to commence the Offer to purchase any and all outstanding shares of common stock. The Offer initially will remain open for twenty business days, subject to possible extension on the terms set forth in the Merger Agreement. The parties currently expect the Offer and the Merger to be completed in the second quarter of 2022.
The Purchaser’s obligation to accept shares of common stock tendered in the Offer is subject to customary closing conditions, including: (a) that the number of shares of common stock validly tendered and not validly withdrawn, together with any shares of common stock beneficially owned by the Parent or any subsidiary of the Parent, equals at least one share more than 50% of all shares of common stock then outstanding; (b) the absence of any legal impediment that has the effect of enjoining, restraining, preventing or prohibiting or prohibiting the consummation of the Offer, the Merger or the other transactions contemplated by the Merger Agreement or making the Offer, the Merger or the other transactions contemplated by the Merger Agreement illegal; (c) that, since the date of the Merger Agreement, there shall not have occurred any material adverse effect with respect to the Company; (d) compliance in all material respects by the Company with its covenants under the Merger Agreement; (e) the continued accuracy of representations and warranties made by the Company in the Merger Agreement, except as permitted by the Merger Agreement; (f) that the waiting period (and any extensions thereof) and any approvals or clearances applicable to the Offer and Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, shall have expired, been terminated or obtained; and (g) other customary conditions.
Following the completion of the Offer, subject to the absence of injunctions or other legal restraints preventing the consummation thereof, the Purchaser will merge with and into the Company (the “Merger”), with the Company surviving as a wholly owned subsidiary of the Parent, pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law, without any additional stockholder approvals. The Merger will be effected as soon as practicable following the time of acceptance for purchase by the Purchaser of shares of common stock validly tendered and not withdrawn in the Offer.
The Merger Agreement contains customary representations and warranties from both the Company, on the one hand, and the Parent and the Purchaser, on the other hand. It also contains customary covenants of the Company and customary termination rights including, among others, for failure to consummate the Offer on or before August 22, 2022. If the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement (including under specified circumstances in connection with the Company’s entry into an agreement with respect to a superior proposal or in connection with the Company board’s change in recommendation), the Company will be required to pay the Parent a termination fee of $65.0 million.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and our Executive Vice President and Chief Financial Officer (“CFO”), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021 pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (as amended, the “Exchange Act”). Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures as of December 31, 2021 were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and the information required to be disclosed by us is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the Company;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or dispositions of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, the Company’s management used the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our assessment and the aforementioned criteria, management concluded that, as of December 31, 2021, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting in the quarter ended December 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
Except to the extent provided below, the information required by this Item shall be set forth in the sections titled “Corporate Governance” and “Executive Officers” in our Proxy Statement for our 2022 Annual Meeting of Stockholders, to be filed with the SEC within 120 days of December 31, 2021, and is incorporated into this Annual Report on Form 10-K by reference.
We have adopted a Code of Conduct that applies to our principal executive officer, principal financial officer and principal accounting officer or any person performing similar functions, which we post on our website in the “Corporate Governance” link located at: ir.hmhco.com. We intend to publish any amendment to, or waiver from, the Code of Conduct on our website. We will provide any person, without charge, a copy of such Code of Conduct upon written request, which may be mailed to 125 High Street, Boston, MA 02110, Attn: Corporate Secretary.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this Item shall be set forth in the sections titled “Executive Compensation” and “Director Compensation” in our Proxy Statement for our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2021, and is incorporated into this Annual Report on Form 10-K by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
The information required by this Item shall be set forth in the section titled “Security Ownership and Other Matters” in our Proxy Statement for our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2021, and is incorporated into this Annual Report on Form 10-K by reference.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions
The information required by this Item shall be set forth in the section titled “Corporate Governance - Review and Approval of Transactions with Related Persons” in our Proxy Statement for our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2021, and is incorporated into this Annual Report on Form 10-K by reference.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
The information required by this Item shall be set forth in the section titled “Ratification of the Appointment of the Company’s Independent Registered Public Accounting Firm” in our Proxy Statement for our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2021, and is incorporated into this Annual Report on Form 10-K by reference.

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules
(a) Documents filed as part of the report.
(1) Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
Schedule II-“Valuation and Qualifying Accounts” is included herein as Note 18 in the Notes to Consolidated Financial Statements.
(3) Exhibits.
See the Exhibit Index.
EXHIBIT INDEX
Exhibit No.
Description
2.1
Agreement and Plan of Merger dated as of February 21, 2022 by and among Houghton Mifflin Harcourt Company, Harbor Holding Corp. and Harbor Purchaser Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed February 22, 2022 (File No. 001-36166)).
2.2
Prepackaged Joint Plan of Reorganization of the Debtors Under Chapter 11 of the Bankruptcy Code by and among Houghton Mifflin Harcourt Publishing Company, Houghton Mifflin Harcourt Publishers Inc., HMH Publishers, LLC, Houghton Mifflin Holding Company, Inc., Houghton Mifflin, LLC, Houghton Mifflin Finance, Inc., Houghton Mifflin Holdings, Inc., HM Publishing Corp., Riverdeep Inc., A Limited Liability Company, Broderbund LLC, RVDP, Inc., HRW Distributors, Inc., Greenwood Publishing Group, Inc., Classroom Connect, Inc., Achieve! Data Solutions, LLC, Steck-Vaughn Publishing LLC, HMH Supplemental Publishers Inc., HMH Holdings (Delaware), Inc., Sentry Realty Corporation, Houghton Mifflin Company International, Inc., The Riverside Publishing Company, Classwell Learning Group Inc., Cognitive Concepts, Inc., Edusoft And Advanced Learning Centers, Inc. (incorporated herein by reference to Exhibit No. 2.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-1, filed September 13, 2013 (File No. 333-190356)).
2.3
Stock and Asset Purchase Agreement dated as of April 23, 2015, by and among Houghton Mifflin Harcourt Publishing Company, as Purchaser, Scholastic Corporation, as Parent Seller, and Scholastic Inc., as Seller (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed April 24, 2015 (File No. 001-36166)).
2.4
Asset Purchase Agreement, by and among Houghton Mifflin Harcourt Publishing Company, Houghton Mifflin Harcourt Company (solely for purposes of Section 8.2 and 8.3) and Riverside Assessment, LLC, dated as of September 12, 2018 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed September 12, 2018 (File No. 001-36166)).
2.5
Amendment No. 1 to Asset Purchase Agreement, by and among Houghton Mifflin Harcourt Publishing Company, Houghton Mifflin Harcourt Company (solely for purposes of Section 8.2 and 8.3) and Riverside Assessment, LLC, dated as of October 1, 2018 (incorporated herein by reference to Exhibit 2.1b to the Company’s Current Report on Form 8-K, filed October 5, 2018 (File No. 001-36166)).
2.6
Asset Purchase Agreement, by and among Houghton Mifflin Harcourt Publishing Company, HarperCollins Publishers L.L.C. and News Corporation (solely with respect to Section 7.10) dated as of March 26, 2021 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed March 29, 2021 (File No. 001-36166)).
3.1
Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit No. 3.1 to Amendment No. 4 to the Company’s Registration Statement on Form S-1, filed October 25, 2013 (File No. 333-190356)).
3.2
Certificate of Amendment to Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit No. 3.2 to Amendment No. 4 to the Company’s Registration Statement on Form S-1, filed October 25, 2013 (File No. 333-190356)).
3.3
Amended and Restated By-laws of the Registrant, as amended, effective September 20, 2020 (incorporated herein by reference to Exhibit No. 3.1 to the Company’s Current Report on Form 8-K, filed October 6, 2020 (File No. 001-36166)).
4.1
Investor Rights Agreement, dated as of June 22, 2012, by and among HMH Holdings (Delaware), Inc. and the stockholders party thereto (incorporated herein by reference to Exhibit No. 4.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-1, filed September 13, 2013 (File No. 333-190356)).
4.2
Specimen Common Stock Certificate (incorporated herein by reference to Exhibit No. 4.3 to Amendment No. 4 to the Company’s Registration Statement on Form S-1, filed October 25, 2013 (File No. 333-190356)).
Exhibit No.
Description
4.3
Form of Warrant Certificate (incorporated herein by reference to Exhibit No. 4.4 to Amendment No. 2 to the Company’s Registration Statement on Form S-1, filed October 4, 2013 (File No. 333-190356)).
4.4
Warrant Agreement, dated as of June 22, 2012, among HMH Holdings (Delaware), Inc., Computershare Inc. and Computershare Trust Company, N.A. (incorporated herein by reference to Exhibit No. 4.5 to Amendment No. 2 to the Company’s Registration Statement on Form S-1, filed October 4, 2013 (File No. 333-190356)).
4.5
Indenture, dated as of November 22, 2019, among Houghton Mifflin Harcourt Company, Inc., Houghton Mifflin Harcourt Publishers Inc., Houghton Mifflin Harcourt Publishing Company and HMH Publishers LLC, the subsidiary guarantors party thereto, U.S. Bank National Association, as trustee, and Citibank N.A., as collateral agent (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed November 25, 2019 (File No. 001-36166)).
4.6
Form of 9.000% Senior Secured Notes due 2025 (incorporated herein by reference to Exhibit A to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed November 25, 2019) (File No. 001-36166)).
4.7
Description of Registrant’s Common Stock (incorporated herein by reference to Exhibit 4.7 to the Company’s Annual Report on Form 10-K, filed February 27, 2020 (File No. 36166)).
10.1†
Form of Indemnification Agreement (incorporated herein by reference to Exhibit No. 10.12 to Amendment No. 1 to the Company’s Registration Statement on Form S-1, filed September 13, 2013 (File No. 333-190356)).
10.2
Amended and Restated Term Loan Credit Agreement, dated as of May 29, 2015, by and among Houghton Mifflin Harcourt Company, Houghton Mifflin Harcourt Publishers Inc., HMH Publishers LLC, Houghton Mifflin Harcourt Publishing Company, certain other subsidiaries of Houghton Mifflin Harcourt Company, as subsidiary guarantors, the lenders party thereto and Citibank, N.A., as administrative agent and collateral agent (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed May 29, 2015 (File No. 001-36166)).
10.3
Amended and Restated Term Facility Guarantee and Collateral Agreement, dated as of May 29, 2015, by and among Houghton Mifflin Harcourt Company, Houghton Mifflin Harcourt Publishers Inc., HMH Publishers LLC, Houghton Mifflin Harcourt Publishing Company, the subsidiaries of Houghton Mifflin Harcourt Company from time to time party thereto and Citibank, N.A., as collateral agent (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed May 29, 2015 (File No. 001-36166)).
10.4
Amended and Restated Revolving Credit Agreement, dated as of July 22, 2015, by and among Houghton Mifflin Harcourt Company, Houghton Mifflin Harcourt Publishers Inc., HMH Publishers LLC, Houghton Mifflin Harcourt Publishing Company, certain other subsidiaries of Houghton Mifflin Harcourt Company, as subsidiary guarantors, the lenders party thereto and Citibank, N.A., as administrative agent and collateral agent (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed July 23, 2015 (File No. 001-36166)).
10.5
Amended and Restated Revolving Facility Guarantee and Collateral Agreement, dated as of July 23, 2015, by and among Houghton Mifflin Harcourt Company, Houghton Mifflin Harcourt Publishers Inc., HMH Publishers LLC, Houghton Mifflin Harcourt Publishing Company, the subsidiaries of Houghton Mifflin Harcourt Company from time to time party thereto and Citibank, N.A., as collateral agent (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed July 22, 2015 (File No. 001-36166)).
Exhibit No.
Description
10.6
First Amendment to Credit Agreement, First Amendment to Guarantee and Collateral Agreement and Consent to Release of Mortgages, dated as of June 28, 2019 and effective as of July 1, 2019, by and among Houghton Mifflin Harcourt Company, Houghton Mifflin Harcourt Publishers Inc., HMH Publishers LLC, Houghton Mifflin Harcourt Publishing Company, certain other subsidiaries of Houghton Mifflin Harcourt Company, as subsidiary guarantors, the lenders party thereto and Citibank, N.A., as administrative agent and collateral agent (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed July 1, 2019 (File No. 001-36166)).
10.7
Second Amended and Restated Term Loan Credit Agreement, dated as of November 22, 2019, among Houghton Mifflin Harcourt Company, Inc., Houghton Mifflin Harcourt Publishers Inc., Houghton Mifflin Harcourt Publishing Company and HMH Publishers LLC, the subsidiary guarantors party thereto, Citibank N.A., as administrative agent and collateral agent, Citigroup Global Market Inc., Morgan Stanley Senior Funding, Inc., BofA Securities, Inc. and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners, and Citizens Bank, N.A., as co-manager (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed November 25, 2019 (File No. 001-36166)).
10.8
Second Amended and Restated Revolving Credit Agreement, dated as of November 22, 2019, among Houghton Mifflin Harcourt Company, Inc., Houghton Mifflin Harcourt Publishers Inc., Houghton Mifflin Harcourt Publishing Company and HMH Publishers LLC, the subsidiary guarantors party thereto, Citibank N.A., as administrative agent and collateral agent, Citigroup Global Market Inc., Morgan Stanley Senior Funding, Inc., BofA Securities, Inc. and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners, and Citizens Bank, N.A., as co-manager (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed November 25, 2019 (File No. 001-36166)).
10.9†
HMH Holdings (Delaware), Inc. Change in Control Severance Plan (incorporated herein by reference to Exhibit No. -10.5 to Amendment No. 1 to the Company’s Registration Statement on Form S-1, filed September 13, 2013 (File No. 333-190356)).
10.10†
Houghton Mifflin Harcourt Publishing Company ELT Severance Plan (incorporated herein by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q, filed November 5, 2015 (File No. 001-36166)).
10.11†
Houghton Mifflin Harcourt Severance Plan, amended and restated as of March 31, 2016 (incorporated herein by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q, filed May 4, 2016 (File No. 001-36166)).
10.12†
Form of Director Compensation Letter (incorporated herein by reference to Exhibit No. 10.11 to Amendment No. 1 to the Company’s Registration Statement on Form S-1, filed September 13, 2013 (File No. 333-190356)).
10.13†
Houghton Mifflin Harcourt Company Non-Employee Director Deferred Compensation Plan (incorporated herein by reference to Exhibit No. 10.50 to the Company’s Annual Report on Form 10-K, filed February 25, 2016 (File No. 001-36166)).
10.14†
Amended and Restated Houghton Mifflin Harcourt Company Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed May 19, 2021 (File No. 001-36166)).
10.15†
HMH Holdings (Delaware), Inc. 2012 Management Incentive Plan (incorporated herein by reference to Exhibit No. 10.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-1, filed September 13, 2013 (File No. 333-190356)).
10.16†
HMH Holdings (Delaware), Inc. 2012 Management Incentive Plan Form of Stock Option Award Notice (incorporated herein by reference to Exhibit No. 10.2a to Amendment No. 1 to the Company’s Registration Statement on Form S-1, filed September 13, 2013 (File No. 333-190356)).
Exhibit No.
Description
10.17†
HMH Holdings (Delaware), Inc. 2012 Management Incentive Plan Time-Based Restricted Stock Unit Award Notice (incorporated herein by reference to Exhibit No. 10.32 to the Company’s Annual Report on Form 10-K, filed February 26, 2015 (File No. 001-36166)).
10.18†
HMH Holdings (Delaware), Inc. 2012 Management Incentive Plan Performance-Based Restricted Stock Award Notice (incorporated herein by reference to Exhibit No. 10.33 to the Company’s Annual Report on Form 10-K, filed February 26, 2015 (File No. 001-36166)).
10.19†
HMH Holdings (Delaware), Inc. 2012 Management Incentive Plan Performance-Based Restricted Stock Unit Award Notice (incorporated herein by reference to Exhibit No. 10.34 to the Company’s Annual Report on Form 10-K, filed February 26, 2015 (File No. 001-36166)).
10.20†
HMH Holdings (Delaware), Inc. 2012 Management Incentive Plan Time-Based Restricted Stock Award Notice (incorporated herein by reference to Exhibit No. 10.35 to the Company’s Annual Report on Form 10-K, filed February 26, 2015 (File No. 001-36166)).
10.21†
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-8, filed May 29, 2015 (File No. 333-204519)).
10.22†
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan Form of Time-Based Restricted Stock Unit Award Notice (Employees) (incorporated herein by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-8, filed May 29, 2015 (File No. 333-204519)).
10.23†
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan Form of Performance-Based Restricted Stock Unit Award Notice (Employees) (incorporated herein by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-8, filed May 29, 2015 (File No. 333-204519)).
10.24†
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan Form of Time-Based Restricted Stock Unit Award Notice (Directors) (incorporated herein by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q, filed August 6, 2015 (File No. 001-36166)).
10.25†
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan Form of Stock Option Award Notice (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q, filed August 6, 2015 (File No. 001-36166)).
10.26†
Houghton Mifflin Harcourt Company Form of Restricted Stock Unit Award Notice (with Deferral Feature-Directors) (incorporated herein by reference to Exhibit No. 10.51 to the Company’s Annual Report on Form 10-K, filed February 25, 2016 (File No. 001-36166)).
10.27†
Houghton Mifflin Harcourt Company Form of Performance-Based Restricted Stock Unit Award Notice (TSR/Billings-Employees) (incorporated herein by reference to Exhibit No. 10.1 to the Company’s Current Report on Form 8-K, filed May 4, 2016 (File No. 001-36166)).
10.28†
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan New Hire Stock Option Award Notice dated May 9, 2017 by and between Houghton Mifflin Harcourt Company and John J. Lynch, Jr. (incorporated herein by reference to Exhibit No. 10.27 to the Company’s Annual Report on Form 10-K, filed February 22, 2018) (File No. 001-36166)).
10.29†
Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan New Hire Time-Based Restricted Stock Unit Award Notice dated May 9, 2017 by and between Houghton Mifflin Harcourt Company and John J. Lynch, Jr. (incorporated herein by reference to Exhibit No. 10.28 to the Company’s Annual Report on Form 10-K, filed February 22, 2018) (File No. 001-36166)).
10.30†
William Bayers Offer Letter dated April 10, 2007, as amended on May 14, 2009 (incorporated herein by reference to Exhibit No. 10.9 to Amendment No. 1 to the Company’s Registration Statement on Form S-1, filed September 13, 2013 (File No. 333-190356)).
10.31†
Joseph Abbott Offer Letter dated as of March 10, 2016 (incorporated herein by reference to Exhibit No. 201-5 10.3 to the Company’s Current Report on Form 8-K, filed March 10, 2016 (File No. 001-36166)).
Exhibit No.
Description
10.32†
Letter Agreement, effective September 22, 2016, by and between Houghton Mifflin Harcourt Company and L. Gordon Crovitz (incorporated herein by reference to Exhibit No. 10.1 to the Company’s Quarterly Report on Form 10-Q, filed November 3, 2016 (File No. 001-36166)).
10.33†
John J. Lynch Offer Letter dated February 10, 2017 (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on February 15, 2017 (File No. 001-36166)).
10.34†*
Michael E. Evans Offer Letter dated July 23, 2019.
10.35†*
James P. O’Neill Offer Letter dated August 21, 2017.
10.36†
Amendment No. 1 to the Houghton Mifflin Harcourt Company 2015 Omnibus Incentive Plan dated December 13, 2019 (incorporated herein by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K filed on February 27, 2020 (File No. 001-36166))
10.37†*
Houghton Mifflin Harcourt Company Revised 2021 Bonus Plan - US
21.1*
List of Subsidiaries of the Registrant.
23.1*
Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
31.1*
Certification of CEO Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of CFO Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
The instance document does not appear in the interactive file because its XBRL tags are embedded within the inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
†
Identifies a management contract or compensatory plan or arrangement.
*
Filed herewith.
**
This certification shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities under that section. Furthermore, this certification shall not be deemed to be incorporated by reference into the filings of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, regardless of any general incorporation language in such filing.