Houghton Mifflin Harcourt Company
Notes to Consolidated Financial Statements (Unaudited)
(amounts in tables are in thousands of dollars, except share and per share information)
Houghton Mifflin Harcourt Company (HMH, Houghton Mifflin Harcourt, we, us, our, or
the Company) is a global learning company, committed to delivering integrated 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 serves more than 50 million students and 3 million educators in 150 countries, while its award-winning childrens books, novels, non-fiction, and reference titles are enjoyed by readers throughout the world.
The K-12 market is our primary market, and in the United States, we are a leading provider of educational content by market share. Some of our core educational offerings include HMH Science Dimensions,
Collections, GO Math!, Read 180 Universal, and Journeys. We believe our long-standing reputation and trusted brand enable us to capitalize on trends in the education market through our existing and developing channels.
Furthermore, for nearly two centuries, we have published renowned and awarded childrens, fiction, nonfiction, culinary and
reference titles enjoyed by readers throughout the world. Our distinguished author list includes ten Nobel Prize winners, forty-eight Pulitzer Prize winners, and fifteen National Book Award winners. We are home to popular characters and titles such
as Curious George, Carmen Sandiego, The Lord of the Rings, The Whole30, The Best American Series, the Peterson Field Guides, CliffsNotes, and The Polar Express, and published distinguished authors such as Philip Roth, Temple Grandin,
Tim OBrien, Amos Oz, Kwame Alexander, Lois Lowry, and Chris Van Allsburg.
We sell our products and services across multiple media
and distribution channels. Leveraging our portfolio of content, including some of our best-known childrens brands and titles, such as Carmen Sandiego and Curious George, we have created interactive digital content, mobile applications and
educational games that can be used by families at home or on the go.
Our digital products portfolio, combined with our content
development or distribution agreements with recognized technology leaders such as Apple, Google, Intel and Microsoft, enable us to bring our next-generation educational solutions and content to learners across virtually all platforms and devices.
Additionally, we believe our technology and development capabilities allow us to enhance content engagement and effectiveness with embedded assessment, interactivity and personalized adaptable content as well as increased accessibility.
The September 30, 2018 and December 31, 2017 consolidated financial statements of HMH include the accounts of all of our
wholly-owned subsidiaries as of, and for the three and nine month periods ended September 30, 2018 and 2017.
unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial statements. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted
consistent with Article 10 of Regulation S-X. In the opinion of management, our unaudited consolidated financial statements and accompanying notes include all adjustments (consisting of normal recurring
adjustments) considered necessary by management to fairly state the results of operations, financial position and cash flows for the interim periods presented. Interim results of operations are not necessarily indicative of the results for the full
year or for any future period. These financial statements should be read in conjunction with the annual financial statements and the notes thereto also included therein.
During the nine months ended September 30, 2017, we recorded
out-of-period corrections of approximately $4.0 million increasing net sales and reducing deferred revenue that should have been recognized previously. Management
believes these out-of-period corrections are not material to the current period financial statements or any previously issued financial statements.
Our business is impacted by the inherent seasonality of the academic calendar, which 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.
The ability of the Company to fund planned operations is based on assumptions which involve significant judgment and estimates of future
revenues, capital spend and other operating costs. If necessary, management will take steps intended to improve the Companys financial position and liquidity.
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. Consequently, the performance of our businesses 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.
Approximately 86% of our net sales for the year ended December 31, 2017 were derived from our Education
segment, which is a markedly seasonal business. Schools 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,
2017, 2016 and 2015, approximately 66% 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.