Quarterly Report (10-q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-36166

Houghton Mifflin Harcourt Company

(Exact name of registrant as specified in its charter)

Delaware

27-1566372

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

125 High Street

Boston, MA 02110

(617) 351-5000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange

on which registered

Common Stock, $0.01 par value

HMHC

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of common stock, par value $0.01 per share, outstanding as of May 3, 2021 was 127,410,353.

Table of Contents


		Page (s)

Special Note Regarding Forward-Looking Statements			3

PART I.	FINANCIAL INFORMATION		4

Item 1.	Consolidated Financial Statements (Unaudited):		4

	Consolidated Balance Sheets		4

	Consolidated Statements of Operations		5

	Consolidated Statements of Comprehensive Loss		6

	Consolidated Statements of Cash Flows		7

	Consolidated Statements of Stockholders’ Equity		8

	Notes to Consolidated Financial Statements		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		36

Item 4.	Controls and Procedures		37

PART II.	OTHER INFORMATION		38

Item 1.	Legal Proceedings		38

Item 1A.	Risk Factors		38

Item 6.	Exhibits		39

SIGNATURES			40

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The statements contained herein include forward-looking statements, which involve risks and uncertainties. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “projects,” “anticipates,” “expects,” “could,” “intends,” “may,” “will,” “should,” “forecast,” “intend,” “plan,” “potential,” “project,” “target” or, in each case, their negative, or other variations or comparable terminology. Forward-looking statements include all statements that are not statements of historical facts. They include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations; financial condition; liquidity; prospects, growth and strategies; the expected timetable for closing the disposition of HMH Books & Media, including the satisfaction or waiver of closing conditions; the use of the net proceeds from the proposed transaction to pay down debt; the expected impact of the COVID-19 pandemic; our competitive strengths; the industry in which we operate; the impact of new accounting guidance and tax laws; expenses; effective tax rates; future liabilities; the outcome and impact of pending or threatened litigation; decisions of our customers; education expenditures; population growth; state curriculum adoptions and purchasing cycles; the impact of dispositions, acquisitions and other investments; the timing, structure and expected impact of our operational efficiency and cost-reduction initiatives and the estimated savings and amounts expected to be incurred in connection therewith; and potential business decisions. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. We caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are based upon information available to us on the date of this report.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that actual results may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if actual results are consistent with the forward-looking statements contained herein, those results or developments may not be indicative of results or developments in subsequent periods.

Important factors that could cause actual results to vary from expectations include, but are not limited to the duration and severity of the COVID-19 pandemic and its impact on the federal, state and local economies and on K-12 schools; any delays in receiving required regulatory approvals for the proposed sale of HMH Books & Media; the risk that disruption resulting from the proposed transaction may adversely affect the Company’s businesses and business relationships, including with employees and suppliers; delays in satisfying other closing conditions and disruptions in the global credit and financial markets that could have a negative impact on the completion of the proposed transaction; the rate and state of technological change; state requirements related to digital instructional materials; our ability to execute on our Digital First, Connected growth strategy; increases in our operating costs; management and personnel changes; timing, higher costs and unintended consequences of our operational efficiency and cost-reduction initiatives and other factors discussed in the “Risk Factors” section of the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (and our subsequent filings pursuant to the Securities Exchange Act of 1934, as amended). In light of these risks, uncertainties and assumptions, the forward-looking events described herein may not occur.

We undertake no obligation, and do not expect, to publicly update or publicly revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained herein.

PART 1 – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Houghton Mifflin Harcourt Company

Consolidated Balance Sheets (Unaudited)

	March 31,			December 31,
(in thousands of dollars, except share information)	2021			2020
Assets
Current assets
Cash and cash equivalents	$	170,901		$	281,200
Accounts receivable, net of allowances for bad debts and book returns of $8.2 million and $8.4 million, respectively		92,477			88,830
Inventories		175,790			145,553
Prepaid expenses and other assets		25,105			19,276
Assets held for sale		140,971			160,053
Total current assets		605,244			694,912

Property, plant, and equipment, net		86,248			88,801
Pre-publication costs, net		191,232			202,820
Royalty advances to authors, net		2,064			2,425
Goodwill		437,977			437,977
Other intangible assets, net		391,412			402,484
Operating lease assets		123,565			126,850
Deferred income taxes		2,415			2,415
Deferred commissions		30,319			30,659
Other assets		29,991			31,783
Total assets	$	1,900,467		$	2,021,126
Liabilities and Stockholders’ Equity
Current liabilities
Current portion of long-term debt	$	19,000		$	19,000
Accounts payable		47,336			38,751
Royalties payable		21,503			34,765
Salaries, wages, and commissions payable		14,460			21,723
Deferred revenue		320,988			342,605
Interest payable		4,136			11,017
Severance and other charges		11,434			19,590
Accrued pension benefits		1,593			1,593
Accrued postretirement benefits		1,555			1,555
Operating lease liabilities		9,948			9,669
Other liabilities		23,468			22,912
Liabilities held for sale		32,505			30,662
Total current liabilities		507,926			553,842

Long-term debt, net of discount and issuance costs		621,319			624,692
Operating lease liabilities		129,269			132,014
Long-term deferred revenue		542,065			562,679
Accrued pension benefits		17,240			24,061
Accrued postretirement benefits		15,605			16,566
Deferred income taxes		18,503			16,411
Other liabilities		152			398
Total liabilities		1,852,079			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 March 31, 2021 and December 31, 2020		—			—
Common stock, $0.01 par value: 380,000,000 shares authorized; 151,987,387 and 150,459,034 shares issued at March 31, 2021 and December 31, 2020, respectively; 127,410,353 and 125,882,000 shares outstanding at March 31, 2021 and December 31, 2020, respectively		1,520			1,505
Treasury stock, 24,577,034 shares as of March 31, 2021 and December 31, 2020, respectively, at cost		(518,030	)		(518,030	)
Capital in excess of par value		4,921,845			4,918,542
Accumulated deficit		(4,307,813	)		(4,255,830	)
Accumulated other comprehensive loss		(49,134	)		(55,724	)
Total stockholders’ equity		48,388			90,463
Total liabilities and stockholders’ equity	$	1,900,467		$	2,021,126

The accompanying notes are an integral part of these consolidated financial statements.

Houghton Mifflin Harcourt Company

Consolidated Statements of Operations (Unaudited)

	Three Months Ended March 31,
(in thousands of dollars, except share and per share information)	2021			2020
Net sales	$	146,195		$	151,843
Costs and expenses
Cost of sales, excluding publishing rights and pre-publication amortization		58,137			63,652
Publishing rights amortization		3,166			4,432
Pre-publication amortization		25,051			30,562
Cost of sales		86,354			98,646
Selling and administrative		89,235			123,341
Other intangible assets amortization		7,906			5,856
Impairment charge for goodwill		—			262,000
Operating loss		(37,300	)		(338,000	)
Other income (expense)
Retirement benefits non-service (expense) income		(200	)		61
Interest expense		(8,564	)		(9,253	)
Interest income		20			766
Change in fair value of derivative instruments		(674	)		(380	)
Loss from continuing operations before taxes		(46,718	)		(346,806	)
Income tax expense (benefit) for continuing operations		2,310			(8,780	)
Loss from continuing operations		(49,028	)		(338,026	)
Loss from discontinued operations, net of tax		(2,955	)		(7,947	)
Net loss	$	(51,983	)	$	(345,973	)
Net loss per share attributable to common stockholders
Basic and diluted:
Continuing operations	$	(0.39	)	$	(2.71	)
Discontinued operations		(0.02	)		(0.06	)
Net loss	$	(0.41	)	$	(2.77	)
Weighted average shares outstanding
Basic and diluted		126,473,317			124,688,974

The accompanying notes are an integral part of these consolidated financial statements.

Houghton Mifflin Harcourt Company

Consolidated Statements of Comprehensive Loss (Unaudited)

	Three Months Ended March 31,
(in thousands of dollars, except share and per share information)	2021			2020
Net loss	$	(51,983	)	$	(345,973	)
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments, net of tax		(335	)		(113	)
Net change in pension and benefit plan liabilities, net of tax		6,925			—
Net change in unrealized loss on derivative financial instruments, net of tax		—			(331	)
Other comprehensive income (loss), net of taxes		6,590			(444	)
Comprehensive loss	$	(45,393	)	$	(346,417	)

The accompanying notes are an integral part of these consolidated financial statements.

Houghton Mifflin Harcourt Company

Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended March 31,
(in thousands of dollars)	2021			2020
Cash flows from operating activities
Net loss	$	(51,983	)	$	(345,973	)
Adjustments to reconcile net loss to net cash used in operating activities
Loss from discontinued operations, net of tax		2,955			7,947
Depreciation and amortization expense		47,818			53,033
Amortization of operating lease assets		3,285			3,632
Amortization of debt discount and deferred financing costs		660			646
Deferred income taxes		2,085			(9,128	)
Stock-based compensation expense		2,607			3,268
Impairment charge for goodwill		—			262,000
Change in fair value of derivative instruments		674			380
Changes in operating assets and liabilities
Accounts receivable		(3,647	)		29,057
Inventories		(30,238	)		(51,580	)
Other assets		(3,851	)		(335	)
Accounts payable and accrued expenses		3,322			(19,878	)
Royalties payable and author advances, net		(12,924	)		(34,816	)
Deferred revenue		(42,231	)		(59,529	)
Interest payable		(6,881	)		(12	)
Severance and other charges		(8,156	)		(5,320	)
Accrued pension and postretirement benefits		(855	)		(1,108	)
Operating lease liabilities		(2,466	)		(3,304	)
Other liabilities		(720	)		(948	)
Net cash used in operating activities - continuing operations		(100,546	)		(171,968	)
Net cash provided by operating activities - discontinued operations		19,290			15,201
Net cash used in operating activities		(81,256	)		(156,767	)
Cash flows from investing activities
Additions to pre-publication costs		(14,354	)		(18,489	)
Additions to property, plant, and equipment		(9,949	)		(11,875	)
Net cash used in investing activities - continuing operations		(24,303	)		(30,364	)
Net cash used in investing activities - discontinued operations		(400	)		(262	)
Net cash used in investing activities		(24,703	)		(30,626	)
Cash flows from financing activities
Borrowings under revolving credit facility		—			150,000
Payments of long-term debt		(4,750	)		(4,750	)
Tax withholding payments related to net share settlements of restricted stock units		—			(48	)
Issuance of common stock under employee stock purchase plan		410			503
Net cash (used in) provided by financing activities - continuing operations		(4,340	)		145,705
Net (decrease) increase in cash and cash equivalents		(110,299	)		(41,688	)
Cash and cash equivalents at beginning of the period		281,200			296,353
Cash and cash equivalents at end of the period	$	170,901		$	254,665
Supplemental disclosure of cash flow information
Interest paid – continuing operations	$	14,746		$	7,993
Interest paid – discontinued operations		5,803			7,360
Income taxes paid		—			1
Non-cash investing activities
Pre-publication costs included in accounts payable and accruals	$	4,392		$	5,978
Property, plant, and equipment included in accounts payable and accruals		1,452			3,787
Property, plant, and equipment acquired under finance leases		123			288

The accompanying notes are an integral part of these consolidated financial statements.

Houghton Mifflin Harcourt Company

Consolidated Statements of Stockholders’ Equity (Unaudited)

	Common Stock
(in thousands of dollars, except share information)	Shares Issued		Par Value		Treasury Stock			Capital in excess of Par Value			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
Balance at December 31, 2019		148,928,328	$	1,489	$	(518,030	)	$	4,906,165		$	(3,775,992	)	$	(47,272	)	$	566,360
Net loss		—		—		—			—			(345,973	)		—			(345,973	)
Other comprehensive loss, net of tax		—		—		—			—			—			(444	)		(444	)
Issuance of common stock for employee purchase plan		104,331		1		—			678			—			—			679
Issuance of common stock for vesting of restricted stock units		950,496		10		—			(10	)		—			—			—
Stock withheld to cover tax withholdings requirements upon vesting of restricted stock units		—		—		—			(48	)		—			—			(48	)
Stock-based compensation expense		—		—		—			3,386			—			—			3,386
Balance at March 31, 2020		149,983,155	$	1,500	$	(518,030	)	$	4,910,171		$	(4,121,965	)	$	(47,716	)	$	223,960
Balance at December 31, 2020		150,459,034	$	1,505	$	(518,030	)	$	4,918,542		$	(4,255,830	)	$	(55,724	)	$	90,463
Net loss		—		—		—			—			(51,983	)		—			(51,983	)
Other comprehensive income, net of tax		—		—		—			—			—			6,590			6,590
Issuance of common stock for employee purchase plan		239,144		2		—			634			—			—			636
Issuance of common stock for vesting of restricted stock units		1,289,209		13		—			(13	)		—			—			—
Stock-based compensation expense		—		—		—			2,682			—			—			2,682
Balance at March 31, 2021		151,987,387	$	1,520	$	(518,030	)	$	4,921,845		$	(4,307,813	)	$	(49,134	)	$	48,388

The accompanying notes are an integral part of these consolidated financial statements.

Houghton Mifflin Harcourt Company

Notes to Consolidated Financial Statements (Unaudited)

(amounts in tables are 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 12^th 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 accompanying 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 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. 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 March 26, 2021, we entered into a definitive asset purchase agreement to sell the HMH Books & Media segment and that segment is now classified as a discontinued operation. 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 and Consolidated Statements of Operations, 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. As a result, our revenues and financial results from continuing operations are reported under one reportable segment.

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.

Seasonality and Comparability

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. Moreover, uncertainty resulting from the COVID-19 pandemic may result in our business not following this historic pattern.

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, 2020, 2019 and 2018, 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. Prior to the spread of COVID-19 in the United States, we experienced net sales results consistent with our historical first quarters; however, as the COVID-19 pandemic progressed we experienced a decline in net sales and sales orders beginning in the second half of March 2020. We continue to monitor indicators of demand, including our sales pipeline, customer orders and product shipments, as well as observe the impact to state revenues and related educational budgets to ascertain an estimate of the impact; however, the length and severity of the reduction in demand due to the pandemic and its impact on educational spending remains uncertain. Accordingly, our full year results for 2021 will continue to be impacted compared to pre-pandemic prior years.

While we are planning for a demand recovery, the exact timing and pace of recovery is uncertain given the significant disruption caused by the pandemic on the operations of our customers. Our expense management and liquidity measures may be modified as we obtain additional clarity on the timing of customer demand recovery. 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.

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 or will receive 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 or will receive 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 represents cash expenditures, was approximately $33.6 million.

Forward-looking

After reviewing our ability to meet future financial obligations over the next twelve months, including consideration of our recent actions described above in addition to the planned divestiture of the HMH Books & Media business, we have concluded our net cash from operations combined with our cash and cash equivalents and borrowing availability under our revolving credit facility provides 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.

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. Our current assumptions are that our industry will begin to recover and we have performed a sensitivity analysis on various recovery assumptions. Based on the actions in 2020 described above, we have concluded we have sufficient liquidity to fund our current obligations, capital spending, debt service requirements and working capital requirements over at least the next twelve months.

Valuation of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived Assets

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 is 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 HMH Books & Media reporting unit has been recorded as a discontinued operation during the first quarter of 2021 (refer to Note 5). The relevant inputs and assumptions used in the valuation of the Education reporting unit include 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, which is wholly attributed to the Education reporting unit, was impaired and, accordingly, recorded a goodwill impairment charge in the first quarter of 2020 of $262.0 million. 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 and related income tax benefit.

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. The long-lived impairment analysis was performed over the Education reporting unit and the HMH Books & Media reporting unit. 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.

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. 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 pending HMH Books & Media sale and related segment change on our Education reporting unit, to which goodwill and indefinite-lived intangibles are entirely allocated. During the three months ended March 31, 2021, no changes to our reporting units were identified and no impairment triggering events were identified as it relates to our Education reporting unit assets.

3.	Significant Accounting Policies and Estimates

Our financial results are affected by the selection and application of accounting policies and methods. There were no material changes during the three months ended March 31, 2021 to the application of significant accounting policies and estimates as described in our audited consolidated financial statements, which were included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

We evaluate our estimates, judgments and methodologies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values 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 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. We have made estimates of the impact of the COVID-19 pandemic within our financial statements and there may be changes to those estimates in future periods. Actual results may differ from these estimates.

4.	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 Adopted Accounting Standards

In December 2019, the Financial Accounting Standards Board (“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.

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 account reconciliations. At March 31, 2021, we reported allowances for doubtful accounts of $3.7 million, compared to $3.8 million at December 31, 2020, reflecting write-offs of $0.1 million for the three months ended March 31, 2021.

We are also exposed to losses on our royalty advances. Royalty advances to authors are capitalized and represent amounts paid in advance of the sale of an author’s product and are recovered as earned. As advances are recorded, a partial reserve may be recorded immediately based primarily upon historical sales experience. Additionally, advances are evaluated periodically to determine if they are expected to be recovered on a title-by-title basis. Any portion of a royalty advance that is not expected to be recovered is fully reserved. At March 31, 2021, we reported a reserve for royalty advances of $7.4 million, compared to $7.3 million at December 31, 2020, reflecting an increase of $0.1 million for the three months ended March 31, 2021.

5.	Discontinued Operations

On March 26, 2021, we entered into a definitive asset purchase agreement to sell the HMH Books & Media segment, our consumer publishing business, for cash consideration of $349.0 million, subject to a customary working capital adjustment, and the purchaser’s assumption of all liabilities relating to the HMH Books & Media business, subject to specified exceptions. The transaction is expected to close in the second quarter of 2021 subject to customary closing conditions, including regulatory approvals. Upon closing of the transaction, all HMH Books & Media employees will become employees of the purchaser. Net proceeds from the sale after the payment of transaction costs are estimated to be approximately $337.0 million, all of which we intend to use to pay down debt. In connection with the sale of the HMH Books & Media business, we will enter 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, the HMH Books & Media business qualified as a discontinued operation, and we now 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 are intending to use the proceeds from the sale to pay down debt as required by our debt facilities given we are not intending to reinvest such amounts in the business.

	Three Months Ended
	March 31,
	2021			2020
Net sales	$	42,706		$	38,082
Costs		37,615			36,373
Amortization		1,395			1,885
Interest expense		6,557			7,530
Loss from discontinued operations before taxes	$	(2,861	)	$	(7,706	)
Income tax expense		(94	)		(241	)
Loss from discontinued operations, net of tax	$	(2,955	)	$	(7,947	)

The assets and liabilities of the HMH Books & Media business have been classified as assets held for sale and liabilities held for sale on our consolidated balance sheets. The major categories of assets and liabilities of the HMH Books & Media business included in assets held for sale and liabilities held for sale are as follows:

	March 31,		December 31,
	2021		2020
Accounts receivable, net	$	43,066	$	64,002
Inventories		23,970		21,410
Prepaid expenses and other assets		713		655
Property, plant, and equipment, net		4,193		4,401
Pre-publication costs, net		337		329
Royalty advances to authors, net		40,820		40,060
Other intangible assets, net		24,728		26,100
Other assets		3,144		3,096
Total assets held for sale	$	140,971	$	160,053
Accounts payable		7,989		10,353
Royalties payable		21,796		17,628
Salaries and wages payable		453		221
Other liabilities		2,267		2,460
Total liabilities held for sale	$	32,505	$	30,662

6.	Inventories

Inventories consisted of the following:

	March 31, 2021		December 31, 2020
Finished goods	$	165,337	$	134,349
Raw materials		10,453		11,204
Inventories	$	175,790	$	145,553

7.	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 three months ended March 31, 2021:

March 31,

2021

December 31,

2020

$ Change

% Change

Contract assets

596

580

2.8

Contract liabilities (deferred revenue)

863,053

905,284

(42,231

)

(4.7

The $42.2 million decrease in our net contract liabilities from December 31, 2020 to March 31, 2021 was primarily due to the satisfaction of performance obligations related to physical and digital products, and services during the period in excess of revenue deferred during the period.

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 $30.3 million and $30.7 million at March 31, 2021 and December 31, 2020, respectively, and amortized $0.8 million and $1.1 million during the three months ended March 31, 2021 and 2020, 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 $14.2 million and $14.7 million at March 31, 2021 and December 31, 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 $1.3 million and $0.7 million during the three months ended March 31, 2021 and 2020, respectively. The amortization is included in cost of sales, excluding publishing rights and pre-publication amortization.

During the three months ended March 31, 2021 and 2020, we recognized the following net sales as a result of changes in the contract assets and contract liabilities balances:

	Three Months Ended
	March 31,
	2021		2020
Net sales recognized in the period from:
Amounts included in contract liabilities at the beginning of the period	$	74,658	$	79,205

As of March 31, 2021, the aggregate amount of the transaction price allocated to the remaining performance obligations, which includes deferred revenue and open orders, was $903.7 million, and we will recognize approximately 73% to net sales over the next 1 to 3 years.

The following table disaggregates our net sales by major source:

(in thousands)	Three Months ended March 31, 2021		Three Months ended March 31, 2020
Core solutions (1)	$	68,671	$	65,327
Extensions (2)		77,524		86,516
Net sales	$	146,195	$	151,843

(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.

8.	Goodwill and Other Intangible Assets

There were no changes in the carrying amount of goodwill of $438.0 million for the three months ended March 31, 2021. Accumulated impairment losses on goodwill as of March 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 $262.0 million during the three months ended March 31, 2020.

Other intangible assets consisted of the following:

	March 31, 2021							December 31, 2020
	Cost		Accumulated Amortization			Total		Cost		Accumulated Amortization			Total
Trademarks and tradenames: indefinite-lived	$	161,000	$	—		$	161,000	$	161,000	$	—		$	161,000
Trademarks and tradenames: definite-lived		133,330		(51,781	)		81,549		133,330		(46,810	)		86,520
Publishing rights		1,050,000		(1,033,603	)		16,397		1,050,000		(1,030,437	)		19,563
Customer related and other		448,140		(315,674	)		132,466		448,140		(312,739	)		135,401
Other intangible assets, net	$	1,792,470	$	(1,401,058	)	$	391,412	$	1,792,470	$	(1,389,986	)	$	402,484

Amortization expense for definite-lived trademarks and tradenames, publishing rights and customer related and other intangibles were $11.1 million and $10.3 million for the three months ended March 31, 2021 and 2020, respectively. During the normal course of business, we periodically review the useful lives of our definite-lived assets and adjust the amortization periods if evidence shows a shorter life duration. During the first quarter of 2021, several definite-lived intangible assets were adjusted to shorter amortization periods due to anticipated end of life periods as we streamline our offerings.

Debt

Our debt consisted of the following:

	March 31, 2021			December 31, 2020
$380,000 term loan due November 22, 2024, interest payable quarterly (net of discount and issuance costs)	$	342,291		$	346,091
$306,000 senior secured notes due February 15, 2025, interest payable semi-annually (net of discount and issuance costs)	$	298,028		$	297,601
		640,319			643,692
Less: Current portion of long-term debt		(19,000	)		(19,000	)
Total long-term debt, net of discount and issuance costs	$	621,319		$	624,692
Revolving credit facility	$	—		$	—

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. We may redeem all or a portion of the notes at redemption prices as described in the notes.

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 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 is required to be repaid in quarterly installments of approximately $4.8 million with the balance being payable on the maturity date. 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 March 31, 2021, the interest rate on the term loan facility was 7.25%.

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 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.

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 $0.3 million in our statements of comprehensive loss to account for the changes in fair value of these derivatives during the three months ended March 31, 2020. We reclassified $0.5 million from other comprehensive loss to earnings during the three months ended March 31, 2020.

In connection with the term loan facility on November 22, 2019, we incurred a change in the mix of floating rate debt versus fixed rate debt. As a result, the aggregate notional of our active interest rate derivative contracts designated as cash flow hedges exceeded the outstanding floating rate debt notional by approximately $29.5 million. To accommodate for this notional shortfall, we partially de-designated one of our active interest rate derivative contracts. This involved splitting the notional amount with one portion remaining designated under cash flow hedge accounting, and the remaining portion, with a $29.5 million notional amount, left undesignated. There were no changes made to the interest rate derivative contracts from an economic perspective; the notional split is accounting in nature only.

Beginning on November 22, 2019, the fair value changes on the undesignated portion of the swap flow through earnings, as opposed to being deferred as unrealized gains or losses in other comprehensive loss. The impact of this change on the financial statements as of March 31, 2020 was less than $0.1 million and was recorded in our consolidated statements of operations for the three months ended March 31, 2020. We had no interest rate derivative contracts outstanding as of March 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 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 March 31, 2021, no amounts are outstanding under the revolving credit facility.

As of March 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 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.

10.	Restructuring, Severance and Other Charges

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 or will receive 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 or will receive 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 represents cash expenditures, was approximately $33.6 million.

There were no costs associated with the 2020 Restructuring Plan in our consolidated statements of operations for the three months ended March 31, 2021 and 2020. 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:

	2021
	Restructuring						Restructuring
	accruals at						accruals at
	December 31,				Cash		March 31,
	2020		Charges		payments		2021
Severance and termination benefits	$	19,311	$	—	$	(8,029)	$	11,282
	$	19,311	$	—	$	(8,029)	$	11,282

2019 Restructuring Plan

There were no costs associated with the 2019 Restructuring Plan in our consolidated statements of operations for the three months ended March 31, 2021 and 2020. Our restructuring liabilities are comprised of accruals for severance and termination benefits. The following is a rollforward of our liabilities associated with the 2019 Restructuring Plan:

	2021
	Restructuring accruals at December 31, 2020		Charges		Cash payments			Restructuring accruals at March 31, 2021
Severance and termination benefits	$	279	$	—	$	(127	)	$	152
	$	279	$	—	$	(127	)	$	152

11.	Income Taxes

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment, including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained or as the tax environment changes.

At the end of each interim period, we estimate the annual effective tax rate and apply that rate to our ordinary quarterly earnings. The amount of interim tax benefit recorded for the year-to-date ordinary loss is limited to the amount that is expected to be realized during the year or recognizable as a deferred tax asset at year end. The tax expense or benefit related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect, are individually computed, and are recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.

For the three months ended March 31, 2021 and 2020, we recorded an income tax expense of approximately $2.3 million and a benefit of $8.8 million, respectively. For all periods, income tax expense 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. Including the tax effects of these discrete tax items, the effective rate was (4.9)% and 2.5% for the three months ended March 31, 2021 and 2020, respectively.

Reserves for unrecognized tax benefits, excluding accrued interest and penalties, were $15.7 million at both March 31, 2021 and December 31, 2020.

12.	Retirement and Postretirement Benefit Plans

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.

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 loss and subsequently amortize those items in the statement of operations. Due to lump-sum disbursements by participants in the first quarter of 2021, we incurred a settlement charge of $0.5 million. In connection with this settlement charge, we remeasured our pension liability and recorded a $6.4 million benefit through other comprehensive income primarily due to changes in discount rates.

Net periodic benefit (credit) cost for our pension and other postretirement benefit plans consisted of the following:

	Pension Plans
	Three Months Ended March 31,
	2021			2020
Interest cost	$	687		$	1,097
Expected return on plan assets		(1,916	)		(1,855	)
Amortization of net loss		850			581
Settlement loss recognized		500			—
Net periodic benefit cost (credit)	$	121		$	(177	)

	Other Post Retirement Plans
	Three Months Ended March 31,
	2021		2020
Service cost	$	19	$	17
Interest cost		68		107
Amortization of prior service cost		11		11
Amortization of net loss		—		(2	)
Net periodic benefit cost	$	98	$	133

There were no contributions to the pension plans during the three months ended March 31, 2021 and 2020.

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, foreign exchange forward contracts, and interest rate derivatives 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.

Financial Assets and Liabilities

The following tables present our financial assets and liabilities measured at fair value on a recurring basis:

	March 31, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Valuation Technique
Financial assets
Money market funds	$	152,076	$	152,076	$	—	(a)
	$	152,076	$	152,076	$	—
Financial liabilities
Foreign exchange derivatives	$	374	$	—	$	374	(a)
	$	374	$	—	$	374

	December 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Valuation Technique
Financial assets
Money market funds	$	262,135	$	262,135	$	—	(a)
Foreign exchange derivatives		466		—		466	(a)
	$	262,601	$	262,135	$	466

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 $152.1 million and $262.1 million invested in money market funds as of March 31, 2021 and December 31, 2020, respectively, we had $18.8 million and $19.1 million of cash invested in bank accounts as of March 31, 2021 and December 31, 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 $15.5 million and $14.9 million at March 31, 2021 and December 31, 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 March 31, 2021 and December 31, 2020, the fair value of our counterparty default exposure was less than $1.0 million and spread across several highly rated counterparties.

Our interest rate derivatives 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. 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 by converting floating-rate debt into fixed-rate debt. There were no aggregate notional amounts outstanding of the interest rate derivative instruments as of March 31, 2021. We designate derivative instruments either as fair value or cash flow hedges under the accounting guidance related to derivatives and hedging. We record changes in the value of fair value hedges in interest expense, which is generally offset by changes in the fair value of the hedged debt obligation. Interest payments made or received related to our interest rate derivative instruments are included in interest expense. We record the effective portion of any change in the fair value of derivative instruments designated as cash flow hedges as unrealized gains or losses in other comprehensive loss, net of tax, until the hedged cash flow occurs, at which point the effective portion of any gain or loss is reclassified to earnings. In the event the hedged cash flow does not occur, or it becomes no longer probable that it will occur, we reclassify the amount of any gain or loss on the related cash flow hedge to interest expense at that time.

We believe we do not have significant concentrations of credit risk arising from our interest rate derivative instruments, whether from an individual counterparty or a related group of counterparties. We manage the concentration of counterparty credit risk on our interest rate derivatives instruments by limiting acceptable counterparties to a diversified group of major financial institutions with investment grade credit ratings, limiting the amount of credit exposure to each counterparty, and actively monitoring their credit ratings and outstanding fair values on an ongoing basis. Furthermore, none of our derivative transactions contain provisions that are dependent on our credit ratings from any credit rating agency.

We also employ master netting arrangements that reduce our counterparty payment settlement risk on any given maturity date to the net amount of any receipts or payments due between us and the counterparty financial institution. Thus, the maximum loss due to counterparty credit risk is limited to the unrealized gains in such contracts net of any unrealized losses should any of these counterparties fail to perform as contracted. Although these protections do not eliminate concentrations of credit risk, as a result of the above considerations, we do not consider the risk of counterparty default to be significant.

Non-Financial Assets and Liabilities

Our non-financial assets, which include goodwill, other intangible assets, property, plant, and equipment, and pre-publication costs, 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 the three months ended March 31, 2021 and 2020.

The following table presents our non-financial assets measured at fair value on a nonrecurring basis during 2020:

	March 31, 2020		Significant Unobservable Inputs (Level 3)		Total Impairment		Valuation Technique
Non-financial assets
Goodwill	$	454,977	$	454,977	$	262,000		(a)
	$	454,977	$	454,977	$	262,000

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 units by considering our market capitalization and other judgments. There was no goodwill impairment recorded for the three months ended March 31, 2021. Impairment recorded for goodwill for the three months ended March 31, 2020 was $262.0 million. During the fourth quarter of 2020, we recorded an adjustment of $17.0 million to increase the goodwill impairment charge to correct an error of the previously recorded amount.

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 three months ended March 31, 2021 and 2020.

Non-Marketable Investments

At March 31, 2021 and December 31, 2020, the carrying value of our non-marketable investments, which were comprised of equity interests in educational technology private partnerships, was $4.4 million. 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. There were no gains or losses from non-marketable investments during the three months ended March 31, 2021 and 2020.

Fair Value of Debt

The following table presents the carrying amounts and estimated fair market values of our debt at March 31, 2021 and December 31, 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.

	March 31, 2021				December 31, 2020
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Debt
$380,000 Term loan	$	342,291	$	340,580	$	346,091	$	331,382
$306,000 Senior secured notes	$	298,028	$	319,635	$	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 March 31, 2021 and December 31, 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

There were no material changes in our commitments under contractual obligations, as disclosed in our audited consolidated financial statements, which were included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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.

In April 2019, we were notified of an unasserted claim by the Commonwealth of Puerto Rico with regards to payments in the amount of approximately $33.0 million that we received in the normal course of business during the four year period prior to the May 3, 2017 bankruptcy petition of the Commonwealth public instrumentalities. Management believes, based on discussions with its legal counsel, that we have meritorious defenses against such unasserted claim. The Company will vigorously defend this matter if such claim is asserted.

In September 2019, we were notified of an unasserted claim by Riverside Assessments LLC (“Riverside”) with regard to purported breaches of the Asset Purchase Agreement between the Company and Riverside dated September 12, 2018 (“APA”) and the Transition Services Agreement between the Company and Riverside dated October 1, 2018. Management believes, based on discussions with its legal counsel, that we have meritorious defenses against such unasserted claim. With regard to the alleged breaches of the APA, the APA provides that the Company may be liable only for that portion of Riverside’s damages that exceeds $1.4 million, and in an amount that shall not exceed $1.4 million, which we believe would be the maximum exposure. For damages above $2.8 million, Riverside obtained a representation and warranty insurance policy as required by the APA. The Company will vigorously defend this matter if such claim is asserted.

In January 2018, Vanderbilt University (“Vanderbilt”) filed a complaint against the Company and others in connection with a license agreement originally entered into between Vanderbilt and Scholastic Inc. in 1997 and subsequently assigned to the Company as part of our acquisition of Scholastic’s Educational Technology and Services business pursuant to the stock and asset purchase agreement dated April 23, 2015. Vanderbilt alleges entitlement to additional royalties in connection with READ 180 and other products acquired from Scholastic and alleges trademark infringement in the marketing of these products. The Company is vigorously defending this matter. The case is scheduled for trial in August 2021.

In connection with an agreement with a development content provider, we agreed to act as guarantor to that party’s loan to finance such development. Such guarantee is expected to remain until 2022; however, it may terminate sooner in connection with the sale of the HMH Books & Media business. Under the guarantee, we believe the maximum future payments approximate $4.7 million. In the unlikely event that we are required to make payments on behalf of the development content provider, we would have recourse against the development content provider.

We were contingently liable for $1.2 million and $1.4 million of performance-related surety bonds for our operating activities as of March 31, 2021 and December 31, 2020, respectively. An aggregate of $16.5 million and $18.8 million of letters of credit existed at March 31, 2021 and December 31, 2020, respectively, of which $1.1 million backed the aforementioned performance-related surety bonds as of March 31, 2021 and December 31, 2020.

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 March 31, 2021 and December 31, 2020.

15.	Net Loss Per Share

The following table sets forth the computation of basic and diluted earnings per share (“EPS”):

	Three Months Ended March 31,
	2021			2020
Numerator
Loss from continuing operations	$	(49,028	)	$	(338,026	)
Loss from discontinued operations, net of tax		(2,955	)		(7,947	)
Net loss attributable to common stockholders	$	(51,983	)	$	(345,973	)
Denominator
Weighted average shares outstanding
Basic and diluted		126,473,317			124,688,974
Net loss per share attributable to common stockholders
Basic and diluted:
Continuing operations	$	(0.39	)	$	(2.71	)
Discontinued operations		(0.02	)		(0.06	)
Net loss	$	(0.41	)	$	(2.77	)

As we incurred a net loss in each of the periods 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:

	Three Months Ended March 31,
	2021		2020
Stock options		1,882,212		2,349,112
Restricted stock units		4,159,106		3,243,031

Item 2. 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 the interim unaudited consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and the related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which was filed with the Securities Exchange Commission (the “SEC”) on February 25, 2021. This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. See “Special Note Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report on Form 10-Q.

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

HMH Books & Media Consumer Publishing Business and Discontinued Operations

On March 26, 2021, we entered into a definitive asset purchase agreement to sell the HMH Books & Media segment, our consumer publishing business, for cash consideration of $349.0 million, subject to a customary working capital adjustment, and the purchaser’s assumption of all liabilities relating to the HMH Books & Media business subject to specified exceptions (collectively, the “Transaction”). We expect total net cash proceeds after the payment of transaction costs to be approximately $337.0 million, which we intend to use 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 will join the acquiring company. The divestiture is subject to customary closing conditions, including regulatory approvals. The transaction is expected to close in the second quarter of 2021.

Upon entering into the asset purchase agreement on March 26, 2021, the HMH Books & Media business became 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 first quarter discontinued operations financial results is allocated interest expense of $6.6 million and $7.5 million, for 2021 and 2020, respectively, based on our intent to repay the Company’s debt with the net proceeds from the sale. On the balance sheet, all assets and liabilities transferring to the acquirer have been classified as Assets Held for Sale or Liabilities Held for Sale. The results of the HMH Books & Media business were previously reported in its own reportable segment. We will 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

Prior to the spread of COVID-19 in the United States, we experienced net sales results consistent with our historical first quarters. As we proceeded through the first quarter of 2020 and the impact of the COVID-19 pandemic progressed, schools began to close in response to federal, state and local social distancing directives resulting in a decline in net sales and sales orders in the second half of March 2020. We implemented a number of measures intended to help protect our shareholders, employees, and customers amid the COVID-19 pandemic. We also have taken 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.

Given the ongoing COVID-19 situation, our business will continue to be impacted during 2021 as spending by our customers slowly resumes.

2020 Restructuring Plan

We are continuing to assess our cost structure amid the COVID-19 pandemic to 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 or will receive 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 or will receive 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 $33.6 million. These actions are to streamline the cost structure of the Company.

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 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.

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:

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general economic conditions at the federal or state level;

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state or district per student funding levels;

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federal funding levels;

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the cyclicality of the purchasing schedule for adoption states;

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student enrollments;

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adoption of new education standards;

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state acceptance of submitted programs and participation rates for accepted programs;

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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 or 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. California adopted history and social science materials in 2017 for purchase in 2018 and continuing 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 has 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 will appropriate 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 2028, total public school enrollment, a major long-term driver of growth in the K-12 Education market, is projected to increase by 1.4% to 57.4 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 customer segments, 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:

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Pay-up-front: Customer makes a fixed payment at time of purchase and we provide a specific product/service in return; and

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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 $3.0 million for the three months ended March 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 three months ended March 31, 2021 was $7.9 million.

Interest expense

Our interest expense includes interest accrued on 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”) and, to a lesser extent, our revolving credit

facility, finance leases, the amortization of any deferred financing fees and loan discounts, and payments in connection with interest rate hedging agreements. Our interest expense for the three months ended March 31, 2021 was $8.6 million.

Results of Operations

Consolidated Operating Results for the Three Months Ended March 31, 2021 and 2020

	Three Months Ended March 31,
(dollars in thousands)	2021			2020			Dollar Change			Percent Change
Net sales	$	146,195		$	151,843		$	(5,648	)		(3.7	)%
Costs and expenses:
Cost of sales, excluding publishing rights and pre-publication amortization		58,137			63,652			(5,515	)		(8.7	)%
Publishing rights amortization		3,166			4,432			(1,266	)		(28.6	)%
Pre-publication amortization		25,051			30,562			(5,511	)		(18.0	)%
Cost of sales		86,354			98,646			(12,292	)		(12.5	)%
Selling and administrative		89,235			123,341			(34,106	)		(27.7	)%
Other intangible assets amortization		7,906			5,856			2,050			35.0	%
Impairment charge for goodwill		—			262,000			(262,000	)	NM
Operating loss		(37,300	)		(338,000	)		300,700			89.0	%
Other income (expense):
Retirement benefits non-service (expense) income		(200	)		61			(261	)	NM
Interest expense		(8,564	)		(9,253	)		689			7.4	%
Interest income		20			766			(746	)		(97.4	)%
Change in fair value of derivative instruments		(674	)		(380	)		(294	)		(77.4	)%
Loss from continuing operations before taxes		(46,718	)		(346,806	)		300,088			86.5	%
Income tax expense (benefit) for continuing operations		2,310			(8,780	)		11,090		NM
Loss from continuing operations		(49,028	)		(338,026	)		288,998			85.5	%
Loss from discontinued operations, net of tax		(2,955	)		(7,947	)		4,992			62.8	%
Net loss	$	(51,983	)	$	(345,973	)	$	293,990			85.0	%

NM = not meaningful

Net sales for the three months ended March 31, 2021 decreased $5.6 million, or 3.7%, from $151.8 million in 2020 to $146.2 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 $9.0 million from $86.0 million in 2020 to $77.0 million. Within Extensions, net sales of professional services decreased $14.0 million due to lower professional services with the decline of the in-person learning environment as a result of the COVID-19 pandemic. Partially offsetting the decline in Extensions was an increase in Core Solutions of $3.0 million from $65.0 million in 2020 to $68.0 million, driven by strong international net sales and net sales of social studies and math programs in California.

Operating loss for the three months ended March 31, 2021 favorably changed from a loss of $338.0 million in 2020 to a loss of $37.3 million, due primarily to the following:

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An impairment charge for goodwill in 2020 of $262.0 million that did not reoccur in 2021. This non-cash impairment was a direct result of the adverse impact that the COVID-19 pandemic has had on the Company;

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A $34.1 million decrease in selling and administrative expenses, primarily due to lower labor costs of $17.0 million, resulting from cost savings associated with our 2020 Restructuring Plan and a freeze on hiring. Also, there was a $10.0 million decrease in discretionary costs such as travel and marketing due to expense reduction measures. Further, there was a decrease of $5.0 million of variable expenses driven primarily by a reduction of print sampling;

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A $5.5 million decrease in our cost of sales, excluding publishing rights and pre-publication amortization, from $63.7 million in 2020 to $58.1 million, primarily due to lower print costs and increased virtual delivery of products and services. Our cost of sales, excluding publishing rights and pre-publication amortization, as a percentage of sales, decreased to 39.8% from 41.9%;

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A $4.7 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 a streamlining of capital spend and, to a lesser extent, our use of accelerated amortization methods for publishing rights amortization, partially offset by the accelerated amortization of certain other intangible assets due to product life cycle reductions;

Partially offset by:

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A $5.6 million decrease in net sales.

Retirement benefits non-service (expense) income for the three months ended March 31, 2021 changed unfavorably by $0.3 million primarily due to the recognition of a $0.5 million settlement charge related to the pension plan during 2021.

Interest expense for the three months ended March 31, 2021 decreased $0.7 million from $9.3 million in 2020 to $8.6 million, primarily due to lower term loan facility interest expense which was driven by lower LIBOR and net settlement payments on our interest rate derivative instruments during 2020, which did not repeat in 2021.

Interest income for the three months ended March 31, 2021 decreased $0.7 million due to lower interest rates on our money market funds in 2021 and to a lesser extent, lower balances.

Change in fair value of derivative instruments for the three months ended March 31, 2021, unfavorably changed by a $0.3 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.

Income tax expense (benefit) for continuing operations for the three months ended March 31, 2021 increased $11.1 million, from a benefit of $8.8 million in 2020, to an expense of $2.3 million. An income tax benefit was recorded in the first quarter of 2020 and was due primarily to the impairment charge on goodwill, which reduced the related deferred tax liabilities. For 2021, our annual effective tax rate, exclusive of discrete items used to calculate the tax provision, is expected to be approximately (4.4)%. For 2020, our effective annual tax rate exclusive of discrete items was (8.7)%. For both periods income tax expense 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.

Loss from discontinued operations, net of tax for the three months ended March 31, 2021 decreased $5.0 million from a loss of $7.9 million in 2020, to a loss of $3.0 million primarily due to higher net sales in 2021. 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. Included within the loss is allocated interest expense of $6.6 million and $7.5 million, for 2021 and 2020, respectively, based on the intent to repay our debt with the net proceeds from the sale as required by our debt facilities as we are not intending to 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 fluctuations in interest rates or effective tax rates, non-cash charges and impairment charges, levels of depreciation or amortization, and 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 from continuing operations to Adjusted EBITDA from continuing operations for the three months ended March 31, 2021 and 2020:

	Three Months Ended March 31,
	2021			2020
Net loss from continuing operations	$	(49,028	)	$	(338,026	)
Interest expense		8,564			9,253
Interest income		(20	)		(766	)
Provision (benefit) for income taxes		2,310			(8,780	)
Depreciation expense		11,695			12,183
Amortization expense		36,123			40,850
Non-cash charges – goodwill impairment		—			262,000
Non-cash charges – stock compensation		2,607			3,268
Non-cash charges – loss on derivative instruments		674			380
Fees, expenses or charges for equity offerings, debt or acquisitions/dispositions		1,826			27
Adjusted EBITDA from continuing operations	$	14,751		$	(19,611	)

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. Moreover, uncertainty resulting from the COVID-19 pandemic may result in our business not following this historic pattern.

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, 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.

Liquidity and Capital Resources

(in thousands)	March 31, 2021		December 31, 2020
Cash and cash equivalents	$	170,901	$	281,200
Current portion of long-term debt		19,000		19,000
Long-term debt, net of discount and issuance costs		621,319		624,692
Revolving credit facility		—		—
Borrowing availability under revolving credit facility		128,060		104,806

	Three Months Ended March 31,
	2021			2020
Net cash used in operating activities	$	(81,256	)	$	(156,767	)
Net cash used in investing activities		(24,703	)		(30,626	)
Net cash (used in) provided by financing activities		(4,340	)		145,705

Operating activities

Net cash used in operating activities was $81.3 million for the three months ended March 31, 2021, a $75.5 million favorable change from the $156.8 million of net cash used in operating activities for the three months ended March 31, 2020. Net cash used in operating activities included $19.3 million and $15.2 million of cash flow from discontinued operations in 2021 and 2020, respectively and net cash used in operating activities from continuing operations of $100.5 million and $172.0 million in 2021 and 2020, respectively. The $71.4 million improvement in cash used in operating activities from continuing operations resulted from an increase in operating profit, net of non-cash items, of $32.3 million. Further, the improvement was also due to favorable changes in net operating assets and liabilities of $39.1 million primarily due to favorable changes in accounts payable of $23.2 million related to lower commission and incentive expenses, favorable changes in royalties payable of $21.9 million and inventory of $21.3 million and a favorable change in deferred revenue of $17.3 million, offset by unfavorable changes in accounts receivable of $32.7 million due to higher billings and the timing of collections, interest payable of $6.9 million due to the timing of payments, severance and other charges of $2.8 million and other assets and liabilities of $2.2 million.

Investing activities

Net cash used in investing activities was $24.7 million for the three months ended March 31, 2021, a decrease of $5.9 million from the $30.6 million used in investing activities for the three months ended March 31, 2020. Net cash used in investing activities included $0.4 million and $0.3 million of expenditures from discontinued operations in 2021 and 2020, respectively and net cash used in investing activities from continuing operations of $24.3 million and $30.4 million in 2021 and 2020, respectively. The decrease in cash used in investing activities was primarily due to lower capital investing expenditures related to pre-publication costs and property, plant, and equipment of $6.1 million in connection with planned reductions in content development.

Financing activities

Net cash used in financing activities, which is all continuing operations, was $4.3 million for the three months ended March 31, 2021, an increase of $150.0 million from the $145.7 million provided by financing activities for the three months ended March 31, 2020. The increase in cash used in financing activities was primarily due to proceeds from our revolving credit facility of $150.0 million during the prior period, which did not repeat in 2021.

Debt

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

We may redeem all or a portion of the notes at redemption prices as described in the notes.

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 March 31, 2021, we had $356.3 million ($342.3 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 March 31, 2021, the interest rate on the term loan facility was 7.25%.

The term loan facility is required to be repaid in quarterly installments of approximately $4.8 million with the balance being payable on the maturity date.

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. To the extent that we are successful in closing the divestiture of our HMH Books & Media business, we intend to use the proceeds to reduce our outstanding indebtedness, which will increase recurring free cash flow resulting from reduced interest expense. We do not intend to reinvest such proceeds in the business. 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

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 March 31, 2021, there were no amounts outstanding on the revolving credit facility. As of March 31, 2021, we had approximately $16.5 million of outstanding letters of credit and approximately $128.1 million of borrowing availability under the revolving credit facility. As of May 6, 2021, 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 March 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 $170.9 million of cash and cash equivalents and no short-term investments at March 31, 2021 and $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.

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. Our current assumptions are that our industry will begin to recover and we have performed a sensitivity analysis on various recovery assumptions. Based on the actions in 2020, we have concluded we have sufficient liquidity to fund our current obligations, capital spending, debt service requirements and working capital requirements over at least the next twelve months.

Critical Accounting Policies and Estimates

Our financial results are affected by the selection and application of critical accounting policies and methods. There were no material changes in the three months ended March 31, 2021 to the application of critical accounting policies and estimates as described in our audited consolidated financial statements, which were included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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 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.

Impact of Inflation and Changing Prices

We believe that inflation has not had a material impact on our results of operations during the year ended December 31, 2020 or year to date in 2021. 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 March 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.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Recently Issued Accounting Pronouncements

See Note 4 to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recently issued accounting pronouncements.

Item 3. 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 March 31, 2021, we had $356.3 million ($342.3 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 $3.6 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 March 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 March 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 March 31, 2021 and December 31, 2020. We do not enter into derivative transactions or use other financial instruments for trading or speculative purposes.

Item 4. 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 March 31, 2021 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the 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 that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on their evaluation, our CEO and CFO concluded that, as of March 31, 2021 our disclosure controls and procedures were effective.

During the quarter ended March 31, 2021, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. 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 Part I, Item 1. for a discussion of such matters.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which could materially affect our business, financial condition or future results. Except as set forth below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Risks Related to the Pending Sale of our HMH Books & Media Business

The pending sale of our HMH Books & Media business to HarperCollins Publishers, L.L.C. (“HarperCollins”) is subject to conditions, including certain conditions that may not be satisfied or completed on a timely basis, if at all. Failure to complete the transaction with HarperCollins could have a material and adverse effect on us. Even if completed, the sale of HMH Books & Media may not achieve the intended benefits.

On March 26, 2021, we entered into an agreement to sell our HMH Books & Media business to HarperCollins. The proposed transaction is subject to a number of conditions, including certain regulatory approvals and other customary closing conditions. We and HarperCollins may be unable to satisfy such conditions to the closing of the proposed transaction in a timely manner or at all and, accordingly, the proposed transaction may be delayed or may not be completed. Failure to complete the proposed transaction could have a material and adverse effect on us, including by delaying our strategic and other objectives relating to the separation of the HMH Books & Media business and adversely affecting our plans to use the proceeds from the proposed transaction to reduce debt. Even if the proposed transaction is consummated, we may not realize some or all of the expected benefits.

Whether or not the proposed transaction is completed, the announcement and pendency of the proposed transaction may be disruptive to our businesses (including our HMH Books & Media business) and may adversely affect our existing relationships with employees and business partners. Uncertainties related to the proposed transaction may also impair our ability to attract, retain and motivate key personnel and could divert the attention of our management and other employees from day-to-day business and operations. If we are unable to effectively manage these risks, the business, results of operations, financial condition and prospects of our businesses may be adversely affected.

Item 6. Exhibits

Exhibit No.		Description

3.1		Amended and Restated By-Laws of the Registrant, effective September 30, 2020 (incorporated 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)).

10.1		Amendment to the Nomination Agreement, effective November 4, 2020, by and among Houghton Mifflin Harcourt Company and certain affiliates of Anchorage Capital Group, L.L.C.(incorporated by reference to Exhibit No 10.1 to the Company’s Quarterly Report on Form 10-Q filed November 5, 20202 (File No. 001-36166)) .

10.2		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)).

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.

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*	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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Houghton Mifflin Harcourt Company (Registrant)

May 6, 2021	By:	/s/ John J. Lynch, Jr.
		John J. Lynch, Jr.
		Chief Executive Officer (Principal Executive Officer)

	Houghton Mifflin Harcourt Company (Registrant)

May 6, 2021	By:	/s/ Joseph P. Abbott, Jr.
		Joseph P. Abbott, Jr.
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)