Item 1. Consolidated Financial Statements
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements (Unaudited)
(amounts in tables are in thousands of dollars, except share and per share information)
Houghton Mifflin Harcourt Company (“HMH,” “Houghton Mifflin Harcourt,” “we,” “us,” “our,” or the “Company”) is a learning technology company committed to delivering connected solutions that engage learners, empower educators and improve student outcomes. As a leading provider of Kindergarten through 12th grade (“K-12”) core curriculum, supplemental and intervention solutions and professional learning services, HMH partners with educators and school districts to uncover solutions that unlock students’ potential and extend teachers’ capabilities. HMH estimates that it serves more than 50 million students and three million educators in 150 countries.
We focus on the K-12 market and, in the United States, we are a market leader. We specialize in comprehensive core curriculum, supplemental and intervention solutions, and we provide ongoing support in professional learning and coaching for educators and administrators. Our offerings are rooted in learning science, and we work with research partners, universities and third-party organizations as we design, build, implement and iterate our offerings to maximize their effectiveness. We are purposeful about innovation, leveraging technology to create engaging and immersive experiences designed to deepen learning experiences for students and to extend teachers’ capabilities so that they can focus on making meaningful connections with their students.
Our diverse portfolio enables us to help ensure that every student and teacher has the tools needed for success. We are able to build deep partnerships with school districts and leverage the scope of our offerings to provide holistic solutions at scale with the support of our far-reaching sales force and talented field-based specialists and consultants. We provide print, digital, and blended print/digital solutions that are tailored to a district’s needs, goals and technological readiness.
The 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 May 10, 2021, we completed the previously announced sale of our HMH Books & Media segment, our consumer publishing business. We determined that the HMH Books & Media business met the “held for sale” criteria and the “discontinued operations” criteria in accordance with Financial Accounting Standard Boards (“FASB”) Accounting Standards Codification (“ASC”) 205, Presentation of Financial Statements, (“FASB ASC 205”) as of March 31, 2021 due to its relative size and strategic rationale. The Consolidated Balance Sheets 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 of the disposal of the former segment, 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
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
9
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 separation payments in accordance with our severance policy.
On September 30, 2020, we undertook a restructuring program, including a reduction in force, as part of the ongoing assessment of our cost structure amid the COVID-19 pandemic. The reduction in force resulted in a 22% reduction in our workforce, including positions eliminated as part of the voluntary retirement incentive program mentioned above, and net of newly created positions to support our digital first operations. The reduction in force resulted in the departure of approximately 525 employees and was completed in October 2020. Each of the employees received separation payments in accordance with our severance policy. The total one-time, non-recurring cost incurred in connection with the restructuring program, inclusive of the voluntary retirement incentive program (collectively the “2020 Restructuring Plan”), all of which 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 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.
10
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
Due to the sale of the HMH Books & Media segment during the second quarter of 2021, we operate as one operating segment with one reportable segment and have only one reporting unit. No impairment triggering events were identified during the second quarter of 2021. 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 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 during the first quarter of 2021. As the sale price was in excess of the carrying value of the asset group, no impairment was identified. Additionally, we considered the impacts of the HMH Books & Media sale and related segment change on our Education reporting unit, to which goodwill and indefinite-lived intangibles are entirely allocated.
|
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 and six months ended June 30, 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.
11
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 June 30, 2021, we reported allowances for doubtful accounts of $3.5 million, compared to $3.8 million at December 31, 2020, reflecting write-offs of $0.3 million for the six months ended June 30, 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 June 30, 2021, we reported a reserve for royalty advances of $7.5 million, compared to $7.4 million at December 31, 2020, reflecting an increase of $0.1 million for the six months ended June 30, 2021.
|
5.
|
Discontinued Operations
|
On May 10, 2021, we completed the sale of the HMH Books & Media segment, our consumer publishing business, for cash consideration of $349.0 million, subject to a customary working capital adjustment expected to approximate a payment to the purchaser of $7.8 million, and the purchaser’s assumption of all liabilities relating to the HMH Books & Media business, subject to
12
specified exceptions. Upon closing of the transaction, all HMH Books & Media employees became employees of the purchaser. Net proceeds from the sale after the payment of transaction costs and exclusive of working capital adjustment, were approximately $337.0 million, all of which we used to pay down debt. In connection with the sale of HMH Books & Media, we entered into a Transition Services Agreement (“TSA”) with the purchaser whereby we will perform certain support functions for a period of up to 12 months. Upon the signing of the asset purchase agreement on March 26, 2021, the HMH Books & Media business qualified as a discontinued operation, and we therefore 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 income (loss) from discontinued operations is interest expense which was allocated to the HMH Books & Media business as we used the proceeds from the sale to pay down debt, which was required by our debt facilities, and we were not intending to reinvest such amounts in the business.
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Net sales
|
|
$
|
20,341
|
|
|
$
|
34,977
|
|
|
$
|
63,047
|
|
|
$
|
73,059
|
|
|
Costs
|
|
|
15,590
|
|
|
|
31,945
|
|
|
|
53,205
|
|
|
|
68,318
|
|
|
Amortization
|
|
|
—
|
|
|
|
1,795
|
|
|
|
1,395
|
|
|
|
3,680
|
|
|
Interest expense
|
|
|
2,805
|
|
|
|
6,868
|
|
|
|
9,362
|
|
|
|
14,398
|
|
|
Income (loss) from discontinued operations before taxes
|
|
$
|
1,946
|
|
|
$
|
(5,631
|
)
|
|
$
|
(915
|
)
|
|
$
|
(13,337
|
)
|
|
Income tax (benefit) expense
|
|
|
(4
|
)
|
|
|
100
|
|
|
|
90
|
|
|
|
341
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
1,950
|
|
|
$
|
(5,731
|
)
|
|
$
|
(1,005
|
)
|
|
$
|
(13,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020, the assets and liabilities of the HMH Books & Media business have been classified as assets of discontinued operations and liabilities of discontinued operations on our consolidated balance sheets. The major categories of assets and liabilities of the HMH Books & Media business included in assets of discontinued operations and liabilities of discontinued operations are as follows:
|
|
|
December 31,
|
|
|
|
|
2020
|
|
|
Accounts receivable, net
|
|
$
|
64,002
|
|
|
Inventories
|
|
|
21,410
|
|
|
Prepaid expenses and other assets
|
|
|
655
|
|
|
Property, plant, and equipment, net
|
|
|
4,401
|
|
|
Pre-publication costs, net
|
|
|
329
|
|
|
Royalty advances to authors, net
|
|
|
40,060
|
|
|
Other intangible assets, net
|
|
|
26,100
|
|
|
Other assets
|
|
|
3,096
|
|
|
Total assets of discontinued operations
|
|
$
|
160,053
|
|
|
Accounts payable
|
|
|
10,353
|
|
|
Royalties payable
|
|
|
17,628
|
|
|
Salaries and wages payable
|
|
|
221
|
|
|
Other liabilities
|
|
|
2,460
|
|
|
Total liabilities of discontinued operations
|
|
$
|
30,662
|
|
Inventories consisted of the following:
|
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
|
Finished goods
|
|
$
|
136,310
|
|
|
$
|
134,349
|
|
|
Raw materials
|
|
|
8,717
|
|
|
|
11,204
|
|
|
Inventories
|
|
$
|
145,027
|
|
|
$
|
145,553
|
|
13
|
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 six months ended June 30, 2021:
|
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
|
$ Change
|
|
|
% Change
|
|
|
Contract assets
|
|
$
|
715
|
|
|
$
|
580
|
|
|
$
|
135
|
|
|
|
23.3
|
%
|
|
Contract liabilities (deferred revenue)
|
|
$
|
880,965
|
|
|
$
|
905,284
|
|
|
$
|
(24,319
|
)
|
|
|
(2.7
|
%)
|
The $24.3 million decrease in our contract liabilities from December 31, 2020 to June 30, 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 $32.4 million and $30.7 million at June 30, 2021 and December 31, 2020, respectively, and amortized $4.9 million during both the six months ended June 30, 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 $16.9 million and $14.7 million at June 30, 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 $2.7 million and $1.4 million during the six months ended June 30, 2021 and 2020, respectively. The amortization is included in cost of sales, excluding publishing rights and pre-publication amortization.
During the three and six months ended June 30, 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
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Net sales recognized in the period from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in contract liabilities at the beginning
of the period
|
|
$
|
101,607
|
|
|
$
|
93,722
|
|
|
$
|
176,265
|
|
|
$
|
172,927
|
|
As of June 30, 2021, the aggregate amount of the transaction price allocated to the remaining performance obligations, which includes deferred revenue and open orders, was $974.2 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:
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
(in thousands)
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Core solutions (1)
|
|
$
|
165,528
|
|
|
$
|
119,210
|
|
|
$
|
234,199
|
|
|
$
|
184,442
|
|
|
Extensions (2)
|
|
|
143,144
|
|
|
|
97,029
|
|
|
|
220,668
|
|
|
|
183,676
|
|
|
Net sales
|
|
$
|
308,672
|
|
|
$
|
216,239
|
|
|
$
|
454,867
|
|
|
$
|
368,118
|
|
(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.
14
|
8.
|
Goodwill and Other Intangible Assets
|
There were no changes in the carrying amount of goodwill of $438.0 million for the three and six months ended June 30, 2021. Accumulated impairment losses on goodwill as of June 30, 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 six months ended June 30, 2020.
Other intangible assets consisted of the following:
|
|
|
June 30, 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
|
|
|
|
(56,752
|
)
|
|
|
76,578
|
|
|
|
133,330
|
|
|
|
(46,810
|
)
|
|
|
86,520
|
|
|
Publishing rights
|
|
|
1,050,000
|
|
|
|
(1,036,092
|
)
|
|
|
13,908
|
|
|
|
1,050,000
|
|
|
|
(1,030,437
|
)
|
|
|
19,563
|
|
|
Customer related and other
|
|
|
448,140
|
|
|
|
(318,572
|
)
|
|
|
129,568
|
|
|
|
448,140
|
|
|
|
(312,739
|
)
|
|
|
135,401
|
|
|
Other intangible assets, net
|
|
$
|
1,792,470
|
|
|
$
|
(1,411,416
|
)
|
|
$
|
381,054
|
|
|
$
|
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 $21.4 million and $19.6 million for the six months ended June 30, 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.
On July 8, 2021, we sold the intellectual property, including the copyrights and trademarks, of certain product titles for total cash proceeds of $5.0 million. We had approximately $1.3 million of other intangible assets at the time of sale and estimate that the gain on sale will be approximately $3.6 million, net of tax, and will be recorded in the third quarter.
Our debt consisted of the following:
|
|
|
June 30,
2021
|
|
|
December 31,
2020
|
|
|
$380,000 term loan due November 22, 2024, interest payable
quarterly (net of discount and issuance costs)
|
|
$
|
20,882
|
|
|
$
|
346,091
|
|
|
$306,000 senior secured notes due February 15, 2025, interest
payable semi-annually (net of discount and issuance costs)
|
|
$
|
295,729
|
|
|
$
|
297,601
|
|
|
|
|
|
316,611
|
|
|
|
643,692
|
|
|
Less: Current portion of long-term debt
|
|
|
—
|
|
|
|
(19,000
|
)
|
|
Total long-term debt, net of discount and issuance costs
|
|
$
|
316,611
|
|
|
$
|
624,692
|
|
|
Revolving credit facility
|
|
$
|
—
|
|
|
$
|
—
|
|
15
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. We redeemed $2.7 million of the notes during the second quarter of 2021 utilizing proceeds from the sale of the HMH Books & Media business.
The notes do not require us to comply with financial maintenance covenants. We are currently required to meet certain incurrence based financial covenants as defined under our notes. The notes are subject to restrictions on our ability to incur additional indebtedness, issue certain preferred stock, redeem, purchase or retire subordinated debt, make certain investments, pay dividends or other amounts, enter into certain transactions with affiliates, merge or consolidate with another person, sell or otherwise dispose of all or substantially all of our assets, sell certain assets, including capital stock, designate our subsidiaries as unrestricted subsidiaries, redeem or repurchase capital stock or make other restricted payments, and incur certain liens. The notes are subject to customary events of default. If an event of default occurs and is continuing, the administrative agent may, or at the request of certain required lenders shall, accelerate the obligations outstanding under the notes.
Term Loan Facility
On November 22, 2019, we entered into a second amended and restated term loan credit agreement for an aggregate principal amount of $380.0 million (the “term loan facility”). The term loan facility matures on November 22, 2024 and the interest rate per annum is equal to, at the option of the Company, either (a) LIBOR plus a margin of 6.25% or (b) an alternate base rate plus a margin of 5.25%. As of June 30, 2021, the interest rate on the term loan facility was 7.25%. We repaid $334.6 million of the term loan facility during the second quarter of 2021 utilizing proceeds from the sale of the HMH Books & Media business. We were required to repay debt under the term loan facility as we did not intend to reinvest the proceeds from the sale in the business. There are no future quarterly repayment installments required and the balance is payable on the maturity date. In connection with the repayment, we recorded a loss on extinguishment of debt totaling $12.5 million relating to the pro rata write-off of a portion of the unamortized deferred financing costs and discount.
On July 27, 2017, the U.K. Financial Conduct Authority (the “FCA”) announced that it will no longer require banks to submit rates for the calculation of LIBOR after 2021. Our term loan facility provides that the administrative agent may determine that (i) adequate and reasonable means do not exist for ascertaining the LIBOR rate or (ii) the FCA or the government authority having jurisdiction over the administrative agent has made a public statement identifying a specific date after which the LIBOR rate shall no longer be used for determining interest rates for loans. If the administrative agent determines that (i) or (ii) above is unlikely to be temporary then the administrative agent and the Company will agree to transition to an alternate base rate or amend the term loan facility to establish an alternate rate of interest to LIBOR that gives due consideration to the then-prevailing market convention for determining a rate of interest for syndicated loans in the United States at such time.
The term loan facility was issued at a discount equal to 4.0% of the outstanding borrowing commitment.
The 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.
16
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 gain of $0.7 million in our statements of comprehensive loss to account for the changes in fair value of these derivatives during the six months ended June 30, 2020. We reclassified $1.6 million from other comprehensive loss to earnings during the six months ended June 30, 2020.
We had no interest rate derivative contracts outstanding as of June 30, 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 June 30, 2021, no amounts are outstanding under the revolving credit facility.
As of June 30, 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
|
2021
During the six months ended June 30, 2021, we recorded an impairment in the amount of $10.9 million for real estate consolidation costs relating to vacated office space for certain floors in connection with the sale of our HMH Books & Media
17
business, of which $9.3 million is reflected as a reduction in operating lease assets and $1.6 million as a reduction in property, plant, and equipment in our consolidated balance sheet as of June 30, 2021.
2020 Restructuring Plan
On September 4, 2020, we finalized a voluntary retirement incentive program, which was offered to all U.S. based employees at least 55 years of age with at least five years of service. Of the eligible employees, 165 elected to participate representing approximately 5% of our workforce. The majority of the employees voluntarily retired as of September 4, 2020 with select employees leaving later in the year. Each of the employees received separation payments in accordance with our severance policy.
On September 30, 2020, we undertook a restructuring program, including a reduction in force, as part of the ongoing assessment of our cost structure amid the COVID-19 pandemic and in line with our strategic transformation plan. The reduction in force resulted in a 22% reduction in our workforce, including positions eliminated as part of the voluntary retirement incentive program mentioned above, and net of newly created positions to support our digital first operations. The reduction in force resulted in the departure of approximately 525 employees and was completed in October 2020. Each of the employees received separation payments in accordance with our severance policy. The total one-time, non-recurring cost incurred in connection with the restructuring program, inclusive of the voluntary retirement incentive program, (collectively the “2020 Restructuring Plan”) all of which represents cash expenditures, was approximately $33.6 million.
There was a favorable adjustment to severance costs associated with the 2020 Restructuring Plan in our consolidated statements of operations for the three and six months ended June 30, 2021. There were no costs associated with the 2020 Restructuring Plan in our consolidated statements of operations for the three and six months ended June 30, 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
|
|
|
June 30,
|
|
|
|
|
2020
|
|
|
Charges
|
|
|
payments
|
|
|
2021
|
|
|
Severance and termination benefits
|
|
$
|
19,311
|
|
|
$
|
(1,053)
|
|
|
$
|
(13,231)
|
|
|
$
|
5,027
|
|
|
|
|
$
|
19,311
|
|
|
$
|
(1,053)
|
|
|
$
|
(13,231)
|
|
|
$
|
5,027
|
|
2019 Restructuring Plan
There were no costs associated with the 2019 Restructuring Plan in our consolidated statements of operations for the three and six months ended June 30, 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
June 30,
2021
|
|
|
Severance and termination benefits
|
|
$
|
279
|
|
|
|
$
|
—
|
|
|
$
|
(254
|
)
|
|
$
|
25
|
|
|
|
|
$
|
279
|
|
|
|
$
|
—
|
|
|
$
|
(254
|
)
|
|
$
|
25
|
|
18
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 June 30, 2021 and 2020, we recorded an income tax benefit for continuing operations of approximately $0.01 million and $1.4 million, respectively, and for the six months ended June 30, 2021 and 2020, we recorded an income tax expense for continuing operations of approximately $2.3 million and a benefit for continuing operations of $10.2 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 (0.4)% and 4.1% for the three months ended June 30, 2021 and 2020, respectively, and (5.2)% and 2.7% for the six months ended June 30, 2021 and 2020, respectively.
Reserves for unrecognized tax benefits, excluding accrued interest and penalties, were $15.7 million at both June 30, 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 during the six months ended June 30, 2021, we incurred a settlement charge of $0.9 million. In connection with this settlement charge, we remeasured our pension liability and recorded a $7.6 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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Interest cost
|
|
$
|
810
|
|
|
$
|
1,097
|
|
|
$
|
1,497
|
|
|
$
|
2,194
|
|
|
Expected return on plan assets
|
|
|
(1,840
|
)
|
|
|
(1,855
|
)
|
|
|
(3,756
|
)
|
|
|
(3,710
|
)
|
|
Amortization of net loss
|
|
|
597
|
|
|
|
581
|
|
|
|
1,447
|
|
|
|
1,162
|
|
|
Settlement loss recognized
|
|
|
380
|
|
|
|
—
|
|
|
|
880
|
|
|
|
—
|
|
|
Net periodic benefit cost (credit)
|
|
$
|
(53
|
)
|
|
$
|
(177
|
)
|
|
$
|
68
|
|
|
$
|
(354
|
)
|
19
|
|
|
Other Post Retirement Plans
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Service cost
|
|
$
|
19
|
|
|
$
|
17
|
|
|
$
|
38
|
|
|
$
|
34
|
|
|
Interest cost
|
|
|
68
|
|
|
|
107
|
|
|
|
136
|
|
|
|
214
|
|
|
Amortization of prior service cost
|
|
|
11
|
|
|
|
11
|
|
|
|
22
|
|
|
|
22
|
|
|
Amortization of net loss
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
|
Net periodic benefit cost
|
|
$
|
98
|
|
|
$
|
133
|
|
|
$
|
196
|
|
|
$
|
266
|
|
We made contributions to the pension plan during the three months ended June 30, 2021 of approximately $0.5 million. There were no contributions to the pension plans during the three and six months ended June 30, 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, and foreign exchange forward contracts. The accounting standard for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty and its credit risk in its assessment of fair value.
20
Financial Assets and Liabilities
The following tables present our financial assets and liabilities measured at fair value on a recurring basis:
|
|
|
June 30,
2021
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Valuation
Technique
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
124,439
|
|
|
$
|
124,439
|
|
|
$
|
—
|
|
|
(a)
|
|
|
|
$
|
124,439
|
|
|
$
|
124,439
|
|
|
$
|
—
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivatives
|
|
$
|
308
|
|
|
$
|
—
|
|
|
$
|
308
|
|
|
(a)
|
|
|
|
$
|
308
|
|
|
$
|
—
|
|
|
$
|
308
|
|
|
|
|
|
|
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 $124.4 million and $262.1 million invested in money market funds as of June 30, 2021 and December 31, 2020, respectively, we had $22.1 million and $19.1 million of cash invested in bank accounts as of June 30, 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 $15.6 million and $14.9 million at June 30, 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 June 30, 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.
Non-Financial Assets and Liabilities
Our non-financial assets, which include goodwill, other intangible assets, property, plant, and equipment, pre-publication costs and operating lease assets, are not required to be measured at fair value on a recurring basis. However, if certain trigger events occur, or if an annual impairment test is required, we evaluate the non-financial assets for impairment. If an impairment did occur, the asset is required to be recorded at the estimated fair value. An impairment analysis was performed for the preparation of the 2020 first quarter report, as there was a triggering event for the three months ended March 31, 2020 related to the decline in our stock price attributed to the market environment, which resulted in a goodwill impairment. There were no non-financial liabilities that were required to be measured at fair value on a nonrecurring basis during the six months ended June 30, 2021 and 2020.
The following table presents our non-financial assets measured at fair value on a nonrecurring basis during 2020:
|
|
|
June 30,
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
|
|
|
|
|
|
21
In evaluating goodwill for impairment, we first compare our reporting unit's fair value to its carrying value. We estimate the fair values of our reporting unit by considering our market capitalization and other judgments. There was no goodwill impairment recorded for the six months ended June 30, 2021. Impairment recorded for goodwill for the six months ended June 30, 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 six months ended June 30, 2021 and 2020.
We test our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable or that it may exceed its fair value. During the three and six months ended June 30, 2021, we recorded an impairment of our operating lease assets in the amount of $9.3 million for real estate consolidation costs relating to vacated office space formerly utilized by employees of the HMH Books & Media business. The fair value of the operating lease assets was determined based on the income approach, with level 3 inputs utilizing certain market participant assumptions. These inputs included forecasted cash inflows from estimated subleases and a discount rate. The remaining carrying value was $2.0 million as of June 30, 2021. In connection with the real estate consolidation costs, we also recorded an impairment of property, plant, and equipment, of $1.6 million during the three and six months ended June 30, 2021 using the income approach with level 3 inputs. This was primarily related to leasehold improvements on the vacated office space, which had a remaining carrying value of $0.3 million as of June 30, 2021.
Non-Marketable Investments
At June 30, 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 $5.2 million and $4.4 million, respectively. The amounts are included in other assets in our consolidated balance sheets. Our non-marketable investments are accounted for using the cost method and are adjusted for observable transactions as appropriate. Gains from non-marketable investments were $0.8 million during the three and six months ended June 30, 2021. There were no gains or losses from non-marketable investments during the three and six months ended June 30, 2020.
Fair Value of Debt
The following table presents the carrying amounts and estimated fair market values of our debt at June 30, 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.
|
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$380,000 Term loan
|
|
$
|
20,882
|
|
|
$
|
20,882
|
|
|
$
|
346,091
|
|
|
$
|
331,382
|
|
|
$306,000 Senior secured notes
|
|
$
|
295,729
|
|
|
$
|
314,212
|
|
|
|
297,601
|
|
|
|
304,297
|
|
22
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 June 30, 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 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 alleged entitlement to additional royalties in connection with READ 180 and other products acquired from Scholastic and alleged trademark infringement in the marketing of these products. The Company has settled this matter and has recorded an expense of $2.5 million in the second quarter of 2021.
We were contingently liable for $0.9 million and $1.4 million of performance-related surety bonds for our operating activities as of June 30, 2021 and December 31, 2020, respectively. An aggregate of $16.2 million and $18.8 million of letters of credit existed at June 30, 2021 and December 31, 2020, respectively, of which $1.1 million backed the aforementioned performance-related surety bonds as of June 30, 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 June 30, 2021 and December 31, 2020.
23
|
15.
|
Net Income (Loss) Per Share
|
The following table sets forth the computation of basic and diluted earnings per share (“EPS”):
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
2,158
|
|
|
$
|
(32,437
|
)
|
|
$
|
(46,870
|
)
|
|
$
|
(370,463
|
)
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
216,470
|
|
|
|
(5,731
|
)
|
|
|
213,515
|
|
|
|
(13,678
|
)
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
218,628
|
|
|
$
|
(38,168
|
)
|
|
$
|
166,645
|
|
|
$
|
(384,141
|
)
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
127,500,256
|
|
|
|
125,458,566
|
|
|
|
126,989,623
|
|
|
|
125,073,770
|
|
|
Diluted
|
|
|
130,350,602
|
|
|
|
125,458,566
|
|
|
|
129,761,257
|
|
|
|
125,073,770
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.01
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(2.96
|
)
|
|
Discontinued operations
|
|
|
1.70
|
|
|
|
(0.05
|
)
|
|
|
1.69
|
|
|
|
(0.11
|
)
|
|
Net income (loss)
|
|
$
|
1.71
|
|
|
$
|
(0.30
|
)
|
|
$
|
1.31
|
|
|
$
|
(3.07
|
)
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.02
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(2.96
|
)
|
|
Discontinued operations
|
|
|
1.66
|
|
|
|
(0.05
|
)
|
|
|
1.65
|
|
|
|
(0.11
|
)
|
|
Net income (loss)
|
|
$
|
1.68
|
|
|
$
|
(0.30
|
)
|
|
$
|
1.28
|
|
|
$
|
(3.07
|
)
|
As we incurred a net loss in the three and six months ended June 30, 2020 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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
2021
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
Stock options
|
|
|
1,744,849
|
|
|
2,313,612
|
|
|
|
1,744,849
|
|
|
|
2,313,612
|
|
|
Restricted stock units
|
|
|
—
|
|
|
4,569,914
|
|
|
|
197,464
|
|
|
|
3,631,697
|
|
24