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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Houghton Mifflin Harcourt Company    HMHC

HOUGHTON MIFFLIN HARCOURT COMPANY

(HMHC)
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HOUGHTON MIFFLIN HARCOURT : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/05/2020 | 07:15am EST
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, 2019, which was filed with the Securities Exchange Commission (the
"SEC") on February 27, 2020. 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, while our award-winning children's
books, novels, non-fiction, and reference titles are enjoyed by readers
throughout the world.

For nearly two centuries, our HMH Books & Media segment has brought renowned and
awarded children's, fiction, non-fiction, culinary and reference titles to
readers throughout the world. Our distinguished author list includes ten Nobel
Prize winners, forty-nine Pulitzer Prize winners, and twenty-six National Book
Award winners. We are home to popular characters and titles such as Curious
George, Carmen Sandiego, The Lord of the Rings, The Whole 30, The Best American
Series, the Peterson Field Guides, CliffsNotes, and The Polar Express, and
published distinguished authors such as Tim O'Brien, Temple Grandin, Tim
Ferriss, Kwame Alexander, Lois Lowry, and Chris Van Allsburg.

Recent Developments



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 outbreak. We also
have taken actions to help mitigate some of the adverse impact of COVID-19 to
our profitability and cash flow in 2020, while working proactively with schools
to support them through this period of disruption with virtual learning
resources.



Actions taken to address COVID-19 and in addition to the Strategic
Transformation initiatives announced in the fourth quarter of 2019 include: (1)
director, executive and senior leadership salary reductions, and for the
majority of employees, a four-day work week with associated labor cost
reductions, in each case beginning in April 2020 and ceasing near the end of
July 2020; (2) a freeze on spending not directly tied to near-term billings,
including a reduction in all discretionary spending such as marketing,
advertising, travel, and office supplies; (3) reduced inventory purchasing; (4)
deferral of long-term capital projects not directly contributing to billings in
2020 and (5) borrowing $150 million from our asset-backed credit facility as a
pre-emptive measure to mitigate against capital market disruptions. Further, we
elected to defer the payment of our employer payroll taxes allowed under the
Coronavirus Aid, Relief, and Economic Security (CARES) Act.



The majority of the HMH workforce continued to work remotely during the third
quarter. The four-day work week furlough program along with director, executive,
and senior leadership salary reductions that we announced in March 2020 ended by
the end of July. The costs associated with ending the furlough program and the
salary reductions were subsequently mitigated by the 2020 Restructuring actions
discussed below. We also repaid $50.0 million of our asset-backed credit
facility at the end of June and repaid the remaining outstanding $100.0 million
during July and currently have no drawn balance on our asset-backed credit
facility.



Given the COVID-19 situation, our Education business will continue to be
impacted, and significant uncertainty is likely to persist in the marketplace.
Additionally, our HMH Books & Media business will be impacted as states enforce
temporary shut-downs of non-essential businesses and changes in consumer
spending habits are likely to occur. As a result, we withdrew our 2020 full-year
financial guidance and 3-year outlook, issued in conjunction with our fourth
quarter 2019 earnings on February 27, 2020 and the continued uncertainty
prevents us from providing full year guidance at this time.



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2020 Restructuring Plan




We are continuing to assess our cost structure amid the COVID-19 pandemic and in
line with our Strategic Transformation Plan announced in the fourth quarter of
2019, mentioned hereafter, to ensure our cost structure is aligned 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 and in line with our previously
disclosed 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 will
result 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 represents cash expenditures, is approximately $33.5
million and was recorded during the three months ended September 30, 2020. These
actions are aligned with our Strategic Transformation Plan launched in the
fourth quarter of 2019 to streamline the cost structure of the Company.

Strategic Transformation Plan


On October 15, 2019, our Board of Directors approved changes connected with our
ongoing strategic transformation to simplify our business model and accelerate
growth. This includes new product development and go-to-market capabilities, as
well as the streamlining of operations company-wide for greater efficiency.
These actions, which we refer to as our 2019 Restructuring Plan, resulted in the
net elimination of approximately 10% of our workforce, after taking into account
new strategy-aligned positions that are expected to be added, and additional
operating and capitalized cost reductions, including an approximately 20%
reduction in previously planned content development expenditures over the next
three years. These steps are intended to further simplify our business model
while delivering increased value to customers, teachers and students. The
workforce reductions were completed during the first quarter of 2020.

After considering additional headcount actions, implementation of the planned
actions resulted in total charges of $15.8 million which was recorded in the
fourth quarter of 2019. With respect to each major type of cost associated with
such activities, substantially all costs were severance and other termination
benefit costs and will result in cash expenditures.

Further, as part of such strategic transformation plan, we recorded an incremental $9.8 million inventory obsolescence charge in the fourth quarter of 2019 which is recorded in cost of sales in the statement of operations.

Other Events


In November 2020, the Company announced that it will explore a potential sale of
the HMH Books and Media business. Such a sale would be intended to build on the
Company's other strategic restructuring efforts and further align its cost
structure to its digital-first strategy.

Key Aspects and Trends of Our Operations

Business Segments


We are organized along two business segments: Education and HMH Books & Media
(formerly referred to as Trade Publishing). Our Education segment is our largest
segment and represented approximately 85%, 86% and 87% of our total net sales
for the years ended December 31, 2019, 2018 and 2017, respectively. Our HMH
Books & Media segment represented approximately 13%, 15% and 14% of our total
net sales for the years ended December 31, 2019, 2018 and 2017, respectively.
The Corporate and Other category represents certain general overhead costs not
fully allocated to the business segments, such as legal, accounting, treasury,
human resources and executive functions.

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Net Sales


We derive revenue primarily from the sale of print and digital content and
instructional materials, trade books, multimedia instructional programs, license
fees for book rights, content, 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 billings 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 Education segment 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 51% 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 Education segment net
sales is dependent upon our ability to maintain residual sales, which are
subsequent sales after the year of the original adoption, and our ability to
continue to generate new business by developing new programs that meet our
customers' evolving needs. In addition, our market is affected by changes in
state curriculum standards, which drive instruction, assessment and
accountability in each state. Changes in state curriculum standards require that
instructional materials be revised or replaced to align to the new standards,
which historically has driven demand for core curriculum programs.

We also derive our Education segment 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.

Our HMH Books & Media segment sells works of fiction and non-fiction in the
General Interest and Young Reader's categories, dictionaries and other reference
works. While print remains the primary format in which trade books are produced
and distributed, the market for trade titles in digital format, primarily
ebooks, generally represents approximately 8% to 10% of our annual HMH Books &
Media net sales. Further, HMH Books & Media licenses content to other publishers
along with media companies.

Factors affecting our net sales include:

Education

  • general economic conditions at the federal or state level;


  • state or district per student funding levels;


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  • federal funding levels;


  • the cyclicality of the purchasing schedule for adoption states;


  • student enrollments;


  • adoption of new education standards;

• state acceptance of submitted programs and participation rates for

accepted programs;

• technological advancement and the introduction of new content and products

that meet the needs of students, teachers and consumers, including through

strategic agreements pertaining to content development and distribution;

and

• the amount of net sales subject to deferrals which is impacted by the mix

of product offering between digital and non-digital products, the length

of programs and the mix of product delivered immediately or over time.



HMH Books & Media

• consumer spending levels as influenced by various factors, including the

U.S. economy and consumer confidence;

• the publishing of bestsellers along with obtaining recognized authors;

• film and series tie-ins to our titles that spur sales of current and

backlist titles, which are titles that have been on sale for more than a

        year; and


  • market growth or contraction.


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. 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 2019 legislative session appropriated funds for
purchases in 2019 and 2020. 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. We do not currently have
contracts with these states for future instructional materials adoptions and
there is no guarantee that our programs will be accepted by the state.

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.

Our HMH Books & Media segment is heavily influenced by the U.S. and broader global economy, consumer confidence and consumer spending.


While print remains the primary format in which trade books are produced and
distributed, the market for trade titles in digital format, primarily ebooks,
has developed in the recent decade, as the industry evolved to embrace new
technologies for developing, producing, marketing and distributing trade works.
We continue to focus on the development of innovative new digital products which
capitalize on our strong content, our digital expertise and the consumer demand
for these products.

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In the HMH Books & Media segment, annual results can be driven by bestselling
trade titles. Furthermore, backlist titles can experience resurgence in sales
when made into films or series. In past years, a number of our backlist titles
such as The Hobbit, The Lord of the Rings, Life of Pi, The Handmaid's Tale, The
Polar Express, and The Giver have benefited in popularity due to movie or series
releases and have subsequently resulted in increased trade sales.

We employ several 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:

• Pay-up-front: Customer makes a fixed payment at time of purchase and we

provide a specific product/service in return; and



    •   Pre-pay Subscription: Customer makes a one-time payment at time of
        purchase, but receives a stream of goods/services over a defined time
        horizon; for example, we currently provide customers the option to

purchase a multi-year subscription to textbooks where for a one-time

charge, a new copy of the work text is delivered to the customer each year

for a defined time period. Pre-pay subscriptions to online textbooks are

another example where the customer receives access to an online book for a

specific period of time.

Cost of sales, excluding publishing rights and pre-publication amortization


Cost of sales, excluding publishing rights and pre-publication amortization,
include expenses directly attributable to the production of our products and
services, including the non-capitalizable costs associated with our content and
platform development group. The expenses within cost of sales include variable
costs such as paper, printing and binding costs of our print materials, royalty
expenses paid to our authors, gratis costs or products provided at no charge as
part of the sales transaction, and inventory obsolescence. Also included in cost
of sales are labor costs related to professional services and the
non-capitalized costs associated with our content and platform development
group. We also include amortization expense associated with our customer-facing
software platforms. Certain products such as trade books and products associated
with our renowned authors 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 with respect to our HMH Books & Media
segment's consumer books, for which we generally expense such costs as incurred,
and the acquired 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 $21.9 million for the nine months ended September 30, 2020)
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.

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Other intangible asset amortization


Our other intangible asset 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 nine months ended September 30, 2020 was
$18.8 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, for 2019
only, our previous $800.0 million term loan credit facility ("previous term loan
facility") along with, 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 nine months ended September 30, 2020 was $50.4 million.

Results of Operations


Consolidated Operating Results for the Three Months Ended September 30, 2020 and
2019



                                             Three Months Ended          Dollar        Percent
                                                September 30,            Change         Change
(dollars in thousands)                       2020          2019           2020           2019
Net sales                                  $ 386,590$ 565,668$ (179,078 )        (31.7 )%
Costs and expenses:
Cost of sales, excluding publishing
rights and
  pre-publication amortization               182,767       246,527        (63,760 )        (25.9 )%
Publishing rights amortization                 4,761         6,341         (1,580 )        (24.9 )%
Pre-publication amortization                  31,647        39,319         (7,672 )        (19.5 )%
Cost of sales                                219,175       292,187        (73,012 )        (25.0 )%
Selling and administrative                   127,324       188,957        (61,633 )        (32.6 )%
Other intangible assets amortization           6,274         6,383           (109 )         (1.7 )%
Restructuring/severance and other
charges                                       33,545           270         33,275             NM
Operating income                                 272        77,871        (77,599 )         99.7 %
Other income (expense):
Retirement benefits non-service income            61            41             20           48.8 %
Interest expense                             (16,168 )     (11,597 )       (4,571 )        (39.4 )%
Interest income                                   32           509           (477 )        (93.7 )%
Change in fair value of derivative
instruments                                      432          (737 )        1,169             NM
Gain on investments                            1,738             -          1,738             NM
Income from transition services
agreement                                          -           571           (571 )           NM
(Loss) income before taxes                   (13,633 )      66,658        (80,291 )           NM
Income tax (benefit) expense                  (1,081 )      (2,602 )        1,521           58.5 %
Net (loss) income                          $ (12,552 )$  69,260$  (81,812 )           NM




NM = not meaningful

Net sales for the three months ended September 30, 2020 decreased
$179.1 million, or 31.7%, from $565.7 million in 2019 to $386.6 million. The net
sales decrease was driven by a $186.7 million decrease in our Education segment,
offset slightly by a $7.6 million increase in our HMH Books & Media segment.
Within our Education segment, 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
$120.0 million from $244.0 million in 2019 to $124.0 million. Within Extensions,
net sales decreased due to lower sales of the Heinemann's Fountas & Pinnell
Classroom, LLI Leveled Literacy and Calkins products due to a difficult
comparison to last year's Texas K-6 sales coupled with the impact of the
COVID-19 pandemic in 2020 along with reduced face-to-face delivery of
professional services. Further, there were lower net sales from Core Solutions
which decreased by $67.0 million from $273.0 million in 2019 to $206.0 million,
which was primarily due to the smaller new adoption market opportunity in Texas
ELA, along with impacts of the COVID-19 pandemic. Within our HMH Books & Media
segment, the increase in net sales was primarily due to an increase in licensing
revenue of $7.3 million, which included $4.3 million from the Carmen Sandiego
series on Netflix.

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Operating income for the three months ended September 30, 2020 unfavorably changed from $77.9 million in 2019 to $0.3 million, due primarily to the following:

  • A $179.1 million decrease in net sales,


    •   A $33.3 million increase in costs associated with our
        restructuring/severance and other charges due to $33.5 million of
        severance costs associated with the 2020 Restructuring Plan,

Partially offset by:

• A $63.8 million decrease in our cost of sales, excluding publishing rights

        and pre-publication amortization, from $246.5 million in 2019 to
        $182.8 million, primarily due to lower billings. Our cost of sales,
        excluding publishing rights and pre-publication amortization, as a
        percentage of sales, increased to 47.3% from 43.6%,

• A $61.6 million decrease in selling and administrative expenses, primarily

due to lower labor costs of $28.0 million, due to cost savings associated

with our employee furlough initiative in response to the COVID-19

pandemic, and to a lesser extent, our early retirement incentive program,

the 2019 Restructuring Plan and a freeze on hiring. Also, there was a

decrease of $23.0 million of variable expenses such as transportation and

commissions due to lower billings, which decreased $241.0 million from the

third quarter of 2019. Further, there were lower discretionary costs of

        $12.0 million related to travel and expense reduction measures and
        marketing, and



• A $9.4 million decrease in net amortization expense related to publishing

        rights, pre-publication and other intangible assets, primarily due to a
        decrease in pre-publication amortization attributed to the timing and

large amount of 2019 major product releases and, to a lesser extent, our

use of accelerated amortization methods for publishing rights

amortization.



Interest expense for the three months ended September 30, 2020 increased
$4.6 million from $11.6 million in 2019 to $16.2 million, primarily due to our
debt refinancing during the fourth quarter of 2019 in which the previous term
loan facility was replaced with the term loan facility and the notes with higher
interest rates (the "2019 Refinancing"). Further, there was an increase of
$0.4 million of net settlement payments on our interest rate derivative
instruments during 2020.

Interest income for the three months ended September 30, 2020 slightly decreased due to lower interest rates on our money market funds in 2020.

Change in fair value of derivative instruments for the three months ended September 30, 2020, favorably changed by a $1.2 million due to foreign exchange forward contracts executed on the Euro that were favorably impacted by the weakening of the U.S. dollar against the Euro.

Gain on investments for the three months ended September 30, 2020 was $1.7 million and was related to the fair value change in our equity interests in educational technology private partnerships.


Income tax (benefit) expense for the three months ended September 30, 2020
decreased $1.5 million, from a benefit of $2.6 million in 2019, to a benefit of
$1.1 million. An income tax benefit was recorded in the first quarter of 2020
and was due primarily to the book impairment on goodwill, which reduced the
related deferred tax liabilities. For 2020, our annual effective tax rate,
exclusive of discrete items used to calculate the tax provision, is expected to
be approximately (1.3)%. For 2019, our effective annual tax rate exclusive of
discrete items was (3.9)%. 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.



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Consolidated Operating Results for the Nine Months Ended September 30, 2020 and
2019



                                               Nine Months Ended            Dollar        Percent
                                                 September 30,              Change         Change
(dollars in thousands)                        2020           2019            2020           2019
Net sales                                  $  827,731$ 1,149,199$ (321,468 )        (28.0 )%
Costs and expenses:
Cost of sales, excluding publishing
rights and
  pre-publication amortization                397,139         533,413       (136,274 )        (25.5 )%
Publishing rights amortization                 15,295          20,217         (4,922 )        (24.3 )%
Pre-publication amortization                   94,043         108,140        (14,097 )        (13.0 )%
Cost of sales                                 506,477         661,770       (155,293 )        (23.5 )%
Selling and administrative                    367,006         516,206       (149,200 )        (28.9 )%
Impairment charge for goodwill                262,000               -        262,000             NM
Other intangible assets amortization           18,819          19,519           (700 )         (3.6 )%
Restructuring/severance and other
charges                                        33,545           5,921         27,624             NM
Operating loss                               (360,116 )       (54,217 )     (305,899 )           NM
Other income (expense):
Retirement benefits non-service income            183             125             58           46.4 %
Interest expense                              (50,433 )       (35,142 )      (15,291 )        (43.5 )%
Interest income                                   873           1,698           (825 )        (48.6 )%
Change in fair value of derivative
instruments                                       172          (1,171 )        1,343             NM
Gain on investments                             1,738               -          1,738             NM
Income from transition services
agreement                                           -           4,248         (4,248 )           NM
Loss before taxes                            (407,583 )       (84,459 )     (323,124 )           NM
Income tax (benefit) expense                  (10,890 )         4,256        (15,146 )           NM
Net loss                                   $ (396,693 )$   (88,715 )$ (307,978 )           NM




NM = not meaningful

Net sales for the nine months ended September 30, 2020 decreased $321.5 million,
or 28.0%, from $1,149.2 million in 2019 to $827.7 million. The net sales
decrease was driven by a $322.7 million decrease in our Education segment,
offset slightly by a $1.2 million increase in our HMH Books & Media segment.
Within our Education segment, 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
$221.0 million from $528.0 million in 2019 to $307.0 million. Within Extensions,
net sales decreased due to lower sales of the Heinemann's Fountas & Pinnell
Classroom, Calkins and LLI Leveled Literacy products due to a difficult
comparison to prior year Texas K-6 sales coupled with the impact of the COVID-19
pandemic in 2020. Further, there were lower net sales from Core Solutions which
decreased by $102.0 million from $493.0 million in 2019 to $391.0 million, which
was primarily due to the smaller new adoption market opportunity in Texas ELA,
along with the COVID-19 pandemic. Within our HMH Books & Media segment, the
increase in net sales was primarily due to $2.4 million of licensing revenue
from production series. Offsetting the aforementioned, was lower net sales of
both Adult and Young Reader's categories due to the closure of bookstores during
the COVID-19 pandemic and the corresponding delay in releases of new frontlist
titles.

Operating loss for the nine months ended September 30, 2020 unfavorably changed
from a loss of $54.2 million in 2019 to a loss of $360.1 million, due primarily
to the following:

• A $321.5 million decrease in net sales,

• An impairment charge for goodwill during the first quarter of 2020 of

$262.0 million. This non-cash impairment is a direct result of the adverse

        impact that the COVID-19 pandemic has had on the Company,


    •   A $27.6 million increase in costs associated with our
        restructuring/severance and other charges due to $33.5 million of
        severance costs associated with the 2020 Restructuring Plan,


                                       34

--------------------------------------------------------------------------------

• Partially offset by a $149.2 million decrease in selling and

administrative expenses, primarily due to lower labor costs of

$62.0 million, due to cost savings associated with our employee furlough

initiative, which began in April and ceased at the end of July, in

response to COVID-19 and to a lesser extent our early retirement incentive

program, the 2019 Restructuring Plan and a freeze on hiring. Also, there

was a decrease of $50.0 million of variable expenses such as commissions

and transportation due to lower billings, which decreased $456.0 million

from 2019. Further, there were lower discretionary costs of $28.0 million

primarily related to travel and expense reduction measures and marketing

along with lower depreciation expense of $9.0 million,

• A $136.3 million decrease in our cost of sales, excluding publishing

rights and pre-publication amortization, from $533.4 million in 2019 to

        $397.1 million, primarily due to lower billings. Our cost of sales,
        excluding publishing rights and pre-publication amortization, as a
        percentage of sales, increased to 48.0% from 46.4%, and

• A $19.7 million decrease in net amortization expense related to publishing

        rights, pre-publication and other intangible assets, primarily due to a
        decrease in pre-publication amortization attributed to the timing and

large amount of 2019 major product releases and, to a lesser extent, our

use of accelerated amortization methods for publishing rights

amortization.

Interest expense for the nine months ended September 30, 2020 increased $15.3 million from $35.1 million in 2019 to $50.4 million, primarily due to our 2019 Refinancing during the fourth quarter of 2019. Further, there was an increase of $2.7 million of net settlement payments on our interest rate derivative instruments during 2020.

Interest income for the nine months ended September 30, 2020 decreased $0.8 million due to lower interest rates on our money market funds in 2020.

Change in fair value of derivative instruments for the nine months ended September 30, 2020, favorably changed by $1.3 million due to foreign exchange forward contracts executed on the Euro that were favorably impacted by the weakening of the U.S. dollar against the Euro.

Gain on investments for the nine months ended September 30, 2020 was $1.7 million and was related to the fair value change in our equity interests in educational technology private partnerships.


Income from transition services agreement for the nine months ended September
30, 2019 was $4.2 million and was related to transition service fees under the
transition services agreement with the purchaser of our Riverside Business
pursuant to which we performed certain support functions through September 30,
2019.

Income tax (benefit) expense for the nine months ended September 30, 2020
increased $15.1 million, from an expense of $4.3 million in 2019, to a benefit
of $10.9 million. An income tax benefit was recorded in the first quarter of
2020 and was due primarily to the book impairment on goodwill, which reduced the
related deferred tax liabilities. For 2020, our annual effective tax rate,
exclusive of discrete items used to calculate the tax provision, is expected to
be approximately (1.3)%. For 2019, our effective annual tax rate exclusive of
discrete items was (3.9)%. 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.



                                       35

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Adjusted EBITDA


To supplement our financial statements presented in accordance with GAAP, we
have presented Adjusted EBITDA, which is not prepared in accordance with GAAP.
This information should be considered as supplemental in nature and should not
be considered in isolation or as a substitute for the related financial
information prepared in accordance with GAAP. Management believes that the
presentation of Adjusted EBITDA provides useful information to investors
regarding our results of operations because it assists both investors and
management in analyzing and benchmarking the performance and value of our
business. Adjusted EBITDA provides an indicator of general economic performance
that is not affected by debt restructurings, fluctuations in interest rates or
effective tax rates, gain or losses on investments, non-cash charges, or levels
of depreciation or amortization along with costs such as severance, separation
and facility closure costs, 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) income to Adjusted EBITDA for the three and nine months ended September 30, 2020 and 2019:



                                             Three Months Ended          For the Nine Months
                                                September 30,            Ended September 30,
                                             2020          2019           2020          2019
Net (loss) income                          $ (12,552 )$  69,260$ (396,693 )$ (88,715 )
Interest expense                              16,168        11,597         50,433        35,142
Interest income                                  (32 )        (509 )         (873 )      (1,698 )
Provision (benefit) for income taxes          (1,081 )      (2,602 )      (10,890 )       4,256
Depreciation expense                          12,566        13,901         38,016        46,945
Amortization expense - film asset              4,698             -          4,854         6,772
Amortization expense                          42,682        52,043        128,157       147,876
Non-cash charges - goodwill impairment             -             -        262,000             -
Non-cash charges - stock compensation          3,112         3,835          8,751        11,094
Non-cash charges - (gain) loss on
derivative instruments                          (432 )         737           (172 )       1,171
Fees, expenses or charges for equity
offerings, debt or
  acquisitions/dispositions                      339           183            366           731
Restructuring/severance and other
charges                                       33,545           270         33,545         5,921
Gain on investments                           (1,738 )           -         (1,738 )           -
Adjusted EBITDA                            $  97,275$ 148,715$  115,756$ 169,495




                                       36

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Segment Operating Results


Results of Operations - Comparing Three Months Ended September 30, 2020 and 2019

Education



                                             Three Months Ended
                                                September 30,            Dollar        Percent
                                             2020          2019          Change         Change
Net sales                                  $ 330,926$ 517,614$ (186,688 )        (36.1 )%
Costs and expenses:
Cost of sales, excluding publishing
rights and
  pre-publication amortization               145,434       219,920        (74,486 )        (33.9 )%
Publishing rights amortization                 3,469         4,874         (1,405 )        (28.8 )%
Pre-publication amortization                  31,596        39,051         (7,455 )        (19.1 )%
Cost of sales                                180,499       263,845        (83,346 )        (31.6 )%
Selling and administrative                    96,659       154,439        (57,780 )        (37.4 )%
Other intangible asset amortization            5,738         4,876            862           17.7 %
Operating income                              48,030        94,454        (46,424 )        (49.1 )%
Net income                                 $  48,030$  94,454$  (46,424 )        (49.1 )%
Adjustments from net income to
  Education segment Adjusted EBITDA
Depreciation expense                       $   8,840$  10,160$   (1,320 )        (13.0 )%
Amortization expense                          40,803        48,801         

(7,998 ) (16.4 )% Education segment Adjusted EBITDA $ 97,673$ 153,415$ (55,742 ) (36.3 )%




NM = not meaningful

Our Education segment net sales for the three months ended September 30, 2020
decreased $186.7 million, or 36.1%, from $517.6 million in 2019 to
$330.9 million. The net sales 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
$120.0 million from $244.0 million in 2019 to $124.0 million. Within Extensions,
net sales decreased due to lower sales of the Heinemann's Fountas & Pinnell
Classroom, LLI Leveled Literacy and Calkins products due to a difficult
comparison to prior year Texas K-6 sales coupled with the impact of the COVID-19
pandemic along with reduced face-to-face delivery of professional services and
supplemental products. Further, there were lower net sales from Core Solutions
which decreased by $67.0 million from $273.0 million in 2019 to $206.0 million,
which was primarily due to the smaller new adoption market opportunity in Texas
ELA, along with the COVID-19 pandemic.

Our Education segment cost of sales for the three months ended September 30,
2020 decreased $83.3 million, or 31.6%, from $263.8 million in 2019 to
$180.5 million. Our cost of sales, excluding publishing rights and
pre-publication amortization, decreased $74.5 million from $219.9 million in
2019 to $145.4 million, due to the decline in net sales. Our cost of sales,
excluding publishing rights and pre-publication amortization, as a percentage of
sales, slightly increased year over year from 42.4% to 43.9%. Pre-publication
amortization decreased by $7.5 million from 2019 primarily due to the timing and
large amount of 2019 major product releases, and publishing rights amortization
decreased $1.4 million attributed to our use of accelerated amortization
methods.

Our Education segment selling and administrative expense for the three months
ended September 30, 2020 decreased $57.8 million, or 37.4%, from $154.4 million
in 2019 to $96.7 million. The decrease was driven by lower labor costs due to
savings associated with our employee furlough initiative in response to COVID-19
pandemic, and to a lesser extent, our early retirement incentive program, the
2019 Restructuring Plan and a freeze on hiring. Further, there were lower
variable expenses such as samples, transportation, depository fees and
commissions attributed to lower billings from the prior year. Discretionary
spending was also lower due to travel reductions and cost reductions throughout
the Company.

Our Education segment other intangible asset amortization expense for the three months ended September 30, 2020 increased $0.9 million from 2019.


Our Education segment Adjusted EBITDA for the three months ended September 30,
2020 decreased $55.7 million, from $153.4 million in 2019 to $97.7 million. Our
Education segment Adjusted EBITDA excludes depreciation and amortization. The
change is due to the identified factors impacting net sales, cost of sales and
selling and administrative expenses after removing those items not included in
Education segment Adjusted EBITDA.

                                       37

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HMH Books & Media



                                              Three Months Ended
                                                September 30,            Dollar        Percent
                                              2020          2019         Change         Change
Net sales                                  $   55,664$  48,054$   7,610           15.8 %
Costs and expenses:
Cost of sales, excluding publishing
rights and
  pre-publication amortization                 37,333        26,607        10,726           40.3 %
Publishing rights amortization                  1,292         1,467          (175 )        (11.9 )%
Pre-publication amortization                       51           268          (217 )        (81.0 )%
Cost of sales                                  38,676        28,342        10,334           36.5 %
Selling and administrative                     12,859        13,312          (453 )         (3.4 )%
Other intangible asset amortization               536         1,507          (971 )        (64.4 )%
Operating income                                3,593         4,893        (1,300 )        (26.6 )%
Net income                                 $    3,593$   4,893$  (1,300 )        (26.6 )%
Adjustments from net income to HMH Books
& Media
  segment Adjusted EBITDA
Depreciation expense                       $       97$     167$     (70 )        (41.9 )%
Amortization expense film asset                 4,698             -         4,698             NM
Amortization expense                            1,879         3,242        (1,363 )        (42.0 )%
HMH Books & Media segment Adjusted
EBITDA                                     $   10,267$   8,302$   1,965           23.7 %




NM = not meaningful

Our HMH Books & Media segment net sales for the three months ended September 30,
2020 increased $7.6 million, or 15.8%, from $48.1 million in 2019 to
$55.7 million. The increase in net sales was primarily due to an increase in
licensing revenue of $7.3 million, which includes $4.3 million from the Carmen
Sandiego series on Netflix. Partially offsetting the aforementioned were lower
net sales of both Adult and Young Reader's categories due to the closure of
bookstores during the COVID-19 pandemic and the corresponding delay in releases
of new frontlist titles.

Our HMH Books & Media segment cost of sales for the three months ended September
30, 2020 increased $10.3 million, or 36.5%, from $28.3 million in 2019 to
$38.7 million. The increase was driven by our cost of sales, excluding
publishing rights and pre-publication amortization, which increased
$10.7 million of which $4.7 million was related to an increase in film asset
amortization, and an increase in sales along with product mix.

Our HMH Books & Media segment selling and administrative expense for the three
months ended September 30, 2020 decreased $0.5 million from $13.3 million in
2019 to $12.9 million. The decrease was due to labor savings associated with our
employee furlough initiative in response to COVID-19 pandemic, and to a lesser
extent, our early retirement incentive program, the 2019 Restructuring Plan and
a freeze on hiring.

Our HMH Books & Media segment other intangible asset amortization expense for
the three months ended September 30, 2020 decreased $1.0 million from 2019, due
to certain definite-lived intangible assets being fully depreciated in 2019.

Our HMH Books & Media segment Adjusted EBITDA for the three months ended
September 30, 2020 changed favorably from an income of $8.3 million in 2019 to
$10.3 million due to the identified factors impacting net sales, cost of sales
and selling and administrative expenses after removing those items not included
in our HMH Books & Media segment Adjusted EBITDA. Our HMH Books & Media segment
Adjusted EBITDA excludes depreciation and amortization.

                                       38

--------------------------------------------------------------------------------

Corporate and Other



                                             Three Months Ended
                                                September 30,           Dollar        Percent
                                             2020          2019         Change         Change
Net sales                                  $       -     $       -     $       -              -
Costs and expenses:
Cost of sales, excluding publishing
rights and
  pre-publication amortization                     -             -             -              -
Publishing rights amortization                     -             -             -              -
Pre-publication amortization                       -             -             -              -
Cost of sales                                      -             -             -              -
Selling and administrative                    17,806        21,206        (3,400 )        (16.0 )%
Restructuring/severance and other
charges                                       33,545           270        33,275             NM
Operating loss                               (51,351 )     (21,476 )     (29,875 )           NM
Retirement benefits non-service income            61            41            20           48.8 %
Interest expense                             (16,168 )     (11,597 )      (4,571 )        (39.4 )%
Interest income                                   32           509          (477 )        (93.7 )%
Change in fair value of derivative
instruments                                      432          (737 )       1,169             NM
Gain on investments                            1,738             -         1,738             NM
Income from transition services
agreement                                          -           571          (571 )           NM
Net loss before taxes                        (65,256 )     (32,689 )     (32,567 )        (99.6 )%
Income tax (benefit) expense                  (1,081 )      (2,602 )       1,521           58.5 %
Net loss                                   $ (64,175 )$ (30,087 )$ (34,088 )           NM
Adjustments from net loss to Corporate
and Other Adjusted
  EBITDA
Interest expense                           $  16,168$  11,597$   4,571           39.4 %
Interest income                                  (32 )        (509 )         477           93.7 %

Provision (benefit) for income taxes (1,081 ) (2,602 ) 1,521

           58.5 %
Depreciation expense                           3,629         3,574            55            1.5 %
Non-cash charges - (gain) loss on
derivative instruments                          (432 )         737        (1,169 )           NM
Non-cash charges - stock compensation          3,112         3,835          (723 )        (18.9 )%
Fees, expenses or charges for equity
offerings, debt or
  acquisitions/dispositions                      339           183           156             NM
Restructuring/severance and other
charges                                       33,545           270        33,275             NM
Gain on investments                           (1,738 )           -        (1,738 )           NM

Corporate and Other Adjusted EBITDA $ (10,665 )$ (13,002 )$ 2,337

           18.0 %




NM = not meaningful

The Corporate and Other category represents certain general overhead costs not
fully allocated to the business segments such as legal, accounting, treasury,
human resources, technology and executive functions along with severance and
other non-operating costs.

Our selling and administrative expense for the Corporate and Other category for
the three months ended September 30, 2020 decreased $3.4 million from $21.2
million in 2019 to $17.8 million, primarily attributed to cost savings
associated with our employee furlough initiative in response to COVID-19
pandemic, and to a lesser extent, our early retirement incentive program, the
2019 Restructuring Plan and a freeze on hiring. Additionally, selling and
administrative expenses were lower due to lower stock compensation charges.

Our restructuring/severance and other charges for the three months ended September 30, 2020 increased by $33.3 million due to $33.5 million of severance costs associated with the 2020 Restructuring Plan.

                                       39

--------------------------------------------------------------------------------
Interest expense for the three months ended September 30, 2020 increased
$4.6 million from $11.6 million in 2019 to $16.2 million, primarily due to our
debt refinancing during the fourth quarter of 2019 in which the previous term
loan facility was replaced with the term loan facility and the notes with higher
interest rates (the "2019 Refinancing"). Further, there was an increase of
$0.4 million of net settlement payments on our interest rate derivative
instruments during 2020.

Interest income for the three months ended September 30, 2020 slightly decreased due to lower interest rates on our money market funds in 2020.

Change in fair value of derivative instruments for the three months ended September 30, 2020, favorably changed by a $1.2 million due to foreign exchange forward contracts executed on the Euro that were favorably impacted by the weakening of the U.S. dollar against the Euro.

Gain on investments for the three months ended September 30, 2020 was $1.7 million and was related to the fair value change in our equity interests in educational technology private partnerships.


Income from transition services agreement for the three months ended September
30, 2019 was $0.6 million and was related to transition service fees under the
transition services agreement with the purchaser of our Riverside Business
pursuant to which we performed certain support functions through September 30,
2019.

Income tax (benefit) expense for the three months ended September 30, 2020
decreased $1.5 million, from a benefit of $2.6 million in 2019, to a benefit of
$1.1 million. An income tax benefit was recorded in the first quarter of 2020
and was due primarily to the book impairment on goodwill, which reduced the
related deferred tax liabilities. For 2020, our annual effective tax rate,
exclusive of discrete items used to calculate the tax provision, is expected to
be approximately (1.3)%.  For 2019, our effective annual tax rate exclusive of
discrete items was (3.9)%. 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.

Adjusted EBITDA for the Corporate and Other category for the three months ended
September 30, 2020 favorably changed $2.3 million, or 18.0%, from a loss of
$13.0 million in 2019 to a loss of $10.7 million. Our Adjusted EBITDA for the
Corporate and Other category excludes interest, taxes, depreciation, derivative
instruments charges, equity compensation charges, gains or losses on
investments, acquisition/disposition-related activity, and restructuring
costs. The favorable change in our Adjusted EBITDA for the Corporate and Other
category was due to the factors described above after removing those items not
included in Adjusted EBITDA for the Corporate and Other category.

Results of Operations - Comparing Nine Months Ended September 30, 2020 and 2019

Education



                                               Nine Months Ended
                                                 September 30,              Dollar        Percent
                                              2020           2019           Change         Change
Net sales                                  $  698,574$ 1,021,259$ (322,685 )        (31.6 )%
Costs and expenses:
Cost of sales, excluding publishing
rights and
  pre-publication amortization                309,079         450,567       (141,488 )        (31.4 )%
Publishing rights amortization                 11,332          15,737         (4,405 )        (28.0 )%
Pre-publication amortization                   93,878         107,654        (13,776 )        (12.8 )%
Cost of sales                                 414,289         573,958       (159,669 )        (27.8 )%
Selling and administrative                    279,308         415,913       (136,605 )        (32.8 )%
Impairment charge for goodwill                262,000               -        262,000             NM
Other intangible asset amortization            17,212          15,000          2,212           14.7 %
Operating (loss) income                      (274,235 )        16,388       (290,623 )           NM
Net (loss) income                          $ (274,235 )$    16,388$ (290,623 )           NM

Adjustments from net (loss) income to

  Education segment Adjusted EBITDA
Depreciation expense                       $   27,002$    34,127$   (7,125 )        (20.9 )%
Amortization expense                          122,421         138,391        (15,970 )        (11.5 )%
Impairment charge for goodwill                262,000               -        262,000             NM

Education segment Adjusted EBITDA $ 137,188$ 188,906 $

 (51,718 )        (27.4 )%


                                       40
--------------------------------------------------------------------------------

NM = not meaningful


Our Education segment net sales for the nine months ended September 30, 2020
decreased $322.7 million, or 31.6%, from $1,021.3 million in 2019 to
$698.6 million. The net sales 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
$221.0 million from $528.0 million in 2019 to $307.0 million. Within Extensions,
net sales decreased due to lower sales of the Heinemann's Fountas & Pinnell
Classroom, Calkins and LLI Leveled Literacy products due to a difficult
comparison to prior year Texas K-6 sales coupled with the impact of the COVID-19
pandemic along with face-to-face delivery of professional services and
supplemental products. Further, there were lower net sales from Core Solutions
which decreased by $102.0 million from $493.0 million in 2019 to $391.0 million,
which was primarily due to the smaller new adoption market opportunity in Texas
ELA, along with the COVID-19 pandemic.

Our Education segment cost of sales for the nine months ended September 30, 2020
decreased $159.7 million, or 27.8%, from $574.0 million in 2019 to
$414.3 million. Our cost of sales, excluding publishing rights and
pre-publication amortization, decreased $141.5 million from $450.6 million in
2019 to $309.1 million, due to the decline in net sales. Our cost of sales,
excluding publishing rights and pre-publication amortization, as a percentage of
sales, was essentially flat year over year. Pre-publication amortization
decreased by $13.8 million from 2019 primarily due to the timing and large
amount of 2019 major product releases, and $4.4 million decrease in publishing
rights amortization attributed to our use of accelerated amortization methods.

Our Education segment selling and administrative expense for the nine months
ended September 30, 2020 decreased $136.6 million, or 32.8%, from $415.9 million
in 2019 to $279.3 million. The decrease was driven by lower labor costs
primarily attributed to cost savings associated with our employee furlough
initiative in response to COVID-19 pandemic, and to a lesser extent, our early
retirement incentive program, the 2019 Restructuring Plan and a freeze on
hiring. Further, lower variable expenses such as commissions, samples,
transportation, and depository fees attributed to lower billings from the prior
year and lower discretionary spending due to travel reductions and cost
reductions throughout the Company.

Our Education segment other intangible asset amortization expense for the nine months ended September 30, 2020 decreased $2.2 million from 2019.


Our Education segment impairment charge for goodwill for the nine months ended
September was $262.0 million. This non-cash impairment, which was recorded in
the first quarter of 2020, is a direct result of COVID-19's impact on the
Company.

                                       41

--------------------------------------------------------------------------------
Our Education segment Adjusted EBITDA for the nine months ended September 30,
2020 decreased $51.7 million, from $188.9 million in 2019 to $137.2 million. Our
Education segment Adjusted EBITDA excludes depreciation, amortization and
goodwill impairment charges. The increase is due to the identified factors
impacting net sales, cost of sales and selling and administrative expenses after
removing those items not included in Education segment Adjusted EBITDA.

HMH Books & Media



                                              Nine Months Ended
                                                September 30,           Dollar        Percent
                                             2020          2019         Change         Change
Net sales                                  $ 129,157$ 127,940$   1,217            1.0 %
Costs and expenses:
Cost of sales, excluding publishing
rights and
  pre-publication amortization                88,060        82,846         5,214            6.3 %
Publishing rights amortization                 3,963         4,480          (517 )        (11.5 )%
Pre-publication amortization                     165           486          (321 )        (66.0 )%
Cost of sales                                 92,188        87,812         4,376            5.0 %
Selling and administrative                    36,397        40,633        (4,236 )        (10.4 )%
Other intangible asset amortization            1,607         4,519        (2,912 )        (64.4 )%
Operating loss                                (1,035 )      (5,024 )       3,989           79.4 %
Net loss                                   $  (1,035 )$  (5,024 )$   3,989           79.4 %
Adjustments from net loss to HMH Books &
Media
  segment Adjusted EBITDA
Depreciation expense                       $     286$   1,027$    (741 )        (72.2 )%
Amortization expense film asset                4,854         6,772        (1,918 )        (28.3 )%
Amortization expense                           5,736         9,485        (3,749 )        (39.5 )%
HMH Books & Media segment Adjusted
EBITDA                                     $   9,841$  12,260$  (2,419 )        (19.7 )%




NM = not meaningful

Our HMH Books & Media segment net sales for the nine months ended September 30,
2020 increased $1.2 million, or 1.0%, from $127.9 million in 2019 to
$129.2 million. The increase in net sales was primarily due to $6.0 million of
licensing revenue from a new production series and strong net sales of the
frontlist titles Compromised, Chosen Ones and Defined Dish. Offsetting the
aforementioned, was a $3.6 million decrease in licensing revenue attributed to
the Carmen Sandiego series on Netflix, lower net sales of both Adult and Young
Reader's categories due to the closure of bookstores during the COVID-19
pandemic and the corresponding delay in releases of new frontlist titles.

Our HMH Books & Media segment cost of sales for the nine months ended September
30, 2020 increased $4.4 million, or 5.0%, from $87.8 million in 2019 to
$92.2 million. The majority of the increase was driven by our cost of sales,
excluding publishing rights and pre-publication amortization, which increased
$5.2 million due to a product mix with higher production costs. Our cost of
sales, excluding publishing rights and pre-publication amortization, as a
percentage of net sales, increased to 68.2% from 64.8%.

Our HMH Books & Media segment selling and administrative expense for the nine
months ended September 30, 2020 decreased $4.2 million from $40.6 million in
2019 to $36.4 million. The decrease was due to labor savings associated with our
employee furlough initiative in response to COVID-19 pandemic, and to a lesser
extent, our early retirement incentive program, the 2019 Restructuring Plan and
a freeze on hiring.

Our HMH Books & Media segment other intangible asset amortization expense for
the nine months ended September 30, 2020 decreased $2.9 million from 2019, due
to certain definite-lived intangible assets being fully depreciated in 2019.

                                       42

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Our HMH Books & Media segment Adjusted EBITDA for the nine months ended
September 30, 2020 changed unfavorably from $12.3 million in 2019 to
$9.8 million due to the identified factors impacting net sales, cost of sales
and selling and administrative expenses after removing those items not included
in our HMH Books & Media segment Adjusted EBITDA. Our HMH Books & Media segment
Adjusted EBITDA excludes depreciation and amortization.

Corporate and Other



                                               Nine Months Ended
                                                 September 30,            Dollar        Percent
                                              2020           2019         Change         Change
Net sales                                  $        -     $        -     $       -              -
Costs and expenses:
Cost of sales, excluding publishing
rights and
  pre-publication amortization                      -              -             -              -
Publishing rights amortization                      -              -             -              -
Pre-publication amortization                        -              -             -              -
Cost of sales                                       -              -             -              -
Selling and administrative                     51,301         59,660        (8,359 )        (14.0 )%
Restructuring/severance and other
charges                                        33,545          5,921        27,624             NM
Operating loss                                (84,846 )      (65,581 )     (19,265 )        (29.4 )%
Retirement benefits non-service income            183            125            58           46.4 %
Interest expense                              (50,433 )      (35,142 )     (15,291 )        (43.5 )%
Interest income                                   873          1,698          (825 )        (48.6 )%
Change in fair value of derivative
instruments                                       172         (1,171 )       1,343          114.7 %
Gain on investments                             1,738              -         1,738             NM
Income from transition services
agreement                                           -          4,248        (4,248 )           NM
Net loss before taxes                        (132,313 )      (95,823 )     (36,490 )        (38.1 )%
Income tax (benefit) expense                  (10,890 )        4,256       (15,146 )           NM
Net loss                                   $ (121,423 )$ (100,079 )$ (21,344 )        (21.3 )%
Adjustments from net loss to Corporate
and Other Adjusted
  EBITDA
Interest expense                           $   50,433$   35,142$  15,291           43.5 %
Interest income                                  (873 )       (1,698 )     

825 (48.6 )% Provision (benefit) for income taxes (10,890 ) 4,256 (15,146 )

           NM
Depreciation expense                           10,728         11,791        (1,063 )         (9.0 )%
Non-cash charges (gain) loss on
derivative instruments                           (172 )        1,171        (1,343 )           NM
Non-cash charges - stock compensation           8,751         11,094        (2,343 )        (21.1 )%
Fees, expenses or charges for equity
offerings, debt or
  acquisitions/dispositions                       366            731          (365 )        (49.9 )%
Severance, separation costs and facility
closures                                       33,545          5,921        27,624             NM
Gain on investments                            (1,738 )            -        (1,738 )           NM

Corporate and Other Adjusted EBITDA $ (31,273 )$ (31,671 ) $

   398            1.3 %




NM = not meaningful



Our selling and administrative expense for the Corporate and Other category for
the nine months ended September 30, 2020 decreased $8.4 million from $59.7
million in 2019 to $51.3 million, primarily attributed to labor savings
associated with our employee furlough initiative in response to the COVID-19
pandemic, and to a lesser extent, our early retirement incentive program, the
2019 Restructuring Plan and a freeze on hiring. Additionally, selling and
administrative expenses were lower due to lower stock compensation charges and
depreciation.

Our restructuring/severance and other charges for the nine months ended September 30, 2020 increased by $27.6 million due to $33.5 million of severance costs associated with the 2020 Restructuring Plan.

Interest expense for the nine months ended September 30, 2020 increased $15.3 million from $35.1 million in 2019 to $50.4 million, primarily due to our 2019 Refinancing during the fourth quarter of 2019. Further, there was an increase of $2.7 million of net settlement payments on our interest rate derivative instruments during 2020.

                                       43

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Interest income for the nine months ended September 30, 2020 decreased $0.8 million due to lower interest rates on our money market funds in 2020.

Change in fair value of derivative instruments for the nine months ended September 30, 2020, favorably changed by $1.3 million due to foreign exchange forward contracts executed on the Euro that were favorably impacted by the weakening of the U.S. dollar against the Euro.

Gain on investments for the nine months ended September 30, 2020 was $1.7 million and was related to the fair value change in our equity interests in educational technology private partnerships.


Income from transition services agreement for the nine months ended September
30, 2019 was $4.2 million and was related to transition service fees under the
transition services agreement with the purchaser of our Riverside Business
pursuant to which we performed certain support functions through September 30,
2019.

Income tax (benefit) expense for the nine months ended September 30, 2020
increased $15.1 million, from an expense of $4.3 million in 2019, to a benefit
of $10.9 million. An income tax benefit was recorded in the first quarter of
2020 and was due primarily to the book impairment on goodwill, which reduced the
related deferred tax liabilities. For 2020, our annual effective tax rate,
exclusive of discrete items used to calculate the tax provision, is expected to
be approximately (1.3)%. For 2019, our effective annual tax rate exclusive of
discrete items was (3.9)%. 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.

Adjusted EBITDA for the Corporate and Other category for the nine months ended
September 30, 2020 favorably changed $0.4 million, or 1.3%, from a loss of
$31.7 million in 2019 to a loss of $31.3 million. Our Adjusted EBITDA for the
Corporate and Other category excludes interest, taxes, depreciation, derivative
instruments charges, equity compensation charges,
acquisition/disposition-related activity, gains or losses on investments, and
restructuring costs. The unfavorable change in our Adjusted EBITDA for the
Corporate and Other category was due to the factors described above after
removing those items not included in Adjusted EBITDA for the Corporate and Other
category.

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 businesses may not be comparable quarter to consecutive
quarter and should be considered on the basis of results for the whole year or
by comparing results in a quarter with results in the same quarter for the
previous year. Moreover, uncertainty resulting from the COVID-19 pandemic may
result in 2020 not following this historic pattern.

Approximately 87% of our net sales for the year ended December 31, 2019 were
derived from our Education segment, which is a markedly seasonal business.
Schools typically conduct the majority of their purchases in the second and
third quarters of the calendar year in preparation for the beginning of the
school year. Thus, over the past three completed fiscal years, approximately 67%
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 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.

Liquidity and Capital Resources



                                                          September 30,       December 31,
(in thousands)                                                2020                2019
Cash and cash equivalents                                $       271,543$      296,353
Current portion of long-term debt                                 19,000    

19,000

Long-term debt, net of discount and issuance costs               628,066    

638,187

Revolving credit facility                                              -                  -
Borrowing availability under revolving credit facility           160,710            161,961


                                       44
--------------------------------------------------------------------------------



                                               Nine Months Ended
                                                 September 30,
                                              2020          2019

Net cash provided by operating activities $ 75,166$ 127,372 Net cash used in investing activities (86,596 ) (65,079 ) Net cash used in financing activities (13,380 ) (6,982 )




Operating activities

Net cash provided by operating activities was $75.2 million for the nine months
ended September 30, 2020, a $52.2 million decrease from the $127.4 million of
net cash provided by operating activities for the nine months ended September
30, 2019. The decrease in cash provided by operating activities was primarily
driven by a decrease in operating profit, net of non-cash items, of $98.6
million. Partially offsetting this decrease were favorable changes in net
operating assets and liabilities of $46.4 million primarily due to favorable
period over period changes in accounts receivable of $133.5 million due to
collections from greater billings in 2019, favorable period over period
inventory changes of $64.8 million, an increase in severance and other charges
of $23.0 million due to the 2020 Restructuring Plan, an increase in operating
lease liabilities of $4.9 million, an increase in net other assets and
liabilities of $8.7 million, offset by unfavorable changes in deferred revenue
of $135.7 million related to greater billings in 2019, accounts payable of $31.3
million related to timing of disbursements, royalties of $18.7 million, and
pension benefits of $2.8 million.

Investing activities


Net cash used in investing activities was $86.6 million for the nine months
ended September 30, 2020, an increase of $21.5 million from the nine months
ended September 30, 2019. The increase in cash used in investing activities was
primarily due to lower net proceeds from sales and maturities of short-term
investments of $50.0 million compared to 2019, offset by lower capital investing
expenditures related to pre-publication costs and property, plant, and equipment
of $22.3 million in connection with previously planned reductions in content
development, and by the acquisition of a business for $5.5 million in 2019.

Financing activities

Net cash used in financing activities was $13.4 million for the nine months ended September 30, 2020, an increase of $6.4 million from the nine months ended September 30, 2019. The increase in cash used in financing activities was primarily due to an increase in principal payments on our term loan of $8.3 million in 2020 partially offset by a decrease in tax withholding payments related to net share settlements of restricted stock units of $1.9 million.

Debt


Under each of the notes, the term loan facility and the revolving credit
facility, Houghton Mifflin Harcourt Publishers Inc., Houghton Mifflin Harcourt
Publishing Company and HMH Publishers LLC are the borrowers (collectively, the
"Borrowers"), and Citibank, N.A. acts as both the administrative agent and the
collateral agent.

The obligations under the senior secured notes, the term loan facility and the
revolving credit facility are guaranteed by the Company and each of its direct
and indirect for-profit domestic subsidiaries (other than the Borrowers)
(collectively, the "Guarantors") and are secured by all capital stock and other
equity interests of the Borrowers and the Guarantors and substantially all of
the other tangible and intangible assets of the Borrowers and the Guarantors,
including, without limitation, receivables, inventory, equipment, contract
rights, securities, patents, trademarks, other intellectual property, cash, bank
accounts and securities accounts and owned real estate. The revolving credit
facility is secured by first priority liens on receivables, inventory, deposit
accounts, securities accounts, instruments, chattel paper and other assets
related to the foregoing (the "Revolving First Lien Collateral"), and second
priority liens on the collateral which secures the term loan facility on a first
priority basis. The term loan facility is secured by first priority liens on the
capital stock and other equity interests of the Borrowers and the Guarantors,
equipment, owned real estate, trademarks and other intellectual property,
general intangibles that are not Revolving First Lien Collateral and other
assets related to the foregoing, and second priority liens on the Revolving
First Lien Collateral.

                                       45

--------------------------------------------------------------------------------

Senior Secured Notes


On November 22, 2019, we completed the sale of $306.0 million in aggregate
principal amount of 9.0% Senior Secured Notes due 2025 (the "notes") in a
private placement to qualified institutional buyers under Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"), and to persons
outside the United States pursuant to Regulation S under the Securities Act. The
notes mature on February 15, 2025 and bear interest at a rate of 9.0% per annum.
Interest is payable semi-annually in arrears on February 15 and August 15 of
each year, beginning on February 15, 2020. As of September 30, 2020, we had
$306.0 million ($297.2 million, net of discount and issuance costs) outstanding
under the notes.

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


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 September 30, 2020, we had $365.8 million ($349.9
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 September
30, 2020, 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 does not require us to comply with financial maintenance
covenants. We are currently required to meet certain incurrence based financial
covenants as defined under our term loan facility.

The term loan facility contains customary mandatory prepayment requirements,
including with respect to excess cash flow, proceeds from certain asset sales or
dispositions of property, and proceeds from certain incurrences of
indebtedness. The term loan facility permits the Company to voluntarily prepay
outstanding amounts at any time without premium or penalty, other than customary
breakage costs with respect to LIBOR loans; provided, however, that any
voluntary prepayment in connection with certain repricing transactions that
occur before the date that is twelve months after the closing of the term loan
facility shall be subject to a prepayment premium of 1.00% of the principal
amount of the amounts prepaid.

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. The excess cash flow
provision did not apply in 2019.

Revolving Credit Facility


On November 22, 2019, we entered into a second amended and restated revolving
credit agreement that provides borrowing availability in an amount equal to the
lesser of either $250.0 million or a borrowing base that is computed monthly or
weekly and comprised of the Borrowers' and the Guarantors' eligible inventory
and receivables (the "revolving credit facility").

                                       46

--------------------------------------------------------------------------------
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 September 30, 2020, there were no amounts outstanding on the revolving
credit facility. As of September 30, 2020, we had approximately $19.2 million of
outstanding letters of credit and approximately $160.7 million of borrowing
availability under the revolving credit facility. As of November 5, 2020, 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 September 30, 2020, 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 $271.5 million of cash and cash equivalents and no short-term investments
at September 30, 2020. We had $296.4 million of cash and cash equivalents and no
short-term investments at December 31, 2019.

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 as school districts become, or continue being, fully
operational, either in-person, fully remote or hybrid, during the remainder of
2020. We have performed a sensitivity analysis on these assumptions to forecast
the impact of a slower-than-anticipated recovery and believe we can take
additional financial and operational actions to mitigate the impact of lower
billings than our current plans assume. These actions include, but are not
limited to, additional expense reductions, asset sales, and capital raising
activities.

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 nine
months ended September 30, 2020 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, 2019.

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.

                                       47

--------------------------------------------------------------------------------

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, 2019 or year to date in 2020. 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 September 30, 2020, 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.

                                       48

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