The Tortured History of Houghton Mifflin Harcourt

Born under a mountain of debt in late 2007, Houghton Mifflin Harcourt forced its executives to spend as much time finding ways to keep the company financially afloat as publishing educational materials and trade and reference books. That is one reason why when HMH filed for Chapter 11 protection May 21 as part of its prepackaged bankruptcy process, the company, with sales in 2011 of $1.295 billion and adjusted EBITDA of $238 million, was roughly the same size as Houghton Mifflin in 2005 when it had sales of $1.28 billion. And when Barry O’Callaghan’s Riverdeep Group bought HM in late 2006 the combined company was reported to have had sales of $1.4 billion and EBITDA of $392 million for the year ended September 30, 2006. Riverdeep followed up its $3.4 billion purchase of HM a year later by spending $4 billion to acquire the U.S. education and trade and reference units of Harcourt Brace, assets that generated about $1.1 billion in annual revenue, giving the newly christened Houghton Mifflin Harcourt revenue of about $2.4 billion. To help pay for his twin acquisitions, O’Callaghan sold HM’s college division in late 2007, a move that sliced away about $228 million in sales. When the recession hit in mid-2008 and 2009, cuts in educational spending prevented HMH from hitting the sales and earnings figures it needed to pay the tab caused by the $7.4 billion in deals.

Although documents filed in connection with its Chapter 11 filing don’t include financial information for 2008, results from 2009 through 2011 show the struggle HMH had in meeting its debt obligations as sales fell. According to the documents, in 2009 HMH had net interest expense of $860 million, roughly half of its sales in that year of $1.56 billion. In that same year it also took a $953 million impairment charge, largely to write down the value of the HM and Harcourt assets. The result was a $2.14 billion net loss in 2009. With interest payments falling by half in 2010 and a smaller write-down, HMH only lost $819 million in 2010, but when sales fell 14% in 2011, the company took a whopping $1.6 billion impairment charge, which, combined with $244.6 million in interest payments, led to a $2.2 billion net loss.

Since the Harcourt acquisition, HMH has also endured tens of millions of dollars in severance charges as initially it integrated HM and Harcourt, and then, beginning last November, sought to slim down the workforce to conform to the publisher’s smaller size. The filings show that 499 positions were eliminated in 2009, resulting in severance charges of $25.9 million. Although the documents don’t list headcount reductions in 2008 or 2010, they do note that HMH paid $11.1 million in severance in 2010. Late last year, HMH started another round of layoffs, with the goal of reducing its 3,800-person workforce by about 10%, which led to a $28.8 million severance charge; it now has 3,300 employees, 3,245 of whom are full-time.

When it emerges from bankruptcy, still anticipated to be by late June, HMH’s projections show that with its debt load cut by $3.1 billion, it can once again grow. The outlook indicates that, by 2014, it could surpass the EBITDA it had in 2006.

Houghton Mifflin Harcourt, 2009–2011 ( $ in millions )

Projected Results for Houghton Mifflin Harcourt, 2012–2017 ( $ in millions )