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HMH Q3 2015 Earnings Report

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November 5, 2015 HMH Earnings Call Third Quarter 2015


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FORWARD LOOKING STATEMENTS AND NON-GAAP MEASURES This presentation and oral statements made in connection with this presentation contain certain statements that are not historical facts, including information regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, including billings, net sales, deferred revenue and recognition thereof; financial condition; pre-publication or content development costs; liquidity; financing activities and use of proceeds; products, including product mix and format; prospects; growth; adjacent markets; strategies, including with respect to capital allocation; the market, including market size and share, and industry in which we operate and potential business decisions. Those statements constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results express in or implied by our forward-looking statements, including, but not limited to, those identified under the caption “Forward-Looking Statements” in our news release issued on November 5, 2015 and in the “Special Note Regarding Forward-Looking Statements” and “Risk Factors” in our most recent Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. We undertake no obligation, and do not expect, to publicly update or publicly revise any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, this presentation and oral statements made in connection with this presentation reference non-GAAP financial measures, such as adjusted EBITDA, adjusted cash EBITDA , billings and free cash flow. The use of these non-GAAP measures are limited as they include and/ or do not include certain items not included and/or included in the most directly comparable GAAP measure. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is provided in the appendix to this presentation and in our news release issued on November 5, 2015, which are posted on hmhco.com under the Investor Relations section. hmhco.com /2


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Agenda Welcome/Introductions Business Update Financial Overview Questions and Answers hmhco.com /3


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Business Update


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Third Quarter 2015 Highlights1 • HMH captured ~40% market share for the first nine months of the year in its addressable domestic education market2, including 45% of the new adoption market • Billings declined approximately 1% primarily due to the contraction in HMH’s addressable domestic education market Billings3 $692 $682 2014 2015 Net Sales $551 $576 • Net sales increased 4% to $576 million • Adjusted EBITDA declined 4% to $192 million • Digital represented approximately 33% of total billings, 44% of billings within major basal education programs 2014 Adjusted EBITDA3 $200 2014 hmhco.com /5 1 Three months ended September 30, 2015 HMH’s domestic education addressable market, the market where it primarily sells its instructional resources for grades K-12. 3 Please see appendix for a reconciliation of non-GAAP measures. 2 2015 $192 2015


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Solid Performance in Education 45% market share in New Adoption Market Wins in Open Territories Proven and Trusted Core Programs Act as a Foundation for Growth Across Education Portfolio hmhco.com /6 Growing market share with EdTech Intervention Solutions


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Curious World: “The Netflix for Learning” • Recent launch moves offering from a simple app to a robust content service • Subscription-based interactive service for $9.99/month or $79.99/year • All content mapped to 8 key learning areas as defined by HMH’s Early Learning experts • Full dashboard and complementary website for parents • Offers children ages three to seven an ever-expanding collection of games, videos, and eBooks mapped to key learning areas 7 hmhco.com /7


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Extending HMH’s Digital Leadership Acquired select eBook and technology assets of MeeGenius in July eBook subscription service for children up to eight years old that further strengthens our offerings beyond the classroom Provides digital content for parents and young learners Opportunities to leverage assets within Curious World hmhco.com /8 Embarked on new partnership with Osmo, the creators of a platform that is revolutionizing the way children learn on the iPad Brings HMH’s marketleading math programs and learning content to the new Osmo Numbers game Reinforces the connection between home and school learning and underscores HMH’s digital leadership Extended partnership further enhances international footprint Addition of more digital curricula to Trunity’s elearning platform enables on and offline access to HMH programs for K-12 educators and students Launched several science programs in international markets


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Highlights in Trade Publishing hmhco.com /9


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Designed to interact with core HMH Services Supported in the cloud, responsive design • Enhances value to customers with new solutions • Gathers data for core product and platform improvements • Increases long-term growth and “stickiness” • Offers attractive revenue share model with future opportunities to sell-in additional tools and services hmhco.com / 10


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Maintaining Confidence in Long-Term Goals1 • Strategic focus areas will bring greater balance to HMH’s portfolio and help drive revenue growth in the coming years • Including adjacent markets, HMH’s total addressable market in 2019 projects to grow to over $5B ($18B including consumer) • Shift to digital creates meaningful opportunities to introduce and promote subscription-based models that will drive recurring revenue across the portfolio 2014 2019P • Basal business 10% 4% 7% 61% $1.6B 9% • Growth through 5% 8% was the majority of the portfolio 10% 18% 46% of portfolio $2.0B 24% of portfolio 12% 6% 40% 2% Basal Assessment Consumer product diversification driving greater balance Trade Intervention/ Supp International PD & Services 8% Billings 1 You are cautioned not to place undue reliance on our long-term financial goals as they not be representative of our future financial condition and results of our operations. hmhco.com / 11


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Value Creation Through Prudent Capital Allocation Share Repurchase Program Total Authorization Previous Current Aggregate Up to $500 million Up to $1 billion • Year to date through September, approximately $240 million of shares have been repurchased on the open market and through privately negotiated transactions. • On November 3, HMH Board of Directors authorized an increase in the size of its existing share repurchase program by an additional $500 million for an aggregate total of $1 billion. • On a pro forma basis, as of the third quarter of 2015, approximately $760 million would have been available under the aggregate share repurchase program which may be executed through the end of 2018. • HMH plans to increase its debt by an additional $250 million, subject to market and other conditions. hmhco.com / 12


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Financial Overview


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Third Quarter & YTD 2015 Financial Performance Net Sales Billings1 ($ in Millions) Adjusted Cash EBITDA1 ($ in Millions) 1 Please see appendix for a reconciliation of non-GAAP measures. hmhco.com / 14 ($ in Millions) Adjusted EBITDA1 ($ in Millions)


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Education Segment Drivers ($ in Millions) Q3 2015 Net Sales Drivers • Increase largely driven by an $82 million contribution from the EdTech business, which was acquired in Q2 2015. • Strong performance in the West Virginia and Tennessee adoption markets. • Offset by smaller domestic education market in 2015 versus 2014. Year to Date Net Sales hmhco.com / 15 Drivers • Increase was driven by impact of EdTech acquisition and strong performance in the California math and West Virginia adoptions. • Offset by smaller domestic education market in 2015 vs. 2014 due to the absence of large adoptions, including Texas Math and Science adoptions as well as Florida Reading.


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Trade Publishing Segment Drivers ($ in Millions) Q3 2015 Net Sales Drivers • Strong net sales of frontlist culinary titles such as The Whole 30, The Real Paleo Diet Cookbook and Cake My Day • Offset by the absence of prior year strong sales of titles such as The Giver and the bestselling What If? in 2014 Year to Date Net Sales Drivers • Net sales for Trade Publishing in the first three quarters of the year largely impacted by the same drivers outlined above for the third quarter. hmhco.com / 16


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Financial Highlights 1 As of December 31, 2014 , cash and short term investments includes cash and cash equivalents of $456.6M and short-term investments of $286.8M. As of September 30, 2015, cash and short term investments includes cash and cash equivalents of $377.0M and short-term investments of $146.5M. 2 Liquidity includes cash and cash equivalents, short-term investments and borrowing availability under our revolving credit facility of $220.0M and $203.0M as of December 31, 2014 and September 30, 2015, respectively. 3 Please see the appendix for a reconciliation of non-GAAP measures. 4 Capital Expenditures include pre-publication costs and property, plant and equipment expenditures. hmhco.com / 17


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2015 Outlook1 BILLINGS Decrease 1% to 4% from 2014 NET SALES Increase 3% to 6% from 2014 CONTENT DEVELOPMENT SPEND $110 million - $120 million ADDRESSABLE DOMESTIC EDUCATION MARKET SIZE2 Approximately $2.7 billion 1 HMH’s expectations as of November 5, 2015. HMH’s domestic education addressable market, the market where it primarily sells its instructional resources for grades K-12. HMH also sells its products in other markets such as trade, international, direct to consumer and early childhood along with adult education, which are not included in this market size 2 hmhco.com / 18


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Questions and Answers


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Appendix


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Segment Information1 1 Details may not sum to totals due to rounding. and Other represents certain general overhead costs not fully allocated to the business units such as Legal, Accounting, Treasury, Human Resources, Technology and executive functions. 3 Please see appendix for a reconciliation of non-GAAP measures. 2 Corporate hmhco.com / 21


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Non-GAAP Reconciliation – Adjusted EBITDA, Adjusted Cash EBITDA1 Q3 ($ in millions) YTD Net Income (Loss) Interest Expense Provision (Benefit) for Income Taxes Depreciation Expense Amortization Expense Non-Cash Charges- Stock-Based Compensation Expense 2014 107 5 3 18 62 3 2015 131 10 (40) 17 59 3 2014 (28) 13 7 53 184 9 2015 (37) 22 (30) 53 163 10 Non-Cash Charges- (Gain) Loss on Derivative Instruments 1 0 2 2 Non-Cash Charges- Asset Impairment Charges - - 1 - Purchase Accounting Adjustments Fees Expenses or Charges for Equity Offerings, Debt or Acquisitions 1 4 3 5 0 - 4 19 Restructuring 0 4 3 5 Severance, Separation Costs and Facility Closures Loss on Extinguishment of Debt Adjusted EBITDA 0 200 2 1 192 5 256 4 3 219 Change in Deferred Revenue 141 106 245 148 Adjusted Cash EBITDA 341 298 501 367 2 1 2 Details may not sum to total due to rounding. Represents certain non-cash accounting adjustments, relating to deferred revenue. hmhco.com / 22


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Non-GAAP Reconciliation – Segment Adjusted EBITDA1 Trade Adjusted EBITDA ($ in millions) Net Income (Loss) Depreciation Expense Amortization Expense Non-Cash Charges- Asset Impairment Charges Purchase Accounting Adjustments Adjusted EBITDA 1 2 2 Q3 2014 $3 0 4 2015 $0 0 3 0 0 0 0 0 7 0 4 0 8 0 3 Details may not sum to total due to rounding. Represents certain non-cash accounting adjustments. Most significantly relating to deferred revenue. hmhco.com / 23 Year to Date 2014 2015 ($3) ($8) 0 1 11 10


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Non-GAAP Reconciliation – Adjusted EBITDA Corporate/Other1 Corporate/Other Adjusted EBITDA Q3 Year to Date ($ in millions) 2015 2014 2015 Net Income (Loss) Interest Expense Provision (Benefit) for Income Taxes Depreciation Expense Non-Cash Charges- (Gain) Loss on Derivatives Instruments Non-Cash Charges- Stock-based Compensation Expense Fees Expenses or Charges for Equity Offerings, Debt or Acquisitions Restructuring Severance, Separation Costs and Facility Closures Loss on Extinguishment of Debt Adjusted EBITDA 1 2014 ($28) 5 3 2 $6 10 (40) 3 ($85) 13 7 5 ($75) 22 (30) 9 1 0 2 2 3 3 9 10 0 0 4 19 0 4 3 5 0 2 5 4 0 (13) 1 (11) 0 (37) 3 (31) Details may not sum to total due to rounding. hmhco.com / 24


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Non-GAAP Reconciliation – Liquidity1 Liquidity $ in Millions 457 377 Short Term Investments 287 146 Total Available Cash 743 524 Revolving Credit Facility Borrowing Base2 220 203 Outstanding Borrowings 0 0 Available under Revolving Credit Facility 220 203 Total Liquidity 2 September 30, 2015 Cash and Cash Equivalents 1 December 31, 2014 963 727 Details may not sum to total due to rounding. Borrowing Base is net of letters of credit issued under the facility. HMH issued $20.2 million of Letters of Credit as of December 31, 2014 and $29.5 million as of September 30, 2015. hmhco.com / 25


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Non-GAAP Reconciliation – Free Cash Flow1 $ in Millions Net cash used in operating activities Additions to pre-publication costs Additions to property, plant, and equipment Free Cash Flow 1 Details may not sum to total due to rounding. hmhco.com / 26 Nine Months Ended September 30, 2014 September 30, 2015 301 163 (90) (79) (50) (50) 161 35


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Non-GAAP Reconciliation – Billings Q3 $ in millions Net Sales 2014 551 2015 576 Change in Deferred Revenue 141 106 Change in Deferred Revenue Billings 692 682 Billings hmhco.com / 27 Net Sales YTD 2014 1,107 2015 1,118 245 148 1,352 1,266


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Balance Sheet Dec 31, 2014 ($ in Millions) Dec 31, 2014 Current Assets Cash and cash equivalents Short-term investments Accounts receivable less allowance for bad debts and book returns Inventories Deferred income taxes Prepaid expenses and other assets Total current assets Property, plant, and equipment, net Pre-publication costs, net Royalty advances to authors, net Goodwill Other intangible assets, net Deferred income taxes Other assets Total assets Sep 30, 2015 $457 287 $377 146 256 479 184 20 19 1,222 186 17 29 1,234 138 237 47 533 802 4 28 3,011 135 327 46 784 940 4 37 3,506 Current Liabilities Current portion of long-term debt Accounts payable Royalties payable Salaries, wages, and commissions payable Deferred revenue Interest payable Severance and other charges Accrued postretirement benefits Other liabilities Total current liabilities Long-term debt, net of discount Long-term deferred revenue Accrued pension benefits Accrued postretirement benefits Deferred income taxes Other liabilities Total liabilities Stockholders' Equity Preferred stock Common stock Treasury stock Capital in excess of par value Accumulated deficit Accumulated other comprehensive loss Total stockholder's equity Total liabilities and stockholder's equity hmhco.com 13 / 28 Sep 30, 2015 $68 51 80 60 157 0 6 2 27 451 $8 80 96 66 235 0 5 2 38 530 176 370 19 27 112 98 1,251 786 460 16 25 151 22 1,991 1 4,785 (3,000) (27) 1 (239) 4,823 (3,037) (33) 1,760 1,515 3,011 3,506


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Income Statement ($ in Millions) Q3 2014 Net Sales Costs and expenses Cost of sales, excluding pre-publication and publishing rights amortization Publishing rights amortization Pre-publication amortization Cost of sales Selling and administrative Other intangible asset amortization Impairment charge for investment in preferred stock Severance and other charges Operating Income (Loss) Year to Date 2015 2014 2015 $551 $576 $1,107 $1,118 205 220 465 485 25 33 264 168 3 0 116 19 32 272 192 7 2 103 81 95 640 457 9 1 5 (6) 62 87 634 506 15 4 (39) (10) (0) (1) (13) (2) - (22) (2) (3) Other Income (Expense) Interest expense Change in fair value of derivative instruments Loss on extinguishment of debt (5) (1) - Income (Loss) before taxes 110 91 (21) (67) Income tax expense (benefit) Net Income (Loss) 3 107 (40) 131 7 (28) (30) (37) hmhco.com 13 / 29


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Statement of Cash Flows ($ in Millions) Nine Months Ended Nine Months Ended Sept 30, 2014 Cash flow s from operating activities Net loss Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization expense Amortization of debt discount and deferred financing costs Deferred income taxes Stock-based compensation expense Loss on extinguishment of debt Impairment charge for investment in preferred stock Change in fair value of derivative instruments Changes in operating assets and liabilities, net of acquisitions: Accounts receivable Inventories Accounts payable and accrued expenses Royalties, net Deferred revenue Interest payable Severance and other charges Accrued pension and postretirement benefits Other, net Net cash provided by operating activities hmhco.com 13 / 30 Sept 30, 2014 Sept 30, 2015 ($28) ($37) 237 4 3 9 1 2 217 6 42 10 3 2 (207) (8) 47 16 244 (0) (5) (10) (4) 301 (192) 12 26 16 148 0 (3) (4) (82) 163 Cash flow s from investing activities Proceeds from sales and maturities of short-term investments Purchases of short-term investments Additions to pre-publication costs Additions to property, plant, and equipment Acquisition of business, net of cash acquired Net cash used in investing activities Cash flow s from financing activities Proceeds from term loan Payments of long-term debt Payments of deferred financing fees Repurchases of common stock Tax w ithholdng payments related to net share settlements of restricted stock units Proceeds from stock option exercises Net cash provided by financing activities Sept 30, 2015 $94 (275) (90) (50) (9) (330) $287 (147) (79) (50) (578) (567) (2) - 796 (245) (15) (239) (1) 15 12 (1) 28 324 Net decrease in cash and cash equivalents (17) (80) Cash and cash equivalents at beginning of period Net decrease in cash and cash equivalents 314 (17) 457 (80) Cash and cash equivalents at end of period 297 377


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