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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD FROM JULY 1, 1997 TO SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 1-5406
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ............. to ................
---------------------
HOUGHTON MIFFLIN COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1456030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
222 BERKELEY ST., BOSTON 02116-3764
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 351-5000
NOT APPLICABLE
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 1997:
Class Outstanding at October 31, 1997
- ------------------------------- -------------------------------
Common Stock, $1 par value 30,175,531
Preferred Stock Purchase Rights 30,175,531
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HOUGHTON MIFFLIN COMPANY
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
September 30, 1997 and 1996 and December 31, 1996 3 - 4
Consolidated Condensed Statements of Operations
and Retained Earnings -- Three Months Ended
September 30, 1997 and 1996 5
Consolidated Condensed Statements of Operations
and Retained Earnings -- Nine Months Ended
September 30, 1997 and 1996 6
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996 7
Notes to Unaudited Consolidated Condensed
Financial Statements 8 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 19
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited; in thousands except share amounts)
<TABLE>
<CAPTION>
September 30, September 30, December 31,
1997 1996 1996
------------- ------------- ------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 12,386 $ 18,911 $ 11,534
Marketable securities available
for sale, at fair value 614 611 612
Accounts receivable 322,583 308,875 189,978
Less: allowance for book returns 18,092 18,063 25,166
---------- ---------- ----------
304,491 290,812 164,812
Inventories
Finished goods 133,923 125,488 124,263
Work in process 10,281 17,094 9,162
Raw materials 4,452 5,173 5,122
---------- ---------- ----------
148,656 147,755 138,547
Income taxes 20,661 23,727 20,551
Prepaid expenses 2,919 2,446 1,913
---------- ---------- ----------
Total current assets 489,727 484,262 337,969
Property, plant and equipment, and book plates (net of accumulated
depreciation and amortization of $169,293 in 1997, $140,291 in
1996 and $144,648 at December 31, 1996) 114,977 109,369 116,447
Intangible assets, net 469,278 484,595 485,766
Other assets 84,547 82,445 66,260
---------- ---------- ----------
$1,158,529 $1,160,671 $1,006,442
========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
3
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited; in thousands except share amounts)
<TABLE>
<CAPTION>
September 30, September 30, December 31,
1997 1996 1996
------------- ------------- ------------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 70,964 $ 70,151 $ 57,585
Commercial paper 94,688 76,488 -
Royalties 34,481 35,326 38,154
Salaries, wages and commissions 20,238 19,143 19,408
Income taxes payable 41,509 39,309 -
Other accrued expenses 32,408 31,072 30,783
Current portion of long-term debt 40,000 - 40,000
---------- ---------- ----------
Total current liabilities 334,288 271,489 185,930
Long-term debt 436,061 550,978 500,999
Accrued royalties 1,640 2,040 1,899
Other liabilities 22,650 17,582 19,666
Accrued postretirement medical benefits 28,105 27,672 27,655
Stockholders' equity
Preferred stock, $1 par value; 500,000 shares
authorized, none issued -- -- --
Common stock, $1 par value;
70,000,000 shares authorized; 30,162,131 shares
issued in 1997, 29,517,452 shares issued in 1996,
and 29,561,852 shares issued at December 31, 1996 30,162 29,518 29,562
Capital in excess of par value 71,729 35,645 43,476
Retained earnings 300,300 267,186 243,998
---------- ---------- ----------
402,191 332,349 317,036
Less:
Notes receivable from purchase agreement (4,807) (5,840) (5,916)
Unearned compensation related to outstanding
restricted stock (7,786) (1,716) (1,563)
Common shares held in treasury, at cost
(247,644 shares in 1997, 263,544 shares in 1996
and 230,780 shares at December 31, 1996) (4,265) (2,796) (2,448)
Benefits trust assets, at market (49,548) (31,087) (36,816)
---------- ---------- ----------
Total stockholders' equity 335,785 290,910 270,293
---------- ---------- ----------
$1,158,529 $1,160,671 $1,006,442
========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
4
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED; IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net sales by industry segment:
Educational publishing $370,354 $334,121
General publishing 28,740 22,548
-------- --------
399,094 356,669
Costs and expenses:
Cost of sales 149,857 136,806
Selling and administrative 98,186 90,747
-------- --------
248,043 227,553
-------- --------
Operating income 151,051 129,116
Other income (expense):
Gain on sale of INSO Corporation common stock -- 9,596
Net interest expense (10,776) (11,327)
Equity in earnings (losses) of INSO Corporation (1,831) 1,280
Other expense (15) --
-------- --------
(12,622) (451)
-------- --------
Income before taxes 138,429 128,665
Income tax provision 55,372 52,618
-------- --------
Net income 83,057 76,047
Retained earnings at beginning of period 220,894 194,488
Valuation allowance on noncurrent marketable
equity securities (81) --
Dividends declared (3,563) (3,349)
Two-for-one stock split effected in the form of a stock dividend (7) --
-------- --------
Retained earnings at end of period $300,300 $267,186
======== ========
Net income per common share $ 2.91 $ 2.73
Average number of common shares 28,537 27,892
Cash dividends paid per common share $ 0.125 $ 0.120
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
5
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED; IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net sales by industry segment:
Educational publishing $601,518 $536,052
General publishing 68,645 61,666
-------- --------
670,163 597,718
Costs and expenses:
Cost of sales 295,730 271,248
Selling and administrative 247,038 222,682
-------- --------
542,768 493,930
-------- --------
Operating income 127,395 103,788
Other income (expense):
Gain on equity transactions of INSO Corporation 14,904 --
Gain on sale of INSO Corporation common stock -- 32,546
Net interest expense (30,575) (31,593)
Equity in earnings of INSO Corporation 459 2,170
Other expense (9) --
-------- --------
(15,221) 3,123
-------- --------
Income before taxes 112,174 106,911
Income tax provision 45,168 43,480
-------- --------
Net income 67,006 63,431
Retained earnings at beginning of period 258,779 228,528
Valuation allowance on noncurrent marketable
equity securities (101) --
Dividends declared (10,381) (10,014)
Two-for-one stock split effected in the form of a stock dividend (15,003) (14,759)
-------- --------
Retained earnings at end of period $300,300 $267,186
======== ========
Net income per common share $ 2.35 $ 2.28
Average number of common shares 28,456 27,826
Cash dividends paid per common share $ 0.365 $ 0.360
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
6
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HOUGHTON MIFFLIN COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED; IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income $ 67,006 $ 63,431
Adjustments to reconcile net income to
net cash used in operating activities:
Equity in earnings of INSO Corporation (459) (2,170)
Depreciation and amortization 73,684 66,526
Gain on equity transactions of INSO Corporation and
sale of INSO Corporation stock (14,904) (32,546)
Changes in operating assets and liabilities:
Accounts receivable (138,715) (107,968)
Inventories (8,720) (7,827)
Accounts payable 13,089 (24,403)
Royalties (3,429) (7,476)
Deferred and income taxes payable 41,399 44,053
Salaries, wages and commissions 797 391
Other, net 7,179 (2,425)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 36,927 (10,414)
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
Proceeds from the sale of INSO Corporation stock -- 36,663
Book plate expenditures (40,926) (46,206)
Acquisition of publishing assets (8,832) (15,501)
Property, plant and equipment expenditures (10,020) (9,708)
Marketable securities -- (7)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (59,778) (34,759)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Dividends paid on common stock (10,381) (10,014)
Issuance (repayment) of commercial paper 94,688 (68,124)
Issuance of long-term financing 90,000 224,785
Repayment of long-term financing (155,000) (99,955)
Exercise of stock options 4,638 919
Other (242) (228)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 23,703 47,383
Increase in cash and cash equivalents 852 2,210
Cash and cash equivalents at beginning of period 11,534 16,701
--------- ---------
Cash and cash equivalents at end of period $ 12,386 $ 18,911
========= =========
Supplementary disclosure of cash flow information:
Income taxes paid $ 3,069 $ 837
Interest paid $ 29,310 $ 27,292
</TABLE>
See accompanying notes to unaudited consolidated condensed financial statements.
7
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
of Houghton Mifflin Company and its subsidiaries ("the Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information. All adjustments (consisting of normal recurring accruals)
that, in the opinion of management, are necessary for the fair presentation of
this interim financial information have been included.
Results of interim periods are not necessarily indicative of results to
be expected for the year as a whole. The effect of seasonal business
fluctuations and the occurrence of many costs and expenses in annual cycles
require certain estimations in the determination of interim results.
The information contained in the interim financial statements should be
read in conjunction with the Company's latest Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
Certain reclassifications have been made to prior period financial
statements in order to conform to the presentation used in the 1997 interim
financial statements.
(2) COMMON STOCK SPLIT
On June 25, 1997, the Board of Directors declared a two-for-one split of
the Company's common stock effected in the form of a 100% stock dividend to
shareholders of record on July 11, 1997, which was distributed on July 25, 1997.
The effect of the split is retroactively stated within stockholders' equity
for all periods presented by transferring the par value for the additional
shares issued from the retained earnings account to the common stock account.
All share and per share amounts in this report have been restated to reflect the
effect of this stock split.
(3) ACQUISITIONS
On May 12, 1997, the Company acquired the assets of Chapters Publishing
Ltd., predominantly a publisher of cookbooks. The acquisition has been accounted
for as a purchase and the net assets and results of operations are included in
the Company's consolidated financial statements from the date of the
acquisition. Net cash consideration for the acquisition amounts to approximately
$3.2 million, which was almost fully paid as of September 30, 1997. The cost of
the acquisition was allocated on the basis of the estimated fair market value of
the assets acquired and the liabilities assumed. The excess of the net assets
acquired, or goodwill, is being amortized on a straight-line basis over a period
of ten years.
On September 10, 1997, the Company, through its subsidiary The
Riverside Publishing Company, acquired the assets of Wintergreen/Orchard House,
Inc., a publisher of guidance products for the elementary and secondary school
markets. The acquisition has been accounted for as a purchase and the net assets
and results of operations are included in the Company's consolidated financial
statements from the date of the acquisition. Net cash consideration for the
acquisition amounts to approximately $3.6 million, of which approximately $3.4
million had been paid as of September 30, 1997. The cost of the acquisition was
allocated on the basis of the estimated fair market value of the assets acquired
and the liabilities assumed. The excess of the net assets acquired, or goodwill,
is being amortized on a straight-line basis over a period of fifteen years.
8
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HOUGHTON MIFFLIN COMPANY
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --Continued--
(4) INSO CORPORATION
In March 1994, the Company spun off its former Software Division in an
initial public offering. The equity interest in INSO Corporation ("INSO"), the
successor company, was approximately 40% after the offering. The Company's
recognition of earnings from its investment in INSO is based upon the equity
method of accounting. Accordingly, the Company records its pro-rata share of
income and losses and the impact of INSO's equity activities on a quarterly
basis in arrears.
In November 1996, INSO completed an additional public offering of 1.2
million shares of common stock at a net offering price of $47.27 for a total
consideration of $56.7 million. A gain of $14.9 million ($8.6 million
after-tax), or $0.30 per share, was recorded in the first quarter of 1997,
representing the Company's portion of the increase in INSO's net equity. As of
September 30, 1997, the Company's equity ownership has been reduced to
approximately 27%.
(5) INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, September 30, December 31,
1997 1996 1996
------------- ------------- ------------
<S> <C> <C> <C>
Goodwill $514,895 $502,183 $510,500
Publishing rights 16,623 16,638 16,787
Other 4,000 4,000 4,000
Less: accumulated amortization (66,240) (38,226) (45,521)
-------- -------- --------
Total $469,278 $484,595 $485,766
======== ======== ========
</TABLE>
The carrying value of goodwill is periodically reviewed to determine
recoverability based upon projected net cash flows over the remaining life of
the related business unit. If the analysis indicates that impairment has
occurred, the Company will adjust the book value of the intangible asset to the
undiscounted net cash flow amount.
(6) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" ("SFAS 128"), which is required to be
adopted for fiscal periods ending after December 15, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under SFAS 128, the dilutive effect
of common stock equivalents will be excluded in calculating basic earnings per
share. All dilutive securities will be considered in the presentation of diluted
earnings per share under SFAS 128. There is no material impact on earnings per
share for the quarter and nine months ended September 30, 1997 and 1996
calculated under SFAS 128.
(7) DIVIDENDS DECLARED
The Board of Directors, at its October 29, 1997 meeting, declared a
quarterly cash dividend of $0.125 per share, payable on November 26, 1997, to
shareholders of record on November 12, 1997.
9
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's principal business is publishing, and its operations are
classified into two industry segments: (1) textbooks and other educational
materials ("instructional materials") and services for the school and college
markets; and (2) general publishing, including fiction, nonfiction, children's
books, and dictionary and reference materials in a variety of formats and media.
In the school market, the process by which elementary and secondary schools
select and purchase new instructional materials is referred to as the "adoption"
process. Twenty-two states, or approximately one-half of the United States
school population, adopt new instructional materials on a statewide basis for
a particular subject approximately every five to seven years. These
twenty-two states are referred to as "adoption states." Generally, a school or
school district within an adoption state may use state monies to purchase
instructional materials only from the list of publishers' programs which have
been approved, or adopted, by the particular state's governing body. In the
other states, referred to as "open territories," individual schools or school
districts make the purchasing decisions from the unrestricted offerings of all
publishers. The industry terms "adopted," or "adoption" may be used in either of
two ways: (1) to describe a state governing body's approval process, or (2) to
describe a school or school district's selection and purchase of instructional
materials. After adopting, or selecting instructional materials, schools later
decide how much to purchase in order to implement the adoption.
Sales of instructional materials are cyclical, with some years offering more
sales opportunities than others. There were more sales opportunities for the
Company's instructional materials in 1997 than in 1996, due to an increase in
the number of states adopting elementary and secondary school products in
subjects in which the Company publishes, particularly in the reading/language
arts discipline. By combining the acquisitions of D.C. Heath and Company
("Heath") in 1995 and McDougal Littell & Company in 1994 with in-house
development of new products, the Company believes that it is less dependent on
any single subject area than it was prior to these acquisitions.
10
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Textbook purchasing patterns are seasonal; the majority of educational
publishing revenues occur in the second and third quarters of the year when
textbook purchases are made in preparation for the beginning of the school year
in September. Textbook publishers tend to incur operating losses in the first
and fourth quarters of the year when fewer educational institutions are making
purchases, and the first-quarter losses are reflected in the results for the
first nine months.
On June 25, 1997, the Board of Directors declared a two-for-one split of the
Company's common stock effected in the form of a 100% stock dividend to
shareholders. All per share amounts have been retroactively restated in this
report to reflect the effect of the stock split.
RESULTS OF OPERATIONS:
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996
Consolidated net income for the quarter ended September 30, 1997 was $83.1
million, or $2.91 per share, compared to net income of $76.0 million, or $2.73
per share, for the same period in 1996. The third quarter of 1997 included a
one-time charge of $2.0 million ($1.2 million after-tax), or $0.04 per share,
related to the equity investment in INSO for: (1) the acquisition of Level Five
Research, Inc.; and (2) a restructuring charge affecting INSO's information
products and certain of its information management tools products. The third
quarter of 1996 included a gain of approximately $9.6 million ($5.6 million
after-tax), or $0.20 per share, on the sale of 200,000 shares of INSO common
stock.
Excluding these non-recurring items, net income for the third quarter of 1997
would have been $84.2 million, or $2.95 per share, compared to net income of
$70.5 million, or $2.53 per share, in the third quarter of 1996. The primary
reasons for the increase in net income during this period were higher sales and
improvement in the operating margin.
11
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Net sales:
Net sales for the quarter ended September 30, 1997 were $399.1 million, an
increase of 12% from the $356.7 million reported in the third quarter of 1996.
Educational publishing net sales increased $36.2 million, or 11%, to $370.4
million in the third quarter of 1997, from last year's third-quarter net sales
of $334.1 million. This increase was due to higher net sales in all educational
publishing divisions. The School Division and McDougal Littell benefited from
the increased sales opportunities in adoption states and open territories.
The School
Division's reading program, Houghton Mifflin Reading: Invitations to Literacy
(C)1996, 1997, had increased sales in state adoptions and open territories, as
did its social studies program, We The People (C)1997. McDougal Littell, the
Company's secondary school division, gained significant market share in adoption
states and open territories with its language arts program, The Language of
Literature (C)1997, and Spanish language program, Dime! (C) 1997. Riverside
Publishing's sales increased over the same period last year as a result of
increased sales of group and clinical assessment materials. Great Source's
third-quarter sales increased over the same period in 1996 principally as a
result of increased Write Source product sales. The College Division reported
higher third-quarter sales due to newly published titles performing extremely
well, the strength of the backlist, and a decline in book returns.
The general publishing segment's third-quarter net sales of $28.7 million
increased $6.2 million, or 27%, from 1996's third-quarter net sales of $22.5
million. The gain was due to increased sales of adult and juvenile books,
dictionary products, and from the acquisition of Chapters, the cookbook
imprint purchased in the second quarter of 1997. Partially offsetting these
increases were lower sales of publishing rights and lower distribution income.
The gain in adult and juvenile books was due to increased sales of new titles
and promotion of the backlist, led by Mariner Books, the Trade & Reference
Division's new paperback imprint. Houghton Mifflin Interactive's net sales for
the quarter grew significantly over the same period last year due mainly to the
increase in the number of product offerings and the number of retail outlets
which stock its titles.
12
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Cost of sales:
Primarily as a result of higher sales, cost of sales of $149.9 million in the
third quarter of 1997 increased $13.1 million, or 10%, from $136.8 million in
1996. Cost of sales as a percent of sales decreased to 37.6% in 1997 from 38.4%
in 1996, primarily due to the greater proportion of higher margin products among
the publications sold and improved operating efficiencies. The improvement in
operating efficiencies is partially attributable to ongoing initiatives to
manage costs. Manufacturing costs as a percent of sales were reduced because the
volume of reading and literature product sales increased, permitting more
economical print runs. Editorial and plate expenses declined as a percent of
sales, reflecting the larger product base and more efficient development
efforts. By combining the acquisitions of Heath in 1995 and McDougal Littell &
Company in 1994 with in-house development of new products, the Company has built
a wide spectrum of products which are positioned to compete in the large number
of state adoption and open territory sales opportunities anticipated in 1997,
1998 and 1999. Although management does not expect editorial expenses in 1997 to
decline in absolute dollars, these costs are expected to decline as a percent of
sales as the Company supports the existing product base.
Selling and administrative:
Selling and administrative expenses in the third quarter of 1997 were $98.2
million, an increase of $7.4 million, or 8%, from $90.7 million in the third
quarter of 1996. For the third quarter of 1997 and 1996, selling and
administrative expenses decreased as a percent of sales to 24.6% from 25.4%. The
primary reason for this improvement was a decrease in distribution costs, which
is a result of improvements made to the customer service and warehouse
management processes.
Other income and expense:
In the third quarter of 1997, the Company recorded a one-time charge of $2.0
million ($1.2 million after-tax), or $0.04 per share, related to INSO's
acquisition of Level Five Research, Inc. and a restructuring charge recorded by
13
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INSO. Equity income from the Company's investment in INSO declined to $0.1
million in the third quarter of 1997 from $1.3 million in the third quarter of
1996. The third quarter of 1996 included a gain of approximately $9.6 million
($5.6 million after-tax), or $0.20 per share, on the sale of 200,000 shares of
INSO common stock.
Net interest expense of $10.8 million for the third quarter of 1997 was $0.6
million lower than in the same period in 1996. The reduction was primarily a
result of lower working capital borrowings in the third quarter of 1997 and the
paydown of $30.3 million of debt in the fourth quarter of 1996, offset by higher
interest rates in 1997.
Income taxes:
The tax provision increased $2.8 million, or 5%, over the same period last year.
This increase was the result of higher operating income in 1997, partially
offset by a decrease in the tax rate to 40.0% in 1997 from 40.9% in 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Consolidated net income for the nine months ended September 30, 1997 was
$67.0 million, or $2.35 per share, compared to net income of $63.4 million, or
$2.28 per share, for the same period in 1996. During the nine months ended
September 30, 1997, the Company recorded a gain of $14.9 million ($8.6 million
after-tax), or $0.30 per share, as the result of INSO's offering of common stock
and a one-time charge of $2.5 million ($1.5 million after-tax), or $0.05 per
share, related to the equity investment in INSO. During the nine months ended
September 30, 1996, the Company recorded a gain of approximately $32.5 million
($18.8 million after-tax), or $0.68 per share, on the sale of 737,500 shares of
INSO common stock and a one-time charge related to the equity investment in INSO
of $1.4 million ($0.8 million after-tax), or $0.03 per share.
14
<PAGE> 15
Excluding these non-recurring items, the net income for the nine months ended
September 30, 1997 would have been $59.8 million, or $2.10 per share, compared
to net income of $45.4 million, or $1.63 per share, in the first nine months of
1996. The primary reasons for the increase in net income in 1997 were higher
sales and improvement in the operating margin.
Net sales:
Net sales for the nine months ended September 30, 1997 were $670.2 million, an
increase of 12% from the $597.7 million reported in the same period in 1996.
Educational publishing net sales increased $65.5 million, or 12%, to $601.5
million in the nine months ended September 30, 1997 from net sales of $536.1
million in the same period in 1996. All educational publishing divisions
reported higher sales with the largest dollar increases reported by the School
Division and McDougal Littell. Sales in both divisions benefited from the
increased sales opportunities in adoption states and open territories.
The general publishing segment's net sales of $68.6 million in the nine months
ended September 30, 1997 increased $7.0 million, or 11%, from net sales of $61.7
million during the same period in 1996. This increase was due to increased Trade
& Reference Division sales of adult and juvenile books, dictionary products, and
the Chapters imprint, partially offset by lower sales of publishing rights and
lower distribution income. Higher sales from Houghton Mifflin Interactive also
contributed to the increase.
Cost of sales:
Primarily as a result of higher sales, cost of sales of $295.7 million in the
nine months ended September 30, 1997 rose $24.5 million, or 9%, from $271.2
million during the same period in 1996. Cost of sales as a percent of sales for
the nine months ended September 30, 1997 decreased to 44.1% from 45.4% during
the same period in 1996. This improvement was primarily due to lower
manufacturing costs and editorial expenses as a percent of sales, reflecting
15
<PAGE> 16
the greater proportion of higher margin products among the publications sold
and improved operating efficiencies.
Selling and administrative:
Selling and administrative expenses during the nine months ended September 30,
1997 were $247.0 million, an increase of $24.4 million, or 11%, from $222.7
million recorded in the same period in 1996. Selling and administrative expenses
decreased as a percent of sales to 36.9% from 37.3% for the nine months ended
September 30, 1997 and 1996, respectively. The primary reason for this
improvement was lower distribution costs, which benefited from investments made
in customer service and warehouse management processes. Partially offsetting
this decrease was an increase in selling costs as a percent of sales,
reflecting, in part, the addition of freelance personnel to expand the sales
force and increased sample and implementation expense. The increases are the
result of the large number of sales opportunities in adoption states and open
territories in 1997.
Other income and expense:
In the nine months ended September 30, 1997, the Company recognized a gain of
$14.9 million ($8.6 million after-tax), or $0.30 per share, representing the
Company's portion of the increase in INSO's net equity as a result of INSO's
fourth quarter 1996 completion of a public offering of 1.2 million shares of
common stock at a net offering price of approximately $47 per share. The Company
also recorded a one-time charge of $2.5 million ($1.5 million after-tax), or
$0.05 per share, related to the equity investment in INSO. During the nine
months ended September 30, 1996, the Company recorded a gain of approximately
$32.5 million ($18.8 million after-tax), or $0.68 per share, on the sale of
737,500 shares of INSO common stock and a one-time charge related to the equity
investment in INSO of $1.4 million ($0.8 million after-tax), or $0.03 per share.
Net interest expense of $30.6 million for the nine months ended September 30,
1997 decreased $1.0 million from the same period in 1996. The reduction was
primarily a result of lower working capital borrowings during the nine months
16
<PAGE> 17
ended September 30, 1997 and the paydown of $30.0 million of debt in the
fourth quarter of 1996, offset by higher interest rates in 1997.
Income taxes:
The tax provision increased $1.7 million, or 4%, during the nine months ended
September 30, 1997 over the same period last year. This increase was the result
of the higher operating income in 1997, partially offset by a decrease in the
tax rate to 40.3% in 1997 from 40.7% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal businesses are seasonal, with approximately 70% of net
sales normally reported in the second and third quarters. The Company usually
incurs operating losses in the first and fourth quarters.
This sales seasonality affects the Company's operating cash flow. A net cash
deficit from all the Company's activities is normally incurred through the
middle of the third quarter of the year. The deficit is funded through the
draw-down of cash and marketable securities, supplemented by short-term
borrowings, principally commercial paper. As of September 30, 1997, the Company
used $29.7 million of net borrowings to cover its seasonal operating loss and
working capital needs and to fund publishing and capital investments. As of
September 30, 1996, the Company used proceeds of $36.7 million from the sale of
INSO stock and $56.7 million of net borrowings to cover its seasonal operating
loss and working capital needs and to fund publishing and capital investments.
Net cash provided by operating activities was $36.9 million during the nine
months ended September 30, 1997, a $47.3 million increase from $10.4 million in
cash used in operations during the same period in 1996. Excluding the equity
earnings of INSO, depreciation and amortization, and gain on the equity
transaction of INSO and sale of INSO stock, earnings increased $30.1 million.
17
<PAGE> 18
Changes in operating assets and liabilities used $17.3 million less cash during
the nine months ended September 30, 1997 than in the same period in 1996,
primarily due to improved working capital management.
Cash required for investing activities was $59.8 million during the nine months
ended September 30, 1997, an increase of $25.0 million from $34.8 million
required during the same period in 1996. Excluding the $36.7 million in proceeds
the Company received from the sale of shares of INSO common stock during the
nine months ended September 30, 1996, cash required for investing activities
decreased by $11.6 million, principally due to a $5.3 million decrease in book
plate expenditures and a $6.7 million decrease in acquisition of publishing
assets for the nine months ended September 30, 1997 compared to the same period
in 1996.
Net proceeds from financing decreased by $23.7 million during the nine months
ended September 30, 1997 from the same period in 1996, primarily due to lower
working capital requirements. In March 1996, the Company completed the
refinancing of the debt incurred in conjunction with the Heath acquisition by
replacing short-term bank financing with $125 million of long-term debt and
$100 million of medium-term notes. Proceeds from these issuances were used to
repay $125 million of commercial paper and $100 million of the five-year credit
facility drawn upon in conjunction with the Heath acquisition.
The Company expects that cash flows from operations for the full year 1997 will
be sufficient to provide adequate financing resources to support operational
needs and to fund capital expenditures, dividend payments, and paydown by
yearend a portion of the debt outstanding at the beginning of 1997.
18
<PAGE> 19
"SAFE HARBOR" STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
This report includes forward-looking statements which reflect the Company's
current views with respect to future events and financial performance. The words
"believe," "expect," "anticipate," and similar expressions identify
forward-looking statements. Reliance should not be placed on forward-looking
statements because they are subject to a variety of risks, uncertainties, and
other factors that could cause actual results to differ materially from those
expressed in any forward-looking statements made by the Company. These factors
include, but are not limited to, (i) the seasonal and cyclical nature of the
Company's educational sales; (ii) variable funding in school systems throughout
the nation, which may result in both cancellation of planned purchases of
educational materials and shifts in timing of purchases; (iii) changes in
purchasing patterns in elementary, secondary, and college markets; (iv)
regulatory changes which would affect the purchase of educational materials and
services; (v) strength of the retail market for general-interest publications
and market acceptance of newly published titles and new electronic products; and
(vi) other factors detailed from time to time in the Company's filings with the
Securities and Exchange Commission.
19
<PAGE> 20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. (27) Financial Data Schedule
(b) Reports on Form 8-K
None
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
HOUGHTON MIFFLIN COMPANY
--------------------------------------
Registrant
Dated: November 13, 1997 /s/ Gail Deegan
--------------------------------------
Gail Deegan
Executive Vice President,
Chief Financial Officer, and Treasurer
Dated: November 13, 1997 /s/ David R. Caron
--------------------------------------
David R. Caron
Vice President, Controller
</TABLE>
21
<PAGE> 22
Houghton Mifflin Company
Index To Exhibits
Item 6(a)
<TABLE>
<CAPTION>
Exhibit No Description of Document Page Number in This Report*
- ---------- ----------------------- --------------------------
<S> <C> <C>
(27) Financial Data Schedule 23
</TABLE>
* Page numbers refer to sequentially numbered copy.
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 12,386
<SECURITIES> 614
<RECEIVABLES> 322,583
<ALLOWANCES> 18,092
<INVENTORY> 148,656
<CURRENT-ASSETS> 489,727
<PP&E> 284,270
<DEPRECIATION> 169,293
<TOTAL-ASSETS> 1,158,529
<CURRENT-LIABILITIES> 334,288
<BONDS> 0
0
0
<COMMON> 30,162
<OTHER-SE> 305,623
<TOTAL-LIABILITY-AND-EQUITY> 1,158,529
<SALES> 399,094
<TOTAL-REVENUES> 399,094
<CGS> 149,857
<TOTAL-COSTS> 248,043
<OTHER-EXPENSES> 1,846
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,776
<INCOME-PRETAX> 138,429
<INCOME-TAX> 55,372
<INCOME-CONTINUING> 83,057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83,057
<EPS-PRIMARY> 2.91
<EPS-DILUTED> 2.91
</TABLE>
