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.

Recent Developments




HMH Books & Media Consumers Publishing Business And interrupted work




On May 10, 2021, we completed the sale of our HMH Books & Media segment, our
consumer publishing business, for cash consideration of $349.0 million, subject
to a customary working capital adjustment expected to approximate a payment to
the purchaser of $7.8 million, and the purchaser's assumption of all liabilities
relating to the HMH Books & Media business subject to specified exceptions
(collectively, the "Transaction"). Total net cash proceeds after the payment of
transaction costs and exclusive of future working capital adjustment, were
approximately $337.0 million, which we used to pay down debt. The divestiture
enables HMH to focus singularly on K-12 education and accelerate growth momentum
in digital sales, annual recurring revenue and free cash flow while paying down
a significant portion of our debt. As part of the agreement, all HMH Books &
Media business employees joined the acquiring company.



Upon entering into the asset purchase agreement on March 26, 2021, the HMH Books
& Media business was classified as a Discontinued Operation due to its relative
size and strategic rationale, and accordingly, all results of the HMH Books &
Media business have been removed from continuing operations for all periods
presented, including from discussions of total net sales and other results of
operations. Included within the nine months ended September 30, 2021
discontinued operations financial results is allocated interest expense of $9.4
million, and included within the three and nine months ended September 30, 2020
discontinued operations financials results is allocated interest expense of $6.9
million and $21.4 million, respectively, based on our required repayment of the
Company's debt with the net proceeds from the sale. On the balance sheet, all
assets and liabilities that transferred to the acquirer have been classified as
Assets of discontinued operations or Liabilities of discontinued operations. The
results of the HMH Books & Media business were previously reported in its own
reportable segment. We currently report our revenues and financial results from
continuing operations under one reportable segment.



Unless otherwise noted, all financial information indicates ongoing operations.




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 pandemic. We also
took actions to help mitigate some of the adverse impact of COVID-19 to our
profitability and cash flow including, but not limited to, furloughs, salary
reductions, spending freezes, and proactive outreach to schools to support them
through this period of disruption with virtual learning resources.



Given the ongoing CV-19 situation, our business will continue to suffer in 2021.




2020 Restructuring Plan



We revised our cost structure amid the COVID-19 pandemic to further align our
cost structure 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 separation payments in
accordance with our severance policy.

                                       24

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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. The reduction in force resulted
in a 22% reduction in our workforce, including positions eliminated as part of
the voluntary retirement incentive program mentioned above, and net of newly
created positions to support our digital first operations. The reduction in
force resulted in the departure of approximately 525 employees and was completed
in October 2020. Each of the employees received separation payments in
accordance with our severance policy. The total one-time, non-recurring cost
incurred in connection with the 2020 restructuring program, inclusive of the
voluntary retirement incentive program (collectively the "2020 Restructuring
Plan"), all of which represented cash expenditures, was approximately $33.6
million. These actions are to streamline the cost structure of the Company.

Key aspects and trends of our work

Net sales


We derive revenue primarily from the sale of print and digital content and
instructional materials, multimedia instructional programs, 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 invoices 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 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 50% 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 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 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.

Further, we also derive net sales from the delivery of services to K-12
educators and administrators to build instructional excellence, cultivate
leadership and provide school districts with the comprehensive support they need
to raise student achievement. These offerings include ongoing curriculum support
and expertise in professional development, coaching, and strategic consulting.

                                       25

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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.

Factors influencing our net sales include:

  • general economic conditions at the federal and state level;


  • state and school district per student funding levels;


  • federal funding levels;


  • the cyclicality of the purchasing schedule for adoption states;


  • student enrollments;


  • adoption of new academic standards;

• Accept offered programs and specify participation rates

Approved programs;

• Technological advancement and introduction of new content and products

Meeting the needs of students, teachers and consumers, including

Strategic agreements on content development and distribution;

And

• Net sales volume due to mixed impact

The supply chain between digital and non-digital products, the length

A mix of programs and products immediately or over time.



State and 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 2020 and adopted
Science materials in 2018 for purchase in 2019 and continuing through 2021.
Florida called for K-12 English Language Arts materials in 2020 for purchase
beginning in 2021 and has called for K-12 Mathematics for review in 2021 and
purchase beginning in 2022. 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 2021 legislative session appropriated funds
for purchases in 2021 and 2022. 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. There is no guarantee that
our programs will be approved for purchase in future instructional materials
adoptions in these states.

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.

We employ different 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:

• Prepaid Client Client makes a certain payment at the time of purchase and we

Providing 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

Buy a one-year subscription to one-time textbooks

Payment, a new copy of the work text is delivered to the client every year

For a while. Online tutorials are prepaid subscriptions.

Another example of the customer receiving online book access b a

        specific period of time.


                                       26

———————————- —————- ——————

Excluding sales costs, copyright and pre-print compensation


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 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 the 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.

Sales and management costs


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 $22.8 million for the nine months ended September 30, 2021)
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.

Underestimation of other intangible assets


Our other intangible assets 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, 2021 was
$23.0 million.

Interest expense


Our interest expense includes interest accrued on the outstanding balances of
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, 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, 2021 was $26.8 million.

                                       27

———————————- —————- ——————

Results of operations


Consolidated Operating Results for the Three Months Ended September 30, 2021 and
2020



                                               Three Months Ended
                                                  September 30,
                                                                            Dollar        Percent
(dollars in thousands)                        2021             2020         Change         Change
Net sales                                  $  417,130       $  331,205     $  85,925           25.9 %
Costs and expenses:
Cost of sales, excluding publishing
rights and
  pre-publication amortization                152,893          146,155         6,738            4.6 %
Publishing rights amortization                  2,516            3,469          (953 )        (27.5 )%
Pre-publication amortization                   27,620           31,570        (3,950 )        (12.5 )%
Cost of sales                                 183,029          181,194         1,835            1.0 %
Selling and administrative                    134,951          118,275        16,676           14.1 %
Other intangible assets amortization            7,241            5,857         1,384           23.6 %
Restructuring/severance and other
charges                                            33           31,776       (31,743 )           NM
Gain on sale of assets                         (3,661 )              -        (3,661 )           NM
Operating income (loss)                        95,537           (5,897 )     101,434             NM
Other income (expense):
Retirement benefits non-service income            214               61           153             NM
Interest expense                               (8,239 )         (9,311 )       1,072           11.5 %
Interest income                                    18               32           (14 )        (43.8 )%
Change in fair value of derivative
instruments                                      (368 )            432          (800 )           NM
Gain on investments                               606            1,738        (1,132 )        (65.1 )%
Income from transition services
agreement                                       1,399                -         1,399             NM
Income (loss) from continuing operations
before taxes                                   89,167          (12,945 )     102,112             NM
Income tax benefit for continuing
operations                                     (6,192 )         (1,060 )      (5,132 )           NM

95,359 (11,885)

  107,244             NM
Loss from discontinued operations, net
of tax                                              -             (667 )         667             NM
Net income (loss)                          $   95,359       $  (12,552 )   $ 107,911             NM




NM = not meaningful

Net sales for the three months ended September 30, 2021 increased $85.9 million,
or 25.9%, from $331.2 million in 2020 to $417.1 million. The increase was
primarily due to strong net sales in Extensions, consisting of our Heinemann
brand, intervention and supplemental products as well as professional services,
which increased by $58.0 million from $124.0 million in 2020 to $182.0 million.
Within Extensions, net sales of our Heinemann products increased due to the
return of in-person learning for most of our customers, as well as in
supplemental and professional services due to strong customer demand. Further,
net sales in Core Solutions increased by $28.0 million from $207.0 million in
2020 to $235.0 million, driven by strong open territory net sales as a result of
the market recovery.

Operating income (loss) expired for three months. September 30, 2021 It has changed dramatically from extinction $ 5.9 million Income to 2020 $ 95.5 millionMainly due to the following:

• Increased net sales $ 85.9 million;

• a $ 31.7 million Reduction of restructuring / termination and other charges

        to the 2020 Restructuring Plan;


    •   A $3.7 million gain on sale of assets in 2021 from the sale of

Limited intellectual property, including copyrights and trademarks

Product titles;

• a $ 3.5 million Reduction of net breeding costs associated with printing

Rights, pre-publications and other intangible assets, primarily in a

        decrease in pre-publication amortization attributed to a streamlining of
        capital spend;


                                       28

———————————- —————- ——————

Partially offset by

• a $ 6.7 million Increasing our sales costs without including printing rights

And pre-print amortization, from $ 146.2 million To 2020

$ 152.9 millionMainly due to increased sales, in fact

Compensation for low printing costs, product mix, increased virtual supply

        products and services along with favorable inventory obsolescence due to
        strong net sales. Our cost of sales, excluding publishing rights and

Pre-printing fees, as a percentage of sales, decreased to 36.7%.

44.1%;

• a $ 16.7 million Mainly increase sales and management costs

Because of the increase $ 12.8 million Flexible costs such as sales

Commissions and transportation due to high invoices. It was more than that

        an increase in incentive compensation compared to the prior year due to
        higher achievement of performance measures in 2021 compared to 2020.



Three months of interest expired. September 30, 2021 Reduced
$ 1.1 million from $ 9.3 million To 2020 $ 8.2 millionA.D. Due to the low amount of debt owed on our interest rate instruments by 2020 and a non-recurring net payment by 2021.


Change in fair value of derivative instruments for the three months ended
September 30, 2021 unfavorably changed by $0.8 million due to foreign exchange
forward contracts executed on the Euro that were unfavorably impacted by the
strengthening of the U.S. dollar against the Euro.

Gain on investments for the three months ended September 30, 2021 decreased $1.1
million from $1.7 million in 2020 to $0.6 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, 2021 was $1.4 million and was related to transition service fees under the
transition services agreement with the purchaser of our HMH Books & Media
business. We had no transition services agreement during 2020.

Income tax benefit for continuing operations for the three months ended
September 30, 2021 increased $5.1 million from a benefit of $1.1 million in 2020
to a benefit of $6.2 million in 2021. For 2021, our annual effective tax rate,
exclusive of discrete items used to calculate the tax provision, is expected to
be approximately (8.5)%. For 2020, our effective annual tax rate exclusive of
discrete items was (1.3)%. 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.

Loss from discontinued operations, net of tax for the three months ended
September 30, 2020 was a loss of $0.7 million. The sale of our HMH Books & Media
business during the second quarter of 2021 has been accounted for as a
discontinued operation, whereby the direct results of its operations were
removed from the results from continuing operations for the periods presented.
Included within the loss is allocated interest expense of $6.9 million for 2020,
based on the repayment of debt with the net proceeds from the sale, which was
required by our debt facilities, as we did not reinvest such amounts in the
business.



                                       29
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Consolidated Operating Results for the Nine Months Ended September 30, 2021 and
2020



                                             For the Nine Months Ended
                                                   September 30,
                                                                                 Dollar        Percent
(dollars in thousands)                      2021                 2020            Change         Change
Net sales                                $   871,997         $     699,287     $  172,710           24.7 %
Costs and expenses:
Cost of sales, excluding publishing
rights and
  pre-publication amortization               335,390               310,351         25,039            8.1 %
Publishing rights amortization                 8,171                11,332         (3,161 )        (27.9 )%
Pre-publication amortization                  79,177                93,791        (14,614 )        (15.6 )%
Cost of sales                                422,738               415,474          7,264            1.7 %
Selling and administrative                   338,953               339,815           (862 )         (0.3 )%
Other intangible assets amortization          23,016                17,568          5,448           31.0 %
Impairment charge for goodwill                     -               262,000       (262,000 )           NM
Restructuring/severance and other
charges                                        9,880                31,776        (21,896 )        (68.9 )%
Gain on sale of assets                        (3,661 )                   -         (3,661 )           NM
Operating income (loss)                       81,071              (367,346 )      448,417             NM
Other income (expense):
Retirement benefits non-service
(expense) income                                 (12 )                 183           (195 )           NM
Interest expense                             (26,788 )             (29,178 )        2,390            8.2 %
Interest income                                   52                   873           (821 )        (94.0 )%
Change in fair value of derivative
instruments                                     (915 )                 172         (1,087 )           NM
Gain on investments                            1,442                 1,738           (296 )        (17.0 )%
Income from transition services
agreement                                      2,253                     -          2,253             NM
Loss on extinguishment of debt               (12,505 )                   -        (12,505 )           NM
Income (loss) from continuing
operations before taxes                       44,598              (393,558 )      438,156             NM
Income tax benefit for continuing
operations                                    (3,891 )             (11,210 )        7,319             NM
Income (loss) from continuing
operations                                    48,489              (382,348 )      430,837             NM
Loss from discontinued operations, net
of tax                                        (1,005 )             (14,345 )       13,340           93.0 %
Gain on sale of discontinued
operations, net of tax                       214,520                     -        214,520             NM
Income (loss) from discontinued
operations, net of tax                       213,515               (14,345 )      227,860             NM
Net income (loss)                        $   262,004         $    (396,693 )   $  658,697             NM


NM = not meaningful

Net sales for the nine months ended September 30, 2021 increased $172.7 million,
or 24.7%, from $699.3 million in 2020 to $872.0 million. The increase was due to
strong net sales in Extensions, consisting of our Heinemann brand, intervention
and supplemental products as well as professional services, which increased by
$95.0 million from $308.0 million in 2020 to $403.0 million. Within Extensions,
nets sales of our Heinemann products increased due to strong demand across most
product portfolios. Further, net sales in Core Solutions increased by $78.0
million from $391.0 million in 2020 to $469.0 million, driven by strong open
territory net sales as a result of market recovery in 2021.

Operating income (loss) for the nine months ended September 30, 2021 favorably
changed from a loss of $367.3 million in 2020 to income of $81.1 million, due
primarily to the following:

Voluntary Disability Payment in 2020 $ 262.0 million does not

A.D. It will happen again in 2021. This non-financial problem is a direct result of this.

The negative impact of the Covide-19 epidemic on the company in 2020;


  • A $172.7 million increase in net sales;

• a $ 21.9 million Reduction of restructuring / termination and other charges. In

        2021, there were $9.8 million of non-cash restructuring/severance and
        other charges related to vacated office space formerly utilized by
        employees of the HMH Books & Media business, of which $9.3 million is
        reflected as a reduction in operating lease assets and $1.6 million as a
        reduction in property, plant, and equipment. In 2020, there were $31.8
        million of severance costs associated with the 2020 Restructuring Plan;


                                       30

———————————- —————- ——————

• a $ 12.3 million Reduction of net breeding costs associated with printing

Rights, pre-publications and other intangible assets, primarily in a

Decrease in pre-print b

Capital costs and, to a lesser extent, our accelerated use of fertilization

Methods of publishing rights in part b

Accelerate certain other intangible assets due to production

        life cycle reductions;


    •   A $3.7 million gain on sale of assets in 2021 from the sale of

Limited intellectual property, including copyrights and trademarks

Product titles;

• Significant reduction in sales and management costs

        the 2020 Restructuring Plan with reduced labor, professional fees and
        travel and marketing costs. Partially offsetting the aforementioned was an

Increase in variable costs such as sales commissions and transportation

Higher invoices with increased incentive compensation;



Partially offset by:



• a $ 25.0 million Increasing our sales costs without including printing rights

And pre-print amortization, from $ 310.4 million To 2020

$ 335.4 million, Mainly by increasing sales volume, in part

Compensation for low printing costs, product mix, increased virtual supply

        products and services along with favorable inventory obsolescence due to
        strong net sales. Our cost of sales, excluding publishing rights and

Pre-print fees, as a percentage of sales, have dropped to 38.5%.

44.4%;



Interest expense for the nine months ended September 30, 2021 decreased
$2.4 million from $29.2 million in 2020 to $26.8 million, primarily due to net
settlement payments on our interest rate derivative instruments during 2020,
which did not repeat in 2021, and to a lesser extent lower term loan facility
interest expense driven by lower LIBOR rates.

The nine-month interest rate is over September 30, 2021 Reduced $ 0.8 million Due to low interest rates in our financial markets in 2021.


Change in fair value of derivative instruments for the nine months ended
September 30, 2021 unfavorably changed by $1.1 million due to foreign exchange
forward contracts executed on the Euro that were unfavorably impacted by the
strengthening of the U.S. dollar against the Euro.

Gain on investments for the nine months ended September 30, 2021 decreased $0.3
million from $1.7 million in 2020 to $1.4 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, 2021 was $2.3 million and was related to transition service fees under the
transition services agreement with the purchaser of our HMH Books & Media
business. We had no transition services agreement during 2020.

Loss on extinguishment of debt for the nine months ended September 30, 2021
consisted of a $10.0 million write-off of the remaining balance of the debt
discount associated with the term loan facility and a $2.5 million write-off
related to unamortized deferred financing fees associated with the term loan
facility. The total write-off of $12.5 million was proportional to the pay down
in term loan debt.

Income tax benefit for continuing operations for the nine months ended September
30, 2021 decreased $7.3 million, from a benefit of $11.2 million in 2020 to a
benefit of $3.9 million in 2021. For 2021, our annual effective tax rate,
exclusive of discrete items used to calculate the tax provision, is expected to
be approximately (8.5)%. For 2020, our effective annual tax rate exclusive of
discrete items was (1.3)%. 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.

Income (loss) from discontinued operations, net of tax for the nine months ended
September 30, 2021 favorably changed by $227.9 million from a loss of $14.3
million in 2020, to income of $213.5 million primarily due to the gain on sale
of our HMH Books & Media business, which has been accounted for as a
discontinued operation whereby the direct results of its operations were removed
from the results from continuing operations for the periods presented. Included
within the loss is allocated interest expense of $9.4 million and $21.4 million,
for 2021 and 2020, respectively, based on the repayment of debt with the net
proceeds from the sale, which was required by our debt facilities, as we did not
reinvest such amounts in the business.



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Adjusted EBITDA from next works


To supplement our financial statements presented in accordance with GAAP, we
have presented Adjusted EBITDA from continuing operations, 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, gains or losses on investments, non-cash charges and
impairment charges, levels of depreciation or amortization, and
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 income (loss) from continuing operations to
Adjusted EBITDA from continuing operations for the three and nine months ended
September 30, 2021 and 2020:



                                          Three Months Ended September 30,       Nine Months Ended September 30,
                                                2021                2020             2021                2020
Net income (loss) from continuing                                $  (11,885 )
operations                                $         95,359                      $        48,489       $  (382,348 )
Interest expense                                     8,239            9,311              26,788            29,178
Interest income                                        (18 )            (32 )               (52 )            (873 )
Provision (benefit) for income taxes                (6,192 )         (1,060 )            (3,891 )         (11,210 )
Depreciation expense                                11,063           12,358              34,334            37,382
Amortization expense                                37,377           40,896             110,364           122,691
Non-cash charges - goodwill impairment                   -                -                   -           262,000
Non-cash charges - stock compensation                3,177            2,971               8,727             8,295
Non-cash charges - (gain) loss on
derivative instruments                                 368             (432 )               915              (172 )
Fees, expenses or charges for equity
offerings, debt or
  acquisitions/dispositions                            676              339                 866               366
Gain on investments                                   (606 )         (1,738 )            (1,442 )          (1,738 )
Gain on sale of assets                              (3,661 )              -              (3,661 )               -
Loss on debt extinguishment                              -                -              12,505                 -
Legal settlement                                         -                -               2,470                 -
Restructuring/severance and other
charges                                                 33           31,776               9,880            31,776
Adjusted EBITDA from continuing
operations                                $        145,815       $   82,504     $       246,292       $    95,347


Seasonality and Comparability

Our net sales, operating profit or loss and net cash provided by or used in
operations are impacted by the inherent seasonality of the academic calendar,
which typically results in a cash flow usage in the first half of the year and a
cash flow generation in the second half of the year. Consequently, the
performance of our business may not be comparable quarter to consecutive quarter
and should be 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.

Schools 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 69% 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 based on 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.

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Liquid and capital resources



                                                          September 30,       December 31,
(in thousands)                                                2021                2020
Cash and cash equivalents                                $       420,318     $      281,200
Current portion of long-term debt                                      -    

19,000

Long-term debt, net of discount and issuance costs               317,095    

624,692

Revolving credit facility                                              -                  -
Borrowing availability under revolving credit facility           163,635            104,806






                                                            Nine Months Ended September 30,
                                                              2021                   2020
Net cash provided by operating activities               $         196,577       $        75,166
Net cash provided by (used in) investing activities               282,577               (86,596 )
Net cash used in financing activities                            (340,036 )             (13,380 )




Operating activities

Net cash provided by operating activities was $196.6 million for the nine months
ended September 30, 2021, a $121.4 million favorable change from the
$75.2 million of net cash provided by operating activities for the nine months
ended September 30, 2020. Net cash provided by operating activities included
$3.9 million and $9.1 million of net cash provided by discontinued operations in
2021 and 2020, respectively, and net cash provided by operating activities from
continuing operations of $192.7 million and $66.0 million in 2021 and 2020,
respectively. The $126.7 million improvement in cash provided by operating
activities from continuing operations was primarily due to an increase in
operating profit, net of non-cash items, of $173.3 million. The improvement was
partially offset by unfavorable changes in net operating assets and liabilities
of $46.6 million primarily due to unfavorable changes in accounts receivable of
$93.8 million related to higher billings and the timing of collections,
unfavorable changes in severance and other charges of $40.8 million mainly
attributable to the 2020 Restructuring Plan, unfavorable changes in interest
payable of $6.9 million due to the timing of payments and unfavorable changes in
other operating assets and liabilities of $9.2 million, offset by favorable
changes in accounts payable of $49.1 million due to timing of disbursements,
favorable changes in royalties and author advances of $33.6 million, favorable
changes in inventory of $10.5 million, operating lease liabilities of $8.0
million and pension and postretirement benefits of $2.9 million.

Investment activities


Net cash provided by investing activities was $282.6 million for the nine months
ended September 30, 2021, an increase of $369.2 million from the $86.6 million
of net cash used in investing activities for the nine months ended September 30,
2020. Net cash from investing activities included $0.6 million and $0.4 million
of cash usage from discontinued operations in 2021 and 2020, respectively, and
net cash provided by (used in) investing activities from continuing operations
of $283.2 million and $(86.2) million in 2021 and 2020, respectively. The
increase in cash provided by investing activities was primarily due to proceeds
from the sale of our HMH Books & Media business of $349.0 million and from the
sale of assets of $5.0 million during 2021 and to a lesser extent, lower capital
investing expenditures related to pre-publication costs and property, plant, and
equipment of $15.4 million in connection with planned reductions in content
development.

Financial activities


Net cash used in financing activities, which is all continuing operations, was
$340.0 million for the nine months ended September 30, 2021, an increase of
$326.6 million from the $13.4 million used in financing activities for the nine
months ended September 30, 2020. The increase in cash used in financing
activities was primarily due to a net increase in our debt repayments of $327.8
million primarily from the proceeds of the sale of our HMH Books & Media
business. Partially offsetting the increase was net collections under the
transition services agreement of $1.6 million in 2021.



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

                                       33

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"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.

Highly protected 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, 2021, we had
$303.3 million ($296.2 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. We redeemed $2.7 million of the notes during the second quarter of
2021 utilizing proceeds from the sale of the HMH Books & Media business.

The notes do not require us to comply with financial maintenance covenants. We
are currently required to meet certain incurrence based financial covenants as
defined under 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, 2021, we had $21.7 million ($20.9 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, 2021, the interest rate on the term loan facility was 7.25%.

The term loan facility was required to be repaid in quarterly installments of
approximately $4.8 million with the balance being payable on the maturity date.
We repaid $334.6 million of the term loan facility during the second quarter of
2021 utilizing proceeds from the sale of the HMH Books & Media business. There
are no future quarterly repayment installments required and the balance is
payable on the maturity date; however, we are not prohibited from continuing to
make debt payments and may elect to do so.

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.
To the extent that we are successful in closing the divestiture of our HMH Books
& Media business, we intend to use the proceeds to reduce our outstanding
indebtedness, which will increase recurring free cash flow resulting from
reduced interest expense. We do not intend to reinvest such proceeds in the
business. The term loan facility permits the Company to voluntarily prepay
outstanding amounts at any time without premium or penalty, other than customary
breakage costs with respect to LIBOR loans.

The term loan facility 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.

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We are subject to the provision of surplus cash flow under our credit facility based on our usage ratio and cash flow.

Referral Credit Institution


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").

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, 2021, there were no amounts outstanding on the revolving
credit facility. As of September 30, 2021, we had approximately $16.1 million of
outstanding letters of credit and approximately $163.6 million of borrowing
availability under the revolving credit facility. As of November 4, 2021, 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, 2021, 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 $420.3 million of cash and cash equivalents and no short-term investments
at September 30, 2021 and $281.2 million of cash and cash equivalents and no
short-term investments at December 31, 2020.

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 continue to recover and we have performed a sensitivity analysis on various
recovery assumptions. We have concluded we have sufficient liquidity to fund our
current obligations, capital spending, debt service requirements and working
capital requirements over at least the next twelve months.

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, 2021 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, 2020.

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.

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Influence of inflation and change


We believe that inflation has not had a material impact on our results of
operations during the year ended December 31, 2020 or the first nine months of
2021. 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 obedience

as such September 30, 2021We have kept all our debt commitments and expect to be obedient in 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.

Out of balance sheet arrangements

We have no plans beyond the balance.

Recent financial statements

See note 4 of the consolidated financial statements included in Part I of Part 1 of this Quarterly Report Form 10-Q.

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