HMH, Pearson Release Details About Impact of School Disruption from COVID-19 on Their Businesses

Associate Editor

Two public companies that serve K-12—Houghton Mifflin Harcourt Co. and Pearson—recently shared some financial and operational details about the impact of the fallout from school closures meant to slow the spread of COVID-19.

Houghton Mifflin Harcourt said it has “already taken actions to help mitigate some of the adverse impact of COVID-19 to its profitability and cash flow in 2020,” including salary reductions for executives, directors, and senior leadership, and a four-day work week to reduce labor costs for most of the staff, according to a press release it issued on March 27. At the same time, the company is supporting schools with virtual learning resources.

Another move HMH has made is to borrow $100 million of its asset-backed credit facility. This pre-emptive measure is intended to mitigate against capital market disruptions, the company said.

“We began 2020 with approximately $300 million in cash along with our $250 million asset-backed revolving credit facility, which provides us extra liquidity to help mitigate near-term disruption to our business,” HMH CFO Joe Abbott said in the release.

HMH is also withdrawing its 2020 full-year financial guidance and 3-year outlook, issued in conjunction with its Q4 2019 earnings on February 27, citing “significant uncertainty” that is likely to persist in the marketplace. [For the latest state-by-state information on school closures due to COVID-19, see Education Week’s map.]

“While we continue to be confident in the strategic direction we embarked on nearly two years ago, given the many unknowns about the virus’ impact on our customers, we believe it is appropriate at this time to withdraw our prior guidance,” said HMH CEO Jack Lynch. “We are taking precautionary steps to mitigate the commercial risk posed by school closings and disrupted purchasing activity while working hard to protect the safety and well-being of our staff.”

Pearson‘s U.S. student assessment business has been affected by COVID-19 school cancellations, the company said in a March 23 update to traders of its stock. “To date, we have seen test cancellations which impact our 2020 operating profit by around £15 million after mitigating actions. We believe there is risk of further state test cancellations which could have a similar impact on profit,” the company said in its announcement.

The company works with 22 states and on national assessment programs, including the National Assessment of Educational Progress (NAEP) delivered on behalf of the U.S. Department of Education. As of March 27, 49 states, the District of Columbia, Puerto Rico, and the Bureau of Indian Education had all received or were seeking permission from the U.S. Department of Education to suspend or cancel the summative assessments.

Pearson’s contracts vary by state. Besides administering and scoring these tests, the company also works with state partners over the course of the year. That work may include item development, psychometric services, system configuration, and training. Many of these other services have already been completed or are in progress.

In addition to the K-12 component of U.S. assessments, the company offers certification examinations and clinical products administered by school guidance counselors in the U.S.

About a year ago, Pearson sold its K-12 instructional materials business in the U.S. to a private firm.

Company-wide, Pearson said it has “significant financial headroom” because it is diversified and operates in a various geographical areas. Pearson is “working to protect our cash flow and are pro-actively managing our working capital,” the company said in its statement. At the end of February, it had about £1 billion in total liquidity available from cash and a revolving credit facility, and it was looking at options to further maximize liquidity.

At HMH, additional steps that have been taken to mitigate the financial impact include a freeze on spending that is not directly tied to near-term billings; reduced purchasing of inventory; temporary closures of warehousing and distribution centers, and a deferral of long-term capital projects not directly contributing to billings in 2020.

“Continuity of K-12 education is vital to the long-term recovery of our nation and the global economy,” said HMH CEO Jack Lynch in the company’s statement. “HMH is committed to supporting the immediate crisis response, stabilization and recovery efforts of our customers with connected learning solutions that are effective, engaging and equitable. Our leadership team remains focused on this fast-evolving situation, and rest assured we are taking action in real-time to protect our people, deliver for our customers, and maintain our momentum.”

At Pearson, the company announced plans to pause its share buyback, in light of the COVID-19 impact and “the likelihood of prolonged uncertainty,” the company said in its statement.

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