HM Completes Disappointing Year
Jim Milliot -- 2/19/01

A disappointing third quarter that was followed by a weaker than expected fourth quarter kept Houghton Mifflin from achieving its profit and sales goals in 2000. In the year, total sales rose 8.2%, to $1.03 billion, while income from operations increased 24.6%, to $61 million. Net income in 2000 was $55.8 million, down from $76.3 million in 1999, a figure that included a one-time gain of $30.3 million.

Company chairman Nader Darehshori said that while a number of HM divisions exceeded expectations in the year, sales were "far less" than anticipated in the school division due to the "dramatic" failure of a science program, slower than anticipated ordering in California and lower than forecast sales of a reading program. The college division, where sales rose 0.4%, to $174.4 million, also performed below expectations, which Darehshori attributed to disappointing backlist sales and lower sales of advanced placement texts. On the positive side, Darehshori said, Riverside did better than expected; the Great Source supplementary division had a 25% sales increase to more than $60 million; and international sales were up 30%. For the entire k-12 publishing segment, revenues were up 9.7%, to $750.7 million. Darehshori was also pleased with the performance of the trade and reference group, which posted an operating margin of better than 10% on a strong sales gain. Total sales in the "other" segment, which includes trade and reference, rose 12.2% in 2000 to $102.6 million.

Darehshori said he is optimistic about prospects for 2001, and he predicted that sales will increase by more than 10% and income from operations--excluding the equity loss from HM's investment in Classwell Learning--will also top 10%. Darehshori was pinning most of his hopes on the company's k-12 operations, where he sees growth of 13%-14%. Continued strong funding, particularly in California; a number of new programs from both the elementary school and high school divisions; and new products at Riverside were cited by Darehshori as the basis for his optimism. He said sales in the college division are projected to increase 4%-5% and that the company has budgeted flat sales in its trade and reference division because the group's strong results in 2000 were helped by the release of the American Heritage Dictionary. Darehshori said HM's goal is for the trade and reference group to average a 10% operating margin, but he acknowledged that the group may not hit the target every year.

Darehshori said HM will decide if it will participate in a second round of funding for Classwell--expected in early 2002--based on the startup's performance; HM has a 32% stake in the online education company (News, Sept. 18, 2000). Darehshori said he has been pleased with Classwell's performance to date and said the company expects to break even in 2003 and be profitable in 2004. He also told analysts that an announcement about succession plans could be made within the next several months; Darehshori will hit HM's mandatory retirement age near the end of 2001. He said the HM board is looking at candidates inside and outside of the company.