10-Q: McGraw Hill Swings to Profit on Digital Growth, Debt Cut

McGraw Hill, Inc. reported a significant turnaround to net income for the quarter ended June 30, 2025, driven by robust digital revenue growth and reduced interest expenses following strategic debt refinancing.

Summary

• Revenue for the three months ended June 30, 2025, increased by $12.8 million, or 2.4%, to $535.7 million, compared to $523.0 million in the prior year.
• Net income for the quarter was $0.5 million, a substantial improvement from a net loss of $9.4 million in the same period last year.
• Adjusted EBITDA increased by $12.8 million, or 7.2%, reaching $191.4 million for the quarter, up from $178.6 million.
• Higher Education revenue grew by 14.1% to $182.4 million, primarily due to increased digital Re-occurring Revenue and growth in Inclusive Access sales.
• K-12 revenue decreased by 1.4% to $270.9 million, mainly due to lower Transactional Revenue from reduced market opportunities, partially offset by higher Re-occurring Revenue.
• International revenue declined by 11.7% to $51.5 million, attributed to lower market opportunities in the Middle East and Asia.
• Interest expense, net, decreased by $22.1 million, or 27.3%, to $58.8 million, largely due to debt refinancing and lower variable interest rates.
• Operating cash flow for the quarter was a use of $96.7 million, compared to a use of $2.9 million in the prior year, primarily due to unfavorable changes in deferred revenue, accounts payable, and inventory.
• The company completed an Initial Public Offering (IPO) on July 25, 2025, raising net proceeds of $385.7 million, which were used to repay debt under the A&E Term Loan Facility.
• A 1.06555-for-1 stock split became effective on July 23, 2025, in connection with the IPO.

Sentiment

Score: 8

Explanation: The company demonstrated a strong financial turnaround, moving from a net loss to profitability, coupled with significant Adjusted EBITDA growth and substantial reduction in interest expense. Strategic moves like the IPO and debt repayment are positive. While operating cash flow was negative, it is attributed to seasonality and ongoing investments in product development, which are expected to drive future revenue. The ongoing legal proceedings introduce some uncertainty, but the company believes they will not have a material adverse effect.

Positives

• Achieved a net income of $0.5 million, a significant turnaround from a $9.4 million net loss in the prior year, demonstrating improved profitability.
• Total revenue increased by 2.4% to $535.7 million, indicating overall business growth.
• Adjusted EBITDA grew by 7.2% to $191.4 million, reflecting enhanced operational efficiency.
• Higher Education segment revenue surged by 14.1%, driven by strong digital adoption, over 30% increase in Inclusive Access sales, U.S. enrollment growth, market share gains, and higher customer retention.
• Interest expense decreased by 27.3% due to the refinancing of the A&E Term Loan Facility, which reduced variable rate indebtedness by $749.6 million and benefited from lower variable interest rates.
• The successful completion of an Initial Public Offering (IPO) and the use of proceeds to repay $385.7 million of debt significantly strengthened the balance sheet and reduced financial leverage.
• The company's Re-occurring Revenue, primarily from digital subscriptions, increased to approximately 72% of total revenue, indicating a more predictable and stable long-term revenue model.

Negatives

• Operating cash flow was a negative $96.7 million for the quarter, a significant increase from a negative $2.9 million in the prior year, primarily due to unfavorable changes in deferred revenue, accounts payable, and inventory.
• K-12 segment revenue decreased by 1.4%, mainly due to lower Transactional Revenue from reduced market opportunities.
• International segment revenue declined by 11.7%, impacted by lower market opportunities in the Middle East and Asia.
• The company faces ongoing legal proceedings, including a Florida False Claims Act complaint and author royalty class actions, with uncertain outcomes and potential financial implications.
• The effective tax rate for the quarter was 98.7%, significantly higher than the prior year, due to a valuation allowance recorded against domestic and certain foreign net deferred tax assets.

Risks

• Intense competition for products and services.
• Failure to win new adoptions or reductions in federal, state, and local education funding.
• Seasonality of business and changes in customer ordering patterns.
• Changes in policy and funding shifts, including potential reorganization of the U.S. Department of Education.
• Political and economic issues, and compliance with international laws and regulations.
• Increased availability of free or inexpensive products and customer expectations for lower prices.
• Current and potential litigation, including the Florida False Claims Act and author royalty disputes.
• Malfunction or intentional hacking of technological systems.
• Compliance with privacy, accessibility, and other laws, and protection of personal data.
• Defects in and unauthorized copying and distribution of products.
• Challenges to intellectual property rights.
• Material and sustained reduction in enrollment at colleges and universities.
• Reliance on third-party distributors and consolidation in distribution/retail channels.
• Costs and supply of paper products.
• Large returns or changes in customer/reseller orders.
• Ability to retain and attract qualified authors, employees, and key personnel.
• Fluctuations between foreign currencies and the U.S. dollar, including tariffs and export controls.
• General economic conditions, including inflationary pressures, market rate volatility, and interest rate fluctuations.
• Financial leverage and outstanding indebtedness.
• Ability to make accurate assumptions or estimations in financial statements.
• Ownership structure and potential conflicts of interest with Platinum Equity.
• Rapidly changing expectations and standards on environmental, social, and governance matters.
• Stock price volatility and inability to sell shares at or above purchase price.
• No anticipated dividends or share repurchases in the foreseeable future.
• Dependence upon McGraw-Hill Education, Inc. and its controlled subsidiaries for results of operations, cash flows, and distributions.
• Status as a controlled company.

Future Outlook

The company anticipates a favorable impact on its income tax provision for the quarter ending September 30, 2025, and the fiscal year ending March 31, 2026, due to the enactment of the One Big Beautiful Bill Act. Management believes that future cash flow from operations, combined with existing funds and access to capital markets, will adequately cover operating and financing needs for at least the next 12 months. Over the longer term, capital requirements will depend on cash generation and market access. Working capital requirements are expected to improve with the ongoing migration from print to digital learning solutions. Planned capital and product development expenditures are significant and are expected to generate additional revenue.

Management Comments

• We believe that we have positively impacted hundreds of millions of learners and educators with our personalized learning solutions to support learning at scale worldwide.
• Education is foundational to global stability and economic prosperity, and we have continuously innovated for over 135 years to help educators and institutions unlock the potential of each learner.
• Our scalable digital solutions rely on shared technology infrastructure, years of collaborative partnerships with leading institutions, expertise in learning science, and a focus on high-value iterative product design and development activities.
• We utilize our data analytics capabilities to generate continuous feedback loops that drive product and go-to-market innovation, which allows us to simplify workflows while creating meaningful learning experiences tailored to the needs of each learner.
• Our revenue models across each of our businesses are transforming along with our customers' increasing adoption of digital learning solutions, with digital solutions generally sold on a subscription basis with high renewal rates, providing a more predictable and stable long-term revenue model.
• We are focused on optimizing our product development expenditures to generate content that can be leveraged across our full range of products, maximizing long-term return on investment.

Industry Context

The education industry is undergoing a significant transformation driven by technology, with rapid proliferation of mobile devices accelerating the adoption of digital learning solutions and fostering data-driven instruction. McGraw Hill is actively leveraging this trend, having invested over $2.0 billion in digital learning solutions over the last decade. The company's focus on subscription-based digital offerings, such as its flagship Connect solution with over 34 million lifetime learners, aligns with the industry's shift towards more predictable revenue models. The 'Evergreen content delivery model' for continuous updates is presented as outpacing industry standards. The company also highlights its role in 'Inclusive Access' programs, a course material affordability initiative guided by the U.S. Department of Education, which has saved students over $1.5 billion since fiscal year 2018. The mention of generative AI indicates awareness and potential future integration of advanced technologies in educational content delivery.

Comparison to Industry Standards

• The company is a top two provider in the U.S. K-12 market, serving approximately 99% of public K-12 districts, indicating a strong market position.
• The company is a top two provider of digital and print learning solutions in the U.S. higher education market, serving approximately 82% of U.S. higher education institutions.
• The 'Evergreen content delivery model' for continuous content updates is stated to 'outpace the industry standard' and advance beyond traditional episodic revision cycles.
• The AccessMedicine solution is available across approximately 94% of U.S. medical schools, demonstrating strong penetration in the medical education sector.
• The ALEKS learning solution has leveraged data science and machine learning to enhance learning outcomes for over 25 years, suggesting a long-standing leadership in adaptive learning technology.

Management Changes

Corporate Governance

Legal Proceedings

• **Florida False Claims Act Complaint**: On August 12, 2025, the State of Florida filed a complaint against McGraw Hill, LLC and Savvas Learning Company, LLC, alleging violations of the Florida False Claims Act by purportedly overcharging K-12 schools for instructional materials and not extending pricing advantages. A qui tam complaint, previously under seal, was unsealed on August 11, 2025, alleging similar claims. The company intends to vigorously defend itself, and the outcome or amount of loss is currently not estimable.
• **Author Royalties Class Actions**: Two purported class actions filed in January and February 2021, consolidated, alleging breach of author agreements and implied covenant of good faith regarding royalty calculation methodology. While a breach of contract claim was initially dismissed, it was remanded by the U.S. Court of Appeals for the Second Circuit in November 2024 for further adjudication on one element. Discovery has concluded, and a Motion for Summary Judgment is expected in late Q2 or early Q3 fiscal year 2026. The outcome or amount of loss is currently not estimable.
• **Achieve3000 vs. Beable Education Inc.**: A complaint filed in July 2020 alleging intellectual property/patent infringement, fraudulent inducement, unfair competition, theft of trade secret, and breach of contract. A counterclaim was filed by Beable and Dodelson. The patent was ruled invalid by the PTAB in January 2023, affirmed by the Federal Circuit in July 2024. Achieve3000 filed an application to reissue the patent in November 2023. Discovery resumed in March 2025. The outcome of the counterclaims or amount of loss is currently not estimable.

Related Party Transactions

• The company paid Platinum Advisors, an entity affiliated with Platinum Equity, management fees of $2.5 million and expense reimbursements of $0.1 million for the three months ended June 30, 2025, under a Corporate Advisory Services Agreement.
• The Advisory Agreement with Platinum Advisors was terminated on July 25, 2025, in connection with the consummation of the IPO, eliminating future management fees and expense reimbursements.
• Platinum Equity, LLC, through its affiliated investment vehicles, formed McGraw Hill, Inc. and indirectly owned McGraw-Hill Education, Inc. The filing notes that Platinum's interests may conflict with the company's or shareholders' interests due to its status as a controlled company.

Stakeholder Impact

• **Shareholders**: The IPO provided an opportunity for new investment, while the stock split may improve liquidity. However, the company does not anticipate paying dividends or repurchasing shares in the foreseeable future. The company's status as a controlled company by Platinum Equity means Platinum's interests may conflict with other shareholders.
• **Employees**: Lower annual incentive compensation expense was noted, reflecting higher incentive payments in the prior year. Higher salaries and wages were due to annual merit-based compensation increases. Restructuring and cost savings initiatives may impact headcount.
• **Customers**: Continued investment in platform enhancements and product development aims to provide enhanced digital learning solutions. The growth in Inclusive Access sales benefits students by offering course material affordability. However, the Florida False Claims Act complaint alleges overcharges to K-12 school districts.
• **Authors**: The ongoing class action litigation regarding royalty calculation methodology directly impacts authors and their compensation from content usage.
• **Creditors**: The repayment of $385.7 million of debt using IPO proceeds reduces the company's overall indebtedness and improves its financial leverage, benefiting creditors. The company remains in compliance with all debt covenants.

Next Steps

• The company expects a favorable impact on its income tax provision for the quarter ended September 30, 2025, and the fiscal year ended March 31, 2026, due to the One Big Beautiful Bill Act.
• A Motion for Summary Judgment is intended to be filed in the author royalties class action litigation in the late second or early fiscal third quarter of fiscal year 2026.
• The company will continue to assess the outcome and potential loss from the Florida False Claims Act and Achieve3000 vs. Beable Education Inc. legal matters as they progress.

Key Dates

Recommendation

McGraw Hill, Inc. has demonstrated a significant financial turnaround, moving from a net loss to profitability and achieving robust Adjusted EBITDA growth. The successful IPO and subsequent debt repayment have substantially reduced the company's financial leverage and interest expense, strengthening its balance sheet. The strategic shift towards digital learning solutions, particularly in Higher Education, is yielding strong revenue growth and high retention rates, indicating a more stable and predictable future revenue stream. While operating cash flow was negative for the quarter due to seasonality and ongoing investments, these investments are crucial for long-term growth and digital transformation. The company's strong market position in K-12 and Higher Education, coupled with its innovation in digital content and adaptive learning, positions it well for continued success despite ongoing legal challenges, which the company believes will not have a material adverse effect. For a seasoned investor, these factors suggest a compelling 'buy' opportunity for long-term capital appreciation.

Keywords

Education Technology, EdTech, K-12 Education, Higher Education, Digital Learning Solutions, Educational Publishing, SEC Filing, Quarterly Earnings, Financial Results, Corporate Debt, Initial Public Offering, Subscription Revenue