FORT WORTH, Texas--(BUSINESS WIRE)--A fund affiliated with Q Investments, L.P., announced today that it sent a letter to the Houghton Mifflin Harcourt Company’s (NASDAQ: HMHC) Board of Directors calling on the Board to return some of its substantial cash holdings to shareholders by instituting an ongoing or special dividend or announcing a tender for a substantial amount of its stock (or a similar recapitalization mechanism).

As outlined in the letter, Q Investments believes that the company has performed well since emerging from bankruptcy in 2012 and, as a result, currently holds an overabundance of excess cash. Q Investments believes that returning some of this cash to shareholders would better communicate the company’s belief in its future prospects and enhance shareholder value.

Q Investments has been a holder of Houghton Mifflin debt and stock since 2010, having worked with the company through its bankruptcy and restructuring process.

A full text of the letter, as well as the proposal, follows below:

December 11, 2014

Dear Ladies and Gentlemen:

We want to commend the company for doing a fine job improving its operations over the past two years and now finding itself in an enviable financial position. The company has guided that it will have approximately $700 million of cash on its balance sheet at year-end 2014. According to our analysis, the company can generate over $200 million of annual free cash flow over the next year, which would give it close to $1 billion of cash by the end of 2015 (excluding spending for acquisitions). The company has truly made a remarkable turnaround since we first invested in 2010.

As you know, we recently submitted a Rule 14a-8 shareholder proposal for inclusion in the company’s 2015 proxy statement because of our ongoing frustration with the company’s lack of any meaningful action to return capital to shareholders (our proposal is attached as Exhibit A). In our view, the company’s current “fortress” balance sheet is positioned as if school districts across the country were going to imminently shutter their doors. In reality, state and local revenue now exceeds pre-crisis levels, there are numerous adoptions, and many jurisdictions (including California) have earmarked special taxes to buttress educational spending. In our opinion, the company sits on a mountain of excess liquidity.

We do not believe that the company’s stock price accurately reflects both the positive macro trends in the industry and the robust cash flow of the company. We attribute this to the fact that the company is doing next to nothing with its more than ample liquidity. While the board recently approved a non-committed $100 million share buyback over a two-year period, we think the company should take this opportunity to send an undeniably strong signal to the market that it sees further upside in its business and has confidence in its future.

Specifically, we think the company should immediately capitalize on two opportunities:

• Attract additional shareholders focused on the company’s long-term growth prospects and cash-generating profile by instituting either an ongoing or special dividend

• Take advantage of the market’s mispricing of your equity by announcing a tender for a substantial amount of stock (or a similar recapitalization mechanism)

Both of these actions would concretely communicate the company’s belief in its future prospects and substantial free cash flow as the cyclical recovery continues.

Much as a stock tender or buyback signals the company’s belief in its future, a dividend also signals a company’s belief in the stability of its core business. Each of the company’s public peers (Pearson, Wiley and Scholastic) has a healthy on-going dividend, and we believe instituting a similar policy would open the company up to an additional investor base focused on yield. Your peers have apparently realized the importance of returning capital to their shareholders, and we hope that you can also see the benefits of such an approach.

We have discussed these ideas with a number of equity analysts, and many have been excited about the strong signal the company could send that it sees an ever brighter future, not to mention the support this would provide for the equity. In these conversations, many have also questioned why the company did not announce a more significant share repurchase program, or at least institute an on-going dividend, and why the company does not already have a nominal amount of net debt (given the unprecedented attractiveness of the credit markets).

The lack of any meaningful action on these fronts is truly mystifying given the company’s “fortress” balance sheet, its ample free-cash-flow generation and the positive signal that this would, in our view, send to the markets about the board’s and management’s confidence in the company’s outlook. We believe that with the approximately $5 per share of cash you are expected to have at the end of this year and the approximately $2 per share you should generate each year thereafter, the company should do something to benefit its shareholders.

We can only surmise that you may be hoarding cash for a large acquisition. We would certainly support an acquisition if the combination could be justified on its own merits. However, given the current environment of the capital markets and the company’s very strong balance sheet, a significant amount of the purchase price could be financed with debt. It is unnecessary to hoard cash earning nothing on the balance sheet for a possible acquisition that may or may not ever materialize. Empire building, in other words, isn’t always the best policy.

We ask that you reach out to some of your largest equity holders, as we have done, and get their thoughts on the merits of a dividend or a tender offer or a more significant stock buyback. As you well know, in the past many of these shareholders have not been afraid to voice their views. It is our very strong belief that you will discover that holders representing over 50% of your shares support some or all of our suggestions.

In speaking with the large holders and research analysts, we have learned that many have also been dismayed with how the company recently communicated its quarterly earnings. What we believe should have been viewed as a “blow-out” quarter instead created confusion. The changing nature of the company’s revenue mix towards digital and the impact of this shift on deferred revenue was not explained well, and the void created by the confusion left a vacuum of information where some apparently assumed the worst. It would be extremely helpful if the company were to provide both a more detailed explanation of how it expects revenue to be deferred going forward and guidance for 2015 on both a GAAP and a cash basis. The investment community could then clearly see what we believe are the strong underlying fundamentals of the business while the shift to digital is ongoing.

Time is of the essence. We urge you not to wait until the annual meeting to take actions that you should have implemented long ago. Shareholders need to know that you are now listening because we have seen little over the past year to give us confidence you are doing so. Rest assured, we are continuing to consider all of our options.

Sincerely yours,

R² Investments, LDC

Exhibit A

RESOLVED, that the shareholders of the Company request the Board of Directors to prioritize more highly the return of capital to shareholders relative to other uses of capital, focusing primarily on (i) evaluating the current dividend policy to consider either a special dividend or an ongoing dividend distributed to shareholders on a quarterly basis and/or (ii) implementing a tender, and/or a similar recapitalization mechanism, for a substantial amount of the Company’s stock; all consistent with applicable law and existing contractual obligations.