John Wiley & Sons, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2019. The request references “2018 Q3,” but the filing reports fiscal 2019 third-quarter results, compared with the three and nine months ended January 31, 2018. Amounts are in thousands except per-share data.
Business context
Wiley operates through Research, Publishing, and Solutions segments. Research includes academic journals, open access, licensing, and publishing technology services. Publishing includes professional, scientific, technical, education, course workflow, and test-preparation products. Solutions includes education services, professional assessment, and corporate learning.
On November 1, 2018, Wiley acquired The Learning House, Inc., an education-services provider, for preliminary consideration of approximately $201.3 million, including $200.8 million of cash and $0.5 million of warrants. The acquisition was funded through revolving-credit borrowings and contributed $13.4 million of revenue and a $5.2 million operating loss during the nine-month period.
Key financial metrics
| Metric | Three months ended January 31, 2019 | Three months ended January 31, 2018 | Nine months ended January 31, 2019 | Nine months ended January 31, 2018 |
|---|---|---|---|---|
| Revenue | $449.4 million | $455.7 million | $1,308.9 million | $1,318.9 million |
| Operating income | $50.3 million | $65.4 million | $144.0 million | $158.8 million |
| Net income | $34.9 million | $68.8 million | $105.0 million | $138.1 million |
| Diluted EPS | $0.61 | $1.19 | $1.81 | $2.39 |
| Gross profit margin | 68.0% | 70.1% | 69.1% | 70.1% |
| Cash provided by operating activities | Not separately provided | Not separately provided | $47.6 million | $190.7 million |
Third-quarter operating income declined 23% and nine-month operating income declined 9%. Net income declined 49% in the quarter and 24% year to date. The third-quarter effective tax rate was 22.7%, versus an 18.1% tax benefit in the prior year, while the nine-month rate was 22.6%, versus 4.0%. The prior-year rates benefited from a provisional $25 million Tax Cuts and Jobs Act benefit.
Third-quarter adjusted EPS was $0.61 versus $0.87, and nine-month adjusted EPS was $1.92 versus $2.49. Adjusted measures exclude specified restructuring, foreign-exchange, and tax-law effects and are not U.S. GAAP measures.
Segment performance
| Segment | Q3 2019 revenue | Q3 year-over-year change | Q3 contribution to profit | Nine-month 2019 revenue | Nine-month year-over-year change |
|---|---|---|---|---|---|
| Research | $226.4 million | Up 1%; up 5% constant currency | $60.5 million | $680.0 million | Up 1%; up 2% constant currency |
| Publishing | $145.6 million | Down 14%; down 13% constant currency | $33.7 million | $428.1 million | Down 8%; down 7% constant currency |
| Solutions | $77.4 million | Up 25%; up 26% constant currency | $(3.4) million | $200.8 million | Up 14% |
Research benefited from strong open-access growth and publishing technology services, partly offset by lower journal-subscription revenue. Publishing was pressured by lower print sales, particularly in education and STM/professional products. Solutions revenue increased primarily because of Learning House, but higher marketing, employment, operating, and amortization costs reduced profitability.
Cash flow, debt, and liquidity
- Cash provided by operating activities was $47.6 million for the nine months, down from $190.7 million in the prior year.
- Free cash flow less product-development spending was negative $16.6 million, compared with positive $81.3 million in the prior year.
- Investing cash outflows were $259.1 million, including $190.5 million for Learning House, $50.0 million for technology, property and equipment, and $14.3 million for product development.
- Financing cash inflows were $181.0 million, reflecting $490.5 million of new borrowings partly offset by $217.2 million of debt repayments, $57.0 million of dividends, and $35.0 million of share repurchases.
- At January 31, 2019, cash and cash equivalents were $132.8 million, approximately 90% of which was held outside the United States.
- Debt outstanding was $633.5 million, with approximately $469.2 million of unused borrowing capacity. The company stated that it complied with its leverage and interest-coverage covenants.
- Negative working capital was $246.8 million, primarily reflecting deferred subscription revenue and seasonal billing and collection patterns.
Material changes and unusual items
- Learning House increased goodwill by approximately $109.1 million and added approximately $109.5 million of identifiable intangible assets. Its preliminary purchase-price allocation remains subject to finalization.
- Restructuring and related charges were a $0.3 million credit in the quarter and $3.6 million for the nine months, compared with charges of $2.2 million and $26.5 million, respectively, in the prior year. Management does not anticipate further material charges under the program.
- The company adopted the new revenue standard, Topic 606, using the modified retrospective method. Adoption had no material effect on consolidated revenue, financial position, or results of operations, but changed the presentation of receivables, deferred revenue, sales-return reserves, and certain fulfillment costs.
- The company retrospectively reclassified certain education-services advertising and marketing costs from operating and administrative expenses to cost of sales. The reclassification was $11.2 million for the prior-year quarter and $34.7 million for the prior-year nine-month period, with no effect on operating income or net income.
- Contract liabilities were $271.5 million current and $14.7 million long term at January 31, 2019. Excluding the $36.7 million sales-return reserve, approximately $234.9 million of remaining performance obligations was expected to be recognized within twelve months.
- Foreign-exchange transaction losses were $2.5 million in the quarter and $4.3 million year to date. Foreign-currency translation reduced other comprehensive income by $43.2 million year to date.
Guidance, outlook, and risks
Wiley reaffirmed fiscal 2019 revenue guidance of approximately flat revenue versus fiscal 2018 and adjusted EPS guidance for a mid-single-digit percentage decline. It reduced its operating-cash-flow outlook to a high-single-digit decline previously expected to a mid-teen percentage decline. Capital expenditures were expected to be approximately $50 million lower than fiscal 2018, and fiscal 2019 capital spending was forecast at approximately $100 million including technology, property, and product-development spending. Learning House was expected to contribute approximately $30 million of fiscal 2019 revenue and dilute EPS by approximately $0.15; these contributions were excluded from the core guidance.
Key risks include declining demand for print publishing, subscription-agent liquidity, customer and bookstore concentration, seasonality, foreign-exchange exposure, variable-rate debt, execution and integration of Learning House, achievement of restructuring savings, sales-return estimates, intellectual-property protection, global economic conditions, and Brexit-related disruption. A one-percentage-point change in interest rates on $283.5 million of unhedged variable-rate debt was estimated to affect annual net income and cash flow by approximately $2.1 million. A one-percentage-point change in estimated sales-return rates could affect net income by approximately $1.1 million.
Investor verification points
- Verify whether Learning House achieves expected revenue growth and reverses its reported operating losses.
- Monitor Publishing revenue, especially education and STM/professional print products, and the pace of digital-product adoption.
- Assess whether operating cash flow recovers as expected from delayed subscription billings and collections.
- Review debt reduction, interest-rate exposure, unused borrowing capacity, and covenant compliance.
- Reconcile adjusted EPS and constant-currency measures to U.S. GAAP results and evaluate the effects of nonrecurring tax benefits and restructuring items.
- Track open-access growth, journal renewals, subscription-agent liquidity, and the impact of the Projekt DEAL agreement.
- Evaluate the final purchase-price allocation for Learning House and any resulting changes to goodwill, intangible assets, amortization, or impairment risk.