John Wiley & Sons, Inc. — Fiscal 2021 Second-Quarter Form 10-Q
Reporting period: Three and six months ended October 31, 2020, compared with the respective periods ended October 31, 2019. The unaudited results reflect Wiley’s Research Publishing & Platforms, Academic & Professional Learning, and Education Services segments. Fiscal year-end is April 30.
Financial performance
| Metric | Three months ended October 31, 2020 | Prior year | Six months ended October 31, 2020 | Prior year |
|---|
| Revenue | $491.0 million | $466.2 million | $922.3 million | $889.7 million |
| Operating income | $69.9 million | $63.4 million | $99.9 million | $68.0 million |
| Net income | $68.4 million | $44.7 million | $84.8 million | $48.3 million |
| Diluted EPS | $1.22 | $0.79 | $1.51 | $0.85 |
| Adjusted EBITDA | $120.3 million | $110.0 million | $202.0 million | $167.5 million |
- Second-quarter revenue increased 5% reported and 4% at constant currency. Six-month revenue increased 4% reported and 3% at constant currency.
- Six-month operating margin was approximately 10.8%, versus 7.6% in the prior-year period; second-quarter operating margin was approximately 14.2%, versus 13.6%.
- Reported net income benefited from a substantially lower effective tax rate: 0.1% in the quarter and 13.7% for the six months, compared with 20.9% and 20.1%, respectively. The benefit principally reflected the CARES Act NOL carryback, partly offset by a $6.7 million non-cash deferred tax expense from the U.K. rate increase.
- Six-month net cash used in operating activities improved to $76.6 million from $99.5 million. Free cash flow less product development spending was negative $124.1 million, compared with negative $155.7 million, reflecting seasonal working-capital requirements.
- Capital expenditures were $36.4 million and product development spending was $11.0 million in the first six months.
Segment trends and material changes
| Segment | Q2 revenue change | Q2 adjusted EBITDA | Six-month revenue change | Six-month adjusted EBITDA |
|---|
| Research Publishing & Platforms | +7% reported; +5% constant currency | $93.6 million; 37.2% margin | +6% reported; +5% constant currency | $182.9 million; 37.2% margin |
| Academic & Professional Learning | -4% reported; -5% constant currency | $49.1 million; 28.8% margin | -8% reported and constant currency | $67.6 million; 22.7% margin |
| Education Services | +28% reported; +27% constant currency | $14.7 million; 21.3% margin | +29% reported; +28% constant currency | $22.7 million; 17.1% margin |
- Research Publishing & Platforms benefited from continued Open Access growth, including “read and publish” agreements, content platforms, acquisitions, operating efficiencies, and COVID-19-related savings.
- Academic & Professional Learning remained pressured by COVID-19-related retail closures, weaker trade print publishing, reduced classroom-dependent corporate training, and exam cancellations. Digital content and courseware growth offset much of the decline in print education publishing.
- Education Services benefited materially from the January 2020 mthree acquisition and higher online program management enrollments. mthree contributed approximately $12.5 million of second-quarter revenue and $24.9 million for the first six months.
- Acquisitions increased intangible amortization, which rose 14% in both the quarter and first six months on a reported basis.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $86.1 million at October 31, 2020, down from $202.5 million at April 30, 2020. Approximately $80.0 million, or 93%, was held outside the United States.
- Total debt was $837.7 million, compared with $775.0 million at April 30, 2020. Debt consisted primarily of $229.1 million outstanding under the term loan and $596.1 million under the revolving credit facility.
- Wiley reported approximately $654.9 million of unused borrowing capacity and stated that it was in compliance with its consolidated net leverage and interest coverage covenants.
- The company has a senior unsecured facility comprising a $1.25 billion revolving facility and a $250 million term loan. Approximately $300 million of interest-rate swaps hedge a portion of variable-rate debt; $538.3 million of variable-rate debt was unhedged, for which a hypothetical one-percentage-point rate change would affect annual net income and cash flow by approximately $4.2 million.
- Financing activities provided $18.6 million in the first six months, including $309.5 million of borrowings and $249.9 million of debt repayments. Wiley paid $38.5 million of dividends and made no share repurchases.
Guidance, outlook and unusual items
- Fiscal 2021 guidance calls for revenue of $1.865 billion to $1.885 billion, adjusted EBITDA of $380 million to $395 million, adjusted EPS of $2.50 to $2.70, and free cash flow of $175 million to $200 million. The outlook assumes current foreign-exchange rates for the remainder of the year.
- Management expects low-single-digit overall revenue growth, including low-single-digit Research growth, double-digit Education Services growth, and a mid-single-digit decline in Academic & Professional Learning. Capital expenditures are expected to be approximately $100 million.
- The company expects to receive the $20.7 million CARES Act tax refund by the end of fiscal 2021. The related NOL carryback generated a $14.0 million tax benefit recognized in the six-month period.
- The Business Optimization Program generated $4.3 million of charges in the first six months and is expected to produce approximately $4 million of run-rate savings beginning in fiscal 2022.
- In November 2020, Wiley expanded the program to reduce real-estate occupancy by approximately 12%. It expects an initial pre-tax restructuring charge of approximately $15 million to $20 million in the third quarter of fiscal 2021, primarily non-cash, and annualized savings of approximately $7 million to $8 million. Additional facility-related charges may follow.
- COVID-19 continues to affect customer payments, professional learning, print publishing, testing, classroom training, travel, events, and facilities. Management reported approximately $30 million of customer payments delayed into fiscal 2021, although collections remained in line with expectations.
- Contract liabilities were $285.2 million at October 31, 2020, down from $520.2 million at April 30, 2020, primarily as subscription and other advance billings were recognized as revenue. Remaining performance obligations were approximately $303.6 million, including a $43.6 million sales-return reserve.
Key investor verification points
- Verify that fiscal 2021 guidance is being achieved, particularly adjusted EBITDA, adjusted EPS, and free cash flow conversion.
- Assess the sustainability of Research Publishing growth and the extent to which Open Access and “read and publish” agreements affect future margins.
- Monitor recovery in Academic & Professional Learning, including print publishing, professional training, testing, and retail channels.
- Separate organic performance from acquisition-driven growth, especially the contribution and integration of mthree.
- Evaluate leverage, variable-rate exposure, covenant headroom, and the effect of debt repayments and future acquisitions on liquidity.
- Verify the timing and receipt of the CARES Act tax refund and the extent to which the unusually low tax rate affects reported earnings.
- Track the $15 million to $20 million anticipated restructuring charge and whether the projected $7 million to $8 million annual facility savings are realized.
- Review customer credit losses, subscription-agent liquidity, delayed collections, sales-return estimates, and the concentration of book-customer receivables.
- Consider that management’s outlook relies on non-GAAP measures that may exclude restructuring, foreign-exchange, tax, and other unusual items and are not standardized under U.S. GAAP.
