John Wiley & Sons, Inc. — Fiscal 2022 Second-Quarter Form 10-Q
Business Context and Reporting Period
Wiley is a global research and education company operating through Research Publishing & Platforms, Academic & Professional Learning, and Education Services. The filing covers the three and six months ended October 31, 2021, the second quarter and first half of fiscal 2022. More than 80% of first-half revenue was generated by digital products and services.
Financial Performance and Position
| Metric | Three months ended October 31, 2021 | Three months ended October 31, 2020 | Six months ended October 31, 2021 | Six months ended October 31, 2020 |
|---|---|---|---|---|
| Revenue | $533.0 million | $491.0 million | $1,021.4 million | $922.3 million |
| Operating income | $73.9 million | $69.9 million | $114.9 million | $99.9 million |
| Net income | $56.0 million | $68.4 million | $69.8 million | $84.8 million |
| Diluted EPS | $0.99 | $1.22 | $1.24 | $1.51 |
| Adjusted EBITDA | $127.1 million | $120.3 million | $222.4 million | $202.0 million |
- Second-quarter revenue increased 9% reported and 8% at constant currency. First-half revenue increased 11% reported and 9% at constant currency.
- Second-quarter operating margin was approximately 13.9%, compared with 14.2% in the prior-year quarter. First-half operating margin was approximately 11.2%, compared with 10.8% previously.
- Net income and GAAP EPS declined primarily because the prior-year period benefited from the CARES Act tax refund and related tax effects. The current-year effective tax rates were 20.7% for the quarter and 39.1% for the first half, compared with 0.1% and 13.7%, respectively.
- Newly defined non-GAAP Adjusted EPS was $1.29 for the quarter and $2.14 for the first half, compared with $1.25 and $1.91, respectively. The measure excludes amortization of acquired intangible assets and other specified items and is not a GAAP substitute.
- Research Publishing & Platforms revenue increased 9% in the quarter and 12% in the first half. Open Access revenue rose 28% and 41%, respectively, while traditional subscription revenue declined.
- Academic & Professional Learning revenue increased 4% in the quarter and 7% in the first half, driven by Professional Learning and corporate training. Education Publishing revenue declined 5% and 3%, respectively; print textbooks declined 15% and 8%.
- Education Services revenue increased 17% in the quarter and 16% in the first half, driven by talent placements and higher university enrollment. Adjusted EBITDA declined 35% and 30%, respectively, as Wiley invested in employee capacity and incurred higher student acquisition and sales costs.
- Cash and cash equivalents were $100.9 million at October 31, 2021, compared with $93.8 million at April 30, 2021. Current liabilities exceeded current assets by $144.0 million, primarily because of subscription cash collected in advance.
- Cash used in operating activities was $75.6 million for the first half, compared with $76.6 million used in the prior year. Free cash flow less product development spending was negative $126.3 million, compared with negative $124.1 million, reflecting seasonal first-half cash usage.
- Total debt was $1.045 billion at October 31, 2021, up from $821.6 million at April 30, 2021. Wiley had approximately $435.3 million of unused borrowing capacity and was in compliance with its leverage and interest coverage covenants.
- Wiley had $400.0 million of interest-rate swaps hedging a portion of variable-rate debt. A hypothetical one-percentage-point change in rates on approximately $645.4 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $5.1 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based, with the strongest reported growth in Research Publishing & Platforms and Education Services.
- Operating income improved, but higher cost of sales, employee-related expenses, editorial investment, marketing, technology spending, and amortization limited margin expansion.
- Interest expense increased to $5.0 million in the quarter and $9.6 million in the first half because of higher average debt associated with acquisitions.
- Restructuring results improved: Wiley recorded credits of $1.3 million in the quarter and $1.6 million in the first half, compared with charges of $2.1 million and $4.1 million, respectively. The Business Optimization Program had incurred total charges of $64.7 million to date.
- Wiley completed the $12.0 million acquisition of certain assets of J&J Editorial Services on October 1, 2021. It also continued integrating Hindawi, acquired in December 2020 for approximately $300.1 million.
- Wiley repurchased approximately 313,000 shares for $17.4 million during the first half and paid $38.6 million in dividends. The quarterly dividend was increased to $0.345 per share.
- First-half debt borrowings of $340.9 million exceeded repayments of $113.4 million, contributing to the increase in total debt.
Guidance, Outlook, Risks, and Unusual Items
- Management reaffirmed fiscal 2022 guidance: revenue of $2.07 billion to $2.10 billion, Adjusted EBITDA of $415 million to $435 million, newly defined Adjusted EPS of $4.00 to $4.25, and free cash flow of $200 million to $220 million.
- Management expects approximately $10 million of run-rate savings from Business Optimization actions beginning in fiscal 2022, in addition to approximately $8 million of annualized facility-related savings already achieved. Additional facility-related restructuring charges may occur.
- Expected free cash flow headwinds include higher capital expenditures, higher net cash taxes after the prior-year CARES Act refund, and higher incentive compensation payments.
- Key operating risks include COVID-19 effects on customers and collections, journal subscription renewal rates, the financial condition of subscription agents, library and academic budget pressure, used-book market conditions, retailer and wholesaler concentration, foreign exchange volatility, interest-rate exposure, and dependence on successful acquisition integration.
- A UK entity acquired through mthree was inadvertently dissolved while holding assets. Wiley continued consolidating the entity and expected restoration during fiscal 2022; approximately $125.2 million of net intercompany receivables remained associated with the entity at October 31, 2021.
- Wiley reported a $3.7 million pretax gain from selling its world languages product portfolio during the first half. The effective tax rate also included a $20.7 million noncash deferred tax expense from the enacted increase in the UK statutory tax rate.
- Subsequent to quarter-end, Wiley acquired certain assets of Precision Computer Works for approximately $15.0 million and completed another acquisition for approximately $8.0 million.
- Management stated that routine litigation is not expected to have a material effect on consolidated financial condition or results of operations. Disclosure controls were assessed as effective, while J&J and Hindawi remained excluded from the current-year internal-control scope during integration.
Important Facts for Investors to Verify
- Reconcile GAAP EPS with the newly defined Adjusted EPS, particularly the exclusion of acquired-intangible amortization and tax adjustments.
- Assess whether Education Services investment spending converts into sustainable revenue and margin improvement.
- Monitor debt reduction, variable-rate exposure, covenant headroom, and the effect of future acquisitions on leverage.
- Evaluate the sustainability of Open Access growth relative to declining traditional journal subscriptions.
- Review seasonal cash conversion, subscription collections, customer credit risk, and the company’s ability to achieve the $200 million to $220 million free cash flow outlook.
- Track the UK entity restoration process, acquisition accounting finalization, post-quarter-end acquisitions, and any related contingencies.