John Wiley & Sons, Inc. — Fiscal 2021 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended January 31, 2021, compared with the respective periods ended January 31, 2020. The filing represents fiscal 2021 third quarter, despite the request metadata referencing “2020 Q3.” Wiley operates through Research Publishing & Platforms, Academic & Professional Learning, and Education Services.
Financial performance and position
| Metric | Three months ended Jan. 31, 2021 | Year-over-year change | Nine months ended Jan. 31, 2021 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $482.9 million | +3% | $1.405 billion | +4% |
| Operating income | $34.3 million | -29% | $134.3 million | +15% |
| Net income | $22.2 million | -37% | $106.9 million | +28% |
| Diluted EPS | $0.39 | Down from $0.63 | $1.90 | Up from $1.48 |
| Adjusted EBITDA | $104.3 million | +9% | $306.3 million | +16% |
| Operating cash flow | Not separately provided for the quarter | — | $154.8 million | Up from $88.9 million |
Third-quarter GAAP operating margin was approximately 7.1%, compared with 10.4% in the prior-year quarter. Nine-month operating margin was approximately 9.6%, compared with 8.6% in the prior-year period. The quarterly decline primarily reflected higher restructuring charges. Adjusted EBITDA margin was approximately 21.6% for the quarter and 21.8% for the nine-month period.
- Segment revenue: Research Publishing & Platforms increased 3% in the quarter and 5% year to date; Academic & Professional Learning declined 2% and 6%, respectively; Education Services increased 25% and 27%, respectively.
- Segment profitability: Third-quarter adjusted EBITDA was $81.9 million for Research Publishing & Platforms, $50.2 million for Academic & Professional Learning, and $13.0 million for Education Services. Education Services improved substantially from $0.8 million in the prior-year quarter.
- Cash and liquidity: Cash and cash equivalents were $91.3 million at January 31, 2021, down from $202.5 million at April 30, 2020. The company reported approximately $528.8 million of unused borrowing capacity.
- Debt: Total debt was $960.7 million, up from $775.0 million at April 30, 2020, primarily reflecting acquisition financing. Wiley was in compliance with its leverage and interest coverage covenants.
- Cash deployment: Nine-month investing cash outflow was $392.4 million, including $298.6 million for acquisitions. Financing cash inflow was $115.8 million, including $627.1 million of borrowings, $452.9 million of repayments, and $57.8 million of dividends.
- Free cash flow: Free cash flow less product development spending was $79.5 million for the nine months, compared with $5.2 million in the prior-year period.
Material changes versus the prior comparable period
- Wiley acquired Hindawi Limited on December 31, 2020 for preliminary consideration of approximately $300.1 million, funded primarily with borrowings and cash. Hindawi contributed $1.6 million of quarterly revenue and a $3.7 million operating loss; management stated the acquisition reduced quarterly EPS by approximately $0.12.
- Education Services benefited from the mthree acquisition and continued growth in online program management, enrollments, and new university partnerships. mthree contributed $7.7 million of quarterly revenue and $32.6 million of nine-month revenue.
- Academic & Professional Learning remained pressured by COVID-19, exam cancellations, lower print book demand, office closures, and reduced classroom-based corporate training. Digital content and courseware partially offset these effects.
- Research Publishing benefited from growth in open access and “read and publish” agreements, partially offset by lower traditional subscription revenue and academic budget pressure.
- Quarterly restructuring and related charges increased to $20.7 million from $3.3 million in the income statement presentation. The company expanded its Business Optimization Program to reduce real estate occupancy by approximately 12%, producing an initial $18.3 million charge, primarily non-cash.
- Management reported COVID-19-related savings from reduced travel, events, and facilities costs and is seeking to retain a portion of those savings after the pandemic.
- The effective tax rate declined to 14.9% for the nine months, primarily due to a $14.0 million tax benefit from carrying back a U.S. net operating loss under the CARES Act. The related $20.7 million refund was received on February 9, 2021.
Guidance, outlook, risks, and unusual items
- Raised fiscal 2021 outlook: Revenue of $1.900 billion to $1.920 billion; adjusted EBITDA of $395 million to $410 million; adjusted EPS of $2.60 to $2.75; and free cash flow of $200 million to $225 million. Capital expenditures are expected to be approximately $100 million.
- The outlook assumes low-single-digit total revenue growth, including low-single-digit growth in Research, a mid-single-digit decline in Academic & Professional Learning, and double-digit growth in Education Services. It includes approximately four months of Hindawi impact: $10 million of revenue, neutral adjusted EBITDA, and $0.15 of adjusted EPS dilution.
- Management expects approximately $8 million of annualized savings from real estate actions and approximately $4 million of run-rate savings from other actions beginning in fiscal 2022. Additional facility-related restructuring charges are expected in future periods.
- A proposed U.K. corporate tax rate increase from 19% to 25%, if enacted, could produce an estimated nonrecurring, noncash GAAP deferred tax expense of $25 million to $35 million.
- Key risks include COVID-19 effects on demand and collections, delayed customer payments, subscription-agent liquidity, print-book returns, foreign exchange, variable-rate debt, acquisition integration, realization of restructuring savings, academic and corporate training demand, and protection of intellectual property.
- At January 31, 2021, the print-book sales-return reserve net liability was $25.9 million. A one-percentage-point change in the estimated return rate could affect net income by approximately $1.1 million.
- All outstanding debt was variable-rate debt, with $300 million notionally hedged through interest-rate swaps. A hypothetical one-percentage-point change in rates on $661.3 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $5.2 million.
- Management stated that pending litigation was not expected to have a material effect on the financial statements. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether the raised fiscal 2021 outlook is achieved, particularly the adjusted EBITDA and free cash flow ranges.
- The pace of Education Services growth and whether online enrollment gains offset continued weakness in Academic & Professional Learning.
- Hindawi’s post-acquisition revenue, profitability, integration costs, and effect on leverage and EPS.
- Debt reduction capacity, covenant headroom, refinancing exposure, and sensitivity to variable interest rates.
- The timing and cash cost of additional restructuring charges versus the expected $8 million of annualized real estate savings.
- The sustainability of COVID-19-related cost savings and the effect of customer payment delays and print-book returns on working capital.
- The potential impact of the proposed U.K. tax-rate increase and other discrete tax items on GAAP earnings.
- The company’s non-GAAP reconciliations, as adjusted measures exclude material restructuring, foreign-exchange, acquisition, and tax-related effects and may not be comparable with similarly named measures used by other companies.