John Wiley & Sons, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended January 31, 2020. The filing corresponds to fiscal 2020 third quarter, although the request metadata identifies it as “2019 Q3.” Results are unaudited and presented in U.S. dollars unless otherwise stated.
Business Context
Wiley operates through Research Publishing & Platforms, Academic & Professional Learning, and Education Services. The company completed acquisitions of zyBooks, Knewton-related assets, other smaller businesses, and mthree during fiscal 2020. The filing states that COVID-19 did not affect the quarter, but future effects were uncertain.
Financial Performance
| Metric | Three months ended Jan. 31, 2020 | Three months ended Jan. 31, 2019 | Nine months ended Jan. 31, 2020 | Nine months ended Jan. 31, 2019 |
|---|---|---|---|---|
| Revenue | $467.1 million | $449.4 million | $1,356.9 million | $1,308.9 million |
| Operating income | $48.5 million | $50.3 million | $116.4 million | $144.0 million |
| Net income | $35.4 million | $34.9 million | $83.8 million | $105.0 million |
| Diluted EPS | $0.63 | $0.61 | $1.48 | $1.81 |
| Adjusted EBITDA | $95.5 million | $89.8 million | $263.0 million | $267.2 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $88.9 million | $52.1 million |
Margins: Reported operating margin was approximately 10.4% in the quarter versus 11.2% in the prior-year quarter, and approximately 8.6% for the nine-month period versus 11.0%. Net margin was approximately 7.6% in the quarter versus 7.8%, and 6.2% for nine months versus 8.0%. Adjusted EBITDA margin was approximately 20.4% in the quarter and 19.4% for nine months; the filing does not provide a consolidated prior-period adjusted EBITDA margin.
Liquidity and debt: Cash and cash equivalents were $117.4 million at January 31, 2020, including approximately $94.4 million held outside the United States. Total debt was approximately $797.4 million, compared with $478.8 million at April 30, 2019. The company reported approximately $701.4 million of unused borrowing capacity and compliance with its leverage and interest-coverage covenants. Operating lease liabilities totaled $179.7 million on a present-value basis.
Cash flow and capital allocation: Investing activities used $285.9 million, including $200.6 million for acquisitions, $65.9 million for technology, property and equipment, and $17.8 million for product development. Financing activities provided $220.9 million, primarily through net borrowings. The company paid $57.6 million in dividends and repurchased $35.0 million of Class A shares. Free cash flow less product development spending was $5.2 million versus a use of $16.6 million in the prior year.
Material Changes Versus Prior Comparable Period
- Quarterly revenue increased 4%; nine-month revenue increased 4% reported and 5% on a constant-currency basis.
- Quarterly operating income declined 4%, while nine-month operating income declined 19%, primarily from higher amortization and lower EBITDA.
- Quarterly net income increased modestly, but nine-month net income declined 20%; lower nine-month earnings reflected higher amortization, restructuring charges, and interest expense.
- Research Publishing & Platforms revenue increased 3% in the quarter and 2% for nine months, with growth driven mainly by Open Access article volume. Nine-month adjusted EBITDA increased 6%.
- Academic & Professional Learning revenue increased 1% in the quarter but declined 4% for nine months. Nine-month adjusted EBITDA declined 21%, reflecting book-market weakness and higher investment and acquisition-related costs.
- Education Services revenue increased 20% in the quarter and 50% for nine months, aided by Learning House and mthree. Quarterly adjusted EBITDA improved to $0.8 million from a loss of $1.6 million; nine-month adjusted EBITDA improved to $8.8 million from a loss of $0.9 million.
- Interest expense increased to $6.3 million for the quarter and $19.2 million for nine months, reflecting higher average debt and borrowing rates.
- The effective tax rate declined to 20.7% for the quarter and 20.3% for nine months, primarily due to discrete tax items, including reserve releases and a tax-free life insurance recovery.
Guidance, Outlook, Risks, and Unusual Items
- Management reaffirmed fiscal 2020 revenue guidance of $1.855 billion to $1.885 billion, adjusted EBITDA guidance of $357 million to $372 million, and free cash flow guidance of $210 million to $230 million.
- Adjusted EPS guidance was raised to $2.45 to $2.55 from $2.35 to $2.45.
- The multi-year Business Optimization Program is expected to generate $15 million to $20 million of restructuring charges, including $10 million to $15 million of severance, and approximately $100 million of gross savings over three years. The company recorded $17.8 million of related charges during the first nine months.
- Management expects Academic & Professional Learning revenue, including acquisitions, to decline at a low single-digit rate for fiscal 2020. Education Services adjusted EBITDA margin, excluding mthree, is expected to be in the mid- to high-single-digit range for the full year.
- Key risks include COVID-19 and other public-health disruptions, foreign-exchange volatility, variable-rate debt, subscription-agent liquidity, book-return estimates, seasonal education demand, used-book competition, customer concentration, intellectual-property protection, acquisition integration, and execution of the optimization program.
- The company corrected an immaterial prior-period balance-sheet presentation error, increasing both accounts receivable and contract liabilities by approximately $11.8 million at April 30, 2019, with no income or cash-flow impact.
- Goodwill increased to $1.226 billion following acquisitions; management reported no goodwill impairment indication after reorganizing reporting units.
Investor Verification Items
- Confirm the timing and accounting contribution of mthree, zyBooks, Knewton, and Learning House to revenue, EBITDA, goodwill, and intangible amortization.
- Reconcile reported earnings with adjusted EPS and adjusted EBITDA, particularly the treatment of restructuring charges, foreign-exchange losses, and acquisition-related items.
- Monitor leverage, interest expense, covenant headroom, and exposure to unhedged variable-rate debt; management estimated that a 1% rate change would affect annual net income and cash flow by approximately $4.5 million.
- Assess whether the Business Optimization Program achieves the stated savings and whether further restructuring charges arise.
- Evaluate the sustainability of Research Publishing growth and the continuing decline in Academic & Professional Learning.
- Track COVID-19 effects on employees, customers, partners, shipping, education services, and fiscal 2020 guidance.
- Review contract liabilities, sales-return reserves, and subscription-agent collections, which materially affect seasonal cash flow.