Business Context and Reporting Period
John Wiley & Sons, Inc. filed this Form 10-Q for the three months ended July 31, 2019, the first quarter of fiscal 2020. The company operates through Research Publishing & Platforms, Education Publishing & Professional Learning, and Education Services. Prior-period segment results were recast to conform to the current structure.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $423.5 million | $410.9 million | Up 3%; up 5% constant currency |
| Operating income | $4.6 million | $36.1 million | Down 87% |
| Operating margin | 1.1% | 8.8% | Down 7.7 percentage points |
| Net income | $3.6 million | $26.3 million | Down 86% |
| Diluted EPS | $0.06 | $0.45 | Down $0.39 |
| Adjusted EPS | $0.21 | $0.43 | Down 51% |
| Adjusted EBITDA | $57.5 million | $70.2 million | Down 18% |
| Net cash used in operating activities | $94.2 million | $145.0 million | Use improved by $50.8 million |
| Free cash flow less product development spending | $(124.6) million | $(169.5) million | Use improved by $45.0 million |
Cost of sales increased 12% to $143.1 million, while operating and administrative expenses increased 4% to $250.2 million. The effective tax rate was 8.6%, compared with 22.8% in the prior year; excluding discrete items, the current-period rate would have been approximately 22.5%.
Segment Performance
- Research Publishing & Platforms: Revenue increased 2% to $229.4 million, or 3% in constant currency. Adjusted contribution to profit increased 3% to $58.3 million.
- Education Publishing & Professional Learning: Revenue declined 7% to $144.9 million, primarily due to weakness in books, test preparation and certification. Adjusted contribution to profit fell 63% to $7.7 million.
- Education Services: Revenue increased 69% to $49.3 million, primarily from the Learning House acquisition and 9% organic growth. The segment remained loss-making, with adjusted contribution to profit of $(5.1) million.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $104.0 million at July 31, 2019, including approximately $89.8 million held outside the United States.
- Total debt was $730.5 million, compared with $478.8 million at April 30, 2019. The increase primarily funded acquisitions.
- The amended credit agreement provides a $1.25 billion five-year revolving facility and a $250 million five-year term loan. Approximately $771.4 million of borrowing capacity remained available.
- The company was in compliance with its leverage and interest-coverage covenants at July 31, 2019.
- Operating cash flow was seasonally negative because annual journal subscription collections generally occur later in the fiscal year. Contract liabilities were $408.6 million, primarily representing subscription cash collected in advance.
- The company paid $19.3 million of dividends and repurchased $10.0 million of common stock during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue growth was more than offset by higher cost of sales, operating expenses, restructuring charges and amortization, resulting in a substantial decline in operating income and EPS.
- Interest expense increased to $6.1 million from $2.8 million because of higher average debt and a higher weighted-average borrowing rate.
- The company recorded a $2.7 million foreign-exchange transaction gain versus a $1.7 million loss in the prior year, partially offsetting the operating decline.
- Foreign currency translation losses were $35.5 million, producing comprehensive loss of $23.7 million despite net income of $3.6 million.
- On July 1, 2019, Wiley acquired Zyante Inc., or zyBooks, for approximately $54.1 million net of cash acquired. It also acquired certain Knewton assets and two smaller businesses; total cash consideration for these other acquisitions was approximately $19.1 million.
- Wiley adopted the new lease standard on May 1, 2019, recognizing $147.4 million of operating lease right-of-use assets and $184.7 million of operating lease liabilities at July 31, 2019. Adoption did not affect reported income or cash flow.
- The company initiated a multi-year Business Optimization Program and recorded $10.9 million of related pre-tax charges in the quarter. The prior-year period benefited from $6.1 million of restructuring credits.
Guidance, Outlook and Management Commentary
Management reaffirmed fiscal 2020 guidance at constant currency and updated it for zyBooks:
| Metric | Updated FY2020 Outlook |
|---|---|
| Revenue | $1.855 billion to $1.885 billion |
| Adjusted EBITDA | $357 million to $372 million |
| Adjusted EPS | $2.35 to $2.45 |
| Free cash flow | $210 million to $230 million |
The Business Optimization Program is expected to generate approximately $100 million of gross savings over three years, with most savings expected to be reinvested in growth. Management anticipates total restructuring charges of approximately $15 million to $20 million, including $10 million to $15 million of severance-related costs.
Risks, Contingencies and Unusual Items
- Results are exposed to seasonality in education and journal subscriptions, customer and subscription-agent liquidity, used-book markets, retailer concentration, foreign currency movements, interest rates and the ability to integrate acquisitions.
- A hypothetical one-percentage-point change in interest rates on $631.3 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $4.8 million.
- A one-percentage-point change in the estimated print-book sales-return rate could affect net income by approximately $1.8 million. The related contract liability reserve was $33.4 million.
- Goodwill totaled $1.122 billion and intangible assets totaled $878.3 million. Management reported no goodwill impairment indication after its reporting-unit reorganization.
- Routine litigation is pending, but management does not expect the ultimate resolution of pending matters to materially affect the financial statements.
- The filing states that disclosure controls were effective. Zyante was excluded from management’s internal-control assessment while it is integrated into the company’s control environment.
Investor Verification Checklist
- Verify whether the expected Business Optimization savings and restructuring charges are realized as projected.
- Monitor Education Publishing & Professional Learning revenue and profitability, particularly books, test preparation and certification.
- Assess whether Education Services can convert substantial revenue growth and Learning House synergies into sustained profitability.
- Reconcile acquisition purchase-price allocations, goodwill and intangible-asset balances as the measurement periods are finalized.
- Track leverage, interest expense, variable-rate debt exposure and compliance with credit-agreement covenants.
- Evaluate seasonal cash generation, subscription collections and the conversion of contract liabilities into revenue.
- Consider the effect of foreign currency movements and print-book sales returns on reported earnings and comprehensive income.