ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with our Condensed Consolidated Financial Statements and related notes set forth in Item 1 of Part I of this Quarterly Report on Form 10-Q, our MD&A set forth in Item 7 of Part II of our 2019 Form 10-K and our Consolidated Financial Statements and related notes set forth in Item 8 of Part II of our 2019 Form 10-K. See Part II, Item 1A, “Risk Factors,” below and “Cautionary Notice Regarding Forward-Looking Statements “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995,” above, and the information referenced therein, for a description of risks that we face and important factors that we believe could cause actual results to differ materially from those in our forward-looking statements. All amounts and percentages are approximate due to rounding and all dollars are in thousands, except per share amounts or where otherwise noted. When we cross-reference to a “Note,” we are referring to our “Notes to Unaudited Condensed Consolidated Financial Statements,” unless the context indicates otherwise.
RESULTS OF OPERATIONS – THREE MONTHS ENDED OCTOBER 31, 2019
CONSOLIDATED OPERATING RESULTS
Revenue:
Revenue for the three months ended October 31, 2019 increased $17.6 million, or 4%, as compared with prior year. On a constant currency basis, revenue increased 5% mainly driven by the following factors:
These increases were partially offset by a decline of $9.5 million in the Academic & Professional Learning business.
Excluding the impact of acquisitions, revenues on a constant currency basis decreased 1%.
See the “Segment Operating Results” below for additional details on each segment’s revenue and Adjusted EBITDA performance.
Cost of Sales:
Cost of sales for the three months ended October 31, 2019 increased $10.8 million, or 8%, as compared with prior year. On a constant currency basis, cost of sales increased 10%. This increase was primarily due to costs associated with acquired businesses, an increase in marketing and other program costs in the Education Services business; partially offset by lower inventory and royalty costs due to efficiency gains.
Operating and Administrative Expenses:
Operating and administrative expenses for the three months ended October 31, 2019 increased $4.2 million, or 2%, as compared with prior year. On a constant currency basis, operating and administrative expenses increased 3%. The increase was primarily due to investments in growth and optimization initiatives, including additional resources in editorial support, as well as advertising, marketing, sales and technology. These factors were partially offset by a decrease in employee benefit costs due to timing, lower costs associated with strategic planning, and a life insurance recovery of $2 million.
Restructuring and Related Charges:
Business Optimization Program
Beginning in fiscal year 2020, we initiated a multi-year Business Optimization Program to drive efficiency improvement and operating savings with improved workflows and cycle times and enhanced researcher experiences. We anticipate approximately $15 million to $20 million of restructuring charges, of which approximately $10 million to $15 million to be severance-related costs and the remainder to be other related costs. We anticipate gross savings over the three-year period to be approximately $100 million, with most of that amount to be reinvested in the Company to drive and sustain profitable revenue growth.
For the three months ended October 31, 2019, we recorded pre-tax restructuring charges of $3.2 million related to this program. These charges are reflected in Restructuring and Related Charges in the Unaudited Condensed Consolidated Statements of Income. See Note 9, “Restructuring and Related Charges” for more details on these charges.
Restructuring and Reinvestment Program
Beginning in fiscal year 2013, we initiated the Restructuring and Reinvestment Program to restructure and realign our cost base with current and anticipated future market conditions. We are targeting most of the cost savings achieved to improve margins and earnings, with the remainder reinvested in growth opportunities.
For the three months ended October 31, 2019 and 2018, we recorded pre-tax restructuring charges of $0.8 million and $10.0 million, respectively, related to this program. These charges are reflected in Restructuring and Related Charges in the Unaudited Condensed Consolidated Statements of Income. See Note 9, “Restructuring and Related Charges” for more details on these charges.
For the impact of both of our restructuring programs on diluted earnings per share, see the section below, “Diluted Earnings per Share (“EPS”).”
Amortization of Intangibles:
Amortization of intangibles was $15.0 million for the three months ended October 31, 2019, an increase of $2.7 million, or 21%, as compared with prior year. On a constant currency basis, amortization of intangibles increased 23% as compared with prior year. The increase in amortization was primarily due to the acquisition of Learning House in fiscal year 2019 and, to a lesser extent, intangibles acquired as part of the acquisitions completed in fiscal year 2020. See Note 3, “Acquisitions” for more details on these transactions.
Operating Income:
Operating income was $63.4 million for the three months ended October 31, 2019, an increase of $5.9 million, or 10%, as compared with prior year. On a constant currency basis and excluding restructuring charges, Adjusted EBITDA increased 3% primarily due to higher revenue discussed above.
Interest Expense:
Interest expense for the three months ended October 31, 2019 was $6.8 million compared with prior year of $3.6 million. This increase was due to higher average debt balances outstanding, which included borrowings for the funding of acquisitions and a higher weighted average effective borrowing rate.
Foreign Exchange Transaction Losses:
Foreign exchange transaction losses were $2.7 million for the three months ended October 31, 2019 and were primarily due to the net impact of the change in average foreign exchange rates as compared to the U.S. dollar on our third-party accounts receivable and payable balances. For the three months ended October 31, 2018, foreign exchange transaction losses were less than $0.1 million.
Provision for Income Taxes:
The effective tax rate for the three months ended October 31, 2019 was 20.9%, compared with 22.3% for the prior year. The rate for the three months ended October 31, 2019 was lower than the rate for the prior year primarily due to a more favorable earnings mix, as well as certain net discrete items, including a tax-free life insurance recovery. Excluding the effects of these discrete items, the rate for the three months ended October 31, 2019 would have been 21.5%.
Diluted Earnings per Share (“EPS”):
EPS for the three months ended October 31, 2019 was $0.79 per share compared with $0.76 per share for the three months ended October 31, 2018. Excluding the impact of the items included in the table below, Adjusted EPS for the three months ended October 31, 2019 decreased 4% to $0.85 per share compared with $0.89 per share for the three months ended October 31, 2018. On a constant currency basis, Adjusted EPS decreased 1% as increased Adjusted EBITDA was more than offset by higher amortization of intangible assets and an increase in interest expense.
SEGMENT OPERATING RESULTS
Revenue:
Research Publishing & Platforms revenue for the three months ended October 31, 2019 increased 2% to $234.7 million on a reported basis and increased 4% on a constant currency basis as compared with prior year. This increase was primarily due to continued article volume growth in Research Publishing in Open Access.
Adjusted EBITDA:
Adjusted EBITDA increased 5% to $81.1 million for the three months ended October 31, 2019 as compared with the prior year. On a constant currency basis and excluding restructuring charges, Adjusted EBITDA increased 6% compared with prior year. This increase was due to higher revenues and efficiency gains, which were partially offset by an increase in royalty costs, and higher operating costs, reflecting investments in additional resources in editorial to support increased journal publishing.
Society Partnerships:
For the three months ended October 31, 2019:
Revenue:
Academic & Professional Learning revenue decreased 6% to $177.7 million on a reported basis and decreased 5% on a constant currency basis as compared with prior year. This decrease was primarily due to declines in book publishing reflecting market conditions. This decline was partially offset by contributions from acquisitions and, to a lesser extent, growth in corporate training and test preparation and certification. Excluding revenue from acquisitions, organic revenue declined 9% on a constant currency basis. On July 1, 2019, we completed the acquisition of zyBooks, a leading provider of computer science and STEM education courseware. We originally expected Academic & Professional Learning revenue to grow slightly this fiscal year, inclusive of revenue from acquisitions. However, given the market-driven declines in book publishing through the second quarter, we now expect this segment’s revenue to decline at a low single-digit rate.
Adjusted EBITDA:
Adjusted EBITDA decreased 20% to $53.2 million for the three months ended October 31, 2019 as compared with the prior year. On a constant currency basis and excluding restructuring charges, Adjusted EBITDA decreased 19% as compared with prior year. This decrease was primarily due to the decline in revenue, and to a lesser extent, higher sales, technology and administrative related costs, including costs associated with the acquisition of zyBooks and Knewton, Inc. (“Knewton”), partially offset by lower cost of sales, primarily due to lower royalty costs.
# Not meaningful
Revenue:
Education Services revenue increased 80% to $53.8 million, on a reported and on a constant currency basis as compared with prior year. The increase was mainly driven by the impact of the acquisition of Learning House, and organic growth of 10%.
Adjusted EBITDA:
Adjusted EBITDA was $7.6 million compared to $2.5 million in the prior year. On a constant currency basis, excluding restructuring (credits) charges, Adjusted EBITDA was favorable by $5.2 million as compared with prior year. This was due to higher revenue and favorable timing of expenses, partially offset by higher costs of sales, including higher marketing costs, which was primarily due to the incremental impact of the acquisition of Learning House. Adjusted EBITDA margin was 14.2% as compared with 8.3% in the prior year. For full year 2020, we anticipate Adjusted EBITDA margin to be in the mid- to high single digit range.
Education Services Partners:
As of October 31, 2019, Wiley had 65 university partners under contract. As of October 31, 2018, Wiley had 36 university partners under contract, which excludes the impact of the acquisition of Learning House.
CORPORATE EXPENSES:
Corporate expenses for the three months ended October 31, 2019 decreased 22% to $37.5 million as compared with prior year. On a constant currency basis and excluding restructuring charges, these expenses decreased 18%. This decrease was primarily due to cost savings, lower employee benefit costs due to timing and a life insurance recovery of $2 million.
RESULTS OF OPERATIONS – SIX MONTHS ENDED OCTOBER 31, 2019
CONSOLIDATED OPERATING RESULTS
Revenue:
Revenue for the six months ended October 31, 2019 increased $30.2 million, or 4%, as compared with prior year. On a constant currency basis, revenue increased 5% mainly driven by the following factors:
These increases were partially offset by a decline of $18.8 million in the Academic & Professional Learning business.
Excluding the impact of acquisitions, revenues on a constant currency basis were flat.
See the “Segment Operating Results” below for additional details on each segment’s revenue and Adjusted EBITDA performance.
Cost of Sales:
Cost of sales for the six months ended October 31, 2019 increased $26.2 million, or 10%, as compared with prior year. On a constant currency basis, cost of sales increased 12%. This increase was primarily due to additional costs associated with the Learning House acquisition, an increase in marketing costs in the Education Services business and, to a lesser extent, higher royalty costs.
Operating and Administrative Expenses:
Operating and administrative expenses for the six months ended October 31, 2019 increased $13.9 million, or 3%, as compared with prior year. On a constant currency basis, operating and administrative expenses increased 4%. The increase was primarily due to investments in additional resources in content and editorial support, as well as advertising, marketing, sales and technology costs.
Restructuring and Related Charges:
Business Optimization Program
For the six months ended October 31, 2019, we recorded pre-tax restructuring charges of $14.0 million, related to this program. These charges are reflected in Restructuring and Related Charges in the Unaudited Condensed Consolidated Statements of Income. See Note 9, “Restructuring and Related Charges” for more details on these charges.
Restructuring and Reinvestment Program
For the six months ended October 31, 2019 and 2018, we recorded pre-tax restructuring charges of $0.7 million and $3.9 million, respectively, related to this program. These charges are reflected in Restructuring and Related Charges in the Unaudited Condensed Consolidated Statements of Income. See Note 9, “Restructuring and Related Charges” for more details on these charges.
For the impact of both of our restructuring programs on diluted earnings per share, see the section below, “Diluted Earnings per Share (“EPS”).”
Amortization of Intangibles:
Amortization of intangibles was $30.0 million for the six months ended October 31, 2019, an increase of $4.9 million, or 20%, as compared with prior year. On a constant currency basis, amortization of intangibles increased 22% as compared with prior year. The increase in amortization was primarily due to the acquisition of Learning House and, to a lesser extent intangibles acquired as part of the acquisitions completed in fiscal year 2020. See Note 3, “Acquisitions” for more details on these transactions.
Operating Income:
Operating income was $68.0 million for the six months ended October 31, 2019, a decrease of $25.7 million, or 27%, as compared with prior year. On a constant currency basis and excluding restructuring charges, Adjusted EBITDA decreased 5% primarily due to higher costs of sales and operating and administrative expenses, offset by higher revenue.
Interest Expense:
Interest expense for the six months ended October 31, 2019 was $12.9 million compared with prior year of $6.4 million. This increase was due to higher average debt balances outstanding, which included borrowings for the funding of acquisitions and a higher weighted average effective borrowing rate.
Foreign Exchange Transaction Losses:
Foreign exchange transaction losses were less than $0.1 million for the six months ended October 31, 2019 and were primarily due to the net impact of the change in average foreign exchange rates as compared to the U.S. dollar on our intercompany and third-party accounts receivable and payable balances. For the six months ended October 31, 2018, foreign exchange transaction losses were $1.8 million primarily due to the net impact of the change in average foreign exchange rates as compared to the U.S. dollar on our intercompany and third-party receivable and payable balances.
Provision for Income Taxes:
The effective tax rate for the six months ended October 31, 2019 was 20.1%, compared with 22.5% for the prior year. The rate for the six months ended October 31, 2019 was lower than the rate for the prior year due to the mix of earnings, as well as certain net discrete items, including a tax-free life insurance recovery. Excluding the effects of these discrete items, the rate for the six months ended October 31, 2019 would have been 21.6%.
Diluted Earnings per Share (“EPS”):
EPS for the six months ended October 31, 2019 was $0.85 per share compared with $1.21 per share for the six months ended October 31, 2018. Excluding the impact of the items included in the table below, Adjusted EPS for the six months ended October 31, 2019 decreased 19% to $1.06 per share compared with $1.31 per share for the six months ended October 31, 2018. On a constant currency basis, Adjusted EPS decreased 18% due to lower Adjusted EBITDA, higher interest expense and amortization of intangibles, partially offset by a lower provision for income taxes.
SEGMENT OPERATING RESULTS
# Not meaningful
Revenue:
Research Publishing & Platforms revenue for the six months ended October 31, 2019 increased 2% to $464.1 million on a reported basis and increased 4% on a constant currency basis as compared with prior year. This increase was primarily due to continued growth in Research Publishing in Open Access.
Adjusted EBITDA:
Adjusted EBITDA increased 5% to $156.5 million for the six months ended October 31, 2019 as compared with the prior year. On a constant currency basis and excluding restructuring charges, Adjusted EBITDA increased 6% as compared with prior year. This increase was due to higher revenues and efficiency gains, partially offset by an increase in royalty costs, and higher operating costs, which reflected investments in additional resources in editorial and content to support increased journal publishing.
Society Partnerships:
For the six months ended October 31, 2019:
# Not meaningful
Revenue:
Academic & Professional Learning revenue decreased 7% to $322.6 million on a reported basis and decreased 5% on a constant currency basis as compared with prior year. This decrease was primarily due to declines in book publishing reflecting market conditions. This decline was partially offset by contributions from acquisitions, and to a lesser extent, growth in professional assessment. Excluding revenue from acquisitions, organic revenue declined 8% on a constant currency basis.
Adjusted EBITDA:
Adjusted EBITDA decreased 27% to $77.4 million for the six months ended October 31, 2019 as compared with the prior year. On a constant currency basis and excluding restructuring charges, Adjusted EBITDA decreased 26% as compared with prior year. This decrease was primarily due to the decline in revenue; and to a lesser extent, increased investment in growth initiatives including costs associated with the acquisition of zyBooks and Knewton.
# Not meaningful
Revenue:
Education Services revenue increased 75% to $103.1 million, on a reported and on a constant currency basis as compared with prior year. The increase was mainly driven by the impact of the acquisition of Learning House, and organic growth of 10%.
Adjusted EBITDA:
Adjusted EBITDA was $8.0 million compared to $0.7 million in the prior year. On a constant currency basis, excluding restructuring charges, Adjusted EBITDA was favorable by $7.3 million as compared with prior year. This was due to the following:
partially offset by:
CORPORATE EXPENSES:
Corporate expenses for the six months ended October 31, 2019 increased 1% to $86.3 million as compared with prior year. On a constant currency basis and excluding restructuring charges, these expenses decreased 5%. This was primarily due to a decrease in employment and technology related costs and a life insurance recovery of $2 million. These factors were partially offset by an increase in costs associated with strategic planning and business optimization efforts.
FISCAL YEAR 2020 OUTLOOK:
We are reaffirming our financial outlook with updates that reflect the addition of zyBooks. Note, Knewton was included in the original outlook.
Amounts in millions, except Adjusted EPS
(1) 2020 Outlook reflects an effective tax rate of approximately 22% and is at constant currency (reflecting Fiscal Year 2019 average foreign exchange rates) and excludes the impact of foreign exchange movements on results through the second quarter. If current foreign currency exchange rates remain consistent throughout the remainder of fiscal year 2020, we anticipate that consolidated revenue would be unfavorably impacted by approximately $15 million and Adjusted EPS would be immaterially impacted as compared to the prior year.
Adjusted EBITDA:
Below is a reconciliation of GAAP net income to Non-GAAP EBITDA and Adjusted EBITDA:
LIQUIDITY AND CAPITAL RESOURCES
Principal Sources of Liquidity
We believe that our operating cash flow, together with our revolving credit facilities and other available debt financing, will be adequate to meet our operating, investing and financing needs in the foreseeable future, although there can be no assurance that continued or increased volatility in the global capital and credit markets will not impair our ability to access these markets on terms commercially acceptable. We do not have any off-balance-sheet debt.
As of October 31, 2019, we had cash and cash equivalents of $107.7 million, of which approximately $88.3 million, or 82%, was located outside the U.S. Maintenance of these cash and cash equivalent balances outside the U.S. does not have a material impact on the liquidity or capital resources of our operations. Notwithstanding the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), which generally eliminated federal income tax on future cash repatriation to the U.S., cash repatriation may be subject to state and local taxes or withholding or similar taxes. Since April 30, 2018, we no longer intend to permanently reinvest earnings outside the U.S. We have a $2.0 million liability related to the estimated taxes that would be incurred upon repatriating certain non-U.S. earnings.
On May 30, 2019, we entered into a credit agreement that amended and restated our existing revolving credit agreement (“Amended and Restated RCA”). The Amended and Restated RCA provides for senior unsecured credit facilities comprised of a (i) five-year revolving credit facility in an aggregate principal amount up to $1.25 billion, and (ii) a five-year term loan A facility consisting of $250 million.
As of October 31, 2019, we had approximately $794.7 million of debt outstanding, net of unamortized issuance costs of $0.8 million, and approximately $705.8 million of unused borrowing capacity under our Amended and Restated RCA and other facilities. Our Amended and Restated RCA contains certain restrictive covenants related to our consolidated leverage ratio and interest coverage ratio, which we were in compliance with as of October 31, 2019.
Analysis of Historical Cash Flow
The following table shows the changes in our Unaudited Condensed Consolidated Statement of Cash Flows for the six months ended October 31, 2019 and 2018.
Free Cash Flow less Product Development Spending helps assess our ability, over the long term, to create value for our shareholders, as it represents cash available to repay debt, pay common dividends, and fund share repurchases and new acquisitions. Below are the details of Free Cash Flow less Product Development Spending for the six months ended October 31, 2019 and 2018.
Cash flow from operations is seasonally a use of cash in the first half of Wiley’s fiscal year principally due to the timing of collections for annual journal subscriptions, which occurs in the beginning of the second half of our fiscal year.
Free Cash Flow less Product Development Spending:
Net Cash Used In Operating Activities
The following is a summary of the $17.1 million change in Net Cash Used In Operating Activities for the six months ended October 31, 2019 as compared with the six months ended October 31, 2018 (amounts in millions).
Our negative working capital was $138.5 million and $379.8 million as of October 31, 2019 and April 30, 2019, respectively, due to the seasonality of our businesses. The primary driver of the negative working capital is unearned contract liabilities related to subscriptions for which cash has been collected in advance. Cash received in advance for subscriptions is used by us for a number of purposes including funding: acquisitions, debt repayments, operations and dividend payments and purchasing treasury shares.
The $241.3 million change in negative working capital was primarily due to the decrease in accounts receivable and contract liabilities primarily representing deferred revenue on calendar year 2019 subscriptions primarily in the six months ended October 31, 2019, and the timing of certain working capital items including the payment of certain payables; partially offset by, an increase in current liabilities of $18.4 million due to the recognition of the short-term portion of operating lease liabilities due to the adoption of ASU 2016-02, "Leases (Topic 842).” See Note 2, “Recent Accounting Standards”, for further details.
The revenue from contract liabilities will be recognized when the products are shipped or made available online to the customers over the term of the subscription. Current liabilities as of October 31, 2019 and as of April 30, 2019 includes $248.7 million and $507.4 million, respectively, primarily related to deferred subscription revenue for which cash was collected in advance.
Net Cash Used In Investing Activities
Net Cash Used in Investing Activities for the six months ended October 31, 2019 was $134.4 million compared to $49.7 million in the prior year. The increase was due to $74.2 million of net cash used to acquire zyBooks, Knewton and other acquisitions during the six months ended October 31, 2019, and to a lesser extent, an increase of $10.0 million for technology, property and equipment, due to increased investments in products and platforms.
Net Cash Provided By Financing Activities
Net Cash Provided by Financing Activities was $249.3 million for the six months ended October 31, 2019 compared to $120.5 million for the six months ended October 31, 2018. This increase in cash provided by financing activities was due to an increase in net borrowings of $138.2 million for the six months ended October 31, 2019 compared to the six months ended October 31, 2018 which was primarily due to the acquisitions described above. This was partially offset by $8.7 million of lower cash proceeds from the exercise of stock options and other activities.
During the six months ended October 31, 2019, we repurchased 551,847 shares of Class A Common stock at an average price of $45.30 compared to 425,120 shares of Class A Common Stock at an average price of $58.79 in the prior year.
In the six months ended October 31, 2019, we increased our quarterly dividend to shareholders by 3% to $1.36 per share annualized versus $1.32 per share annualized in the prior year.