JOHN WILEY & SONS, INC. - Quarter Report: 2018 March (Form 10-Q)

---

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

OF THE SECURITIES EXCHANGE ACT 1934

 

For the quarterly period ended January 31, 2018

 

Commission File No. 1-11507

OR

OF THE SECURITIES ACT OF 1934

For the transition period from_____  to _____

JOHN WILEY & SONS, INC.

(Exact name of Registrant as specified in its charter)

Former name, former address, and former fiscal year, if changed since last report

The number of shares outstanding of each of the Registrant's classes of Common Stock as of February 28, 2018 were:

Class A, par value $1.00 – 48,259,778

Class B, par value $1.00 – 9,156,993

JOHN WILEY & SONS, INC.

INDEX

Cautionary Notice Regarding Forward-Looking Statements "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:

This report contains "forward-looking statements" within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 concerning our business, consolidated financial condition and results of operations. The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. Forward-looking statements are subject to risks and uncertainties, many of which are outside our control, which could cause actual results to differ materially from these statements. Therefore, you should not rely on any of these forward-looking statements. Forward-looking statements can be identified by such words as "anticipates," "believes," "plan," "assumes," "could," "should," "estimates," "expects," "intends," "potential," "seek," "predict," "may," "will" and similar references to future periods. All statements other than statements of historical facts included in this report regarding our strategies, prospects, financial condition, operations, costs, plans and objectives are forward-looking statements. Examples of forward-looking statements include, among others, statements we make regarding the Company's fiscal year 2018 outlook, operations, performance, and financial condition.  Reliance should not be placed on forward-looking statements, as actual results may differ materially from those in any forward-looking statements.  Any such forward-looking statements are based upon a number of assumptions and estimates that are inherently subject to uncertainties and contingencies, many of which are beyond the control of the Company, and are subject to change based on many important factors. Such factors include, but are not limited to (i) the level of investment in new technologies and products; (ii) subscriber renewal rates for the Company's journals; (iii) the financial stability and liquidity of journal subscription agents; (iv) the consolidation of book wholesalers and retail accounts; (v) the market position and financial stability of key retailers; (vi) the seasonal nature of the Company's educational business and the impact of the used-book market; (vii) worldwide economic and political conditions; (viii) the Company's ability to protect its copyrights and other intellectual property worldwide; (ix) the ability of the Company to successfully integrate acquired operations and realize expected opportunities and (x) other factors detailed from time to time in the Company's filings with the SEC. The Company undertakes no obligation to update or revise any such forward-looking statements to reflect subsequent events or circumstances.

Please refer to Part I, Item 1A, "Risk Factors," of our Annual Report on Form 10-K for important factors that we believe could cause actual results to differ materially from those in our forward-looking statements. Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

Non-GAAP Financial Measures:

We present financial information that conforms to Generally Accepted Accounting Principles in the United States of America ("U.S. GAAP"). We also present financial information that does not conform to U.S. GAAP, which we refer to as non-GAAP.

In this report, we may present the following non-GAAP performance measures:

·        Adjusted Earnings Per Share "(Adjusted EPS)"

·        Free Cash Flow less product development spending;

·        Adjusted Operating Income and margin;

·        Adjusted Contribution to Profit and margin; and

·        Results on a constant currency basis.

Management uses these non-GAAP performance measures as supplemental indicators of our operating performance and financial position as well for internal reporting and forecasting purposes, when publicly providing its outlook, to evaluate the Company's performance and to evaluate and calculate incentive compensation. The Company presents these non-GAAP performance measures in addition to U.S. GAAP financial results because it believes that these non-GAAP performance measures provide useful information to certain investors and financial analysts for operational trends and comparisons across accounting periods. The use of these non-GAAP performance measures provides a consistent basis to evaluate operating profitability and performance trends by excluding items that we do not consider to be controllable activities for this purpose.

For example:

·	Adjusted EPS, Adjusted Operating Profit, Adjusted Contribution to Profit provide a more comparable basis to analyze operating results and earnings and are measures commonly used by shareholders to measure our performance.

·	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.

·

Results on a constant currency basis removes distortion from the effects of foreign currency movements to provide better comparability of our business trends from period to period. We measure our performance before the impact of foreign currency (or at "constant currency"), which means that we apply the same foreign currency exchange rates for the current and equivalent prior period.

In addition, the Company has historically provided these or similar non-GAAP performance measures and understands that some investors and financial analysts find this information helpful in analyzing the Company's operating margins, and net income and comparing the Company's financial performance to that of its peer companies and competitors. Based on interactions with investors, we also believe that our non-GAAP performance measures are regarded as useful to our investors as supplemental to our U.S. GAAP financial results, and that there is no confusion regarding the adjustments or our operating performance to our investors due to the comprehensive nature of our disclosures. We have not provided our 2018 outlook for the most directly comparable U.S. GAAP financial measures, as they are not available without unreasonable effort due to the high variability, complexity, and low visibility with respect to certain items, including restructuring charges and credits, gains and losses on foreign currency, and other gains and losses. These items are uncertain, depend on various factors, and could be material to our results computed in accordance with U.S. GAAP.

Non-GAAP performance measures do not have standardized meanings prescribed by U.S. GAAP and therefore may not be comparable to the calculation of similar measures used by other companies, and should not be viewed as alternatives to measures of financial results under U.S. GAAP. The adjusted metrics have limitations as analytical tools and should not be considered in isolation from or as a substitute for U.S. GAAP information. It does not purport to represent any similarly titled U.S. GAAP information and is not an indicator of our performance under U.S. GAAP. Non-U.S. GAAP financial metrics that we present may not be comparable with similarly titled measures used by others. Investors are cautioned against placing undue reliance on these non-U.S. GAAP measures.

 

 

 

 

JOHN WILEY & SONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW – UNAUDITED
(In thousands)
		Nine Months
		Ended January 31,
		2018		2017
Operating Activities
Net income	$	138,126	$	66,968
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangibles		35,965		37,321
Amortization of product development assets		30,314		29,502
Depreciation of technology, property and equipment		48,471		50,520
Restructuring charges		26,531		15,045
Restructuring payments		(26,345)		(15,740)
Deferred income tax benefit on UK rate change		-		(2,575)
Unfavorable tax decision		-		47,531
One-time pension settlement		-		8,842
Stock-based compensation expense		6,510		10,187
Excess tax benefit from stock based compensation		-		(227)
Royalty advances		(89,366)		(79,804)
Earned royalty advances		81,976		77,554
Other non-cash charges		(1,376)		26,096
Change in deferred revenue		(56,265)		(7,733)
Net change in operating assets and liabilities		(4,419)		(34,335)
Net Cash Provided by Operating Activities		190,122		229,152
Investing Activities
Product development spending		(30,426)		(31,904)
Additions to technology, property and equipment		(78,958)		(77,722)
Acquisitions, net of cash acquired		(25,227)		(152,110)
Net Cash Used for Investing Activities		(134,611)		(261,736)
Financing Activities
Repayments of long-term debt		(238,951)		(340,207)
Borrowings of long-term debt		305,754		600,900
Change in book overdrafts		(8,884)		(8,866)
Cash dividends		(55,093)		(53,638)
Purchase of treasury stock		(29,257)		(35,362)
Proceeds from exercise of stock options and other		30,606		16,444
Excess tax benefit from stock based compensation		-		227
Net Cash Provided by Financing Activities		4,175		179,498
Effects of Foreign Currency Exchange Rate Changes on Cash and Cash Equivalents		10,015		(28,399)
Cash and Cash Equivalents
Increase for the Period		69,701		118,515
Balance at Beginning of Period		58,516		363,806
Balance at End of Period	$	128,217	$	482,321
Cash Paid During the Period for:
Interest	$	10,766	$	9,900
Income taxes, net of refunds	$	39,655	$	22,491
See the accompanying notes to the unaudited condensed consolidated financial statements.

 

JOHN WILEY & SONS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Basis of Presentation

Throughout this report, when we refer to "Wiley," the "Company," "we," "our," or "us," we are referring to John Wiley & Sons, Inc. and all of our subsidiaries, except where the context indicates otherwise.

Our unaudited Condensed Consolidated Financial Statements include all of the accounts of the Company and our subsidiaries. We have eliminated all significant intercompany transactions and balances in consolidation. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Condensed Consolidated Financial Condition, Results of Operations, Comprehensive Income and Cash Flows for the periods presented. Operating results for the interim period are not necessarily indicative of the results expected for the full year. All amounts are in thousands, except per share amounts, and approximate due to rounding.  These financial statements should be read in conjunction with the most recent audited financial statements included in the Company's Form 10-K for the fiscal year ended April 30, 2017 as filed with the U.S. Securities and Exchange Commission ("SEC") on June 29, 2017 ("2017 Form 10-K").

Our Condensed Consolidated Financial Statements were prepared in accordance with the interim reporting requirements of the SEC. As permitted under those rules, annual footnotes or other financial information that are normally required by Generally Accepted Accounting Principles in the United States of America ("U.S. GAAP") have been condensed or omitted. The preparation of the Company's Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year's presentation.

 

2.	Recent Accounting Standards

Recently Adopted Accounting Standards

Effective April 30, 2017, the Company adopted Accounting Standard Update ("ASU") 2015-17 "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes." ASU 2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The Company elected to adopt this standard prospectively and thus prior period balances were not adjusted.  As of April 30, 2017, there were $0.8 million of current deferred tax assets reported within Prepaid and Other Current Assets in the Condensed Consolidated Statements of Financial Position.

In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-09 "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting", which simplifies the accounting for share-based payment transactions, including income taxes, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance also allows an entity to make an accounting policy election to account for forfeitures when they occur or to estimate the number of awards that are expected to vest with a subsequent true up to actual forfeitures (current U.S. GAAP).  The Company adopted ASU 2016-09 on a prospective basis on May 1, 2017.  As a result of the adoption:

·

Excess income tax benefits and deficiencies from stock-based compensation are now recognized as a discrete item within the Provision for Income Taxes in the Condensed Consolidated Statements of Income, rather than Additional Paid-In-Capital in the Condensed Consolidated Statements of Financial Position, and amounted to $0.6 million for the nine months ended January 31, 2018.

 

 

·	Excess income tax benefits and deficiencies are no longer considered when applying the treasury stock method for computing diluted shares outstanding, which resulted in an increase in diluted shares outstanding of less than 0.1 million.

·

Excess income tax benefits and deficiencies are now classified as an Operating Activity in the Condensed Consolidated Statements of Cash Flows. There were no excess tax benefits recorded in operating activities for the nine months ended January 31, 2018, while $0.2 million were recorded in Financing Activities for the nine months ended January 31, 2017.

·	The Company has elected to continue estimating expected forfeitures in determining stock compensation expense each period.

Recently Issued Accounting Standards

In February 2018, the FASB issued ASU 2018-02 "Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income", which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.  The standard is effective for the Company on May 1, 2019 and interim periods within that fiscal year, with early adoption permitted. The Company is currently assessing the impact the new guidance will have on its consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", to simplify and improve the application and financial reporting of hedge accounting. The guidance eases the requirements for measuring and reporting hedge ineffectiveness, and clarifies that changes in the fair value of hedging instruments for cash flow, net investment, and fair value hedges should be reflected in the same income statement line item as the earnings effect of the hedged item. The guidance also permits entities to designate specific components in cash flow and interest rate hedges as the hedged risk, instead of using total cash flows. The standard is effective for the Company on May 1, 2019, with early adoption permitted. The Company is currently assessing the impact the new guidance will have on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09 "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting", which clarifies when changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new guidance, modification accounting is only required if the fair value, vesting conditions or classification (equity or liability) of the new award are different from the original award immediately before the original award is modified. The standard is effective for the Company on May 1, 2018, with early adoption permitted. The new guidance must be applied prospectively to awards modified on or after the adoption date. The future impact of ASU 2017-09 will be dependent on the nature of future stock award modifications.

In March 2017, the FASB issued ASU 2017-07 "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The guidance requires that the service cost component of net pension and postretirement benefit costs be reported in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period, while the other components of net benefit costs must be reported separately from the service cost component and below operating income. The guidance also allows only the service cost component to be eligible for capitalization when applicable. The standard is effective for the Company on May 1, 2018, with early adoption permitted. The new guidance must be applied retrospectively for the presentation of net benefit costs in the income statement and prospectively for the capitalization of the service cost component of net benefit costs. Although the Company does not expect the standard to have an impact on its consolidated net income, the Company's net pension and postretirement costs for the three and nine months ended January 31, 2018 include approximately $2.1 million and $5.9 million of net benefits that will be reclassified from operating income to a line item below operating income upon adoption. The Company's net pension and retirement costs for three and nine months ended January 31, 2017 include $0.8 million and $2.5 million of net benefits that will be reclassified from operating income to a line item below operating income upon adoption.

In January 2017, the FASB issued ASU 2017-04 "Intangibles – Goodwill and Other (Topic 350): "Simplifying the Test for Goodwill Impairment", which simplifies the measurement of a potential goodwill impairment charge by eliminating the requirement to calculate an implied fair value of the goodwill based on the fair value of a reporting unit's other assets and liabilities. The new guidance eliminates the implied fair value method and instead measures a potential impairment charge based on the excess of a reporting unit's carrying value compared to its fair value. The impairment charge cannot exceed the total amount of goodwill allocated to that reporting unit. The standard is effective for the Company on May 1, 2020, with early adoption permitted. Based on the Company's most recent annual goodwill impairment test completed in fiscal year 2018, the Company expects no initial impact on adoption.

In January 2017, the FASB issued ASU 2017-01 "Business Combinations (Topic 805): Clarifying the Definition of a Business", which clarifies the definition of a business in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or business.  The standard is effective for the Company on May 1, 2018, with early adoption permitted.  The future impact of ASU 2017-01 will be dependent upon the nature of future acquisitions or dispositions made by the Company.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). ASU 2016-18 requires that entities include restricted cash and restricted cash equivalents with cash and cash equivalents in the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. The standard is effective for the Company on May 1, 2018, including interim reporting periods within those fiscal years. Early adoption, including adoption in interim periods, is permitted for all entities. Retrospective transition method is to be applied to each period presented. The Company is currently assessing the impact the new guidance will have on its consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16 "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory", which simplifies the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current U.S. GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The new guidance states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this Standard eliminate the exception for an intra-entity transfer of an asset other than inventory. The standard is effective for the Company on May 1, 2018, with early adoption permitted. The Company expects no initial impact on adoption.

In August 2016, the FASB issued ASU 2016-15 "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments", which provides clarification on classifying a variety of activities within the Statement of Cash flows. The standard is effective for the Company on May 1, 2018, with early adoption permitted. The Company is currently assessing the impact the new guidance will have on its statement of cash flows.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments". ASU 2016-13 requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts.  Entities will now use forward-looking information to better form their credit loss estimates.  ASU 2016-13 also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity's portfolio. ASU 2016-13 is effective for the Company on May 1, 2020, including interim periods within those fiscal periods, with early adoption permitted. The Company is currently assessing the impact the new guidance will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 "Leases (Topic 842)".  ASU 2016-02 requires lessees to recognize most leases on the balance sheet which will result in an increase in reported assets and liabilities. The recognition of expenses within the income statement is consistent with the existing lease accounting standards. There are no significant changes in the new standard for lessors under operating leases. The standard is effective for the Company on May 1, 2019 with early adoption permitted. Adoption requires application of the new guidance for all periods presented. The Company is currently assessing the impact the new guidance will have on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities".  ASU 2016-01 requires equity investments except those under the equity method of accounting to be measured at fair value with the changes in fair value recognized in net income.  The amendment simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. In addition, it also requires enhanced disclosures about investments.  The amendments in ASU 2016-01 are effective for the Company on May 1, 2018, including interim periods within those fiscal years. Early application for certain provisions is allowed but early adoption of the amendments is not permitted.  An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company is currently assessing the impact the new guidance will have on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers" (Topic 606) ("ASU 2014-09") which will supersede most existing revenue recognition guidance. The standard is effective for the Company on May 1, 2018. The standard allows for either "full retrospective" adoption, meaning the standard is applied to all periods presented, or "modified retrospective" adoption, meaning the standard is applied only to the most current period presented in the financial statements. Subsequently, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations" ("ASU 2016-08"), ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing" ("ASU 2016-10"), ASU 2016-12, "Revenue from Contracts with Customers (Topic 606) – Narrow Scope Improvements and Practical Expedients" ("ASU 2016-12"), and ASU 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers" ("ASU 2016-20"), which provide clarification and additional guidance related to ASU 2014-09. The Company must adopt ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20 with ASU 2014-09.

The Company is utilizing a comprehensive approach to assess the impact of the standard on its contract portfolio by reviewing its current accounting policies and practices to identify potential differences that would result from applying the new standard to its revenue contracts. While this evaluation is ongoing, we currently do not anticipate the impact of the implementation of this standard to be material to our consolidated financial position or results of operations. We currently expect the most significant accounting changes will relate to the following:

·

Perpetual access licenses – Currently, we recognize revenue for perpetual licenses granted in connection with other deliverables over the life of the associated subscription for future content.  Under the new standard it will require us to recognize the revenue allocated to the perpetual access at a point in time, which is at the time when access is granted.

·

Customers' Unexercised Rights – Currently, we recognize revenue at the end of a pre-determined period for situations where we have received a nonrefundable payment for a customer to receive a good or service and the customer has not exercised such right, referred to as breakage revenue.  Under ASU 2014-09, we will now recognize such breakage amounts as revenue in proportion to the pattern of rights exercised by the customer.

 

We have elected to apply the modified retrospective approach to adopting the new revenue standards where we recognize the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings based on contracts open at the date of adoption. The Company is also in the process of reviewing its current systems, internal controls and processes, and evaluating and making any necessary changes to support the implementation of the new revenue standard.

 

3.	Stock-Based Compensation

The Company has stock-based compensation plans under which employees may be granted performance-based stock awards and other restricted stock awards.  Prior to fiscal year 2017, the Company also granted options to purchase shares of Company common stock at the fair market value at the time of grant. The Company recognizes the grant date fair value of stock-based compensation in net income on a straight-line basis, net of estimated forfeitures over the requisite service period. The measurement of performance for performance-based stock awards is based on actual financial results for targets established three years in advance. For the three months ended January 31, 2018 and 2017, the Company recognized stock-based compensation expense, on a pre-tax basis, of $4.0 million and $5.3 million, respectively.  For the nine months ended January 31, 2018 and 2017, the Company recognized stock-based compensation expense, on a pre-tax basis of $6.5 million and $10.2 million, respectively.

The following table summarizes restricted stock awards granted by the Company:

For the nine months ended January 31, 2018 and 2017, the Company did not grant stock option awards.

President and CEO New Hire Equity Awards

On October 17, 2017, the Company announced Brian A. Napack as the new President and Chief Executive Officer of the Company effective December 4, 2017 (the "Commencement Date").  Upon the Commencement Date, Mr. Napack also became a member of the Company's Board of Directors (the "Board").  In connection with his appointment, the Company and Mr. Napack entered into an employment offer letter (the "Employment Letter"). 

The Employment Letter provides that beginning with the fiscal year 2018-2020 performance cycle, eligibility to participate in annual grants under the Company's Executive Long-Term Incentive Program (ELTIP). Targeted long-term incentive for this cycle is equal to 300% of base salary, or $2.7 million. Sixty percent of the ELTIP value will be delivered in the form of target performance share units and forty percent in restricted share units. The grant date fair value for restricted share units was $59.15 per share and included 20,611 restricted share units which vest 25% each year starting on April 30, 2018 to April 30, 2021.  In addition, there was a performance share unit award with a target of 30,916 units and a grant date fair value of $59.15.  The performance metrics are based on cumulative EBITDA for fiscal year 2018-2020 and cumulative normalized free cash flow for fiscal year 2018-2020.

In addition, the Employment Letter provides for a sign-on grant of restricted share units, with a grant value of $4.0 million, converted to shares using the Company's Class A closing stock price as of the Commencement Date, and vesting in two equal installments on the first and second anniversaries of the employment date. The grant date fair value for this award was $59.15 per share and included 67,625 units at the date of grant.  Grants are subject to forfeiture in the case of voluntary termination prior to vesting and accelerated vesting in the case of earlier termination of employment without Cause, due to death or Disability or Constructive Discharge, or upon a Change in Control (as such terms are defined in the Employment Letter).

The awards are described in further detail in Mr. Napack's Employment Letter filed with the SEC as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 17, 2017.

Changes in Accumulated Other Comprehensive Loss by component, net of tax, for the three and nine months ended January 31, 2018 and 2017 were as follows:

During the three months ended January 31, 2018 and 2017, pre-tax actuarial losses included in Unamortized Retirement Costs of approximately $1.5 million and $1.2 million, respectively, were amortized from Accumulated Other Comprehensive Loss and recognized as pension expense in Operating and Administrative Expenses in the Condensed Consolidated Statements of Income. During the nine months ended January 31, 2018 and 2017, pre-tax actuarial losses of approximately $4.4 million and $9.9 million, respectively, were amortized. 5.     Reconciliation of Weighted Average Shares Outstanding and Share Repurchases

A reconciliation of the shares used in the computation of earnings per share follows:

Since their inclusion in the calculation of diluted earnings per share would have been anti-dilutive, options to purchase 0.3 million shares of Class A Common Stock have been excluded for the nine months ended January 31, 2018 and 2017, respectively. There were no options excluded for the three months ended January 31, 2018 and 0.3 million options were excluded for the three months ended January 31, 2017.

In addition, for the nine months ended January 31, 2018 and 2017, less than 0.1 million unvested restricted shares have been excluded as their inclusion would have been antidilutive, respectively. There were no unvested restricted shares excluded for the three months ended January 31, 2018 and 0.1 million unvested restricted shares were excluded for the three months ended January 31, 2017.

During the three months ended January 31, 2018, the Company did not repurchase any shares of common stock. During the three months ended January 31, 2017, the Company repurchased 0.3 million shares of common stock at an average price of $55.14. During the nine months ended January 31, 2018 and 2017, the Company repurchased 0.6 million and 0.7 million shares of common stock at an average price of $53.12 and $52.74, respectively.

 

On September 30, 2016, the Company acquired the net assets of Atypon Systems, Inc. ("Atypon"), a Silicon Valley-based publishing-software company, for approximately $121 million in cash, net of cash acquired. The Company finalized its purchase accounting for Atypon on July 31, 2017. Atypon's revenue and operating loss included in the Company's results for the three months ended January 31, 2018 were $8.3 million and $0.8 million, respectively. Atypon's revenue and operating loss included in the Company's results for the nine months ended January 31, 2018 were $24.6 million and $1.8 million, respectively. Atypon's revenue and operating loss included in the Company's results for the three months ended January 31, 2017 were $8.0 million and $1.5 million, respectively. Atypon's revenue and operating loss included in the Company's results for the nine months ended January 31, 2017 were $10.4 million and $2.0 million, respectively. 7.     Restructuring Charges

Beginning in fiscal year 2013, the Company initiated a program (the "Restructuring and Reinvestment Program") to restructure and realign its cost base with current and anticipated future market conditions. The Company is targeting most of the cost savings achieved to improve margins and earnings, with the remainder reinvested in growth opportunities.

The following tables summarize the pre-tax restructuring charges (credits) related to this program:

Other Activities reflects leased facility consolidations, contract termination costs and the curtailment of certain defined benefit pension plans. The credits in Other Activities for the nine months ended January 31, 2018 mainly reflect changes in estimates for previously accrued restructuring charges related to facility lease reserves.

The following table summarizes the activity for the Restructuring and Reinvestment Program liability for the nine months ended January 31, 2018:

The restructuring liability as of January 31, 2018 for accrued Severance costs is reflected in Accrued Employment Costs in the Condensed Consolidated Statements of Financial Position. The liability as of January 31, 2018, for Process Reengineering Consulting costs is reflected in Other Accrued Liabilities. As of January 31, 2018, approximately $1.0 million and $2.2 million of the Other Activities are reflected in Other Accrued Liabilities and Other Long-Term Liabilities, respectively.

 

The Company reports its segment information in accordance with the provisions of FASB Accounting Standards Codification ("ASC") Topic 280, "Segment Reporting,".

Segment information is as follows:

 

9.	Inventories

Inventories were as follows:

 

10.	Goodwill and Intangible Assets

Goodwill

The following table summarizes the activity in goodwill by segment as of January 31, 2018:

 

We review goodwill for impairment on a reporting unit basis annually during the third quarter of each year, using a measurement date of January 31, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. While we are permitted to conduct a qualitative assessment to determine whether it is necessary to perform a two-step quantitative goodwill impairment test, for our annual goodwill impairment test in the third quarter of 2018, 2017 and 2016, we performed a quantitative test for all of our reporting units.

The goodwill impairment test involves a two-step process. In step one, we compare the fair value of each of our reporting units to its carrying value, including the goodwill allocated to the reporting unit. If the fair value of the reporting unit exceeds its carrying value, there is no indication of impairment and no further testing is required. If the fair value of the reporting unit is less than the carrying value, we must perform step two of the impairment test to measure the amount of impairment loss, if any. In step two, the reporting unit's fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment loss.

During the third quarter of 2018, we completed step one of our annual goodwill impairment test for our reporting units. We concluded that the fair values of these reporting units were above their carrying values and, therefore, there was no indication of impairment.

We estimated the fair value of these reporting units using a weighting of fair values derived from an income and a market approach. Under the income approach, we determined the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management's estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on a weighted average cost of capital adjusted for the relevant risk associated with the characteristics of the business and the projected cash flows. The market approach estimates fair value based on market multiples of current and forward 12-month operating performance results, as applicable derived from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit.

The excess of estimated fair values over carrying value, including goodwill for each of our reporting units as of the 2018 annual impairment test were the following:  

 

As noted above, the fair value determined under step one of the goodwill impairment test completed in the third quarter of 2018 exceeded the carrying value for each reporting unit.  Therefore, there was no impairment of goodwill. However, if the fair value decreases in future periods, the Company may fail step one of the goodwill impairment test and be required to perform step two. In performing step two, the fair value would have to be allocated to all of the assets and liabilities of the reporting unit. Therefore, any potential goodwill impairment charge would be dependent upon the estimated fair value of the reporting unit at that time and the outcome of step two of the impairment test. The fair values of the assets and liabilities of the reporting unit, including the intangible assets could vary depending on various factors.

The future occurrence of a potential indicator of impairment, such as a decrease in expected net earnings, adverse equity market conditions, a decline in current market multiples, a decline in our common stock price, a significant adverse change in legal factors or business climates, an adverse action or assessment by a regulator, unanticipated competition, strategic decisions made in response to economic or competitive conditions, or a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of, could require an interim assessment for some or all of the reporting units before the next required annual assessment. In the event of significant adverse changes of the nature described above, we might have to recognize a non-cash impairment of goodwill, which could have a material adverse effect on our consolidated financial condition.

We also review our indefinite lived intangible assets for impairment annually, which consists of brands and trademarks and certain acquired publishing rights. During the third quarter of 2018, we completed our annual impairment test related to the indefinite lived intangible assets.  We concluded that the fair values of these indefinite lived intangible assets were above their carrying values and, therefore, there was no indication of impairment. 

Change in Annual Impairment Assessment Date

In connection with the change in the date of the annual goodwill impairment test, the Company also completed step one of our goodwill impairment test as of February 1, 2018. We concluded that the fair values of the reporting units were above their carrying values and, therefore, there was no indication of impairment as of February 1, 2018. In addition, we also completed our annual impairment test related to the indefinite lived intangible assets as of February 1, 2018.  We concluded that the fair values of the indefinite lived intangible assets were above their carrying values and, therefore, there was no indication of impairment as of February 1, 2018.

Intangible Assets

Identifiable intangible assets consisted of the following:

In conjunction with a business review performed in the Publishing segment associated with the restructuring activities discussed above, in the first quarter of fiscal year 2018, the Company identified an indefinite lived brand with forecasted cash flows that did not support its carrying value. As a result, an impairment charge of $3.6 million was recorded in the first quarter of fiscal year 2018 to reduce the carrying value of the brand to its fair value of $1.2 million, which will now be amortized over an estimated useful life of 5 years. This impairment charge is included in Operating and Administrative Expenses in the Condensed Consolidated Statements of Income.

 

11.	Income Taxes

The following table summarizes the effective tax rate for the three and nine months ended January 31, 2018 and 2017:

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the "Tax Act").  In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which allows us to record provisional amounts related to the effect of the Tax Act during a measurement period not to extend beyond one year of the enactment date.  Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting of the transition tax, deferred tax re-measurements and other items to be provisional due to the forthcoming guidance and our ongoing analysis of final data and tax positions.  We expect to complete our analysis within the measurement period in accordance with SAB 118.

The effective tax rates for the three and nine month periods were lower in fiscal 2018 than fiscal 2017 due to the estimated net tax benefit from non-recurring items in the Tax Act.  As described in more detail below, estimated non-recurring items in the Tax Act reduced our income tax expense by $25 million ($0.43/share) or a reduction in our effective tax rate of 42.9 percentage points for the three months and 17.4 percentage points for the nine months ended January 31, 2018.  Excluding the effect of those non-recurring items, the rate was 24.8% and 21.4% for the three month and nine month periods ended January 31, 2018, respectively.

The rate excluding the benefit from the non-recurring items in the Tax Act was lower than the U.S. statutory rate for the year ended April 30, 2018 primarily due to lower foreign rates applicable to non-U.S. earnings.  The nine month period also benefitted from the lower federal statutory blended tax rate of 30.4% in the Tax Act retroactive to the beginning of the fiscal year.

The effective tax rate for the three and nine months ended January 31, 2017 was 3.2% and 49.5%, respectively. The rate for the nine months ended January 31, 2017 was increased by an unfavorable German court decision in September 2016 and decreased by a non-cash deferred tax benefit related to a decrease in the U.K. statutory tax rate from 18% to 17% beginning on April 1, 2020.  Excluding the impact of the unfavorable German court decision and the benefit from a future U.K. statutory tax rate reduction, the rate for the nine month period was 18.1%.  The rates for the three month and nine month periods excluding the German court decision and U.K. tax rate change were lower than the U.S. statutory rate of 35% primarily due to lower foreign tax rates applicable to non-U.S. earnings.  The rates were also lower than the U.S. statutory rate as well as the fiscal 2018 rates excluding the effects of the non-recurring benefits from the Tax Act, due to non-recurring foreign tax benefits in the three month period ended January 31, 2018.

The Tax Act

On December 22, 2017, the U.S. government enacted comprehensive tax legislation.  The Tax Act significantly revises the future ongoing U.S. corporate income tax system by, among other changes, lowering the U.S. federal corporate income tax rate to 21% with a potentially lower rate for certain foreign derived income, accelerating deductions for certain business assets, changing the U.S. system from a worldwide tax system to a modified territorial tax system, requiring companies to pay a one-time transition tax on unrepatriated post-1986 cumulative non-U.S. earnings of foreign subsidiaries ("E&P"), eliminating certain deductions such as the domestic production deduction, establishing limitations on the deductibility of certain expenses including interest and executive compensation, and creating new taxes on certain foreign earnings.

The key impacts for the period were the re-measurement of U.S. deferred tax balances to the new U.S. corporate tax rate and the accrual for the one-time transition tax liability.  While we have not yet completed our assessment of the effects of the Tax Act, we are able to determine reasonable estimates for the impacts of these key items and reported provisional amounts for these items.  In accordance with SAB 118, we are providing additional disclosures related to these provisional amounts.

Deferred tax balances – We remeasured our U.S. deferred tax assets and liabilities based on the federal rate at which they are expected to reverse in the future, generally 21% for reversals anticipated to occur after April 30, 2018.   We are still analyzing certain aspects of the Tax Act and refining our calculations, including our estimates of expected reversals, which could affect the measurement of these balances and give rise to new deferred tax amounts.  The provisional amount recorded related to the re-measurement of our net deferred tax liability was a benefit of $40 million.

Foreign tax effects – In connection with the transition from a global to a modified territorial tax system, the Tax Act establishes a mandatory deemed repatriation tax. The tax is computed using our post-1986 E&P that was previously deferred from U.S. income taxes.  The tax is based on the amount of foreign earnings held in cash equivalents and certain net assets, which are taxed at 15.5%, and those held in other assets, which are taxed at 8%. We recorded a provisional amount of $14.5 million.   This resulted in a corresponding decrease in deferred tax assets due to the utilization of foreign tax credit carryforwards.  The determination of the transition tax requires further guidance as to its applicability to non-calendar year end taxpayers and analysis regarding the amount and composition of our historical foreign earnings.  In addition, we accrued a $0.5 million provisional state tax liability, pending further guidance and legislative action from various states regarding conformity with the Tax Act.

The Tax Act reduces the Federal statutory tax rate from 35% to 21% effective January 1, 2018.  As a result, our U.S. federal statutory tax rate for our fiscal year ended April 30, 2018 is a blended rate of 30.4%.  The reduced rate did not have a significant impact on our effective tax rate for the three month or nine month periods ended January 31, 2018.

We have not determined a reasonable estimate of the tax liability, if any, under the Tax Act for our remaining outside basis difference or evaluated how the Tax Act will affect our existing accounting position to indefinitely reinvest unremitted earnings.  We will continue to evaluate our position for this matter as we finalize our Tax Act calculations.

The Tax Act creates new taxes, effective for us on May 1, 2018, including a provision designed to tax global low taxed income ("GILTI") and a provision establishing new minimum taxes, such as the base erosion anti-abuse tax ("BEAT").  We continue to evaluate the Tax Act, but due to the complexity and incomplete guidance of various provisions, we have not completed our accounting for the income tax effects of certain elements of the Tax Act, including the new GILTI and BEAT taxes.  We have not yet determined whether such taxes should be recorded as a current-period expense when incurred or factored into the measurement of our deferred taxes.  As a result, we have not included an estimate of any tax expense or benefit related to these items for the periods ended January 31, 2018.

The components of net pension (income) expense for the Company's global defined benefit plans were as follows:

Employer defined benefit pension plan contributions were $2.8 million and $3.2 million for the three months ended January 31, 2018 and 2017, respectively, and $8.4 million and $13.8 million for the nine months ended January 31, 2018 and 2017, respectively.

Contributions for employer defined contribution plans were approximately $3.4 million and $3.1 million for the three months ended January 31, 2018 and 2017, respectively, and $11.3 million and $11.6 million for the nine months ended January 31, 2018 and 2017, respectively.

13.	Derivative Instruments and Hedging Activities

The Company, from time-to-time, enters into forward exchange and interest rate swap contracts as a hedge against foreign currency asset and liability commitments, changes in interest rates and anticipated transaction exposures, including intercompany purchases. All derivatives are recognized as assets or liabilities and measured at fair value on our Condensed Consolidated Balance Sheets. Derivatives that are not determined to be effective hedges are adjusted to fair value with a corresponding adjustment to earnings. The Company does not use financial instruments for trading or speculative purposes.

Interest Rate Contracts

The Company had $428.2 million of variable rate loans outstanding at January 31, 2018, which approximated fair value. The Company had $865.7 million of variable rate loans outstanding at January 31, 2017, which approximated fair value. As of January 31, 2018 and 2017 the interest rate swap agreements maintained by the Company were designated as cash flow hedges as defined under ASC 815 "Derivatives and Hedging". As a result, there was no impact on the Company's Condensed Consolidated Statements of Income for changes in the fair value of the interest rate swaps as they were fully offset by changes in the interest expense on the underlying variable rate debt instruments.

On April 4, 2016, the Company entered into a forward starting interest rate swap agreement which fixed a portion of the variable interest due on a variable rate debt renewal on May 16, 2016. Under the terms of the agreement, the Company pays a fixed rate of 0.92% and receives a variable rate of interest based on one-month LIBOR from the counterparty which is reset every month for a three-year period ending May 15, 2019. As of January 31, 2018 and January 31, 2017, the notional amount of the interest rate swap was $350 million.

The Company records the fair value of its interest rate swaps on a recurring basis using Level 2 inputs of quoted prices for similar assets or liabilities in active markets. The fair value of the interest rate swaps as of January 31, 2018 and April 31, 2017 was a deferred gain of $5.1 million and $3.9 million, respectively. Based on the maturity dates of the contracts, the entire deferred gains as of January 31, 2018 and April 30, 2017 were recorded within Other Long-Term Assets. The pre-tax gains that were reclassified from Accumulated Other Comprehensive Loss into Interest Expense for the three months and nine months ended January 31, 2018 were $0.4 million and $0.8 million, respectively. The pre-tax losses that were reclassified from Accumulated Other Comprehensive Loss into Interest Expense for the fiscal year ended April 30, 2017 were $1.1 million.

Foreign Currency Contracts

The Company may enter into forward exchange contracts to manage the Company's exposure on certain foreign currency denominated assets and liabilities. The forward exchange contracts are marked to market through Foreign Exchange Transaction (Losses) Gains in the Condensed Consolidated Statements of Income, and carried at their fair value in the Condensed Consolidated Statements of Financial Position. Foreign currency denominated assets and liabilities are remeasured at spot rates in effect on the balance sheet date, with the effects of changes in spot rates reported in Foreign Exchange Transaction (Losses) Gains.

As of January 31, 2018 and April 30, 2017, the Company did not maintain any open forward exchange contracts. As of January 31, 2017, the fair value of the open forward exchange contracts was a gain of approximately $54.5 million and recorded within Prepaid and Other Current Assets in the Condensed Consolidated Statement of Financial Position. The fair value was measured on a recurring basis using Level 2 inputs. For the three and nine months ended January 31, 2017, the loss recognized on the forward contracts were $11.5 million and $53.2 million, respectively.

14.	Commitments and Contingencies

The Company is involved in routine litigation in the ordinary course of its business. A provision for litigation is accrued when information available to the Company indicates that it is probable a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment may be required to determine both the probability and estimates of loss. When the amount of the loss can only be estimated within a range, the most likely outcome within that range is accrued. If no amount within the range is a better estimate than any other amount, the minimum amount within the range is accrued. When uncertainties exist related to the probable outcome of litigation and/or the amount or range of loss, the Company does not record a liability, but discloses facts related to the nature of the contingency and possible losses if management considers the information to be material. Reserves for legal defense costs are recognized when incurred. The accruals for loss contingencies and legal costs are reviewed regularly and may be adjusted to reflect updated information on the status of litigation and advice of legal counsel. In the opinion of management, the ultimate resolution of all pending litigation as of January 31, 2018 will not have a material effect upon the Condensed Consolidated Financial Condition or Results of Operations of the Company.

Over the past few years, the Company has from time to time faced claims from photographers or agencies that the Company has used photographs without licenses or beyond licensed permissions. The Company has insurance coverage for a significant portion of such claims. The Company does not believe that its exposure to such claims either individually or in the aggregate is material.

---

---

---

---

---

---

---

Operating and Administrative Expenses:

Operating and administrative expenses for the nine months of fiscal year 2018 of $731.9 million approximated the prior year on a reported and on a constant currency basis reflecting :

·	a one-time pension settlement charge in the prior year related to changes in the Company's retiree and long-term disability plans of $8.8 million;

·	lower technology costs in the current year of $14.9 million related to the Company's ERP implementation and other reductions in depreciation, outsourcing and system development consulting costs; and

·	savings from operational excellence initiatives and restructuring activities.

These factors were partially offset by:

·	one-time benefits in the prior year related to changes in the Company's retiree and long-term disability plans of $4.2 million and a life insurance recovery of $1.7 million;

·	incremental costs associated with the Atypon acquisition of $8.7 million;

·	executive transition and strategy consultation costs in the current year of $4.9 million;

·	higher incentive compensation expenses in the current year of $1.9 million, which reflected the expected achievement of certain full year 2018 financial and sales goals; and

·	an impairment charge in the current year related to one of the Company's Publishing brands as a result of a business review performed on the Publishing segment's products and services of $3.6 million.

Restructuring Charges:

---

---

 

We expect Journal Subscriptions' revenue to be flat for full year fiscal 2018 as compared to the prior year.

---

·	12 new society journals were signed in the nine months with combined annual revenue of $10.3 million.

·	83 renewals/extensions were signed with $53.2 million in combined annual revenue.

·	6 journal contacts were not renewed with annual revenue of $1.2 million.

---

Gross Profit:

Gross profit decreased 3% to $320.0 million, or 4% on a constant currency basis as compared with prior year. The gross profit margin approximated that of the prior year as cost of sales decreased in line with revenues.

---

---

---

---

---

---

---

---