John Wiley & Sons, Inc.: Form 10-Q for the period ended Jul 31, 2023

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 2023 Form 10-K and our Consolidated Financial Statements and related notes set forth in Item 8 of Part II of our 2023 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.

OVERVIEW

Wiley is a knowledge company and a global leader in research, publishing, and knowledge solutions. Dedicated to the creation and application of knowledge, Wiley serves the world’s researchers, learners, innovators, and leaders, helping them achieve their goals and solve the world's most important challenges. For more than two centuries, Wiley has been delivering on its timeless mission to unlock human potential. Wiley is a predominantly digital company with over 80% of Wiley's revenue for fiscal year 2023 generated by digital products excluding the Held for Sale or Sold segment revenue. For fiscal year 2023, 50% of revenue excluding the Held for Sale or Sold segment revenue is recurring which includes revenue that is contractually obligated or set to recur with a high degree of certainty.

On June 1, 2023, Wiley’s Board of Directors approved a plan to divest certain businesses that we determined are non-core businesses. Those businesses are University Services, Wiley Edge, and CrossKnowledge. These dispositions are expected to be completed during fiscal year 2024. As a result, we reorganized our segments and our new structure consists of three reportable segments which includes Research (no change), Learning, and Held for Sale or Sold, as well as a Corporate expense category (no change). The operations of University Services, Wiley Edge, and CrossKnowledge are reported in the Held for Sale or Sold segment. Prior period segment results have been revised to the new segment presentation. There were no changes to our consolidated financial results.

• Research is unchanged and includes the reporting lines of Research Publishing and Research Solutions;
• Learning includes the Academic and Professional reporting lines and consists of publishing and related knowledge solutions;
• Held for Sale or Sold includes businesses held-for-sale including University Services, Wiley Edge, and CrossKnowledge, as well as those sold in fiscal year 2024, which includes Tuition Manager, and in fiscal year 2023 Test Prep and Advancement Courses.

Through the Research segment, we provide peer-reviewed scientific, technical, and medical (STM) publishing, content platforms, and related services to academic, corporate, and government customers, academic societies, and individual researchers. The Learning segment provides scientific, professional, and education print and digital books, digital courseware to libraries, corporations, students, professionals, and researchers, as well as assessment services to businesses and professionals.

Wiley’s business strategies are tightly aligned with solid growth trends, including ever-increasing global R&D spend leading to consistent growth in scientific research output, the transition to open research, and the increasing application of new knowledge into solutions to solve real world problems. These strategies include driving publishing output to meet the global demand for peer-reviewed research and expanding platform and service offerings for corporations and societies. Learning strategies include scaling high-value digital content, courseware, and assessments.

RESULTS OF OPERATIONS – THREE MONTHS ENDED JULY 31, 2023

FIRST QUARTER SUMMARY

• US GAAP Results: Consolidated Revenue of $451.0 million (-7%, compared with the prior year), Operating Loss of $16.4 million (4%, compared with the prior year), and Diluted Loss per Share of $-1.67 (-$1.35, compared with the prior year). US GAAP results impacted by charges totaling $102.6 million, including non-cash goodwill impairment and impairment of held-for-sale assets and loss on the sale of a business
• Adjusted Results at Constant Currency (excluding Held for Sale or Sold segment results): Adjusted Revenue of $367.1 million (-8%, compared with the prior year), Adjusted EBITDA of $59.7 million (-10%, compared with the prior year), and Adjusted EPS of $0.27 (-37%, compared with the prior year).

FISCAL YEAR 2024 TRANSITION

• Wiley recently realigned its organization to focus on its core strengths in research, academic, and professional publishing, improve profit and performance, and drive greater operating and capital efficiency.
• In June of 2023, Wiley announced that it was divesting University Services, Wiley Edge, and CrossKnowledge. These businesses are currently reported in the Held for Sale or Sold segment.
• Wiley is rightsizing its cost structure to reflect smaller revenue base and a more narrowly focused company.
• The benefits of these portfolio and restructuring actions are expected to be realized in fiscal year 2025 and fiscal year 2026.

CONSOLIDATED RESULTS OF OPERATIONS

Revenue:

Revenue for the three months ended July 31, 2023, decreased $36.6 million, or 7%, as compared with the prior year. On a constant currency basis, revenue decreased 8% as compared with prior year. Excluding the revenues from the Held for Sale or Sold segment, Adjusted Revenue decreased 8% on a constant currency basis.

Adjusted Revenue

Below is a reconciliation of our consolidated US GAAP Revenue to Non-GAAP Adjusted Revenue:

(1) Our Adjusted Revenue, net excludes the impact of our Held for Sale or Sold segment revenue.

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 July 31, 2023, decreased $16.9 million, or 10%, as compared with the prior year. On a constant currency basis, cost of sales decreased 10% compared with the prior year. This was primarily due to lower employee costs related to the University Services and Wiley Edge business and marketing costs for the University Services business, both in the Held for Sale or Sold segment. Excluding the cost of sales from the Held for Sale or Sold segment, cost of sales decreased 5% on a constant currency basis.

Operating and Administrative Expenses:

Operating and administrative expenses for the three months ended July 31, 2023, decreased $27.0 million, or 10%, as compared with the prior year. On a constant currency basis, operating and administrative expenses decreased 10% as compared with the prior year primarily reflecting lower employee costs associated with recent restructuring actions. Excluding operating and administrative expenses from the Held for Sale or Sold segment, operating and administrative expenses decreased 8% on a constant currency basis.

Impairment of Goodwill:

We recorded an impairment of goodwill in the three months ended July 31, 2023 of $26.7 million. This charge is reflected in the Impairment of goodwill in the Condensed Consolidated Statements of Net Loss.

In accordance with applicable accounting standards, we were required to test goodwill for impairment immediately before and after our segment realignment. Prior to the realignment, we concluded that the fair value of the University Services reporting unit within the former Academic segment was below its carrying value, which resulted in a pretax non-cash goodwill impairment of $11.4 million. University Services was adversely impacted by market conditions and headwinds for online degree programs, which lead to a decline in projected enrollments from existing partners, pricing pressures and revenue share concessions, and a decline in new partner additions over both the short-term and long-term which adversely impacted forecasted revenue growth and operating cash flows.

After the realignment, we concluded that the fair value of the CrossKnowledge reporting unit within the Held for Sale or Sold segment was below its carrying value, which resulted in a pretax non-cash goodwill impairment of $15.3 million. CrossKnowledge was adversely impacted by a decline in the demand for its offerings, which have resulted in lower sales and a decline in average contract value, that adversely impacted forecasted revenue growth and operating cash flows.

See Note 12, "Goodwill and Intangible Assets" for details on these charges.

Restructuring and Related Charges:

In May 2022, the Company initiated a global program (Global Restructuring Program) to restructure and align our cost base with current and anticipated future market conditions, which was previously referred to as the Fiscal Year 2023 Restructuring Program. This program included severance related charges for the elimination of certain positions, the exit of certain leased office space, and the reduction of our occupancy at other facilities. Under this program, we reduced our real estate square footage occupancy by approximately 22%.

In the three months ended July 31, 2023, we expanded the scope of the program to include those actions that will focus Wiley on its leading global position in the development and application of new knowledge and drive greater profitability, growth, and cash flow. We will focus on our strongest and most profitable businesses and large market opportunities in Research and Learning, as well as streamline our organization and rightsize our cost structure to reflect these portfolio actions. As part of the Global Restructuring Program, we are further reducing our real estate square footage occupancy by approximately 6% due to actions taken in the three months ended July 31, 2023.

Excluding actions related to the Held for Sale or Sold segment, we anticipate $10 million of in-year savings from actions taken in the first quarter. These actions are anticipated to yield annualized cost savings of approximately $12 million, excluding the actions related to the Held for Sale or Sold segment.

For the three months ended July 31, 2023 and 2022, we recorded pretax restructuring charges of $11.8 million and $21.7 million, respectively, related to this program.

We anticipate ongoing severance related charges and facility-related costs associated with certain properties to result in additional restructuring charges in future periods.

These charges are reflected in Restructuring and related charges on our Unaudited Condensed Consolidated Statements of Net Loss. See Note 9, “Restructuring and Related Charges” for more details on the Global Restructuring Program charges.

For the impact of our restructuring program on diluted loss per share, see the section below, “Diluted Earnings Loss per Share (EPS).”

Amortization of Intangible Assets:

Amortization of intangible assets was $15.6 million for the three months ended July 31, 2023, a decrease of $9.7 million, or 38%, as compared with the prior year. On a constant currency basis, amortization of intangible assets decreased 39% as compared with the prior year primarily due to the prior year period including $4.6 million due to the acceleration of expense related to the discontinued use of the mthree trademark and, to a lesser extent, the cessation of amortization for held-for-sale assets and, the completion of amortization of certain acquired intangible assets. See Note 3, “Acquisitions and Divestitures” for more details on these held-for-sale assets.

Operating Loss, Adjusted Operating Income (OI) and Adjusted EBITDA:

Our operating loss was $16.4 million for the three months ended July 31, 2023, compared with the prior year loss of $17.0 million. The decrease was primarily due to a decrease in operating and administrative expenses, lower costs of sales and, to a lesser extent, a decrease in restructuring charges and the amortization of intangible assets as described above, mostly offset by a decrease in revenue and the impairment of goodwill in the three months ended July 31, 2023.

Adjusted OI and Adjusted EBITDA on a constant currency basis and excluding restructuring charges, impairment of goodwill, the accelerated amortization of an intangible asset, and the adjusted contribution to profit for the Held for Sale or Sold segment decreased 21% and 10%, respectively, as compared with the prior year. The decrease in Adjusted OI and Adjusted EBITDA was primarily due to lower revenues, partially offset by a decrease in operating and administrative expenses.

Adjusted Operating Income (OI)

Below is a reconciliation of our consolidated US GAAP Operating Loss to Non-GAAP Adjusted OI:

(1) We determined that a revision of the useful life of the mthree trademark was warranted and the intangible asset was fully amortized over its remaining useful life resulting in accelerated amortization expense of $4.6 million in the three months ended July 31, 2022.

(2) Our Adjusted OI excludes the impact of our Held for Sale or Sold segment adjusted contribution to profit.

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Adjusted EBITDA

Below is a reconciliation of our consolidated US GAAP Net Loss to Non-GAAP EBITDA and Adjusted EBITDA:

(1) Our Non-GAAP Adjusted EBITDA excludes the Held for Sale or Sold segment Non-GAAP Adjusted EBITDA.

Interest Expense:

Interest expense for the three months ended July 31, 2023, was $11.3 million compared with the prior year of $6.3 million. This increase was primarily due to a higher weighted average effective interest rate.

Foreign Exchange Transaction Losses:

Foreign exchange transaction losses of $1.6 million for the three months ended July 31, 2023 were primarily due to losses on our third-party accounts receivable and payable balances due to the impact of the change in average foreign exchange rates as compared to the US dollar. In fiscal year 2023 due to the closure of our operations in Russia, the Russia entity was deemed substantially liquidated. In the three months ended July 31, 2023, we wrote off an additional $0.9 million cumulative translation adjustment in earnings.

Foreign exchange transaction losses of $0.6 million for the three months ended July 31, 2022 were primarily due to losses on our intercompany accounts receivable and payable balances and, to a lesser extent, losses on our third-party receivable and payable balances due to the impact of the change in average foreign exchange rates as compared to the US dollar.

Impairment Charge Related to Assets Held-For-Sale and Loss on Sale of a Business:

As part of our ongoing initiatives to simplify our portfolio and focus our attention on core growth areas, we are divesting non-core businesses including University Services, Wiley Edge, and CrossKnowledge. These dispositions are expected to be completed during fiscal year 2024. In addition, these three businesses met the held-for-sale criteria. We measured each disposal group at the lower of carrying value or fair value less cost to sell. In the three months ended July 31, 2023, we recorded a held-for-sale pretax impairment of $73.9 million which includes $40.6 million for University Services and $33.3 million for CrossKnowledge.

In the three months ended July 31, 2023, the loss on sale of a business is due to the sale of our Tuition Manager business previously in our Held for Sale or Sold segment, which resulted in a pretax loss of approximately $2.0 million.

Benefit for Income Taxes:

Below is a reconciliation of our US GAAP Loss Before Taxes to Non-GAAP Adjusted Income Before Taxes:

(1) Our Adjusted Income Before Taxes excludes the Adjusted (Income) Loss of our Held for Sale or Sold segment.

Below is a reconciliation of our US GAAP Income Tax Benefit to Non-GAAP Adjusted Income Tax Provision, including our US GAAP Effective Tax Rate and our Non-GAAP Adjusted Effective Tax Rate:

(1) For the three months ended July 31, 2023 and 2022, substantially all of the tax impact was from deferred taxes.

(2) Our Adjusted Income Tax Provision excludes the Adjusted Tax (Provision) Benefit of our Held for Sale or Sold segment.

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Our effective tax rate fluctuates based on, among other factors, where income is earned and the level of income relative to tax attributes. The US GAAP effective tax rate for the three months ended July 31, 2023, was 13.5% compared to 23.7% for the three months ended July 31, 2022. The US GAAP effective tax rate for the three months ended July 31, 2023, was lower than the US GAAP effective tax rate for the three months ended July 31, 2022 primarily due to the tax benefit on impairment of goodwill resulting from the segment realignment described in Note 12, "Goodwill and Intangible Assets," as well as the held-for-sale impairment described in Note 3, "Acquisitions and Divestitures", which resulted in a deferred tax benefit, the impact of US state taxes, and other discrete items offset by the mix of non-US income.

Excluding the $2.7 million tax benefit from the impairment of goodwill and $10.7 million tax benefit of the impairment charge related to assets held-for-sale and the loss on sale of a business, restructuring and other adjustments noted in the table above, the Non-GAAP adjusted effective tax rate was 23.8% for the three months ended July 31, 2023, compared to 22.4% for the three months ended July 31, 2022. The increase in the Non-GAAP adjusted effective tax rate for the three months ended July 31, 2023, compared with the prior year ended July 31, 2022, was primarily due to the mix of non-US income offset by tax incentives in the US.

Diluted Loss per Share (EPS):

Diluted loss per share for the three months ended July 31, 2023 was $1.67 per share compared with a loss of $0.32 per share for the three months ended July 31, 2022. This decrease was primarily due to the impairment charge related to assets held-for-sale and a loss on the sale of a business in the three months ended July 31, 2023 and, to a lesser extent. an increase in interest expense. This was partially offset by an increase in income tax benefit in the three months ended July 31, 2023 and a lower operating loss in the three months ended July 31, 2023.

Below is a reconciliation of our US GAAP Loss Per Share to Non-GAAP Adjusted EPS. The amount of the pretax, and the related income tax impact for the adjustments included in the table below, are presented in the section above, “Benefit for Income Taxes”.

(1) Our Adjusted EPS excludes the Adjusted Net (Income) Loss of our Held for Sale or Sold segment.

(2) Represents the impact of using diluted weighted-average number of common shares outstanding (55.8 million shares and 56.5 million shares for the three months ended July 31, 2023 and 2022, respectively) included in the Non-GAAP Adjusted EPS calculation in order to apply the dilutive impact on adjusted net income due to the effect of unvested restricted stock units and other stock awards. This impact occurs when a US GAAP net loss is reported and the effect of using dilutive shares is antidilutive.

On a constant currency basis, Adjusted EPS decreased 37% primarily due to higher interest expense, and a decrease in Adjusted Operating Income, partially offset by lower Adjusted income tax provision.

SEGMENT OPERATING RESULTS

# Not meaningful

Revenue:

Research revenue for the three months ended July 31, 2023 decreased $17.1 million, or 6%, as compared with the prior year on a reported basis. On a constant currency basis, revenue decreased 7% as compared with the prior year primarily due to the carryover of the Hindawi publishing disruption experienced in fiscal year 2023. Additionally, revenues were unfavorably impacted by market conditions which affected our corporate advertising and recruitment offerings. These impacts were partially offset by continued strong growth in our core open access publishing program. Excluding Hindawi, Research revenue was flat. Hindawi’s special issues program was suspended in the third quarter of fiscal year 2023 due to the presence in certain special issues of compromised articles. As a result, Hindawi revenue for the three months ended July 31, 2023 decreased $19.2 million on a constant currency basis as compared with the prior year. For fiscal year 2024, we expect Hindawi revenue to decline to $20 million. In fiscal year 2025, we expect to recover most of the Hindawi revenue lost, and by fiscal year 2026 we expect Hindawi to be ahead of where it was in fiscal year 2023. Open access article output was flat compared with the prior year. Excluding Hindawi, open access article output growth was approximately 20% for the three months ended July 31, 2023.

Adjusted EBITDA:

On a constant currency basis, Adjusted EBITDA decreased 18% as compared with the prior year. This decrease was primarily due to revenue performance as cost of sales and operating expenses slightly declined. Excluding Hindawi, Adjusted EBITDA increased 1%. On a constant currency basis, Hindawi Adjusted EBITDA for the three months ended July 31, 2023 decreased $17.9 million as compared with the prior year. For fiscal year 2024, we expect Hindawi Adjusted EBITDA to be a moderate loss.

# Not meaningful

Revenue:

Learning revenue decreased $10.3 million, or 9%, as compared with the prior year on a reported basis. On a constant currency basis, revenue decreased 9% as compared with the prior year. This was primarily due to a decrease in Academic print sales, partially offset by growth in digital courseware. Professional was flat due to an increase in professional assessments, offset by a decline in print sales.

Adjusted EBITDA:

On a constant currency basis, Adjusted EBITDA increased 19% as compared with the prior year. This increase was primarily due to lower operating expenses, which resulted from lower employee costs after recent restructuring actions.

INDEX

# Not meaningful

Revenue:

Revenue for Held for Sale or Sold decreased $9.1 million, or 10%, as compared with the prior year on a reported basis. On a constant currency basis, revenue decreased 10% as compared with the prior year. This was due to the disposition of certain businesses in the fourth quarter of fiscal year 2023 and the first quarter of fiscal year 2024, as well as declines in placement revenues and, to a lesser extent, corporate training sales. For the three months ended July 31, 2023, placements declined 19%. University Services revenue increased slightly, while enrollments declined 7%.

Adjusted EBITDA:

On a constant currency basis, Adjusted EBITDA was $6.5 million compared to a loss of $2.4 million in the prior year. This increase was primarily due to lower cost of sales and operating expenses. These declines were largely resulting from restructuring actions in University Services.

University Services Partners and Programs:

As of July 31, 2023, Wiley had 61 university partners under contract, compared to 66 as of July 31, 2022 within University Services.

CORPORATE EXPENSES:

Corporate expenses for the three months ended July 31, 2023 decreased $15.3 million, or 24%, as compared with the prior year. On a constant currency basis, excluding restructuring charges, these expenses decreased 15%. On a constant currency basis, Adjusted EBITDA decreased 15% as compared with the prior year. This was primarily due to lower employee costs as a result of restructuring actions, and lower occupancy costs.

FISCAL YEAR 2024 TRANSITION YEAR OUTLOOK

Wiley is reaffirming its fiscal year 2024 outlook. The outlook excludes businesses held for sale or sold: University Services, Wiley Edge (formerly Talent Development), and CrossKnowledge. Collectively, these businesses generated $393 million of revenue, $43 million of Adjusted EBITDA, and $0.36 of Adjusted EPS in Fiscal 2023.

(amounts in millions, except Adjusted EPS)

(1) Wiley’s fiscal year 2024 outlook (Adjusted Revenue, Adjusted EBITDA, and Adjusted EPS) exclude businesses held-for-sale, including University Services, Wiley Edge (formerly Talent Development), and CrossKnowledge, as well as those sold in fiscal year 2023, Test Prep and Advancement Courses.

Fiscal Year 2024 Transition Year Outlook

• Adjusted Revenue – primarily due to the Hindawi special issues publishing pause and lower print demand in Academic. We continue to project Research revenue to be flat, but up 3% excluding Hindawi. We expect a better back half of the year as volumes continue to improve and comparisons become more favorable. We expect Research to return to growth in fiscal year 2025. In Learning, Academic remains challenged by lower demand for print products offsetting continued growth in digital content, courseware, and assessments. We continue to anticipate a low-single digit decline for this segment in fiscal year 2024. Note, this is a new metric defined as revenue adjusted to exclude businesses held for sale or sold.
• Adjusted EBITDA – primarily due to projected revenue performance, notably Hindawi, and higher employee costs from the combination of an incentive compensation reset and wage inflation. From its portfolio and restructuring actions, the Company expects material margin improvement in fiscal year 2025 and fiscal year 2026.
• Adjusted EPS – further impacted by $0.42 of non-operational items including a higher tax rate (-$0.21/share), pension expense (-$0.11/share), and interest expense (-$0.10/share). Wiley’s higher tax rate is primarily due to a less favorable mix of earnings by country and an increase in the UK statutory rate. Wiley froze its US and UK pension programs in 2015, and they are approximately 90% funded.

Wiley is not providing a Free Cash Flow outlook at this time due to the uncertainty around both the timing of divestitures and the size and scope of restructuring payments.

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 for at least the next twelve months. Operating cash flow provides the primary source of cash to fund operating needs and capital expenditures. Excess operating cash is used to fund shareholder dividends. Other discretionary uses of cash flow include share repurchases and acquisitions to complement our portfolio of businesses. As necessary, we may supplement operating cash flow with debt to fund these activities. The overall cash position of the Company reflects our durable business results and a global cash management strategy that considers liquidity management, economic factors and tax considerations. Our cash and cash equivalents are maintained at a number of financial institutions. To mitigate the risk of uninsured balances, we select financial institutions based on their credit ratings and financial strength, and we perform ongoing evaluations of these institutions to limit our concentration risk exposure to any financial institution.

As of July 31, 2023, we had cash and cash equivalents of $107.2 million, including cash and cash equivalents classified as held-for-sale of $32.0 million, of which approximately $104.8 million, or 98%, was located outside the US. Maintenance of these cash and cash equivalent balances outside the US does not have a material impact on the liquidity or capital resources of our operations. We intend to repatriate earnings from our non-US subsidiaries, and to the extent we repatriate these funds to the US, we will be required to pay income taxes in various US state and local jurisdictions and applicable non-US withholding or similar taxes in the periods in which such repatriation occurs. Accordingly, as of July 31, 2023, we have recorded a deferred tax liability of approximately $2.1 million related to the estimated taxes that would be incurred upon repatriating certain non-US earnings to the US.

On November 30, 2022, we entered into the second amendment to the Third Amended and Restated Credit Agreement (collectively, the Amended and Restated CA). See Note 15, “Debt and Available Credit Facilities” for more details on the amendment. The Amended and Restated CA provided for senior unsecured credit facilities comprised of a (i) five-year revolving credit facility in an aggregate principal amount up to $1.115 billion, which matures November 2027, (ii) a five-year term loan A facility consisting of $200 million, which matures November 2027, and (iii) $185 million aggregate principal amount revolving credit facility through May 2024.

As of July 31, 2023, we had approximately $895.9 million of debt outstanding, net of unamortized issuance costs of $0.7 million, and approximately $600.6 million of unused borrowing capacity under our Amended and Restated CA and other facilities. Our Amended and Restated CA contains certain restrictive covenants related to our consolidated leverage ratio and interest coverage ratio, which we were in compliance with as of July 31, 2023.

Analysis of Historical Cash Flows

The following table shows the changes in our Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended July 31, 2023 and 2022.

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 typically occurs in the beginning of the second half of our fiscal year.

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 acquisitions. Below are the details of Free cash flow less product development spending.

Free Cash Flow less Product Development Spending:

Net Cash Used in Operating Activities

The following is a summary of the $(7.6) million change in Net cash used in operating activities for the three months ended July 31, 2023 compared with the three months ended July 31, 2022 (amounts in millions).

The favorable change in accounts receivable, net and contract liabilities was primarily due to lower sales, especially Academic publishing, and the timing of collections with customers.

The unfavorable change in accounts payable and accrued royalties was primarily due to the timing of payments.

The favorable changes in other assets and liabilities noted in the table above was primarily due to a decrease in employee-related costs, including lower payments for annual incentive compensation in fiscal year 2024 related to the prior fiscal year, partially offset by an increase in other accrued liability payments.

Our negative working capital (current assets less current liabilities) was $228.2 million and $354.3 million as of July 31, 2023 and April 30, 2023, respectively. This $126.1 million change in negative working capital was primarily due to the seasonality of our business. The primary driver of the negative working capital is the benefit realized from unearned contract liabilities related to subscriptions for which cash has been collected in advance. The contract liabilities will be recognized as income when the products are shipped or made available online to the customers over the term of the subscription. Current liabilities as of July 31, 2023 and as of April 30, 2023 includes $369.6 million and $504.7 million, respectively, primarily related to deferred subscription revenue for which cash was collected in advance.

Cash collected in advance for subscriptions is used by us for a number of purposes, including funding operations, capital expenditures, acquisitions, debt repayments, dividend payments, and share repurchases.

Net Cash Used In Investing Activities

Net cash used in investing activities for the three months ended July 31, 2023 was $25.7 million compared to $21.8 million in the prior year. The increase in cash used in investing activities was primarily due to an increase of $2.2 million for additions of technology, property and equipment, $1.5 million decrease in cash proceeds related to other activities, and an increase of $1.5 million in cash used to acquire businesses, partially offset by a decrease of $2.1 million for product development spending.

Net Cash Provided By Financing Activities

Net cash provided by financing activities was $105.8 million for the three months ended July 31, 2023 compared to $118.0 million for the three months ended July 31, 2022. This decrease in cash provided by financing activities was primarily due to a decrease in net borrowings of long-term debt of $11.4 million.

In the three months ended July 31, 2023, we increased our quarterly dividend to shareholders to $1.40 per share annualized versus $1.39 per share annualized in the prior year.

The following table summarizes the shares repurchased of Class A and Class B Common Stock for the three months ended July 31, 2023 and 2022 (shares in thousands):

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We are exposed to market risk primarily related to interest rates, foreign exchange, and credit risk. It is our policy to monitor these exposures and to use derivative financial investments and/or insurance contracts from time to time to reduce fluctuations in earnings and cash flows when it is deemed appropriate to do so. We do not use derivative financial instruments for trading or speculative purposes.

Interest Rates

From time to time, we may use interest rate swaps, collars, or options to manage our exposure to fluctuations in interest rates. It is management’s intention that the notional amount of interest rate swaps be less than the variable rate loans outstanding during the life of the derivatives.

The information set forth in Note 16, “Derivatives Instruments and Hedging Activities,” of the Notes to Unaudited Condensed Consolidated Financial Statements under the caption “Interest Rate Contracts,” is incorporated herein by reference.

On an annual basis, a hypothetical one percent change in interest rates for the $395.9 million of unhedged variable rate debt as of July 31, 2023 would affect net income and cash flow by approximately $3.0 million.

Foreign Exchange Rates

Fluctuations in the currencies of countries where we operate outside the US may have a significant impact on financial results. We are primarily exposed to movements in British pound sterling, euros, Canadian and Australian dollars, and certain currencies in Asia. The statements of financial position of non-US business units are translated into US dollars using period-end exchange rates for assets and liabilities and the statements of income are translated into US dollars using weighted-average exchange rates for revenues and expenses.

Our significant investments in non-US businesses are exposed to foreign currency risk. Adjustments resulting from translating assets and liabilities are reported as a separate component of Accumulated other comprehensive loss, net of tax within Shareholders’ Equity under the caption Foreign currency translation adjustment. During the three months ended July 31, 2023, we recorded foreign currency translation gains in Accumulated other comprehensive loss, net of tax of approximately $11.2 million, primarily as a result of the fluctuations of the US dollar relative to the British pound sterling. During the three months ended July 31, 2022, we recorded foreign currency translation losses in Accumulated other comprehensive loss, net of tax of approximately $(19.8) million primarily as a result of the fluctuations of the US dollar relative to the euro and the British pound sterling.

Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses on the Unaudited Condensed Consolidated Statements of Net Loss as incurred. Under certain circumstances, we may enter into derivative financial instruments in the form of foreign currency forward contracts to hedge against specific transactions, including intercompany purchases and loans.

The information set forth in Note 16, “Derivatives Instruments and Hedging Activities,” of the Notes to Unaudited Condensed Consolidated Financial Statements under the caption “Foreign Currency Contracts,” is incorporated herein by reference.

Sales Return Reserves

The estimated allowance for print book sales returns is based upon historical return patterns, as well as current market trends in the businesses in which we operate. In connection with the estimated sales return reserves, we also include a related increase to inventory and a reduction to accrued royalties as a result of the expected returns.

The reserves are reflected in the following accounts of our Unaudited Condensed Consolidated Statements of Financial Position:

A one percent change in the estimated sales return rate could affect net income by approximately $0.3 million. A change in the pattern or trends in returns could affect the estimated allowance.

Customer Credit Risk

In the journal publishing business, subscriptions are primarily sourced through journal subscription agents who, acting as agents for library customers, facilitate ordering by consolidating the subscription orders/billings of each subscriber with various publishers. Cash is generally collected in advance from subscribers by the subscription agents and is principally remitted to us between the months of December and April. Although currently we have minimal credit risk exposure to these agents, future calendar-year subscription receipts from these agents are highly dependent on their financial condition and liquidity. Subscription agents account for approximately 15% of total annual consolidated revenue, and no one affiliated group of subscription agents accounts for more than 10% of total annual consolidated revenue.

Our book business is not dependent upon a single customer; however, the industry is concentrated in national, regional, and online bookstore chains. No single book customer accounts for more than 7% of total consolidated revenue and 22% of accounts receivable at July 31, 2023. The top 10 book customers account for approximately 10% of total consolidated revenue and approximately 34% of accounts receivable at July 31, 2023.

The Company’s Chief Executive Officer and Chief Financial Officer, together with the Chief Accounting Officer and other members of the Company’s management, have conducted an evaluation of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the quarter ended July 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

See Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended April 30, 2023. Except as required by the federal securities law, we undertake no obligation to update or revise any risk factor, whether as a result of new information, future events or otherwise.