JOHN WILEY & SONS, INC. quarterly report, Q2 FY2018

John Wiley & Sons, Inc. — Fiscal 2018 Second-Quarter Form 10-Q

Reporting period: Three and six months ended October 31, 2017. The filing covers Wiley’s Research, Publishing, and Solutions segments. Interim results are unaudited and may not be indicative of full-year performance.

Financial Performance and Position

Metric	Three months ended Oct. 31, 2017	Three months ended Oct. 31, 2016	Six months ended Oct. 31, 2017	Six months ended Oct. 31, 2016
Revenue	$451.7 million	$425.6 million	$863.2 million	$829.9 million
Operating income	$82.8 million	$47.6 million	$97.3 million	$91.6 million
Net income	$60.0 million	$(11.5) million	$69.3 million	$19.5 million
Diluted EPS	$1.04	$(0.20)	$1.20	$0.34
Cash used in operating activities	Not separately reported for the quarter	$(46.4) million	$(86.1) million

Reported revenue increased 6% in the quarter and 4% year to date; excluding foreign exchange, growth was approximately 3% and 2%, respectively.
Approximate operating margins were 18.3% for the quarter and 11.3% year to date, compared with 11.2% and 11.0% in the prior comparable periods.
Gross margin was 73.5% in the quarter and 72.8% year to date, with pressure primarily from higher Research journal royalty costs and title mix.
At October 31, 2017, cash and equivalents were $72.9 million, compared with $267.4 million a year earlier and $58.5 million at April 30, 2017.
Long-term debt was $563.0 million, consisting of variable-rate loans. Net debt was approximately $490.1 million. The company reported approximately $544 million of unused borrowing capacity and compliance with its leverage and interest-coverage covenants.
Cash used in investing activities was $77.5 million, including $56.3 million of technology, property and equipment additions and $15.1 million of product-development spending.
Financing activities provided $135.4 million, including $275.1 million of borrowings, $78.5 million of debt repayments, $36.7 million of dividends, and $29.3 million of share repurchases.
Deferred revenue was $244.3 million, primarily subscription-related cash collected in advance.

Material Changes Versus Prior Comparable Period

Research: Quarterly revenue rose 11% to $228.9 million, or 5% excluding foreign exchange, supported by Atypon, Open Access, licensing, and other journal revenue. Six-month revenue rose 10% to $452.5 million.
Publishing: Quarterly revenue was broadly flat on a currency-neutral basis at $165.0 million. Six-month revenue declined 4% to $296.3 million, primarily from lower print and Education Publishing sales and weaker WileyPLUS revenue. Management expects market softness to continue during fiscal 2018.
Solutions: Quarterly revenue increased 3% to $57.9 million and six-month revenue increased 6% to $114.4 million, driven primarily by Education Services and higher enrollments. Corporate Learning remained pressured by slower French government funding.
Quarterly operating income benefited from lower operating and administrative costs, lower amortization, and a $1.4 million restructuring credit versus a $6.8 million charge in the prior year.
Year-to-date restructuring charges increased to $24.3 million from $5.9 million. The restructuring program has generated cumulative charges of approximately $162.3 million.
Prior-year results included a $47.5 million unfavorable German tax settlement, a $8.8 million pension settlement charge, and a $2.6 million U.K. deferred-tax benefit. These items materially affected the year-over-year effective tax-rate and EPS comparison.
Fiscal 2018 included a $3.6 million impairment charge for a Publishing brand, recorded in the first quarter and included in operating and administrative expenses.
Atypon contributed $8.0 million of quarterly revenue and $16.3 million of year-to-date revenue; it generated operating losses of $0.6 million and $1.1 million, respectively.

Guidance, Outlook, Risks, and Unusual Items

Fiscal 2018 guidance at constant currency calls for approximately flat revenue and adjusted operating income, a low-single-digit percentage decline in adjusted EPS, cash from operations of $350 million or more, and slightly lower capital expenditures than fiscal 2017.
Management stated that first-half performance was favorable to guidance, but the second half faces an unfavorable tax comparison because the prior year included discrete tax benefits. Technology expenses are expected to rise sequentially in the second half because of planned ERP investments.
If current exchange rates persisted through year-end, management estimated favorable fiscal-year effects of approximately $45 million on revenue, $25 million on operating income, and $0.35 on EPS.
Wiley expects approximately $110 million of fiscal 2018 technology and property capital spending, $40 million of product-development spending, and $110 million of author advances.
The company plans to migrate Wiley Online Library to Atypon’s Literatum platform and expects annualized operating savings of approximately $10 million after completion.
Key risks include journal subscription renewals and agent liquidity, print-book market weakness and used-book competition, retailer and wholesaler concentration, foreign exchange, interest rates, intellectual-property protection, acquisition integration, ERP implementation, and global economic conditions.
A 1% change in interest rates on the company’s approximately $213 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $1.3 million. A 1% change in estimated print-book returns could affect net income by approximately $2.0 million.
The company reported routine litigation and photographer-related claims but stated that pending matters are not expected to have a material effect. Revenue and net profits related to Iran transactions were each under $2 million for the six-month period.

Investor Verification Items

Verify the sustainability of reported earnings after excluding prior-year tax and pension-related distortions, current restructuring charges, foreign-exchange effects, and the Atypon acquisition.
Monitor second-half execution against the flat-revenue and adjusted-income guidance, particularly the expected tax headwind and higher technology spending.
Assess liquidity and refinancing risk given $563 million of variable-rate debt, $72.9 million of cash, and negative first-half operating cash flow.
Track Publishing performance, especially Education Publishing, print demand, WileyPLUS, and the used-book and rental markets.
Evaluate whether Atypon integration and the Literatum migration deliver the expected growth and approximately $10 million of annualized savings.
Review the effects of the fiscal 2018 restructuring program, brand impairment, pension obligations, sales-return estimates, and foreign currency movements.