JOHN WILEY & SONS, INC. quarterly report, Q2 FY2017

Business Context and Reporting Period

John Wiley & Sons, Inc. filed this unaudited Form 10-Q for the quarter and six months ended October 31, 2016, representing fiscal 2017 second-quarter and year-to-date results. Wiley provides knowledge and learning services through Research, Publishing, and Solutions. Effective August 1, 2016, the Company changed its reportable segments and recast prior-period amounts.

Research includes journals, related content and Atypon platform services; Publishing includes books, reference materials, course workflow, and test preparation; Solutions includes online program management, corporate learning, and professional assessment.

Financial Results and Key Metrics

Metric	Three months ended October 31, 2016	Six months ended October 31, 2016
Revenue	$425.6 million, down 2%	$829.9 million, down 3%
Operating income	$47.6 million, down 21%	$91.6 million, down 13%
Net income (loss)	$(11.5) million	$19.5 million
Diluted EPS	$(0.20), versus $0.74	$0.34, versus $1.29
Gross margin	73.8%, up 70 basis points	72.9%, up 50 basis points
Cash used in operating activities	$86.1 million, versus $126.5 million used in the prior-year period

Revenue increased 2% in the quarter and was approximately flat for the six months on a constant-currency basis. Foreign exchange reduced reported revenue by approximately $15 million in the quarter and $24 million year to date.

Research: Second-quarter revenue was $206.0 million, down 1% reported but up 5% excluding foreign exchange. Six-month revenue was $413.2 million, approximately flat reported and up 4% excluding foreign exchange. Six-month contribution to profit was $120.7 million, down 5%.
Publishing: Second-quarter revenue was $163.3 million, down 7%; six-month revenue was $308.3 million, down 11%. The decline primarily reflected weaker print-book demand and textbook rental market-share pressure. Six-month contribution to profit was $55.8 million, down 13%.
Solutions: Second-quarter revenue was $56.3 million, up 14%; six-month revenue was $108.4 million, up 13%. Six-month contribution to profit improved to $5.5 million from a $1.6 million loss, driven by Online Program Management and Corporate Learning growth.

Balance Sheet, Debt, Liquidity, and Cash Flow

Cash and cash equivalents were $267.4 million at October 31, 2016, compared with $308.2 million a year earlier and $363.8 million at April 30, 2016.
Total debt was approximately $884.0 million, all described as variable-rate loans; net debt was approximately $616.6 million, up $35.8 million from the prior year.
The Company reported approximately $133 million of unused borrowing capacity under revolving credit and other facilities and stated that operating cash flow and available financing should meet foreseeable needs.
Cash used in investing activities was $205.1 million, including $135.8 million for acquisitions and $52.7 million for technology, property, and equipment.
Cash provided by financing activities was $231.8 million, including $480.4 million of long-term borrowings, $201.4 million of repayments, $35.9 million of dividends, and $21.3 million of treasury-stock purchases.
Deferred revenue was $223.3 million, reflecting cash collected in advance primarily for subscriptions. Operating cash flow is seasonal, with subscription collections concentrated from December through April.
Fiscal 2017 projected spending was approximately $115 million for technology, property, and equipment, $50 million for composition, and $110 million for author advances.

Material Changes and Unusual Items

German tax decision: A final unfavorable German Federal Fiscal Court decision caused the Company to forfeit approximately €56.6 million, or $61.7 million, of tax deposits and record a predominantly non-cash income-tax charge of approximately $48 million. The charge drove the reported quarterly net loss and increased the six-month effective tax rate to 76.7% from 22.8%. Excluding the decision, the six-month effective tax rate would have been 19.9%.
Pension settlement: A lump-sum election by approximately 780 terminated vested U.S. pension participants resulted in an $8.8 million pre-tax settlement charge, or approximately $0.09 per share, recorded in operating and administrative expenses. The $28.3 million payments were made from pension plan assets.
Atypon acquisition: On September 30, 2016, Wiley acquired Atypon for approximately $121 million in cash, net of cash acquired. Preliminary purchase accounting included $74 million of goodwill, $21 million of customer relationships, and $18 million of software. Atypon contributed $2.5 million of revenue and approximately $(0.01) of loss per share for the reported periods.
Ranku acquisition: Wiley acquired Ranku, a recruitment technology and predictive analytics company, for an undisclosed amount.
Restructuring: The Company recorded $6.8 million of restructuring charges in the quarter and $5.9 million for the six months. Cumulative program charges since inception were $130.5 million.
Foreign exchange: Foreign currency translation losses were $25.8 million in the quarter and $70.5 million year to date, primarily due to the stronger U.S. dollar against the British pound. A forward contract generated a $64.7 million year-to-date gain that substantially mitigated related currency exposure.
Systems investment: ERP, technology development, maintenance, and related spending increased operating costs. The global ERP rollout is expected to continue in phases over the next three years.

Guidance, Outlook, and Principal Risks

The filing does not provide explicit full-year revenue or earnings guidance. Management expects operating cash flow, revolving facilities, and other debt financing to support foreseeable operating, investing, and financing needs, while noting that access to credit markets could be affected by global market volatility.

Management is targeting restructuring savings toward margin and earnings improvement, with the remainder reinvested in digital growth opportunities.
Key operating risks include journal renewal rates, the financial condition of subscription agents, weakness or consolidation among book retailers and wholesalers, textbook rental and used-book pressure, seasonality, foreign exchange, interest rates, intellectual-property protection, technology execution, and integration of acquisitions.
Subscription agents represent approximately 22% of annual consolidated revenue; no single agent represents more than 11%. The top ten book customers represent approximately 21% of annual consolidated revenue and approximately 35% of accounts receivable.
A 1% change in estimated print-book sales returns could affect net income by approximately $2.0 million. A 1% change in interest rates on $534 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $3.3 million.
The Company disclosed approximately $3.0 million of revenue and $0.8 million of net profit from sales to certain publicly funded Iranian institutions during the first six months and stated that it believes the activity complies with applicable sanctions.

Investor Verification Items

Verify the final purchase accounting, integration progress, and recurring contribution from Atypon and Ranku.
Assess normalized earnings and tax rates excluding the $48 million German tax charge, pension settlement, restructuring charges, and other one-time items.
Monitor Publishing revenue, print-book demand, textbook rental trends, sales returns, and the performance of digital products.
Evaluate leverage, variable-rate debt exposure, refinancing capacity, and the adequacy of the reported $133 million unused borrowing capacity.
Track seasonal subscription collections, deferred revenue recognition, and the Company’s ability to convert revenue into operating cash flow.
Assess the cost, execution risk, and internal-control implications of the multi-year ERP and technology investment program.
Confirm the impact of foreign exchange movements on reported revenue, operating income, accumulated other comprehensive loss, and cash balances held outside the United States.