Business Context and Reporting Period
John Wiley & Sons, Inc. is a global provider of knowledge and knowledge-enabled services across Research, Professional Development, and Education. This Form 10-Q covers the three months ended July 31, 2016, the first quarter of fiscal 2017. Amounts are unaudited and presented in U.S. dollars unless otherwise noted.
Financial Results and Key Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Revenue | $404.3 million | $423.0 million | Down 4%; down 2% excluding foreign exchange |
| Operating income | $43.8 million | $44.9 million | Down 2% |
| Operating margin | 10.8% | 10.6% | Up approximately 20 basis points |
| Net income | $31.0 million | $32.5 million | Down 4% |
| Diluted EPS | $0.53 | $0.55 | Down $0.02 |
| Gross margin | 72.0% | 71.7% | Up 30 basis points |
| Cash used in operating activities | $136.7 million | $124.1 million | Use increased $12.6 million |
| Cash used in investing activities | $37.4 million | $32.8 million | Use increased $4.6 million |
| Cash provided by financing activities | $20.2 million | $65.3 million | Down $45.0 million |
- Cash and cash equivalents were $185.9 million at July 31, 2016, compared with $369.4 million a year earlier and $363.8 million at April 30, 2016.
- Total debt was approximately $653.0 million, all classified as long-term debt at quarter-end. The company reported approximately $454 million of unused borrowing capacity and no off-balance-sheet debt.
- Net debt was approximately $467.1 million, down $14.0 million from the prior year.
- Deferred revenue was $321.6 million, primarily subscription cash collected in advance.
- Cash dividends increased to $0.31 per share from $0.30. The company repurchased 221,305 shares for $11.3 million at an average price of $51.01.
- 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 Versus the Prior Comparable Period
- Research revenue declined 1% to $234.4 million, but increased 2% excluding foreign exchange. Journal revenue grew, while Books and References revenue declined 16%, principally due to lower print-book sales. Research contribution to profit declined to $63.3 million from $65.1 million.
- Professional Development revenue declined 3% to $96.1 million, primarily from weaker print-book demand. Corporate Learning and Online Test Preparation and Certification grew. Contribution to profit increased 3% to $19.6 million.
- Education revenue declined 15% to $73.8 million. Print textbooks, digital books, and custom materials declined, while Online Program Management revenue increased 13% to $23.2 million. Education contribution shifted to a $2.0 million loss from a $5.0 million profit.
- Revenue pressure reflected declines in print books, Education custom materials, and unfavorable foreign exchange. Growth in digital journals, Online Program Management, Corporate Learning, Author-Funded Access, and other society agreements partially offset the declines.
- Cost of sales declined 5% and operating and administrative expenses declined 3%. Savings from restructuring and other actions were partly offset by ERP, technology, systems-development, and maintenance investments.
- Restructuring activity produced a $0.9 million credit compared with a $3.4 million charge in the prior-year quarter. Share-based compensation expense declined to $0.2 million from $3.9 million, mainly because fewer performance awards were expected to vest.
- Comprehensive income was a loss of $5.5 million, compared with income of $51.2 million, primarily because of a $44.6 million foreign-currency translation loss.
Outlook, Commentary, Risks, Contingencies, and Unusual Items
- Management expects operating cash flow, revolving credit facilities, and other available debt financing to meet foreseeable operating, investing, and financing needs, but cautions that volatility in global credit markets could affect access or financing terms.
- Operating cash flow is seasonal. Research subscription receipts are concentrated from December through April, while U.S. higher-education sales are concentrated from June through August and November through January. The company normally requires more working capital from May through October.
- The company is implementing a global ERP system over three years. Management expects efficiency benefits and does not believe implementation will adversely affect internal control over financial reporting, but controls will require testing as the system is rolled out.
- In August 2016, Wiley agreed to acquire Atypon Systems’ net assets for $120 million in cash, subject to Hart-Scott-Rodino review. The transaction was expected to close effective October 1, 2016. Atypon reported more than $31 million of calendar 2015 revenue.
- A voluntary lump-sum pension offer targeted terminated vested U.S. plan participants with total liabilities of $60.5 million, payable from plan trust assets by October 31, 2016. Settlement accounting was expected to result in a fiscal second-quarter remeasurement and actuarial-loss recognition; a full-participation scenario could produce an approximately $20 million loss, although full participation was not expected.
- The company had $62.2 million of deposits related to a German tax dispute. If the company loses its final appeal, the deposits would not be returned, a corresponding non-cash charge would be recorded, and an additional cash expense of up to $5 million could arise. A final judgment was expected during the quarter ended October 31, 2016.
- Interest-rate exposure remained material: $653.0 million of variable-rate loans were outstanding, with $500 million covered by interest-rate swaps at July 31, 2016. A hypothetical 1% change in rates on the $153 million of unhedged variable-rate debt would affect net income and cash flow by approximately $0.9 million annually.
- Foreign exchange remained a significant risk. The company recorded a $44.6 million translation loss in other comprehensive income and held forward contracts with notional amounts of £274 million and £75 million; their fair value was an approximately $40.6 million gain.
- Print-book return reserves totaled approximately $23.3 million. Management estimated that a one-percentage-point change in the return rate could affect net income by approximately $2.0 million.
- Subscription agents represented approximately 22% of annual consolidated revenue, and the largest agent represented no more than 11%. The top 10 book customers represented approximately 19% of annual revenue and 35% of accounts receivable.
Investor Verification Checklist
- Verify whether Education’s print and custom-material declines persist and whether Online Program Management growth offsets them.
- Track journal renewal rates, subscription-agent liquidity, and the effect of the transition to time-based digital journal contracts.
- Assess ERP and headquarters investments against the stated spending plans and expected productivity benefits.
- Confirm the closing, purchase accounting, financing, and integration results for the Atypon acquisition.
- Monitor the German tax appeal, potential deposit recovery, and any related charge or cash expense.
- Review the pension lump-sum participation rate and the resulting second-quarter actuarial loss.
- Reconcile cash generation with seasonal working-capital needs, debt balances, dividend payments, and share repurchases.