John Wiley & Sons, Inc. — Form 10-Q Summary
Business context and reporting period
Wiley is a global provider of knowledge and knowledge-enabled services across Research, Professional Development, and Education. This report covers the three months ended July 31, 2014, the first quarter of fiscal 2015. Results are unaudited and include one month of CrossKnowledge operations reported on a two-month lag.
Key financial metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $437.9 million | $411.0 million | +7%; +4% excluding foreign exchange |
| Operating income | $49.6 million | $35.6 million | +40% |
| Net income | $33.6 million | $35.9 million | -6% |
| Diluted EPS | $0.56 | $0.61 | -8% |
| Gross margin | 71.7% | 70.9% | +80 basis points |
| Effective tax rate | 26.3% provision | 5.3% benefit | Prior period included a $10.6 million U.K. deferred-tax benefit |
| Cash used in operating activities | $(102.2) million | $(56.7) million | Higher use of $45.6 million |
| Cash used in investing activities | $(190.8) million | $(22.8) million | Primarily CrossKnowledge acquisition |
| Cash and equivalents at July 31 | $255.9 million | $189.8 million | +$66.1 million |
| Long-term debt | $788.0 million | $660.0 million | +$128.0 million |
At July 31, 2014, total assets were $3.07 billion and shareholders’ equity was $1.21 billion. The company reported approximately $788 million of debt and $166.6 million of unused borrowing capacity. Current liabilities included $290.2 million of deferred revenue collected in advance.
Material changes versus the prior comparable period
- Research revenue increased 4% to $254.9 million, but was flat excluding foreign exchange. Journal subscriptions and funded access growth offset declines in books and other research revenue.
- Professional Development revenue increased 10% to $92.3 million, driven primarily by Profiles and CrossKnowledge acquisitions. Segment contribution improved to $7.6 million from a $1.3 million loss.
- Education revenue increased 12% to $90.7 million, supported by textbooks, custom products, Education Services, and WileyPLUS. Contribution profit increased 59% to $8.7 million.
- Operating income benefited from the absence of the prior-year $7.8 million restructuring charge; Q1 FY2015 included a $0.2 million restructuring credit.
- Net income and EPS declined despite higher operating income because the prior year included a $10.6 million non-cash U.K. deferred-tax benefit. Excluding specified tax, restructuring, and foreign-exchange effects, management stated that diluted EPS increased 8%.
- Wiley acquired CrossKnowledge on May 1, 2014, for approximately $166 million in cash, net of cash acquired, and acquired Profiles International on April 1, 2014, for approximately $48 million. The acquisitions increased goodwill and intangible assets and were funded with cash and borrowings.
- Net cash used for operating activities increased primarily because of higher incentive compensation payments, accounts receivable timing, deferred revenue movements, and restructuring payments.
- The quarterly dividend increased 16% to $0.29 per share. Wiley repurchased 200,492 shares for $12.2 million at an average price of $60.72.
Guidance, outlook, commentary, risks, and unusual items
- Management forecast fiscal 2015 spending of approximately $80 million for technology, property and equipment, $45 million for composition, and $110 million for author advances.
- Management expects operating cash flow, revolving credit facilities, and other debt financing to meet foreseeable operating, investing, and financing needs, while cautioning that capital-market volatility could affect access or borrowing terms.
- The restructuring and reinvestment program had cumulative charges of $67.0 million and was expected to be fully recovered by the end of fiscal 2015 through savings and reinvestment benefits.
- Wiley renewed its Hoboken headquarters lease through March 2033. Future minimum payments under the new operating lease total $223.0 million, including annual minimum payments of $14.4 million in fiscal 2018 through 2022.
- Wiley had $786.2 million of variable-rate loans outstanding. Interest-rate swaps covered $300 million of notional debt; management estimated that a one-percentage-point change in rates on the $486.2 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $3.0 million.
- Foreign-exchange exposure remains significant. Q1 included a $4.0 million loss on forward contracts and a $2.9 million foreign-currency translation loss in other comprehensive income.
- A German tax audit dispute required cumulative tax deposits of €44 million, or approximately $66.0 million including accrued interest, through July 31, 2014. Wiley expected additional deposits of up to €13 million plus interest and planned to appeal an unfavorable decision. Management believed it was more likely than not to prevail.
- Key operating risks include journal renewal rates, the financial condition of subscription agents, book-retailer and wholesaler concentration, education-market seasonality and used-book competition, foreign exchange, technology investment, intellectual-property protection, acquisition integration, and global economic conditions.
- Sales to certain publicly funded Iranian institutions generated approximately $1.2 million of revenue and $0.3 million of net profit during the quarter. The company stated that it believed these activities complied with applicable sanctions regulations.
Important facts for investors to verify
- Integration progress, performance, and final purchase accounting for CrossKnowledge and Profiles.
- Whether restructuring savings offset acquisition costs, technology investment, and higher amortization over the remainder of fiscal 2015.
- Operating cash-flow conversion, seasonal working-capital requirements, and the effect of deferred revenue and incentive compensation timing.
- Debt leverage, variable-rate exposure, borrowing capacity, and compliance with financing arrangements.
- Resolution and potential additional funding requirements related to the German tax audit.
- Journal renewal rates, subscription-agent liquidity, education adoption trends, and the sustainability of digital and Education Services growth.
- Actual fiscal 2015 capital spending and author-advance levels relative to management’s forecasts.