Business Context and Reporting Period
John Wiley & Sons, Inc. filed this unaudited Form 10-Q for the third quarter and first nine months of fiscal year 2014, ended January 31, 2014. The company provides research, professional development, and education content and services, including journals, books, digital products, online training, assessment, and online program management.
The filing compares the three and nine months ended January 31, 2014 with the corresponding periods ended January 31, 2013. Results are affected by foreign exchange, the divestiture of consumer publishing programs, the prior-year acquisitions of Deltak and ELS, and ongoing restructuring and digital transformation initiatives.
Key Financial Metrics
| Metric | Three months ended January 31, 2014 | Prior comparable period | Nine months ended January 31, 2014 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $457.9 million | $472.4 million | $1.318 billion | $1.315 billion |
| Operating income | $73.4 million | $83.6 million | $159.1 million | $185.6 million |
| Net income | $52.5 million | $57.1 million | $124.6 million | $136.3 million |
| Diluted EPS | $0.88 | $0.95 | $2.10 | $2.26 |
| Cash provided by operating activities | Not presented for the quarter | Not presented for the quarter | $153.8 million | $162.2 million |
| Gross margin | 71.5% | 70.0% | 71.1% | 69.7% |
| Effective tax rate | 25.4% | 27.7% | 17.6% | 22.6% |
At January 31, 2014, cash and cash equivalents were $316.0 million, total debt was approximately $634.0 million, and unused borrowing capacity was approximately $203 million. Net debt decreased $130.9 million from January 31, 2013. Current liabilities included $279.7 million of deferred revenue collected in advance, which contributes to seasonal working-capital fluctuations.
For the first nine months, investing activities used $74.3 million, including $30.5 million of composition spending and $38.7 million of technology, property, and equipment additions. Financing activities used $97.9 million, including $44.2 million of dividends, $38.5 million of treasury-stock purchases, and net debt repayments of approximately $39.0 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 3%, or 2% excluding foreign exchange, primarily because of the divestiture of consumer publishing programs and lower print-book revenue. Research revenue increased 3%, while Professional Development declined 17% and Education declined 3%.
- First-nine-month revenue was essentially flat, but increased 1% excluding foreign exchange. Growth in Research journals, open access, digital products, Deltak, and ELS largely offset divestitures and lower print-book revenue.
- Gross margin improved because of the divestiture of lower-margin consumer publishing programs, higher-margin digital and acquired revenue, and cost savings. The quarterly gross margin increased 150 basis points.
- Operating income decreased 12% in the quarter and 14% for the nine-month period. Operating and administrative expenses increased 1% in the quarter and 3% for the nine-month period, reflecting higher employment, technology, acquisition-related, and transformation costs.
- Restructuring charges increased to $27.3 million for the first nine months from $4.8 million in the prior year. The cumulative Restructuring and Reinvestment Program charge reached $51.8 million.
- The effective tax rate benefited from a $10.6 million non-cash deferred-tax benefit related principally to U.K. tax-rate changes, compared with an $8.4 million benefit in the prior year.
- Cash from operations declined $8.4 million, mainly because of higher restructuring payments and timing of customer receipts, partly offset by lower German tax deposits.
- The quarterly dividend increased to $0.25 per share from $0.24. During the first nine months, the company repurchased 810,257 shares at an average price of $47.56.
Guidance, Outlook, Risks, and Unusual Items
- Management expected approximately $10 million of additional pre-tax restructuring charges during the remainder of fiscal year 2014. The company expected the cumulative program charges to be fully recovered by January 31, 2015.
- Fiscal-year 2014 projected spending was approximately $60 million for technology, property, and equipment and $50 million for composition. Projected royalty advances were approximately $100 million.
- Management stated that operating cash flow, revolving credit facilities, and other available debt financing were expected to meet operating, investing, and financing needs for the foreseeable future, while noting potential limitations from volatility in global credit markets.
- The company had $634 million of variable-rate loans. Interest-rate swaps covered $400 million of notional debt at January 31, 2014; a hypothetical one-percentage-point change in rates on the $234 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $1.5 million.
- The company had deposited approximately $61.1 million with German tax authorities in connection with a disputed tax position and expected to deposit up to an additional €16 million plus interest. Resolution could take several years; management believed it was more likely than not to prevail.
- Annual results are exposed to journal renewal rates, subscription-agent liquidity, book-market conditions, education seasonality, used-book activity, foreign exchange, technology investment, intellectual-property protection, acquisition integration, and global economic conditions.
- A $4.8 million impairment charge was recorded for a terminated internal software-development program. No impairment was required in the annual review of goodwill and indefinite-lived intangible assets.
- Sales-return reserves were $40.5 million at January 31, 2014. A one-percentage-point change in the estimated sales-return rate could affect annual net income by approximately $2.6 million.
- The company disclosed approximately $0.6 million of revenue and $0.2 million of net profit from sales involving certain publicly funded Iranian institutions and stated that it believed the activity complied with applicable sanctions.
Important Facts for Investors to Verify
- Whether journal renewals, digital growth, open access, WileyPLUS, and Deltak expansion offset continued declines in print-book revenue.
- The timing, cash cost, and realized savings from the Restructuring and Reinvestment Program.
- Deltak’s investment in programs not yet generating revenue and its effect on Education margins.
- Progress in reducing debt and the company’s exposure to variable interest rates and foreign exchange.
- The outcome and additional funding requirements associated with the German tax audit deposits.
- Whether projected fiscal-year capital spending and royalty advances remain consistent with cash generation and liquidity.
- The effect of the non-cash U.K. tax benefit and other unusual items when assessing normalized earnings.
- The filing states that disclosure controls and procedures were effective and that no material changes occurred in internal control over financial reporting during the quarter.