John Wiley & Sons, Inc. — Fiscal 2018 Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2018. The requested period is labeled “2017 Q4,” but the supplied filing is the fiscal 2018 annual report, filed June 29, 2018.
Business Context
Wiley is a global research and learning company operating through Research, Publishing, and Solutions. Research provides scholarly journals, open-access content, licensing, and publishing technology; Publishing provides scientific, professional, and education books, test preparation, and course workflow tools; and Solutions provides online program management, professional assessment, and corporate learning services. The Company employed approximately 5,000 full-time-equivalent employees worldwide.
- Research represented approximately 52% of fiscal 2018 revenue.
- Publishing represented approximately 34% of revenue.
- Solutions represented the remaining approximately 14% of revenue.
Financial Performance and Position
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $1,796.1 million | $1,718.5 million | +5%; +1% constant currency |
| Operating income | $239.5 million | $206.2 million | +16% |
| Net income | $192.2 million | $113.6 million | +69% |
| Diluted EPS | $3.32 | $1.95 | +70% |
| Gross profit margin | 73.0% | 73.2% | Down slightly |
| Effective tax rate | 10.2% | 40.5% | Improved |
| Operating cash flow | $381.8 million | $314.9 million | +$66.9 million |
| Free cash flow less product development spending | $231.1 million | $166.2 million | +$64.9 million |
- Cash and cash equivalents were $169.8 million at April 30, 2018, with approximately 87% held outside the United States.
- Debt was $360.0 million, consisting primarily of borrowings under a $1.1 billion revolving credit facility; approximately $742.8 million of borrowing capacity was unused.
- Total assets were $2.84 billion and shareholders’ equity was $1.19 billion.
- Working capital was negative $394.3 million, primarily because of $486.4 million of deferred subscription revenue collected in advance.
- Capital expenditures were $114.2 million and product development spending was $36.5 million.
- Cash dividends were $1.28 per share for both Class A and Class B common stock. Wiley repurchased 713,177 shares during the year at an average price of $55.65.
Segment Results
| Segment | FY2018 Revenue | Change | Contribution to Profit |
|---|---|---|---|
| Research | $934.4 million | +9%; +4% constant currency | $275.5 million |
| Publishing | $617.6 million | -2%; -4% constant currency | $123.9 million |
| Solutions | $244.1 million | +5%; +3% constant currency | $22.1 million |
- Research growth was driven by a full year of Atypon revenue, higher Open Access revenue, and increased licensing, reprints, and backfile sales. Calendar 2018 journal renewals were 2% higher on a constant-currency basis, with approximately 97% of targeted business under contract.
- Publishing declined because of lower print book demand, education-market softness, rental and digital alternatives, and timing of WileyPLUS revenue recognition. Cost reductions helped preserve contribution margin.
- Solutions benefited from higher online program enrollments and Education Services revenue. Corporate Learning was affected by slower French government funding for unemployment initiatives and blended learning programs.
Material Changes and Unusual Items
- Fiscal 2018 included a provisional $25.1 million, or $0.43 per share, favorable tax impact from the Tax Cuts and Jobs Act. The accounting remained subject to further guidance and finalization.
- Fiscal 2017 included a $49.1 million, or $0.85 per share, charge from unfavorable German tax litigation. This makes year-over-year net income and EPS comparisons unusually favorable in fiscal 2018.
- Restructuring and related charges increased to $28.6 million from $13.4 million. Cumulative charges under the restructuring program reached $166.5 million.
- A $3.6 million impairment charge was recorded for a Publishing brand.
- Foreign-exchange transaction losses were $12.8 million in fiscal 2018, compared with a $0.4 million gain in fiscal 2017. Foreign-currency translation gains of $67.6 million were recorded in other comprehensive income.
- The Company completed migration of Wiley Online Library to Atypon’s Literatum platform in March 2018.
- Goodwill was $1.02 billion and intangible assets were $848.1 million. The annual impairment tests indicated no goodwill impairment, although future adverse operating or market conditions could result in material non-cash charges.
- Wiley adopted the new revenue recognition standard on May 1, 2018, using the modified retrospective method. Management reported no material impact on consolidated revenue, financial position, or results of operations.
Guidance, Outlook, and Risks
For fiscal 2019, management expected revenue to be approximately even with the prior year on a constant-currency basis, with low-single-digit growth in Research and Solutions offset by a low-single-digit decline in Publishing. Adjusted EPS was expected to decline by a mid-single-digit percentage, operating cash flow by a high-single-digit percentage, and capital expenditures to be modestly lower. Management attributed the expected EPS and cash-flow pressure primarily to increased investment in growth initiatives and substantially lower working-capital gains.
- Management expected fiscal 2019 effective tax rate of approximately 23%–24%, excluding uncertain effects of certain Tax Act provisions.
- Research faced expected gross-margin pressure from higher journal royalty rates.
- Key risks include continued migration from print to lower-priced digital products, used and rental textbooks, customer and subscription-agent concentration, open-access mandates, foreign-currency volatility, interest-rate exposure, cyberattacks, ERP implementation risks, restructuring execution, acquisition integration, goodwill and intangible impairment, pension funding, tax-law changes, and global political or economic instability.
- Non-U.S. dollar revenues represented approximately 47% of fiscal 2018 revenue, including approximately 27% in British pounds and 12% in euros.
- Contractual obligations totaled approximately $1.23 billion, including $360.0 million of debt, $259.3 million of non-cancelable leases, and $531.8 million of minimum royalty obligations.
- Management stated that routine litigation was not expected to have a material effect. The Company maintained approximately $25 million of trade credit insurance covering certain named customers through June 2019.
Investor Verification Checklist
- Reconcile reported EPS growth after removing the $25.1 million Tax Act benefit, the prior-year $49.1 million German tax charge, restructuring costs, and foreign-exchange losses.
- Assess whether Research and Solutions growth can offset continued Publishing declines, particularly in education and print books.
- Monitor fiscal 2019 operating cash flow, capital spending, product-development investment, and the expected reduction in working-capital benefits.
- Review debt maturities, revolving-credit covenants, variable-rate exposure, and the May 2019 expiration of the $350 million interest-rate swap.
- Evaluate the recoverability of the $1.02 billion goodwill balance and $848.1 million of intangible assets under changing market and operating assumptions.
- Track the final accounting for the Tax Act and the ongoing effects of GILTI, BEAT, repatriation taxes, and other international tax matters.
- Review progress and control implications of the multi-year ERP implementation and the Company’s digital transformation and restructuring programs.