John Wiley & Sons, Inc. — Form 10-Q Summary
Business context and reporting period
John Wiley & Sons, Inc. is a global provider of research, publishing, education, assessment, and corporate learning products and services. This Form 10-Q covers the three and six months ended October 31, 2018, the second quarter and first six months of fiscal 2019. The report is unaudited except for the April 30, 2018 balance sheet amounts.
Reportable segments are Research, Publishing, and Solutions. The company adopted the new revenue standard, Topic 606, using the modified retrospective method on May 1, 2018; management stated that adoption did not materially affect consolidated revenue, financial position, or results of operations.
Key financial metrics
| Metric | Three months ended October 31, 2018 | Prior year | Six months ended October 31, 2018 | Prior year |
|---|---|---|---|---|
| Revenue | $448.6 million | $451.7 million | $859.5 million | $863.2 million |
| Operating income | $57.5 million | $80.8 million | $93.6 million | $93.4 million |
| Net income | $43.8 million | $60.0 million | $70.1 million | $69.3 million |
| Diluted EPS | $0.76 | $1.04 | $1.21 | $1.20 |
| Gross profit margin | 73.2% | 73.5% | 72.7% | 72.8% |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(121.1) million | $(45.8) million |
For the quarter, adjusted EPS was $0.89 versus $1.03, excluding restructuring and foreign-exchange adjustments. For the six-month period, adjusted EPS was $1.31 versus $1.62.
- Quarterly revenue declined 1% as reported but increased 1% on a constant-currency basis. Six-month revenue was essentially flat on both reported and constant-currency bases.
- Quarterly operating income declined 29%, primarily because of $10.0 million of restructuring charges compared with a $1.4 million restructuring credit in the prior year, higher operating expenses, and foreign exchange effects.
- Six-month operating income was broadly flat despite higher operating expenses, lower restructuring charges, and unfavorable foreign currency effects.
- Quarterly operating and administrative expenses increased 3% to $248.6 million; management attributed the increase primarily to growth investments and strategic planning costs.
- Six-month restructuring charges were $3.9 million versus $24.3 million in the prior year. Cumulative charges under the restructuring program were $170.4 million.
- Cash flow was seasonally negative because of the timing of annual journal subscription billings and collections. Free cash flow less product development spending was $(163.5) million versus $(117.2) million in the prior year.
- Capital expenditures and product development spending totaled $42.4 million during the first six months, compared with $71.4 million in the prior year.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $115.6 million at October 31, 2018, including approximately $93.9 million held outside the United States.
- Debt outstanding was $537.3 million, consisting of variable-rate loans. The company reported approximately $565.5 million of unused borrowing capacity and compliance with its leverage and interest-coverage covenants.
- Cash, cash equivalents, and restricted cash decreased by $54.2 million during the first six months, ending at $116.1 million.
- The company borrowed $245.1 million and repaid $65.8 million of long-term debt during the first six months.
- Quarterly dividends were increased to $0.33 per share, or $0.66 per share for the first six months. The company repurchased 425,120 Class A shares for $25.0 million during the first six months.
- The company stated that operating cash flow, revolving credit facilities, and other available debt financing should be adequate for foreseeable operating, investing, and financing needs, while noting potential volatility in global credit markets.
Material changes versus the prior comparable period
- Research revenue was flat for the quarter and six months on a reported basis, with growth in Open Access and Atypon offsetting lower journal subscription revenue. Research contribution to profit declined 16% for the quarter and 11% for the six months, primarily due to higher editorial and other operating costs.
- Publishing revenue declined 5% for both the quarter and six months, driven mainly by lower Education Publishing revenue and weaker STM and Professional Publishing. Course Workflow revenue increased, partly because of the timing of revenue recognition for multi-semester offerings.
- Solutions revenue increased 8% for both the quarter and six months. Corporate Learning and Professional Assessment were key contributors. Six-month Solutions contribution to profit increased 92%, although quarterly contribution declined 4% on a reported basis because of restructuring charges.
- Foreign currency translation produced other comprehensive losses of $20.4 million for the quarter and $60.7 million for the six months, compared with gains in the prior-year periods. Accumulated other comprehensive loss was $488.6 million at October 31, 2018.
- Accounts receivable increased to $236.2 million from $212.4 million at April 30, 2018, while current deferred revenue declined to $237.2 million from $486.4 million, reflecting seasonal recognition of subscription revenue and Topic 606 presentation changes.
- Goodwill declined to $986.2 million, primarily due to foreign currency translation. Net intangible assets declined to $787.6 million from $848.1 million.
- Stock-based compensation expense increased to $8.9 million for the first six months from $2.5 million in the prior-year period.
Guidance, outlook, risks, and unusual items
The company reaffirmed fiscal 2019 guidance, excluding the acquisition of The Learning House, Inc. The outlook calls for constant-currency revenue to be even with fiscal 2018, adjusted EPS to decline by a mid-single-digit percentage, operating cash flow to decline by a high-single-digit percentage, and capital expenditures to be lower. Management expects low-single-digit revenue growth in Research and Solutions, offset by a low-single-digit decline in Publishing, and a non-GAAP effective tax rate of approximately 23% to 24%.
- Learning House was acquired for $200 million in cash on November 1, 2018, after the reporting period. Management expects approximately $30 million of fiscal 2019 revenue and approximately $0.10 of EPS dilution from the acquisition.
- Additional restructuring actions taken during the quarter are expected to generate approximately $15 million of annualized savings beginning in the second half of fiscal 2020. Management does not currently anticipate further material restructuring charges.
- Key risks include subscription renewal rates, the financial condition and liquidity of subscription agents, changes in the educational and used-book markets, dependence on online retailers and book wholesalers, foreign exchange movements, interest-rate exposure, protection of intellectual property, integration of acquisitions, execution of restructuring savings, and global economic and political conditions.
- The company had $537.3 million of variable-rate debt; a one-percentage-point change in interest rates on approximately $187.3 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $1.4 million.
- The company estimated that a one-percentage-point change in the print-book sales-return rate could affect net income by approximately $0.6 million. The sales-return reserve was $31.1 million at October 31, 2018.
- The company reported routine litigation and stated that pending matters were not expected to have a material effect on financial condition or results of operations.
- Disclosure controls were effective. The company continued phased implementation of a global ERP system and stated that it did not expect the implementation to adversely affect internal control over financial reporting.
Most important facts for investors to verify
- Whether the expected Research and Solutions growth offsets continued declines in Publishing, particularly Education Publishing.
- The timing and durability of the forecast $15 million of restructuring savings and whether additional charges arise.
- Post-acquisition performance, integration costs, and the actual revenue and EPS impact of Learning House.
- Cash conversion after the seasonal subscription collection cycle, including the effect of lower working-capital benefits and Topic 606 reclassifications.
- Debt reduction capacity, variable-rate exposure, covenant headroom, and refinancing or credit-market risks.
- The sustainability of Open Access, Atypon, Corporate Learning, Professional Assessment, and WileyPLUS growth.
- Potential changes to provisional Tax Cuts and Jobs Act accounting and the company’s 23% to 24% expected non-GAAP tax rate.