Business Context and Reporting Period
John Wiley & Sons, Inc. filed this unaudited Form 10-Q for the three and nine months ended January 31, 2017, the third quarter of fiscal 2017. Wiley provides research publishing, books and related content, online program management, corporate learning, professional assessment, and course workflow services. Effective August 1, 2016, the Company reorganized its reporting segments into Research, Publishing, and Solutions; prior-period segment data was recast.
Financial Performance and Position
| Metric | Three months ended January 31, 2017 | Year-over-year change | Nine months ended January 31, 2017 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $436.5 million | Flat; up 3% excluding foreign exchange | $1,266.3 million | Down 2%; up 1% excluding foreign exchange |
| Operating income | $51.2 million | Up from $39.6 million | $142.7 million | Down from $144.8 million |
| Net income | $47.4 million | Up from $35.5 million | $67.0 million | Down from $111.6 million |
| Diluted EPS | $0.82 | Up from $0.61 | $1.15 | Down from $1.90 |
| Gross margin | 73.3% | Up 80 basis points | 73.0% | Up 60 basis points |
| Cash provided by operating activities | Not separately provided | Not separately provided | $229.2 million | Up from $116.6 million |
Third-quarter contribution to profit was $94.9 million, compared with $92.9 million in the prior year. Research contribution increased to $52.5 million from $43.9 million, Publishing declined to $38.8 million from $47.2 million, and Solutions increased to $3.6 million from $1.8 million.
For the nine months, Research revenue increased 4% to $619.0 million, Publishing revenue declined 13% to $479.7 million, and Solutions revenue increased 13% to $167.6 million. Research contributed $173.2 million, Publishing $94.6 million, and Solutions $9.1 million.
Cash and cash equivalents were $482.3 million at January 31, 2017, compared with $535.9 million a year earlier and $363.8 million at April 30, 2016. Debt totaled approximately $865.7 million, all classified as long-term debt at quarter-end, with approximately $241 million of unused borrowing capacity. Net debt was approximately $383.4 million. Deferred revenue was $403.3 million, primarily reflecting subscription cash collected in advance.
Nine-month investing cash outflows were $261.7 million, including $152.1 million for acquisitions and $82.3 million for technology, property and equipment. Financing cash inflows were $179.5 million, including $600.9 million of long-term borrowings and $340.2 million of repayments. Dividends paid were $53.6 million and treasury-stock purchases were $35.4 million.
Material Changes Versus the Prior Comparable Period
- Revenue benefited from the transition to time-based digital journal subscriptions, which shifted approximately $34 million of revenue into the first nine months of fiscal 2017 without affecting free cash flow.
- Research results benefited from subscription growth and the September 2016 acquisition of Atypon; Atypon contributed $10.4 million of nine-month revenue and approximately $121 million of acquisition cash outflow.
- Publishing revenue weakened materially, primarily because of lower print-book demand, education-market pressures, sales returns, and the absence of a prior-year one-time digital book sale and large backfile sale.
- Solutions revenue and profitability improved, supported by growth in online program management, corporate learning, and professional assessment.
- Nine-month restructuring charges decreased to $15.0 million from $20.8 million. Cumulative restructuring charges since program inception reached $139.6 million.
- Operating cash flow increased by $112.5 million, principally due to the timing and acceleration of journal subscription collections, higher cash earnings, lower restructuring payments, and lower income-tax payments.
- The Company acquired Ranku for an undisclosed amount and acquired Atypon for approximately $121 million in cash, net of cash acquired.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected approximately 1% full-year calendar 2017 journal subscription growth; approximately 87% of targeted business was under contract as of January 31, 2017.
- Fiscal 2017 projected spending was approximately $110 million for technology, property and equipment, $40 million for composition, and $110 million for author advances.
- The Company expects operating cash flow, revolving credit facilities, and other available debt financing to meet foreseeable operating, investing, and financing needs, while noting potential exposure to volatility in global capital and credit markets.
- A German Federal Fiscal Court decision resulted in forfeiture of approximately €56.6 million of tax deposits and a predominantly non-cash income-tax charge of approximately $48 million. Excluding this item, the nine-month effective tax rate would have been 13.7%, versus the reported 49.5%.
- A $8.8 million pension settlement charge was recognized after approximately 780 former employees elected lump-sum payments totaling $28.3 million from pension-plan assets.
- Foreign exchange remained a significant risk. The Company recorded a nine-month foreign-currency translation loss of $62.7 million in other comprehensive income and held one sterling forward contract with a notional amount of £274 million.
- The Company had $865.7 million of variable-rate loans; a hypothetical 1% interest-rate change on $515.7 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $3.2 million.
- Key operating risks include journal-renewal rates, the financial condition of subscription agents, book-market and used-book trends, customer and retailer concentration, intellectual-property protection, foreign exchange, technology investments, and integration of acquisitions.
- The annual goodwill and indefinite-lived intangible-asset review identified no impairments. The Company was implementing a global ERP system and expected additional rollout over the following three years.
Most Important Facts for Investors to Verify
- Whether journal subscription growth remains sustainable after the temporary timing benefit from the shift to time-based subscriptions.
- Whether Publishing’s print-book decline stabilizes and whether digital and workflow products offset the deterioration.
- The cash-flow quality and sustainability of subscription collections, including the effects of seasonality and customer-agent liquidity.
- Progress on integrating Atypon and Ranku, acquisition-related costs, and the realization of expected strategic benefits.
- Debt repayment capacity, variable-rate exposure, available borrowing capacity, and the effect of future interest-rate movements.
- The effect of the German tax settlement, pension actions, restructuring program, ERP investment, and other non-recurring items on normalized earnings.
- Exposure to foreign exchange, sales-return estimates, book-customer concentration, and regulatory or sanctions-related risks.