John Wiley & Sons, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2015 ended January 31, 2015. The filing compares results with the corresponding periods ended January 31, 2014. Wiley is a global provider of research, professional development, and education content and services.
Financial Results and Position
| Metric | Q3 FY2015 | Q3 FY2014 | 9M FY2015 | 9M FY2014 |
|---|---|---|---|---|
| Revenue | $465.9 million | $457.9 million | $1,380.8 million | $1,318.1 million |
| Operating income | $54.0 million | $73.4 million | $179.7 million | $159.1 million |
| Net income | $42.5 million | $52.5 million | $130.0 million | $124.6 million |
| Diluted EPS | $0.72 | $0.88 | $2.18 | $2.10 |
| Gross margin | 73.3% | 71.5% | 72.3% | 71.1% |
| Operating cash flow | Not separately provided | Not separately provided | $154.2 million | $153.8 million |
Q3 operating income declined because of higher restructuring charges, increased operating expenses, amortization, and acquisition-related costs. The nine-month improvement reflected revenue growth, higher gross margins, and cost savings, partly offset by acquisition investments and restructuring costs.
At January 31, 2015, cash and equivalents were $260.2 million, compared with $316.0 million a year earlier and $486.4 million at April 30, 2014. Total debt was approximately $688.1 million, including $100.0 million of short-term debt and $588.1 million of long-term debt. The Company reported approximately $364.8 million of unused borrowing capacity and compliance with applicable leverage and interest coverage covenants.
Nine-month cash flow included $245.7 million of investing outflows, including approximately $166 million for the CrossKnowledge acquisition. Financing outflows were $109.6 million, including $51.5 million of dividends, $62.0 million of treasury stock purchases, and net debt repayment activity. The quarterly dividend increased to $0.29 per share from $0.25.
Material Changes Versus Prior Period
- Q3 revenue increased 2%, or 5% excluding foreign exchange. Nine-month revenue increased 5%.
- Research revenue declined 1% in Q3 but increased 3% excluding foreign exchange; journal revenue growth offset lower print and digital book revenue.
- Professional Development revenue increased 15% in Q3 and 13% for nine months, primarily from the CrossKnowledge and Profiles acquisitions. Excluding those acquisitions, Professional Development revenue declined.
- Education revenue decreased 4% in Q3 but increased 3% for nine months. Growth in digital books, WileyPLUS, custom products, and Deltak services was offset by lower print textbook revenue.
- Q3 restructuring charges rose to $24.0 million from $4.3 million. Nine-month charges were $23.9 million versus $27.3 million. Cumulative program charges reached $91.1 million, which management expects to recover by the end of fiscal 2016.
- Gross margin improved 180 basis points in Q3 and 120 basis points for the nine months, supported by digital products, acquisitions, outsourcing, and procurement savings.
- The nine-month effective tax rate increased to 24.3% from 17.6%, primarily because the prior year included a $10.6 million non-cash U.K. deferred tax benefit. Excluding that benefit, the effective rate declined from 24.6% to 24.3%.
- Foreign currency translation produced an other comprehensive loss of $166.1 million for nine months, primarily from the stronger U.S. dollar against the pound and euro.
Guidance, Outlook, Risks, and Unusual Items
- Management expects fiscal 2015 spending of approximately $80 million for technology, property and equipment and $40 million for composition activities. Author advances are projected at approximately $110 million.
- Management believes operating cash flow, available revolving facilities, and other debt financing will meet foreseeable operating, investing, and financing needs, although access to credit markets could be affected by market volatility.
- The Company acquired CrossKnowledge for approximately $166 million on May 1, 2014 and Profiles International for approximately $47.5 million on April 1, 2014. CrossKnowledge generated $16.2 million of Q3 revenue and a $2.8 million operating loss; year-to-date revenue was $31.5 million and operating loss was $3.6 million.
- A German tax audit dispute remains unresolved. Wiley had deposited approximately €48 million, or $60.1 million including accrued interest, through January 31, 2015, and expects additional deposits of up to €10 million plus interest. Management expects to prevail and has not recorded a charge for losing the tax treatment.
- Swets Information Services filed for bankruptcy. Wiley expects a potential approximately $5 million impact on calendar 2015 journal subscription revenue, although no material financial statement impact had occurred through the filing date.
- The Company maintains variable-rate debt and interest-rate swaps with total notional amounts of $450 million. A one-percentage-point change in rates on approximately $238 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $1.5 million.
- Open foreign exchange contracts had a fair-value loss of approximately $8.8 million at January 31, 2015. The Company recognized $8.8 million of related losses for the nine-month period, substantially offset by changes in underlying foreign-currency exposures.
- Net print-book sales return reserves were $39.7 million. A one-percentage-point change in the estimated return rate could affect net income by approximately $2.5 million.
- Other risks include journal renewal rates, subscription-agent liquidity, book-market concentration, seasonality, used-book competition, intellectual-property protection, acquisition integration, technology investments, and global economic conditions.
Investor Verification Checklist
- Verify the sustainability of journal subscription growth and the effect of the Swets bankruptcy on renewal and collection trends.
- Assess whether CrossKnowledge and Profiles can convert revenue growth into operating profit after acquisition-related expenses and amortization.
- Review restructuring execution, remaining liabilities, and whether the stated $91.1 million cumulative investment is recovered by fiscal 2016.
- Monitor leverage, debt maturities, unused credit capacity, interest-rate exposure, and compliance with debt covenants.
- Evaluate foreign exchange sensitivity, especially the effect of the stronger U.S. dollar on reported revenue, comprehensive income, and debt-related exposures.
- Follow the German tax appeal, future required deposits, and the potential cash and tax consequences if Wiley does not prevail.
- Reconcile reported EPS with restructuring charges, prior-year tax benefits, acquisition dilution, and other adjusted performance measures.
- Confirm the impact of seasonal deferred revenue, print-book returns, Deltak investment requirements, and projected capital and composition spending on future free cash flow.