Business Context and Reporting Period
John Wiley & Sons, Inc. provides scientific, technical, medical and scholarly content; professional development products and services; and global education content and online services. This Form 10-Q covers the three and nine months ended January 31, 2013, the third quarter and first nine months of fiscal 2013. Comparisons are with the corresponding fiscal 2012 periods.
Key Financial Metrics
| Metric | Three Months Ended January 31, 2013 | Three Months Ended January 31, 2012 | Nine Months Ended January 31, 2013 | Nine Months Ended January 31, 2012 |
|---|---|---|---|---|
| Revenue | $472.4 million | $451.1 million | $1,314.9 million | $1,328.2 million |
| Operating income | $83.6 million | $78.5 million | $185.6 million | $210.6 million |
| Net income | $57.1 million | $62.9 million | $136.3 million | $164.5 million |
| Diluted EPS | $0.95 | $1.03 | $2.26 | $2.69 |
| Operating margin | 17.7% | 17.4% | 14.1% | 15.9% |
| Net margin | 12.1% | 13.9% | 10.4% | 12.4% |
| Cash provided by operating activities | Not provided for the quarter | Not provided for the quarter | $162.2 million | $266.0 million |
- Third-quarter revenue increased 5%, or 4% excluding foreign exchange, primarily from acquisitions and digital growth.
- First-nine-month revenue declined 1%, but was approximately flat excluding foreign exchange.
- Third-quarter gross margin was 70.0%, up 150 basis points; first-nine-month gross margin was 69.7%, up 20 basis points.
- Cash and cash equivalents were $285.9 million at January 31, 2013, compared with $259.8 million at April 30, 2012 and $284.5 million at January 31, 2012.
- Long-term debt was $734.8 million at January 31, 2013, compared with $475.0 million at April 30, 2012 and $483.0 million at January 31, 2012. The company stated that the increase primarily financed the Deltak and ELS acquisitions.
- Working capital remains affected by seasonality and substantial deferred revenue collected in advance from subscriptions.
Material Changes Versus the Prior Comparable Period
- Third-quarter operating income increased 7%, while net income decreased 9% and diluted EPS decreased 8%. Excluding the prior-year tax reserve release, management stated that third-quarter diluted EPS increased 4%.
- First-nine-month operating income decreased 12% and net income decreased 17%. Diluted EPS declined 16% to $2.26, or 7% excluding specified unusual items.
- Professional Development revenue increased 6% in the quarter, supported by Inscape and ELS, and its contribution margin increased to 10.4% from 6.8%.
- Global Education revenue increased 19% in the quarter, primarily from Deltak and digital content, but its contribution margin declined to 29.4% from 31.6%.
- Scientific, Technical, Medical and Scholarly revenue declined 2% in the quarter and its contribution margin increased to 27.6% from 27.2%. Journal renewals for calendar 2013 were approximately 5% above calendar 2012, with 77% of expected business closed as of January 31, 2013.
- Operating and administrative expenses increased 6% in the quarter, driven mainly by acquired operations and higher technology costs.
- Operating cash flow declined $103.8 million year over year, primarily because of changes in deferred revenue, a $30 million German tax deposit and higher use of operating assets and liabilities.
- Investing cash outflows increased to $307.3 million, including $258.7 million for acquisitions, compared with $91.6 million in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Wiley acquired Deltak for approximately $220 million and ELS for approximately $24 million. Deltak was expected to contribute approximately $34 million of fiscal 2013 revenue and be modestly dilutive to EPS; ELS was also expected to be modestly dilutive after financing costs.
- The company sold its travel publishing program to Google for $22 million and recorded a $9.8 million pre-tax gain. It also sold culinary, CliffsNotes and Webster’s New World programs to Houghton Mifflin Harcourt for $11 million.
- The company recorded $4.8 million of restructuring charges and $15.5 million of consumer publishing impairment charges during the first nine months.
- In March 2013, management announced a restructuring program targeting approximately $80 million of run-rate cost savings by the end of April 2014. Wiley expected to record approximately $25 million of restructuring charges in the fourth quarter of fiscal 2013 and at least one additional charge during fiscal 2014.
- Projected fiscal 2013 spending was approximately $75 million for composition and $55 million for technology, property and equipment. Author advances were expected to be approximately $110 million.
- The revolving credit facility limit was increased from $700 million to $825 million to support acquisitions. The filing states that approximately $101 million of borrowing capacity was unused, but the referenced date is not clear in the filing text.
- The company expects operating cash flow, revolving credit facilities and other debt financing to meet foreseeable needs, while warning that volatility in global credit markets could restrict access to financing.
- Key risks include journal renewal rates and subscription-agent liquidity, higher education enrollment and used-book markets, retailer and wholesaler concentration, foreign exchange, interest rates, intellectual-property protection, acquisition integration and global economic conditions.
- Wiley had $734.8 million of variable-rate loans, with a $250 million interest-rate swap. A hypothetical 1% change in rates on $484.8 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $3.0 million.
- The company deposited approximately €24 million with German tax authorities and may be required to deposit up to an additional €33 million plus interest while contesting the tax treatment. The company believes it is more likely than not to prevail.
- Management concluded that disclosure controls and procedures were effective and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the announced restructuring delivers the targeted $80 million of run-rate savings and what total charges are ultimately recorded.
- The pace and profitability of Deltak, ELS and other acquired digital businesses, including integration costs and leverage effects.
- Journal subscription renewals, collection timing and the financial condition of subscription agents.
- Trends in Global Education enrollment, print textbook rentals and the shift toward digital products.
- Debt repayment capacity, variable-rate exposure and remaining borrowing availability under the expanded credit facility.
- The resolution and timing of the German tax dispute and recovery of deposited amounts.
- The effect of consumer publishing divestitures, remaining program wind-downs and related impairment or transition costs.
- The impact of seasonality, deferred revenue movements and sales-return estimates on reported cash flow and earnings.