John Wiley & Sons, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended October 31, 2012, the second quarter and first half of fiscal 2013. Wiley provides scientific, technical, medical and scholarly publishing; professional development content and services; and global education content and services. The company continued shifting from print products toward digital products and services and renamed its Professional/Trade segment Professional Development.
Key financial metrics
| Metric | Three months ended October 31, 2012 | Year-over-year change | Six months ended October 31, 2012 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $431.8 million | Down 3% | $842.5 million | Down 4% |
| Gross profit margin | 70.0% | Down 30 basis points | 69.5% | Down 60 basis points |
| Operating income | $62.9 million | Down 13% | $101.9 million | Down 23% |
| Net income | $43.1 million | Down 15% | $79.2 million | Down 22% |
| Diluted EPS | $0.71 | Down 14% | $1.31 | Down 21% |
| Cash used in operating activities | Not separately provided | $91.6 million | Compared with $34.5 million used |
Second-quarter operating income included a $9.8 million pretax gain on the sale of the travel publishing program and $15.5 million of consumer publishing impairment charges. First-half results also included $4.8 million of restructuring charges. Excluding specified unusual items, foreign exchange and tax effects, management reported a 5% decline in second-quarter diluted EPS and a 13% decline in first-half diluted EPS.
At October 31, 2012, cash and cash equivalents were $92.6 million, compared with $82.3 million a year earlier and $259.8 million at April 30, 2012. Total assets were $2.63 billion. Long-term debt was $701.9 million, consisting primarily of variable-rate borrowings. The company reported approximately $134 million of unused revolving credit capacity after increasing the facility limit from $700 million to $825 million.
First-half investing cash outflow was $266.6 million, including $233.9 million for acquisitions, principally Deltak. Financing activities provided $197.6 million, including new borrowings. Capital spending was $51.4 million for composition and technology, property and equipment. The quarterly dividend increased 20% to $0.24 per share.
Segment performance
- Scientific, Technical, Medical and Scholarly: Second-quarter revenue was $249.8 million, essentially flat as reported and up 1% excluding foreign exchange. Journal subscriptions grew, while print books declined. Contribution to profit increased 1% to $72.5 million.
- Professional Development: Second-quarter revenue declined 8% to $101.3 million, driven by weak legacy print and consumer publishing activity, partly offset by Inscape and digital growth. Digital revenue increased 50% to approximately $22 million and represented 22% of segment revenue. Contribution to profit was a $1.0 million loss, including unusual items.
- Global Education: Second-quarter revenue declined 6% to $80.6 million. Print books fell 15%, while non-traditional and digital content grew 10% and represented 37% of segment revenue. Contribution to profit declined 23% to $15.9 million.
Material changes versus the prior comparable period
- Revenue and profitability declined primarily because of lower print book sales, weakness in education enrollment and retail channels, and lower professional and consumer publishing activity.
- Digital and non-traditional revenue grew in Professional Development and Global Education, while journal subscriptions remained comparatively resilient.
- Operating and administrative expenses declined through cost containment, lower distribution and facility costs, and lower employment-related costs, partly offset by costs from the Inscape acquisition and investments in technology.
- Interest expense increased to $5.7 million for the first half from $3.5 million, and the average borrowing cost rose to approximately 2.1% from 1.1%.
- The effective tax rate for the first half was 18.4%, compared with 21.6%, aided by an $8.4 million non-cash U.K. deferred-tax benefit.
- Accumulated other comprehensive loss was $202.6 million at October 31, 2012, including pension and foreign-currency translation effects.
Guidance, outlook, risks and unusual items
- Acquisitions: Wiley acquired Deltak.edu for approximately $220 million on October 25, 2012, financed with additional revolving-credit borrowings. Deltak supports more than 100 online programs and was expected to contribute approximately $36 million of revenue for the remainder of fiscal 2013 while being modestly dilutive to EPS. Wiley acquired Efficient Learning Systems for approximately $24 million on November 1, 2012; it was expected to be modestly dilutive to fiscal 2013 earnings.
- Portfolio actions: Wiley sold its travel publishing program to Google for approximately $22 million, including $3.3 million held in escrow. It subsequently sold its culinary, CliffsNotes and Webster’s New World programs to Houghton Mifflin Harcourt for approximately $11 million. Wiley continued evaluating the sale or discontinuation of its pets, crafts, nautical and general-interest programs.
- Spending outlook: Fiscal 2013 projected spending was approximately $75 million for composition, $55 million for technology, property and equipment, and $110 million for author advances.
- Liquidity and seasonality: Management expected operating cash flow, revolving facilities and other debt financing to meet foreseeable needs, but noted that cash flows are seasonal and that capital-market volatility could restrict access to financing. Subscription receipts generally occur from November through March, while education sales are concentrated in seasonal periods.
- Tax contingency: German tax authorities challenged tax deductions related to a prior restructuring. Wiley deposited approximately €24 million and expected possible additional deposits of up to €33 million plus interest. Management believed it was more likely than not to prevail; resolution could take several years.
- Market and operating risks: Key risks include journal renewal rates and subscription-agent liquidity, concentration among book customers, retail and used-book market conditions, foreign exchange, variable interest rates, intellectual-property protection, acquisition integration, and the transition from print to digital products.
- Other items: Hurricane Sandy delayed approximately $0.7 million of STMS revenue, $2.0 million of Professional Development revenue and $1.5 million of Global Education revenue into November. A 1% change in estimated sales-return rates could affect net income by approximately $3.5 million.
Most important facts for investors to verify
- Whether digital growth and journal subscription performance offset continuing declines in print publishing.
- The integration, revenue contribution and profitability of Deltak and Efficient Learning Systems.
- Debt reduction capacity, variable-rate exposure and the availability of the remaining revolving-credit capacity.
- The final impact of consumer publishing divestitures, discontinued programs and related transition-service obligations.
- The outcome and timing of the German tax dispute and recovery of deposited amounts.
- Whether seasonal subscription and education cash collections reverse the first-half operating cash outflow.
- The sustainability of earnings excluding the travel-sale gain, impairment charges, restructuring charges and one-time tax benefits.