Business Context and Reporting Period
John Wiley & Sons, Inc. is a global publisher of scientific, technical, medical and scholarly content; professional and trade books and subscription products; and higher-education materials, including digital products and online services. This Form 10-Q covers the three and nine months ended January 31, 2011, the third quarter and first nine months of fiscal 2011. Results are unaudited.
Financial Performance and Position
| Metric | Three months ended Jan. 31, 2011 | Three months ended Jan. 31, 2010 | Nine months ended Jan. 31, 2011 | Nine months ended Jan. 31, 2010 |
|---|---|---|---|---|
| Revenue | $447.9 million | $427.1 million | $1,297.6 million | $1,263.4 million |
| Operating income | $69.7 million | $68.3 million | $210.4 million | $199.2 million |
| Net income | $45.6 million | $42.4 million | $143.3 million | $115.5 million |
| Diluted EPS | $0.74 | $0.71 | $2.34 | $1.95 |
| Gross margin | 69.2% | 68.7% | 69.0% | 68.8% |
Calculated operating margins were approximately 15.6% for the quarter and 16.2% for the nine-month period. Net margins were approximately 10.2% and 11.0%, respectively. Revenue increased 5% in the quarter and 3% for the nine months; excluding foreign exchange, growth was 7% and 5%.
- Third-quarter revenue by segment: STMS $237.9 million, Professional/Trade $114.5 million, and Higher Education $95.4 million.
- Nine-month revenue by segment: STMS $712.2 million, Professional/Trade $327.2 million, and Higher Education $258.2 million.
- Third-quarter direct contribution to profit was $97.1 million for STMS, $20.6 million for Professional/Trade, and $40.2 million for Higher Education.
- Cash provided by operating activities was $353.2 million for the first nine months, compared with $314.7 million in the prior-year period.
- Cash used in investing activities was $153.2 million, including $114.1 million of product-development investment, $32.7 million of property, equipment and technology additions, and $6.5 million for acquisitions.
- Cash used in financing activities was $57.0 million. The company repaid $271.9 million of long-term debt and borrowed $254.8 million.
- Cash and cash equivalents were $305.4 million at January 31, 2011, versus $67.5 million a year earlier.
- Total debt was approximately $631.9 million, consisting primarily of variable-rate borrowings. Unused revolving-credit capacity was approximately $520 million.
- Shareholders’ equity was $906.9 million at January 31, 2011, compared with $746.9 million at January 31, 2010.
- The quarterly dividend increased to $0.16 per share from $0.14. The company repurchased approximately 222,000 treasury shares during the first nine months.
Material Changes Versus the Prior Comparable Period
- Operating income increased 2% in the quarter and 6% for the nine months. Excluding currency effects, the Borders provision, and prior-year impairment and restructuring charges, management reported operating-income growth of 16% for the quarter and 11% for the nine months.
- STMS benefited from journal subscriptions, books, digital products, and improved margins. Nine-month STMS revenue increased 1% reported and 6% excluding foreign exchange.
- Professional/Trade revenue rose 7% in the quarter and 3% for the nine months. eBook sales nearly doubled in the quarter and more than doubled for the nine months.
- Higher Education revenue increased 4% in the quarter and 9% for the nine months. Nine-month WileyPLUS billings increased 14% to approximately $32 million.
- Operating and administrative expenses increased 4% in the quarter and 3% for the nine months, primarily due to technology investments, employment costs, journal editorial costs, and advertising.
- Interest expense declined to $4.6 million from $8.7 million in the quarter and to $15.2 million from $26.5 million for the nine months, driven by lower rates and lower average debt.
- The effective tax rate for the nine months declined to 26.6% from 29.2%, including a $4.2 million non-cash U.K. deferred-tax benefit and an approximately $2.0 million release of a previously accrued tax reserve. Excluding these benefits, the effective rate was 29.8%.
Guidance, Outlook, Risks and Unusual Items
- Management forecast fiscal 2011 product-development spending of approximately $145 million and property, equipment and technology spending of approximately $50 million.
- The company intends to refinance its term loan and revolving credit facility before their February 2013 and February 2012 expirations, respectively. Management believes operating cash flow, available credit, and other financing sources will meet foreseeable needs, but cautions that capital-market volatility could impair refinancing access or terms.
- The company recorded a $9.3 million pre-tax provision for doubtful accounts, or approximately $0.10 per diluted share, related to Borders Group. Borders filed for Chapter 11 bankruptcy protection on February 16, 2011. Management stated that it did not anticipate additional Borders bad-debt expense.
- Prior-year results included $14.3 million of impairment and restructuring charges for the nine months, including charges related to GIT Verlag and other controlled-circulation magazines; no comparable charges were recorded in the current nine-month period.
- Foreign-exchange transaction losses were $1.6 million for the nine months, compared with $10.1 million of losses in the prior year. Foreign-currency translation generated a $33.2 million other-comprehensive-income benefit.
- Key risks include journal-renewal rates, the financial condition of subscription agents and book wholesalers, customer concentration, seasonality in education, used-book competition, technology investment execution, intellectual-property protection, acquisitions, foreign exchange, interest rates, pension obligations, tax-law changes, and access to credit markets.
- A hypothetical 1% change in interest rates on unhedged variable-rate debt would affect annual net income and cash flow by approximately $3.2 million. A 1% change in the estimated sales-return rate could affect net income by approximately $4.6 million.
- Disclosure controls and procedures were deemed effective, and the filing reports no material change in internal control over financial reporting.
Investor Verification Priorities
- Verify the collectability and final recovery outcome of the Borders receivable after its bankruptcy filing.
- Confirm debt maturities, covenant compliance, refinancing progress, and the portion of debt exposed to variable interest rates.
- Assess whether digital investments, WileyPLUS, eBooks, backfiles, and Wiley Online Library are producing the expected revenue and margin benefits.
- Review journal subscription renewals, subscription-agent liquidity, and the seasonal working-capital effect on cash flow.
- Reconcile reported EPS with the $9.3 million Borders provision, tax benefits, foreign-exchange effects, prior-year restructuring charges, and changes in diluted shares.
- Monitor sales-return reserves, book-customer concentration, pension liabilities, foreign-currency exposure, and proposed tax-law changes.