John Wiley & Sons, Inc. — Fiscal 2019 First-Quarter Form 10-Q
Business Context and Reporting Period
John Wiley & Sons, Inc. is a global provider of research publishing, education publishing and learning solutions. This report covers the three months ended July 31, 2018, the first quarter of fiscal 2019, compared with the three months ended July 31, 2017. Results are seasonal, particularly because journal subscription collections are concentrated later in the fiscal year and education publishing sales are concentrated in July–October and December–January.
Financial Performance and Key Metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|
| Revenue | $410.9 million | $411.4 million | Flat; down 1% constant currency |
| Gross profit margin | 72% | 72% | Flat |
| Operating income | $36.1 million | $12.6 million | Up $23.6 million |
| Operating margin | 8.8% | 3.1% | Up approximately 5.7 percentage points |
| Net income | $26.3 million | $9.2 million | Up $17.1 million |
| Diluted EPS | $0.45 | $0.16 | Up $0.29 |
| Net cash used in operating activities | $149.5 million | $81.2 million | Use increased $68.3 million |
| Free cash flow less product development spending | $(169.5) million | $(117.2) million | Greater use of cash |
- Operating results benefited from a $6.1 million restructuring credit in Q1 FY2019 versus a $25.7 million restructuring charge in the prior-year quarter.
- Adjusted EPS, excluding restructuring impacts and foreign-exchange losses, declined 28% to $0.43. Management attributed the decline primarily to higher investment in growth initiatives.
- Interest expense declined to $2.8 million from $3.3 million; foreign-exchange transaction losses declined to $1.7 million from $5.1 million.
- Q1 FY2019 included a 22.8% effective tax rate, compared with a 51.5% tax benefit in the prior-year period. The prior-year benefit was driven primarily by restructuring and impairment charges.
Segment Results
| Segment | Revenue | Year-over-year change | Contribution to profit |
|---|
| Research | $225.0 million | Up 1%; flat constant currency | $57.1 million, down 6% |
| Publishing | $124.9 million | Down 5% | $13.7 million versus $4.5 million |
| Solutions | $61.0 million | Up 8%; up 7% constant currency | $3.2 million versus $(2.0) million |
- Research growth in Open Access and licensing was largely offset by lower journal subscription revenue. Research contribution declined because of higher content management, marketing and technology costs.
- Publishing revenue declined primarily because of weaker Education Publishing demand and the continuing shift from print. STM and Professional Publishing grew 4%.
- Solutions growth was led by Education Services/OPM, including higher tuition revenue from increased enrollments, and Professional Assessment.
Financial Position, Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $113.1 million at July 31, 2018, including approximately $106.1 million, or 94%, held outside the United States.
- Debt outstanding was $507.5 million, compared with $360.0 million at April 30, 2018. The company had approximately $595.3 million of unused borrowing capacity and was in compliance with its leverage and interest-coverage covenants.
- Total assets were $2.77 billion and shareholders’ equity was $1.17 billion at July 31, 2018.
- Operating cash flow was seasonally negative because of working-capital requirements, including collections timing, vendor payments and higher accounts receivable. Negative working capital was $187.2 million at July 31, 2018.
- Investing cash outflows were $22.0 million, including $18.3 million of technology, property and equipment additions and $1.7 million of product development spending.
- Financing cash inflows were $119.2 million, primarily reflecting $177.7 million of new borrowings, partially offset by $29.9 million of debt repayments, $19.0 million of dividends and $8.0 million of share repurchases.
- The company paid a quarterly dividend of $0.33 per share and repurchased 125,932 Class A shares at an average price of $63.48.
- A $350 million interest-rate swap hedged a portion of variable-rate debt through May 2019. Management estimated that a one-percentage-point change in rates on the $157.5 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $1.2 million.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially unchanged, but reported operating income and net income increased substantially because the prior-year period included significant restructuring charges and a $3.6 million publishing-brand impairment charge.
- Underlying profitability weakened: adjusted EPS declined 28%, Research contribution declined 13% excluding restructuring and foreign-exchange effects, and Publishing contribution declined 16% on the same basis.
- Operating cash flow deteriorated by $68.3 million, primarily because of higher vendor payments, increased accounts receivable and higher operating expenses.
- The company adopted the new revenue standard, Topic 606, using the modified retrospective method. Management reported no material impact on revenue or earnings, but accounts receivable and deferred revenue presentation changed materially.
- The company also adopted standards concerning restricted cash, pension-cost presentation, stock compensation, financial instruments and other matters; management reported no material overall impact from these adoptions.
- Foreign currency translation produced a $40.3 million other comprehensive loss, contributing to a $5.9 million comprehensive loss despite $26.3 million of net income.
Guidance, Outlook, Risks and Unusual Items
The company reaffirmed fiscal 2019 guidance:
| Metric | Fiscal 2018 actual | Fiscal 2019 expectation |
|---|
| Constant-currency revenue | $1.796 billion | Even with prior year |
| Adjusted EPS | $3.43 | Mid-single-digit decline |
| Cash provided by operating activities | $381.8 million | High-single-digit decline |
| Capital expenditures | $150.7 million | Lower |
- Management expects low-single-digit growth in Research and Solutions, offset by a low-single-digit decline in Publishing.
- Adjusted EPS is expected to decline because of increased investment in Research and Education Services growth initiatives.
- Fiscal-year operating cash flow is expected to decline because of growth investments and substantially lower working-capital gains. Capital expenditures are expected to decline modestly as headquarters transformation is completed.
- The expected full-year effective tax rate is approximately 23%–24%. Certain Tax Cuts and Jobs Act calculations, including GILTI, BEAT and FDII effects, remained provisional.
- Key risks include journal subscription renewal rates, the financial condition of subscription agents, book-industry consolidation and retailer stability, education-market seasonality and used-book activity, foreign-exchange volatility, economic and political conditions, intellectual-property protection, acquisitions and integration, interest rates, sales returns and customer credit risk.
- Estimated book sales-return reserves could affect net income by approximately $0.3 million for each one-percentage-point change in the estimated return rate.
- The company expects approximately $10 million of costs to fulfill contracts to be reclassified from capital expenditures to operating cash flow under Topic 606. Fiscal 2019 projected spending includes approximately $100 million of technology and property additions, $25 million of product development and $127 million of author advances.
- Routine litigation was not expected to have a material effect on financial condition or results of operations.
Important Facts for Investors to Verify
- Whether Research investment spending produces the expected revenue and margin improvement, given the decline in adjusted EPS and Research contribution.
- The pace of Education Publishing decline and whether Solutions and STM/Professional Publishing growth offsets it.
- Seasonal recovery in operating cash flow and the company’s ability to reduce debt while maintaining dividends, repurchases and investment spending.
- Debt covenant compliance, refinancing requirements and exposure to higher variable interest rates after the interest-rate swap expires in May 2019.
- The effect of foreign-exchange movements on reported revenue, earnings, comprehensive income and shareholders’ equity.
- Finalization of provisional Tax Cuts and Jobs Act accounting and the company’s approximately 23%–24% full-year tax-rate expectation.
- The impact of Topic 606 presentation changes on receivables, deferred revenue, operating cash flow and capital expenditures.
- Management’s execution of the ERP implementation and related internal-control testing as additional functionality is deployed.
