John Wiley & Sons, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended January 31, 2018, representing fiscal 2018 third quarter and year-to-date results. The filing is unaudited except for the April 30, 2017 balance sheet. All amounts are in thousands unless otherwise stated.
Business Context and Financial Position
Wiley operates through Research, Publishing, and Solutions. Research includes journals, open access, licensing, reprints, backfiles, and Atypon publishing technology services; Publishing includes professional, education, course workflow, and test-preparation products; Solutions includes online program management, professional assessment, and corporate learning.
- Assets were $2.86 billion at January 31, 2018, compared with $2.61 billion at April 30, 2017.
- Cash and cash equivalents were $128.2 million, compared with $58.5 million at April 30, 2017.
- Long-term debt was $428.2 million, compared with $365.0 million at April 30, 2017; reported net debt was approximately $300.0 million.
- Shareholders’ equity was $1.17 billion, compared with $1.00 billion at April 30, 2017.
Revenue, Profitability, Cash Flow, and Liquidity
| Metric | Three months ended January 31 | Nine months ended January 31 |
|---|---|---|
| Revenue | $455.7 million, up 4% | $1.319 billion, up 4% |
| Operating income | $67.4 million, versus $51.2 million | $164.7 million, versus $142.7 million |
| Net income | $68.8 million, versus $47.4 million | $138.1 million, versus $67.0 million |
| Diluted EPS | $1.19, versus $0.82 | $2.39, versus $1.15 |
| Operating cash flow | Not separately provided | $190.1 million, versus $229.2 million |
| Capital expenditures | Not separately provided | $79.0 million for technology, property, and equipment |
- Third-quarter gross margin declined to 72.5% from 73.3%, primarily because of higher journal royalty costs. Nine-month gross margin was 72.7% and declined slightly on a constant-currency basis.
- Reported third-quarter net income benefited from a $25 million estimated Tax Cuts and Jobs Act benefit, or $0.43 per diluted share. Excluding this benefit, restructuring charges, and foreign-exchange effects, adjusted EPS declined 2% to $0.87, and declined 14% on a constant-currency basis.
- Nine-month adjusted EPS increased 13% to $2.49, or 1% on a constant-currency basis, excluding specified unusual items.
- Restructuring charges were $2.2 million in the quarter and $26.5 million year to date, compared with $9.1 million and $15.0 million, respectively, in the prior-year periods.
- Operating cash flow declined primarily because of the timing of journal-subscription collections and higher income-tax payments. Investing cash use improved to $134.6 million from $261.7 million, largely because the prior-year period included the $121 million Atypon acquisition.
- Deferred revenue was $409.0 million, reflecting subscription cash collected in advance. Negative working capital was $357.4 million, consistent with the seasonal nature of the business.
- Wiley had approximately $679 million of unused borrowing capacity and was in compliance with its leverage and interest-coverage covenants. Management stated that operating cash flow and available financing should meet foreseeable needs.
Segment Performance and Changes Versus Prior Period
| Segment | Third-quarter revenue change | Nine-month revenue change | Key developments |
|---|---|---|---|
| Research | Up 9% reported; up 1% constant currency | Up 9% reported; up 4% constant currency | Growth in open access, licensing, reprints, backfiles, and Atypon; journal subscription revenue declined on a constant-currency basis. |
| Publishing | Down 1% reported; down 3% constant currency | Down 3% reported; down 4% constant currency | Education Publishing and WileyPLUS declined because of print-market softness and revenue-recognition timing; STM and professional publishing partly offset the decline. |
| Solutions | Up 5% reported; up 2% constant currency | Up 5% reported; up 4% constant currency | Online program management growth and improved recruiting efficiency offset weakness in corporate learning, particularly from slower French government funding. |
- Research contribution to profit increased 13% in the quarter and 11% year to date, although constant-currency growth excluding restructuring was limited.
- Publishing contribution to profit increased 25% in the quarter and 1% year to date, driven primarily by operating-cost savings.
- Solutions contribution to profit increased 78% in the quarter and 29% year to date, supported by higher gross margins and online program management growth.
- The Company recorded a $3.6 million impairment charge on a Publishing brand in the first quarter. Annual goodwill and indefinite-lived intangible-asset testing indicated no impairment.
- Atypon contributed $24.6 million of revenue and a $1.8 million operating loss during the first nine months of fiscal 2018.
Guidance, Outlook, Risks, and Unusual Items
- Fiscal 2018 constant-currency revenue and adjusted operating income were expected to be approximately even with fiscal 2017. Adjusted EPS was expected to decline by a low-single-digit percentage.
- Fiscal 2018 cash from operations was expected to be at least $350 million, compared with $314.5 million in fiscal 2017.
- Technology, property, and equipment spending was expected to be approximately $110 million, and product-development spending approximately $40 million. Author advances were expected to be approximately $120 million.
- Management expected journal-subscription revenue to be flat for fiscal 2018 and continued pressure on Research gross margins from higher royalty rates. Publishing-market softness was expected to continue.
- Management expected an approximate fiscal 2019 effective tax rate of 23% to 24%, excluding certain items that could not be estimated without unreasonable effort.
- The Tax Cuts and Jobs Act accounting remained provisional. Wiley recorded a $40 million deferred-tax remeasurement benefit, a $14.5 million provisional transition-tax liability, and a $0.5 million provisional state-tax liability. Final impacts could differ materially; GILTI and BEAT effects had not been determined.
- Key risks include foreign-exchange volatility, journal-subscription renewals and agent liquidity, book-market and used-book trends, customer concentration among major book customers, royalty costs, restructuring execution, acquisition integration, intellectual-property protection, and potential goodwill or intangible impairment.
- A $350 million interest-rate swap hedged a portion of variable-rate debt through May 2019. A one-percentage-point change in rates on the approximately $78 million of unhedged variable-rate debt was estimated to affect annual net income and cash flow by approximately $0.6 million.
- The Company was implementing a global ERP system and stated that disclosure controls were effective. No significant legal-proceeding developments were reported.
Most Important Facts for Investors to Verify
- Whether reported earnings growth is sustainable after removing the $25 million Tax Act benefit, restructuring items, foreign-exchange effects, and other one-time items.
- Progress toward the fiscal 2018 cash-from-operations target of at least $350 million and the effect of seasonal subscription collections.
- Research royalty-rate pressure, journal-renewal trends, and the expected completion and savings from migration to the Literatum platform.
- The duration and severity of weakness in Education Publishing, WileyPLUS, and corporate learning.
- Final Tax Cuts and Jobs Act accounting, including transition-tax, deferred-tax, GILTI, and BEAT effects.
- Debt levels, variable-rate exposure, covenant compliance, and the availability of revolving-credit capacity.
- Whether restructuring savings, ERP implementation, and Atypon integration deliver the expected operating efficiencies without additional material charges.