Business Context and Reporting Period
John Wiley & Sons, Inc. is a global provider of knowledge and knowledge-enabled services through its Research, Professional Development, and Education segments. This Form 10-Q covers the three and nine months ended January 31, 2016, representing fiscal 2016 third quarter and year-to-date results. The request metadata identifies the period as “2015 Q3,” but the filing itself reports fiscal 2016 third-quarter results.
Key Financial Metrics
| Metric | Three Months Ended January 31, 2016 | Year-over-Year | Nine Months Ended January 31, 2016 | Year-over-Year |
|---|---|---|---|---|
| Revenue | $436.4 million | Down 6% | $1,292.7 million | Down 6% |
| Operating income | $39.6 million | Down 27% | $144.8 million | Down 19% |
| Net income | $35.5 million | Down 17% | $111.6 million | Down 14% |
| Diluted EPS | $0.61 | Down from $0.72 | $1.90 | Down from $2.18 |
| Gross margin | 72.5% | Down 80 basis points | 72.4% | Up 20 basis points |
| Operating margin | 9.1% | Down from 11.6% | 11.2% | Down from 13.0% |
| Cash flow from operations | Not separately provided | Not applicable | $116.6 million | Down from $154.2 million |
- Third-quarter restructuring charges were $13.7 million, compared with $24.0 million in the prior-year quarter. Nine-month charges were $20.8 million, compared with $23.9 million.
- The third-quarter effective tax rate was 4.6%; the nine-month rate was 17.8%, versus 24.3% in the prior-year period. Results included a $5.9 million non-cash deferred tax benefit from U.K. tax-rate changes. Excluding that benefit, the nine-month effective rate was 22.1%.
- Cash and cash equivalents were $535.9 million at January 31, 2016, compared with $260.2 million a year earlier and $457.4 million at April 30, 2015.
- Total debt was approximately $964.7 million, consisting primarily of variable-rate borrowings. Net debt was approximately $428.9 million, and unused borrowing capacity was approximately $132 million.
- Capital expenditures for technology, property and equipment were $69.0 million year to date, while composition spending was $28.6 million.
- The quarterly dividend increased 3% to $0.30 per share. The company repurchased 1.216 million shares year to date for $59.7 million at an average price of $49.09.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because Wiley shifted digital journal subscriptions from issue-based to time-based agreements, moving approximately $29 million of revenue into later periods without affecting free cash flow. Foreign exchange further reduced reported revenue.
- Print-book and print-textbook demand remained weak. Digital books, Online Program Management and selected Corporate Learning activities provided partial offsets.
- Research revenue decreased 9% to $224.7 million in the quarter and 9% to $700.5 million year to date. Research contribution to profit fell 22% in the quarter and 15% year to date.
- Professional Development revenue decreased 5% in the quarter and 2% year to date, but contribution to profit increased substantially due to restructuring savings, lower expenses and improved mix.
- Education revenue decreased 2% in the quarter and 6% year to date. Online Program Management revenue increased 13% in the quarter and 18% year to date, but lower print textbook revenue and higher student-recruitment costs reduced contribution margins.
- Operating and administrative expenses were flat in the quarter but increased 3% excluding foreign exchange. Year-to-date expenses decreased 3% reported but increased 1% excluding foreign exchange, reflecting investments in ERP systems, technology, Online Program Management and Corporate Learning.
- Foreign currency translation produced other comprehensive losses of $66.1 million in the quarter and $61.2 million year to date, primarily due to the stronger U.S. dollar against the British pound.
- The company entered into an agreement to outsource U.S. print-textbook fulfillment to Cengage Learning and planned to exit its New Jersey distribution center in spring 2016.
Outlook, Risks, Contingencies and Unusual Items
- Management forecast fiscal 2016 technology, property and equipment spending of approximately $105 million, composition spending of approximately $40 million, and author advances of approximately $100 million.
- The restructuring and reinvestment program had cumulative charges of $116.8 million. Management expected the nine-month 2016 restructuring charges to be fully recovered within 18 months.
- On March 1, 2016, after the reporting date, Wiley amended and extended its revolving credit agreement from a $940 million facility due November 2016 to a $1.1 billion five-year facility due March 2021.
- Wiley had $59.6 million of income-tax deposits related to a disputed German tax position and expected to deposit up to an additional €10 million plus interest while the appeal continued. Management believed it was more likely than not to prevail and had recorded no charge for the potential loss of the tax benefit.
- Subscription agents represented approximately 23% of annual consolidated revenue; their financial condition and liquidity affect the timing and collectability of journal subscription receipts. No single agent represented more than 10% of annual revenue.
- The top 10 book customers represented approximately 19% of annual revenue and 35% of accounts receivable at January 31, 2016.
- A 1% change in estimated print-book return rates could affect net income by approximately $2.1 million. A hypothetical 1% change in interest rates on unhedged variable-rate debt could affect annual net income and cash flow by approximately $5.1 million.
- Other risks include foreign exchange volatility, changing demand for print products, used-book and rental markets, journal renewal rates, retailer and wholesaler concentration, technology execution, intellectual-property protection, acquisitions and global economic conditions.
- The company stated that disclosure controls were effective. A global ERP implementation was underway and expected to continue in phases over the following three years, requiring continued testing of related internal controls.
Facts Investors Should Verify
- Whether the timing shift from issue-based to time-based journal subscriptions produces the expected revenue recovery during the remainder of calendar 2016 and does not impair cash collections.
- The pace of journal renewals and the financial condition of subscription agents, particularly given the seasonal concentration of receipts.
- Whether ERP, technology and Online Program Management investments generate the anticipated efficiency and growth benefits.
- The sustainability of Professional Development margin improvements and the extent to which restructuring savings offset weakness in print publishing.
- Progress and ultimate resolution of the German tax appeal and recovery of the $59.6 million deposit.
- Debt levels, variable-rate exposure, covenant compliance and liquidity following the March 2016 refinancing.
- Execution and cost savings from outsourcing U.S. textbook fulfillment and exiting the New Jersey distribution center.