Business Context and Reporting Period
John Wiley & Sons, Inc. is a global provider of research, professional development, and education content and services. Its principal segments are Research, Professional Development, and Education, with increasing emphasis on digital products and content-enabled services.
This Form 10-K covers the fiscal year ended April 30, 2013. The filing also provides unaudited fourth-quarter fiscal 2013 results; the supplied metadata references “2012 Q4,” but the filing’s reported fourth quarter is fiscal 2013.
Key Financial Metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Revenue | $1,760.8 million | $1,782.7 million | Down 1% |
| Gross profit | $1,228.5 million | $1,239.3 million | Down 1% |
| Gross margin | 69.8% | 69.5% | Up 30 basis points |
| Operating income | $199.4 million | $280.4 million | Down 29% |
| Net income | $144.2 million | $212.7 million | Down 32% |
| Diluted EPS | $2.39 | $3.47 | Down 31% |
| Cash flow from operations | $337.0 million | $379.6 million | Down $42.6 million |
| Cash and equivalents | $334.1 million | $259.8 million | Up $74.3 million |
| Long-term debt | $673.0 million | $475.0 million | Up $198.0 million |
| Shareholders’ equity | $988.4 million | $1,017.6 million | Down $29.2 million |
Fiscal 2013 operating margin was approximately 11.3%, compared with approximately 15.7% in fiscal 2012. The effective tax rate was 22.8%, versus 21.8% in the prior year.
Fourth-quarter fiscal 2013 revenue was $445.9 million, gross profit was $312.2 million, operating income was $13.9 million, and net income was $7.9 million, compared with fourth-quarter fiscal 2012 revenue of $454.5 million, operating income of $69.7 million, and net income of $48.2 million.
Segment Performance and Material Changes
- Research: Revenue declined 3% to $1,009.8 million, or 2% excluding foreign exchange. Journal subscription revenue was approximately flat on a currency-neutral basis, while book revenue declined 7% excluding foreign exchange. Contribution to profit declined to $286.5 million from $317.5 million.
- Professional Development: Revenue declined 3% to $416.5 million, or 2% excluding foreign exchange. Lower print-book and divested consumer-title revenue was partly offset by growth in digital training and assessment products. Contribution to profit declined to $5.4 million from $25.1 million, including restructuring and impairment charges.
- Education: Revenue increased 6% to $334.5 million, or 7% excluding foreign exchange. Deltak revenue and nontraditional/digital content growth more than offset a 15% decline in print-book revenue. Digital revenue, including Deltak, represented approximately 30% of Education revenue, versus 15% in the prior year. Contribution to profit declined to $50.7 million from $58.4 million.
- Acquisitions: Wiley acquired Deltak for approximately $220 million, ELS for approximately $24 million, and made smaller acquisitions. Deltak contributed $33.7 million of fiscal 2013 revenue; ELS contributed $3.7 million. Acquisition spending totaled $263.3 million.
- Divestitures: Wiley sold substantially all identified Professional Development consumer publishing assets, including Frommer’s-related travel assets and culinary, CliffsNotes, and Webster’s New World programs. Fiscal 2013 revenue from the divested assets was approximately $46 million, versus $73 million in fiscal 2012.
Cash Flow, Debt, Liquidity, and Capital Allocation
- Operating cash flow was $337.0 million. The decline from fiscal 2012 was primarily attributable to a $42.1 million income tax deposit related to German tax matters, changes in operating assets and liabilities, and lower net income.
- Investing cash flow was a use of $342.5 million, including $263.3 million for acquisitions, $58.7 million for technology, property, and equipment, and $50.4 million for composition spending, partially offset by $29.9 million of proceeds from consumer-asset sales.
- Net borrowings were $198.0 million, principally funding the Deltak and ELS acquisitions. The revolving credit facility was increased to $825 million and matures in November 2016.
- At April 30, 2013, approximately $162 million of borrowing capacity was unused. Management stated that operating cash flow, cash balances, and available credit should satisfy foreseeable operating, investing, and financing needs.
- Working capital was negative $32.2 million, primarily because of $363.0 million of deferred subscription revenue collected in advance. This deferred revenue supports liquidity but is recognized as revenue over the applicable subscription period.
- Wiley repurchased 1.85 million shares for $73.7 million and paid $57.4 million in dividends during fiscal 2013. The quarterly dividend increased 20% to $0.24 per share.
Guidance, Outlook, Risks, and Unusual Items
- The Restructuring and Reinvestment Program generated $24.5 million of fourth-quarter charges and $29.3 million for fiscal 2013. Management expected additional fiscal 2014 charges of a similar size as further phases were implemented, while targeting cost savings for margin improvement and reinvestment in digital businesses.
- Total fiscal 2013 impairment charges were $30.7 million, including write-downs of consumer publishing assets, controlled-circulation publishing assets, and technology investments.
- Management expected the restructuring program to improve margins and earnings, but identified execution risks including delays in workforce reductions, employee attrition, morale effects, and failure to achieve targeted savings.
- Fiscal 2014 planned spending included approximately $70 million for technology, property, and equipment, $49 million for composition, and $110 million for author advances.
- Key business risks include migration from print to digital formats, used and rental textbooks, retailer and subscription-agent concentration, open-access mandates, copyright protection, cybersecurity and technology failures, foreign-exchange volatility, interest-rate exposure, acquisition integration, and global economic conditions.
- The Supreme Court’s first-sale decision could increase resale of lower-priced foreign editions in the United States, principally affecting Education. Wiley implemented market restrictions and expected the long-term net effect on revenue and operating profit to be negligible after transition.
- The company had approximately $45.9 million of German tax deposits and accrued interest related to a disputed tax treatment and could be required to deposit up to an additional €25 million plus interest. Management believed its position was more likely than not to prevail.
- Defined benefit pension liabilities increased; the U.S. plans were frozen effective June 30, 2013. A one-percentage-point change in the discount rate would affect net income by approximately $6.7 million and the accrued pension liability by approximately $121.7 million.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Investor Verification Checklist
- Verify fiscal 2014 restructuring charges, employee reductions, realized savings, and the extent to which savings were reinvested in digital operations.
- Assess whether Deltak’s online program management growth and profitability improved from its approximately 6% initial contribution margin.
- Monitor Education print-textbook declines, used and rental textbook pressure, and the effects of the first-sale policy changes.
- Reconcile acquisition-related debt increases with operating cash flow, free cash flow, and covenant headroom.
- Track the resolution and cash-recovery timing of the German tax deposits and the $25.5 million of unrecognized tax benefits.
- Evaluate the sustainability of subscription renewals, journal-agent liquidity, open-access revenue, and digital conversion rates.
- Review pension funding requirements, foreign-exchange impacts, and sensitivity to variable interest rates.