John Wiley & Sons, Inc. — Form 10-Q Summary
Business context and reporting period
John Wiley & Sons is a global publisher of scientific, technical, medical and scholarly content; professional and consumer books and digital products; and educational materials. Reported segments are Scientific, Technical, Medical and Scholarly (STMS), Professional/Trade (P/T), and Global Education (GEd).
The filing covers the three and nine months ended January 31, 2012, representing the third quarter and first nine months of fiscal year 2012. The filing contains unaudited interim financial statements. Results are seasonal, particularly for journal subscriptions and higher-education products.
Key financial metrics
| Metric | Three months ended January 31 | Nine months ended January 31 |
|---|---|---|
| Revenue | $451.1 million, up 1% | $1.328 billion, up 2% |
| Operating income | $78.5 million, up 13% | $210.6 million, essentially flat |
| Net income | $62.9 million, up 38% | $164.5 million, up 15% |
| Diluted EPS | $1.03, versus $0.74 | $2.69, versus $2.34 |
| Operating cash flow | Not separately provided | $266.0 million, versus $276.2 million |
Third-quarter gross profit margin was 68.5%, down 70 basis points year over year. Nine-month gross profit margin was 69.5%, up 50 basis points, primarily because of increased sales of higher-margin digital products.
At January 31, 2012, cash and cash equivalents were $284.5 million, total assets were $2.479 billion, and shareholders’ equity was $1.023 billion. Debt consisted of approximately $483.0 million of long-term variable-rate borrowings, with no current portion classified as current following the refinancing.
The company had approximately $217 million of unused borrowing capacity under its $700 million five-year senior revolving credit facility. Net debt decreased $127.9 million from January 31, 2011. The company paid $36.3 million of dividends and repurchased approximately $60.6 million of stock during the first nine months.
Segment performance and material changes
- STMS: Third-quarter revenue rose 3% to $245.5 million and nine-month revenue rose 5% to $749.3 million. Growth was led by journal subscriptions, digital reference products, eBooks, rights and advertising. Nine-month direct contribution increased 6% to $312.3 million.
- Professional/Trade: Third-quarter revenue declined 6% to $108.0 million and nine-month revenue declined 2% to $320.0 million. Consumer and business print categories were pressured by the weak economy, reduced retail shelf space and the residual effects of the Borders bankruptcy. eBook sales increased approximately $5 million in the quarter to approximately $9 million.
- Global Education: Third-quarter revenue increased 2% to $97.7 million, while nine-month revenue was essentially flat at $258.9 million. Print textbook revenue declined, partly offset by growth in non-traditional and digital content. Nine-month direct contribution declined 3% to $101.0 million.
- Operating expenses: Nine-month operating and administrative expenses increased 6% to $686.1 million, driven by technology investments, employment, facility, editorial and professional costs. Technology costs increased approximately $11 million to support digital products and infrastructure.
- Tax rate: The nine-month effective tax rate was 19.9%, versus 26.6%. The current period included an $8.8 million non-cash U.K. deferred-tax benefit and a $7.5 million release of a tax reserve related to the Blackwell acquisition. Excluding these items, the effective rate was 27.9%, versus 28.7%.
- Prior-period unusual item: The prior-year third quarter included a $9.3 million pre-tax provision related to the Borders receivable. No additional Borders bad-debt expense was recorded in the current period.
Cash flow, debt and liquidity
Operating cash flow declined $10.2 million year over year, primarily because of the timing of income-tax payments and higher pension contributions. Investing cash use increased to $91.6 million, including $47.9 million for technology, property and equipment and $37.3 million for composition spending.
Financing cash use was $84.5 million. The company repaid $789.1 million of long-term debt and borrowed $817.9 million, reflecting refinancing activity. The new facility carries floating-rate pricing based on LIBOR or the applicable base rate and includes leverage and interest-coverage covenants.
Fiscal 2012 projected spending was approximately $55 million for composition, $65 million for technology, property and equipment, and $105 million for author advances. Management stated that operating cash flow, available revolver capacity and other financing sources should meet foreseeable needs, while noting potential volatility in capital and credit markets.
Guidance, outlook, risks and unusual items
- On February 16, 2012, Wiley acquired Inscape Holdings for $85 million in cash. Inscape generates approximately $20 million of annual revenue and provides DiSC-based assessments and training products. Initial purchase accounting had not been completed at filing.
- On March 7, 2012, Wiley announced plans to explore selling selected consumer print and digital assets, including Frommer’s, culinary, general-interest, nautical, pets, crafts, Webster’s New World and CliffsNotes. The assets generated approximately $85 million of fiscal 2011 revenue and approximately $6 million of direct contribution to profit.
- Management highlighted continued investment in digital products, infrastructure and electronic delivery. No specific full-year revenue or earnings guidance is provided in the filing text.
- Key risks include journal subscription renewals and agent liquidity, retail and wholesaler consolidation, online retailer stability, education-market seasonality and used-book competition, global economic conditions, foreign exchange, technology execution, intellectual-property protection, acquisition integration and access to credit markets.
- Approximately $53.1 million of foreign-currency translation losses were recorded in accumulated other comprehensive loss during the first nine months. The company had $358 million of unhedged variable-rate debt; a hypothetical one-percentage-point rate change would affect annual net income and cash flow by approximately $2.2 million.
- Sales return reserves totaled $54.3 million. A hypothetical one-percentage-point change in the estimated return rate could affect net income by approximately $3.8 million.
- The company had approximately $3 million of outstanding trade receivables related mainly to Iran, with uncertainty regarding recoverability because of sanctions. A $1.4 million bad-debt provision related to an Iranian university receivable was recorded in the third quarter.
Investor verification points
- Verify the effect of the Inscape acquisition, including completed purchase accounting, financing and integration results.
- Monitor the proposed divestiture of consumer assets and its effect on revenue, margins, cash proceeds and segment strategy.
- Separate recurring earnings from the $7.5 million tax-reserve release, $8.8 million U.K. tax benefit, foreign-exchange effects and the prior-year Borders charge.
- Assess Professional/Trade consumer weakness, Borders-related comparisons and the sustainability of eBook and digital growth.
- Review interest-rate exposure, covenant compliance, revolver availability and refinancing terms for the $483 million variable-rate debt.
- Track cash conversion, seasonal working-capital needs, planned capital spending and author advances.
- Evaluate foreign-exchange exposure, sales-return estimates, subscription-agent liquidity and receivable recoverability in Iran.