John Wiley & Sons, Inc. — Fiscal 2016 Second-Quarter Form 10-Q
Reporting period: Three and six months ended October 31, 2015, compared with the prior-year periods. Wiley provides research, professional development, education, publishing, digital learning, assessment, and online program management services. The filing was dated December 10, 2015.
Key Financial Metrics
| Metric | Three months ended October 31, 2015 | Prior year | Six months ended October 31, 2015 | Prior year |
|---|
| Revenue | $433.4 million | $477.0 million | $856.3 million | $914.9 million |
| Operating income | $60.3 million | $76.0 million | $105.2 million | $125.6 million |
| Net income | $43.6 million | $53.8 million | $76.1 million | $87.4 million |
| Diluted EPS | $0.74 | $0.90 | $1.29 | $1.46 |
| Gross margin | 73.1% | 71.8% | 72.4% | 71.7% |
| Effective tax rate | 23.0% | 26.1% | 22.8% | 26.2% |
- Second-quarter revenue declined 9%, or 5% excluding foreign exchange. The decline reflected lower print and digital book sales, a prior-year journal backfile sale, and weaker Education custom materials.
- Six-month revenue declined 6%, or 2% excluding foreign exchange. Growth in Deltak, Talent Solutions, and the additional reported months of CrossKnowledge partly offset the declines.
- Operating margin was approximately 13.9% in the quarter and 12.3% year to date, compared with approximately 15.9% and 13.7%, respectively, in the prior year.
- Cash used in operating activities was $126.5 million for the six months, compared with $94.1 million used in the prior year. Cash used in investing activities was $82.9 million, versus $217.6 million, primarily because the prior year included the $166 million CrossKnowledge acquisition.
- Cash and equivalents were $308.2 million at October 31, 2015, compared with $198.9 million a year earlier and $457.4 million at April 30, 2015.
- Total debt was approximately $889 million, including $150 million of short-term debt and $739.1 million of long-term debt. The Company reported approximately $209 million of unused borrowing capacity and compliance with applicable leverage and interest coverage covenants.
- Quarterly dividends increased to $0.30 per share from $0.29. The Company repurchased 637,717 shares during the quarter for $32.0 million and 868,137 shares year to date for $44.7 million.
Segment Performance
| Segment | Quarter revenue change | Quarter contribution to profit | Six-month revenue change | Six-month contribution to profit |
|---|
| Research | Down 10%; down 5% excluding FX | $67.1 million, down 16% | Down 8%; down 3% excluding FX | $132.7 million, down 12% |
| Professional Development | Down 6%; down 3% excluding FX | $18.8 million, up 91% | Flat; up 3% excluding FX | $37.8 million, up 118% |
| Education | Down 10%; down 8% excluding FX | $15.4 million, down 22% | Down 7%; down 5% excluding FX | $20.1 million, down 29% |
- Professional Development benefited from restructuring savings, improved gross margins, and Talent Solutions growth. CrossKnowledge revenue was $23.2 million year to date versus $15.3 million in the comparable prior-year period, although the periods contain different numbers of reported months.
- Education was pressured by lower enrollments, textbook rentals, channel inventory consumption, and fewer adoptions. Deltak remained a growth area, with revenue up 18% in the quarter and 22% year to date; it had 39 university partners and 216 contracted programs at October 31, 2015.
- Research was affected by lower books revenue, the prior-year backfile sale, foreign exchange, and the trailing effects of the Swets subscription-agent bankruptcy.
Material Changes and Unusual Items
- The Company recorded $3.7 million of restructuring charges in the quarter and $7.1 million year to date, compared with a $0.2 million credit in the prior-year six-month period. Cumulative program charges were $103.1 million and management expected the program to be fully recovered by the end of fiscal 2016.
- Wiley changed its journal subscription agreements to time-based digital arrangements for calendar 2016. Management expected approximately $35 million of revenue and $0.35 of diluted EPS to shift from fiscal 2016 to fiscal 2017, with no impact on free cash flow.
- Prior-year CrossKnowledge results included fewer reported months because the acquisition was initially reported on a two-month lag. Current-year comparisons therefore are not fully comparable.
- Accumulated other comprehensive loss was $399.4 million at October 31, 2015. Foreign currency translation produced a $14.2 million loss in the quarter but a $4.9 million gain year to date.
- In November 2015, Wiley agreed to outsource U.S. print textbook fulfillment to Cengage Learning and planned to exit its New Jersey distribution center in spring 2016.
Liquidity, Outlook, and Risks
- Management stated that operating cash flow, revolving facilities, and other debt financing should be adequate for foreseeable operating, investing, and financing needs, while cautioning that volatility in global capital and credit markets could impair access or increase financing costs.
- Fiscal 2016 projected spending was approximately $110 million for technology, property and equipment and $38 million for composition. The technology forecast included approximately $35 million for enterprise resource systems and the Hoboken headquarters transformation. Author advances were projected at approximately $100 million.
- The Company had $889 million of variable-rate loans outstanding. Approximately $589 million was unhedged; a hypothetical 1% interest-rate change was estimated to affect annual net income and cash flow by approximately $3.7 million.
- Wiley had a $59.8 million German tax deposit at October 31, 2015 related to a disputed tax basis step-up. It expected to deposit up to an additional €10 million plus interest in future periods. Management believed it was more likely than not to prevail, but an adverse outcome could affect taxes and cash.
- Seasonality requires additional working capital from May through October. Deferred revenue collected in advance totaled $150.7 million and is recognized as products and services are delivered.
- Journal subscription agents represented approximately 23% of annual consolidated revenue. The Swets bankruptcy was expected to reduce calendar 2015 journal subscription revenue by approximately $5 million. The top ten book customers represented approximately 19% of annual revenue and 41% of accounts receivable.
- Other risks include foreign exchange, textbook rentals and adoption trends, print-book returns, technology investments, intellectual-property protection, customer and retailer concentration, acquisition integration, and global economic conditions.
Investor Verification Priorities
- Verify the sustainability of Research and Education revenue, particularly journal renewals, book demand, textbook adoption trends, and the effect of the time-based journal subscription transition.
- Assess whether restructuring savings offset ongoing investments in ERP systems, CrossKnowledge, Deltak, and other technology initiatives.
- Reconcile negative operating cash flow with reported earnings and monitor seasonal working-capital needs, deferred revenue, royalty payments, and pension contributions.
- Review debt maturities, variable-rate exposure, available borrowing capacity, and compliance with leverage and interest coverage covenants.
- Monitor the German tax litigation and potential additional deposits, as well as the estimated exposure to print-book returns.
- Adjust year-over-year comparisons for foreign exchange, the prior-year journal backfile sale, and the different CrossKnowledge reporting periods.
