JOHN WILEY & SONS, INC. quarterly report, Q2 FY2014

Business Context and Reporting Period

John Wiley & Sons, Inc. is a global provider of research, professional development, and education content and services, including journals, digital and print books, databases, training, assessment, and online program management. This unaudited Form 10-Q covers the three and six months ended October 31, 2013, the second quarter and first half of fiscal 2014, compared with the corresponding fiscal 2013 periods.

Financial Performance and Position

Metric	Three Months Ended October 31, 2013	Three Months Ended October 31, 2012	Six Months Ended October 31, 2013	Six Months Ended October 31, 2012
Revenue	$449.2 million	$431.8 million	$860.2 million	$842.5 million
Operating income	$50.2 million	$62.9 million	$85.8 million	$101.9 million
Net income	$36.2 million	$43.1 million	$72.1 million	$79.2 million
Diluted EPS	$0.61	$0.71	$1.22	$1.31
Cash dividends per share	$0.25	$0.24	$0.50	$0.48

Second-quarter revenue increased 4%; first-half revenue increased 2%. Excluding foreign exchange, growth was approximately 5% and 3%, respectively.
Second-quarter gross margin was 71.0%, up 100 basis points; first-half gross margin was 70.9%, up 140 basis points.
Reported second-quarter operating margin was approximately 11.2%, versus 14.6% in the prior-year quarter. First-half operating margin was approximately 10.0%, versus 12.1%.
Reported second-quarter net margin was approximately 8.1%, versus 10.0%; first-half net margin was approximately 8.4%, versus 9.4%.
Research revenue rose 1% in the quarter and 3% year to date, led by journal subscriptions, digital books, and open-access fees. Professional Development revenue declined 9% in the quarter and 13% year to date, primarily due to the divestiture of consumer publishing programs. Education revenue increased 29% in the quarter and 20% year to date, primarily due to Deltak and growth in digital and custom products.
Cash used in operating activities was $66.5 million for the first six months, compared with $91.6 million used in the prior-year period. Cash used in investing activities was $46.2 million, versus $266.6 million, reflecting the absence of the prior-year Deltak acquisition.
Cash used in financing activities was $73.6 million, compared with $197.6 million provided in the prior-year period. The company repaid $293.5 million of long-term debt and borrowed $268.4 million during the first half.
Cash and cash equivalents were $149.7 million at October 31, 2013, compared with $92.6 million at October 31, 2012 and $334.1 million at April 30, 2013.
Long-term debt was $647.9 million. Management reported approximately $188.6 million of unused borrowing capacity and no off-balance-sheet debt.
Total assets were $2.65 billion and shareholders’ equity was $1.09 billion at October 31, 2013.

Material Changes Versus the Prior Comparable Period

Revenue benefited from the Deltak acquisition, digital products, journal subscriptions, and open-access fees, but was partly offset by lower print-book revenue, foreign exchange, and the prior-year divestiture of consumer publishing programs.
The Deltak online program management business contributed $16.5 million of second-quarter revenue and $31.3 million for the first half. It had 107 revenue-generating programs and 43 additional programs under development at October 31, 2013.
Operating results included $15.3 million of second-quarter restructuring charges and $23.1 million for the first half, compared with none and $4.8 million, respectively, in the prior-year comparable periods.
The company recorded a $4.8 million technology-asset impairment charge in the second quarter after terminating a multi-year internal software development program. The prior-year quarter included $15.5 million of consumer publishing impairment charges and a $9.8 million gain on the sale of the travel publishing program.
Restructuring and technology costs, higher employment and technology expenses, and increased amortization more than offset revenue growth and gross-margin improvement. Excluding specified unusual items and foreign exchange, management stated that diluted EPS increased 8% in the quarter and 6% for the first half.
The effective tax rate was 22.5% in the quarter and 10.7% for the first half, compared with 27.3% and 18.4%, respectively. The first-half rate benefited from a $10.6 million non-cash U.K. deferred-tax benefit; excluding the U.K. benefits, management reported a lower underlying rate of 23.9% versus 27.0%.
Net debt decreased by $111.1 million from October 31, 2012. The company repurchased 435,198 shares during the first half and increased the quarterly dividend by 4% to $0.25 per share.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

Management expected approximately $10 million of additional pre-tax restructuring charges during the remainder of fiscal 2014. Cumulative charges under the Restructuring and Reinvestment Program were $47.5 million and were expected to be fully recovered by January 31, 2015.
Fiscal 2014 projected spending was approximately $70 million for technology, property and equipment, $50 million for composition, and $110 million for royalty advances.
Management believed operating cash flow, revolving credit facilities, and other available financing would satisfy foreseeable operating, investing, and financing needs, while noting potential limitations from volatility in global capital and credit markets.
The company had $61.0 million of income-tax deposits related to a German tax dispute. It expected to deposit up to an additional 16 million euros plus interest in future periods. Management believed it was more likely than not to prevail; resolution could take several years.
Approximately $142.0 million of cash was held outside the United States. The business is seasonal, with significant research subscription receipts generally collected from December through March and higher education working-capital needs typically occurring from May through September.
All $647.9 million of debt was variable-rate debt, partly mitigated by a $250 million interest-rate swap. Management estimated that a one-percentage-point change in rates on the $397.9 million of unhedged debt would affect annual net income and cash flow by approximately $2.5 million.
Key risks include journal subscription renewal rates and agent liquidity, concentration among book customers, print-to-digital transition execution, seasonal education demand, used-book markets, technology investment, acquisition integration, foreign exchange, intellectual-property protection, and global economic conditions.
Net sales-return reserves were $43.2 million at October 31, 2013. A one-percentage-point change in the estimated return rate could affect annual net income by approximately $2.7 million.

Most Important Facts for Investors to Verify

Whether Deltak’s university-program pipeline converts the 43 programs under development into revenue-generating programs and supports expected returns on the acquisition.
Whether restructuring savings and digital-product growth offset continued declines in print books and elevated technology and employment costs.
The timing and total cost of remaining restructuring actions, including the approximately $10 million expected additional fiscal 2014 charge.
The company’s ability to generate positive operating cash flow despite seasonal working-capital needs, royalty advances, and deferred-revenue movements.
Debt repayment capacity, unused borrowing availability, and sensitivity to variable interest rates and foreign exchange.
The ultimate resolution and cash-recovery timing of the German tax deposits, as well as the release of escrow balances related to divestitures.
The sustainability of the unusually low reported tax rate, including the effect of non-cash U.K. deferred-tax benefits and tax reserve releases.