Business Context and Reporting Period
John Wiley & Sons, Inc. filed this Form 10-Q for the three months ended July 31, 2017, the first quarter of fiscal 2018. The company operates through Research, Publishing, and Solutions segments. Prior-period segment amounts were recast to reflect the revised organizational structure implemented August 1, 2016.
Key Financial Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $411.4 million | $404.3 million | Up 2% |
| Operating income | $14.5 million | $43.8 million | Down $29.3 million |
| Net income | $9.2 million | $31.0 million | Down $21.8 million |
| Diluted EPS | $0.16 | $0.53 | Down $0.37 |
| Gross profit margin | 72.1% | Approximately 72.1% | Stable |
| Cash used in operating activities | $81.8 million | $136.7 million | Improved by $54.9 million |
| Cash and cash equivalents | $84.1 million | $185.9 million | Down $101.8 million |
| Long-term debt | $551.6 million | $653.0 million | Down $101.4 million |
The reported effective tax rate was a 51.5% benefit, compared with a 23.1% provision in the prior-year quarter. Excluding restructuring, the Publishing brand impairment, and foreign-currency transaction effects, the effective tax rates were 18.1% and 22.7%, respectively.
Net debt was approximately $467.5 million. The company reported approximately $555 million of unused borrowing capacity and compliance with its leverage and interest-coverage covenants as of July 31, 2017.
Material Changes Versus the Prior Comparable Period
- Revenue increased 2%, or 1% excluding foreign exchange. Research revenue rose 8% to $223.6 million, Publishing revenue declined 9% to $131.3 million, and Solutions revenue increased 9% to $56.5 million.
- Research benefited from the Atypon acquisition, journal growth, open-access activity, and licensing. Atypon contributed $8.3 million of revenue and a $0.5 million operating loss in the quarter.
- Publishing performance weakened because of lower print book revenue, particularly in education, although test preparation and certification revenue grew.
- Solutions revenue grew through higher Education Services enrollments and professional assessment volume, but the segment reported a $2.0 million contribution loss versus a $0.1 million contribution profit in the prior year due to restructuring and growth-related expenses.
- Operating results were materially reduced by $25.7 million of restructuring charges, compared with a $0.9 million restructuring credit in the prior year. Cumulative program charges reached $163.7 million.
- Operating and administrative expenses increased 4% to $243.8 million, reflecting Atypon costs, a $3.6 million impairment of a Publishing brand, and prior-year one-time benefits that did not recur.
- The company recorded a $5.1 million foreign-exchange transaction loss, compared with a $0.2 million gain in the prior year.
- Other comprehensive income was $25.1 million, primarily from a $27.4 million foreign-currency translation gain, compared with a $36.5 million loss in the prior year.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Operating cash use was $81.8 million, while investing cash use was $40.4 million, including $30.1 million for technology, property, and equipment and $5.9 million for product development.
- Financing activities provided $145.2 million, including $214.7 million of long-term borrowings and $28.7 million of debt repayments.
- The company paid $18.4 million in dividends and repurchased 265,158 shares for $14.0 million at an average price of $52.86 per share.
- The quarterly dividend increased 3% to $0.32 per share.
- Management forecast fiscal 2018 capital spending of approximately $110 million for technology, property, and equipment and $40 million for product development. Author advances were forecast at approximately $110 million and are classified as operating cash outflows.
- Approximately $75 million of cash was held outside the United States. Potential U.S. tax on repatriation was estimated at less than $1 million to $20 million.
- The company stated that operating cash flow, revolving facilities, and other debt financing should be adequate for foreseeable operating, investing, and financing needs, while noting potential limitations from global credit-market volatility.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No consolidated revenue or earnings guidance was provided in the filing. Management provided only spending forecasts and operating indicators.
- Management expects restructuring savings to be used primarily to improve margins and earnings, with the remainder reinvested in growth opportunities.
- Key risks include journal subscription renewal rates, the financial condition of subscription agents, weakness in educational and print-book markets, used-book competition, customer and retailer concentration, foreign-exchange movements, interest-rate exposure, intellectual-property protection, acquisition integration, and global economic and political conditions.
- The company had $551.6 million of variable-rate loans outstanding and a $350 million interest-rate swap notional amount. A one-percentage-point change in rates on approximately $201.6 million of unhedged variable-rate debt was estimated to affect annual net income and cash flow by approximately $1.2 million.
- A 1% change in the estimated print-book sales-return rate could affect net income by approximately $2.0 million. Net print-book sales-return reserves were $25.6 million at July 31, 2017.
- The company is implementing a global enterprise resource planning system over the next twelve months. Management stated that disclosure controls were effective and that the implementation was not expected to adversely affect internal control over financial reporting, but additional testing will be required.
- The company adopted ASU 2016-09 on May 1, 2017, affecting stock-compensation tax accounting, diluted shares, and cash-flow classification. It planned to adopt the new revenue-recognition standard on May 1, 2018 using the cumulative-effect method and was still assessing its impact.
- There were no significant developments in legal proceedings during the quarter. Revenue and net profit related to Iran transactions were each below $0.1 million.
Important Facts for Investors to Verify
- Whether the substantial restructuring program produces the anticipated recurring cost savings and margin improvement.
- Whether the Publishing segment stabilizes after the decline in print and education revenue and the brand impairment.
- The sustainability and integration benefits of the Atypon acquisition.
- Future operating cash generation relative to planned capital spending, author advances, dividends, and share repurchases.
- Exposure to variable interest rates, foreign-exchange losses, and the company’s ability to maintain covenant compliance.
- The final effects of revenue-recognition, lease, pension, and other pending accounting standards.
- Progress and control implications of the global ERP implementation.