Business Context and Reporting Period
John Wiley & Sons, Inc. is a global research and learning company operating through Research, Publishing, and Solutions segments. The filing is a Form 10-K for the fiscal year ended April 30, 2017. The requested “2016 Q4” period does not match the filing’s annual reporting period; the filing includes fourth-quarter fiscal 2017 unaudited results.
- Research: scientific, technical, medical, and scholarly journals, content, and platform services.
- Publishing: professional, scientific, and education books, course workflow, and test preparation.
- Solutions: online program management, corporate learning, and professional assessment.
- Approximately 5,100 full-time-equivalent employees worldwide.
Key Financial Metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $1,718.5 million | $1,727.0 million | Down 0.5% |
| Operating income | $206.2 million | $188.1 million | Up 9.6% |
| Operating margin | 12.0% | 10.9% | Up approximately 110 bps |
| Net income | $113.6 million | $145.8 million | Down 22.0% |
| Diluted EPS | $1.95 | $2.48 | Down $0.53 |
| Gross profit margin | 73.2% | 73.0% | Up 20 bps |
| Cash flow from operations | $314.5 million | $350.0 million | Down $35.5 million |
| Cash and cash equivalents | $58.5 million | $363.8 million | Down $305.3 million |
| Long-term debt | $365.0 million | $605.0 million | Down $240.0 million |
| Net debt | $306.5 million | $241.2 million | Up $65.3 million |
FY2017 fourth-quarter revenue was $452.2 million, operating income was $63.5 million, net income was $46.7 million, and diluted EPS was $0.81, compared with $434.3 million, $43.3 million, $34.2 million, and $0.59, respectively, in the prior-year quarter.
Segment Results
| Segment | FY2017 Revenue | Revenue Change | Contribution to Profit |
|---|---|---|---|
| Research | $853.5 million | Up 3%; up 7% excluding foreign exchange | $252.2 million |
| Publishing | $633.4 million | Down 9%; down 7% excluding foreign exchange | $125.7 million |
| Solutions | $231.6 million | Up 13%; up 14% excluding foreign exchange | $14.8 million |
- Research growth reflected higher journal subscriptions, author-funded access, and six months of Atypon revenue.
- Publishing declined primarily because of weaker print book demand, title reductions, education textbook rental activity, and foreign exchange.
- Solutions growth reflected increased online-program-management partners and enrollments, professional assessment growth, and corporate learning expansion.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly stable as Research and Solutions growth offset continued Publishing weakness and a $43 million unfavorable foreign-exchange effect.
- The shift from issue-based to time-based digital journal subscriptions moved approximately $34 million of revenue into FY2017 from FY2016 without affecting free cash flow.
- Operating income improved despite flat revenue, supported by lower restructuring charges, cost savings, and improved Publishing contribution margins.
- Net income and EPS declined because of a one-time $49 million unfavorable German tax ruling, an $8.8 million pension settlement charge, foreign exchange, technology spending, and the prior year’s large backfile sale.
- Research contribution margin declined to 29.6% from 30.5%, while Publishing contribution margin improved to 19.8% from 18.1% and Solutions contribution margin improved to 6.4% from 2.0%.
- The Company acquired Atypon for approximately $121 million and Ranku for approximately $5 million. Atypon contributed $19.1 million of FY2017 revenue and a $3.5 million operating loss.
- Cash used for acquisitions increased to $154.8 million from $20.4 million, while capital spending on technology, property, and equipment increased to $110.7 million.
- The quarterly dividend increased 3% to $0.31 per share. The Company repurchased 953,188 shares during FY2017 and had authorization for 3,793,648 additional shares at year-end.
Guidance, Outlook, Commentary, and Risks
- Management projected FY2018 spending of approximately $110 million for technology, property, and equipment, $40 million for book composition and product development, and $110 million for author advances.
- Management stated that operating cash flow, approximately $742 million of unused borrowing capacity, and available financing should meet foreseeable operating, investing, and financing needs.
- The $1.1 billion revolving credit facility matures in March 2021; the Company was in compliance with its leverage and interest-coverage covenants at April 30, 2017.
- Wiley planned to migrate from Wiley Online Library to Atypon’s Literatum platform beginning in calendar 2018. ERP implementation was also continuing in phases over the next three years.
- Key risks include declining print and textbook demand, used and rental books, journal renewal rates, open-access mandates, customer and subscription-agent concentration, foreign exchange, interest rates, cyberattacks, ERP execution, outsourcing, acquisitions, restructuring, tax audits, pension funding, and impairment of goodwill and intangible assets.
- Goodwill was $982.1 million and intangible assets were $828.1 million at year-end, creating sensitivity to operating performance and valuation assumptions.
- The Company reported $1,196.3 million of contractual obligations, including $365.0 million of debt, $281.0 million of leases, and $472.0 million of minimum royalty obligations.
- Mark J. Allin resigned as President and CEO effective May 8, 2017, and Matthew S. Kissner became Interim CEO. This occurred after the fiscal year-end but before filing.
Most Important Facts to Verify
- Reconcile reported FY2017 earnings with the $49 million German tax charge and determine comparable earnings excluding this item.
- Assess whether Publishing’s print-market decline is stabilizing and whether digital, test preparation, and course workflow growth can offset it.
- Review Atypon’s integration, operating losses, purchase-price allocation, and planned Literatum migration.
- Verify liquidity after the substantial reduction in cash, including seasonal working-capital requirements and access to the revolving facility.
- Evaluate the sustainability of Solutions growth and whether investment in personnel and content can produce higher margins.
- Monitor goodwill and intangible-asset impairment exposure, pension obligations, contractual commitments, and foreign-exchange sensitivity.
- Confirm the effect of the pending revenue-recognition standard adoption planned for May 1, 2018.
- Note that management and KPMG reported effective internal control over financial reporting, but Atypon was excluded from the FY2017 control assessment.