John Wiley & Sons, Inc. — Q1 FY2012 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; higher-education materials; journals; online products; and digital learning solutions. The filing covers the three months ended July 31, 2011, the first quarter of fiscal 2012, with comparisons to July 31, 2010. Results are unaudited and interim performance may not be indicative of the full year.
Key financial metrics
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Revenue | $430.1 million | $407.9 million |
| Operating income | $60.2 million | $63.1 million |
| Operating margin | 14.0% | 15.5% |
| Net income | $50.8 million | $44.0 million |
| Diluted EPS | $0.82 | $0.72 |
| Cash used in operating activities | $35.3 million | $17.1 million |
| Cash used in investing activities | $27.9 million | $22.8 million |
| Cash and equivalents at period end | $121.7 million | $113.9 million |
Gross profit margin was 69.8%, up 0.5 percentage points, primarily because of increased sales of higher-margin digital products. Operating and administrative expenses increased 10% to $231.2 million, driven by technology investments, employment costs, facilities, and travel.
The effective tax rate was 13.6%, compared with 22.8%. Results included an $8.8 million non-cash deferred tax benefit, or approximately $0.14 per diluted share, related principally to U.K. tax-rate changes. Excluding this benefit and foreign-exchange effects, diluted EPS decreased approximately 3%.
Debt outstanding was approximately $475 million at July 31, 2011, substantially all variable-rate loans. The balance sheet reported $118.1 million of current debt and $356.9 million of long-term debt. Unused borrowing capacity under the revolving credit facility was approximately $624 million. Net debt declined by approximately $219.9 million from the prior-year quarter.
Material changes versus the prior comparable period
- Revenue increased 5% to $430.1 million, but was approximately flat excluding favorable foreign-exchange effects.
- Scientific, Technical, Medical and Scholarly revenue rose 10% to $252.7 million, or 3% excluding foreign exchange, supported by journal subscriptions and other publishing income.
- Professional/Trade revenue was essentially flat at $100.3 million, or down 2% excluding foreign exchange. eBook sales increased $7.1 million to $10.8 million and represented 11% of segment revenue.
- Higher Education revenue declined 2% to $77.0 million, or 5% excluding foreign exchange. Print-book revenue fell 6%, while non-traditional and digital content grew 13%.
- Higher Education direct contribution declined 17% to $26.9 million, and its contribution margin fell to 35.0% from 41.1%, reflecting lower print textbook volumes and higher sales, marketing, and advertising costs.
- Operating income declined 5% to $60.2 million, or 11% excluding favorable foreign exchange, as higher shared-service and administrative costs exceeded gross-margin improvement.
- Interest expense declined $4.0 million to $1.7 million because of lower interest rates and lower average debt.
- Operating cash flow worsened by $18.2 million, primarily because of a larger reduction in deferred revenue and the timing of subscription collections.
- The quarterly dividend increased 25% to $0.20 per share. The company repurchased 184,700 shares at an average price of $50.77; no shares were repurchased in the prior-year quarter.
Guidance, outlook, commentary, risks, and unusual items
- Management forecast fiscal 2012 composition spending of approximately $55 million and technology, property and equipment spending of approximately $75 million.
- Management stated that operating cash flow, revolving facilities, and other available debt financing should be sufficient for foreseeable operating, investing, and financing needs, while cautioning that credit-market volatility could restrict access or increase financing costs.
- The planned Fall 2011 launch of WileyPLUS Version 5 was delayed to improve system response time and performance. The delay affected 35 courses, representing 16% of WileyPLUS courses; contingency plans were implemented.
- WileyPLUS billings declined 12% to $10 million, primarily because of lower U.S. enrollments. The U.S. higher-education market had declined 8% since January 1, 2011, according to management.
- Key risks include journal renewal rates, the financial condition of subscription agents, book-wholesaler and retailer consolidation, online-retailer stability, higher-education seasonality and used books, foreign exchange, global economic conditions, copyright protection, and acquisition integration.
- Approximately $116.2 million of cash was held outside the United States. Cash flows are seasonal, with increased working-capital needs generally from May through September.
- A hypothetical 1% change in interest rates on $350 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $2.2 million. A 1% change in estimated sales-return rates could affect net income by approximately $4.1 million.
- Sales-return reserves totaled $46.3 million at July 31, 2011. The top ten book customers represented approximately 43% of accounts receivable, while no single book customer exceeded 7% of consolidated revenue.
Important facts for investors to verify
- Whether Higher Education demand, print textbook volumes, WileyPLUS billings, and the Version 5 rollout recover in subsequent quarters.
- Whether digital growth and journal-subscription renewals offset weakness in print and Professional/Trade categories.
- The sustainability of operating cash flow given deferred-revenue timing and seasonal subscription collections.
- Debt repayments, variable-rate exposure, available revolver capacity, and the effect of interest-rate changes on cash flow.
- The recurring earnings impact of the $8.8 million U.K. deferred-tax benefit and the company’s underlying tax rate excluding unusual benefits.
- Actual fiscal 2012 capital spending relative to management’s approximately $130 million forecast.
- Potential changes in sales returns, customer credit exposure, foreign-exchange effects, and acquisition-related obligations.