Business Context and Reporting Period
John Wiley & Sons, Inc. is a global publisher of scientific, technical, medical and scholarly content; professional and trade books and digital products; and global education materials. This Form 10-Q covers the three and six months ended October 31, 2011, the second quarter and first half of fiscal 2012. Results are unaudited and interim performance may not indicate full-year results.
Key Financial Metrics
| Metric | Q2 FY2012 | Q2 FY2011 | Six Months FY2012 | Six Months FY2011 |
|---|---|---|---|---|
| Revenue | $447.0 million | $441.8 million | $877.1 million | $849.8 million |
| Operating income | $72.0 million | $77.7 million | $132.1 million | $140.8 million |
| Net income | $50.8 million | $53.7 million | $101.6 million | $97.7 million |
| Diluted EPS | $0.83 | $0.88 | $1.65 | $1.60 |
| Gross margin | 70.3% | 68.4% | 70.1% | 68.8% |
- Q2 revenue increased 1%; management characterized growth as flat excluding favorable foreign exchange. First-half revenue increased 3%, or was flat excluding foreign exchange.
- Q2 operating margin was approximately 16.1%, compared with 17.6% in the prior-year quarter. First-half operating margin was approximately 15.1%, compared with 16.6%.
- Q2 operating and administrative expenses increased 8% to $233.3 million, driven primarily by technology investments, employment costs, facilities and journal editorial costs.
- Six-month cash flow from operations was a use of $34.5 million, versus cash provided of $19.7 million in the prior year. The deterioration primarily reflected timing and reduced deferred-revenue cash flows.
- Six-month investing cash use was $59.1 million, including $23.2 million of composition spending, $30.3 million of technology, property and equipment additions, and $5.6 million for acquisitions.
- Cash at October 31, 2011 was $82.3 million, compared with $112.3 million at October 31, 2010 and $201.9 million at April 30, 2011.
- Debt outstanding was approximately $510.0 million, all classified as long-term after the November 2 refinancing. Management reported approximately $560 million of unused borrowing capacity at October 31, 2011.
- The quarterly dividend increased 25% to $0.20 per share. The company repurchased 784,700 shares during the first six months at an average price of $47.76.
Material Changes Versus the Prior Comparable Period
- STMS revenue increased 3% in Q2 and 6% for the first six months, supported by journal subscriptions and other publishing income. Its Q2 direct contribution margin improved to 42.7% from 42.1%.
- Professional/Trade revenue declined 1% in Q2 and was flat for the first six months, although direct contribution increased. Consumer titles were affected by Borders liquidation activity and weak economic conditions, while eBook sales increased approximately 145% to $9 million in Q2.
- Global Education revenue was flat in Q2 and declined 1% for the first six months. Print textbook weakness, lower enrollments and higher returns outweighed growth in digital and non-traditional content. Six-month direct contribution declined 8% and margin fell to 36.4% from 39.3%.
- Gross margin improved primarily because of lower royalty costs, product mix and higher digital revenue, but the benefit was more than offset at the operating-income level by increased administrative and technology spending.
- Interest expense declined to $1.8 million in Q2 and $3.5 million for the first six months, benefiting from lower interest rates and lower average debt.
- The effective tax rate for the first six months was 21.6%, versus 25.1%. The current period included an $8.8 million non-cash U.K. deferred-tax benefit; excluding such benefits, the effective rate was approximately 28.4%, broadly consistent with the prior year.
Guidance, Outlook, Risks and Unusual Items
- Fiscal 2012 projected composition spending was approximately $55 million, technology, property and equipment spending approximately $75 million, and author advances approximately $102 million.
- Management expected operating cash flow, revolving credit facilities and other debt financing to cover foreseeable operating, investing and financing needs, while cautioning that capital-market volatility could restrict access or increase financing costs.
- On November 2, 2011, the company replaced its prior facility with a $700 million, five-year senior revolving credit facility. Approximately $510 million was outstanding under the new agreement, with leverage and interest-coverage covenants. Borrowings bear floating rates based primarily on LIBOR plus a margin of 1.05% to 1.65%.
- The company had $510 million of variable-rate loans and a $125 million interest-rate swap at a fixed rate of 0.8%. A hypothetical one-percentage-point change in rates on $385 million of unhedged debt would affect annual net income and cash flow by approximately $2.4 million.
- Foreign currency translation produced a $32.0 million loss in other comprehensive income during the first six months. The company also recorded foreign-exchange transaction losses of $1.0 million.
- A $0.7 million copyright-infringement settlement was recorded in Interest Income and Other. Duplicate facility rent during the transition to new facilities was approximately $1 million in Q2 and $2 million for the first six months.
- New sanctions involving Iran created uncertainty over approximately $5 million of trade receivables outstanding at October 31, 2011; management was assessing compliance and collectibility.
- Key ongoing risks include journal renewal rates and subscription-agent liquidity, seasonal education demand, customer and retailer concentration, sales returns, foreign exchange, interest rates, digital investment execution, copyright protection, acquisitions and global economic conditions.
Important Facts for Investors to Verify
- Reconcile reported net-income and EPS growth with the non-cash U.K. tax benefit and assess underlying earnings performance.
- Monitor whether higher technology, employment and facility costs generate the expected digital and subscription growth.
- Track operating cash conversion, seasonal deferred-revenue movements, author advances and planned capital expenditures.
- Review the terms, covenants and refinancing effects of the new $700 million revolving credit facility.
- Assess Global Education print declines, Borders-related effects, sales returns and the pace of digital substitution.
- Evaluate exposure to foreign exchange, unhedged variable-rate debt, subscription agents, major book customers and the Iran receivable.