John Wiley & Sons, Inc. — 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 and digital products; and higher-education materials and online learning solutions. The filing covers the three and six months ended October 31, 2010, the second quarter and first half of fiscal 2011. Financial statements are unaudited.
Key financial metrics
| Metric | Three months ended Oct. 31, 2010 | Three months ended Oct. 31, 2009 | Six months ended Oct. 31, 2010 | Six months ended Oct. 31, 2009 |
|---|---|---|---|---|
| Revenue | $441.8 million | $448.0 million | $849.8 million | $836.3 million |
| Operating income | $77.7 million | $75.3 million | $140.8 million | $131.0 million |
| Net income | $53.7 million | $46.3 million | $97.7 million | $73.1 million |
| Diluted EPS | $0.88 | $0.78 | $1.60 | $1.24 |
| Operating margin | 17.6% | 16.8% | 16.6% | 15.7% |
| Gross profit margin | 68.4% | 69.0% | 68.8% | 68.8% |
| Cash provided by operating activities | Not separately provided | Not separately provided | $64.3 million | $40.1 million |
At October 31, 2010, cash and cash equivalents were $112.3 million, versus $61.1 million a year earlier and $153.5 million at April 30, 2010. Total debt was approximately $657.0 million, including $101.3 million classified as current and $555.8 million classified as long-term debt. The company reported approximately $518.3 million of unused revolving-credit capacity. Net debt decreased $247.4 million from October 31, 2009.
Six-month investing cash uses were $93.8 million, including $68.6 million for product development assets, $20.8 million for property, equipment and technology, and $4.3 million for acquisitions. Financing activities used $14.2 million, including $19.3 million of dividends. The quarterly dividend increased 14.3% to $0.16 per share.
Material changes versus the prior comparable period
- Second-quarter revenue declined 1% reported but increased 1% excluding unfavorable foreign exchange. First-half revenue increased 2% reported and 5% currency-neutral.
- Second-quarter operating income rose 3% despite lower revenue, primarily because the prior-year period included an $11.5 million GIT Verlag intangible-asset impairment charge. Excluding foreign exchange and that charge, operating income declined 3% because of lower gross margins and higher operating expenses.
- First-half operating income increased 8% reported, or 9% excluding foreign exchange and the prior-year impairment charge.
- Net income increased 16% in the quarter and 34% in the first half. Results benefited from lower interest expense, lower foreign-exchange losses, the absence of the prior-year impairment charge, and tax benefits.
- Interest expense declined to $4.8 million in the quarter and $10.5 million in the first half, helped by lower average debt and interest rates.
- Higher Education revenue increased 9% in the quarter and 11% in the first half. STMS revenue declined on a reported basis but grew currency-neutral. Professional/Trade revenue declined 6% in the quarter and grew 1% for the first half.
- Operating and administrative expenses increased 1% in the quarter and 3% in the first half, driven by technology development, employment costs, incentive compensation and pension expense.
Guidance, outlook, commentary and risks
- Fiscal 2011 planned product-development spending was approximately $145 million and property, equipment and technology spending approximately $60 million.
- Management stated that operating cash flow, revolving facilities and other available debt financing should meet foreseeable operating, investing and financing needs, while cautioning that capital-market volatility could restrict access or increase financing costs.
- Operating cash flow is seasonal: journal subscription receipts are concentrated from November through February, while U.S. higher-education sales are concentrated in June through August and November through January.
- The fiscal 2010 GIT Verlag impairment reduced the carrying value of acquired publication rights to $7.7 million; the remaining rights were classified as finite-lived and will be amortized over ten years.
- The first-half effective tax rate was 25.1%, including a $4.2 million non-cash U.K. deferred-tax benefit and an approximately $2.0 million release of a previously accrued tax reserve. Excluding these items, the rate was 29.8%.
- Restructuring-related severance accruals were approximately $1.2 million at October 31, 2010, with payments expected to be completed by January 31, 2011.
- Interest-rate exposure remains material: approximately $332.0 million of variable-rate debt was unhedged, and a hypothetical one-percentage-point rate change would affect annual net income and cash flow by approximately $2.1 million.
- Sales-return reserves were $61.1 million. A one-percentage-point change in the estimated return rate could affect net income by approximately $4.8 million.
- Key risks include journal subscription renewals and agent liquidity, retail and wholesaler consolidation, education seasonality and used books, foreign exchange, economic conditions, intellectual-property protection, acquisitions, technology investment and changes in tax legislation.
- The filing’s liquidity discussion refers once to debt and capacity “as of October 31, 2011”; this appears inconsistent with the filing period and other disclosures, which state October 31, 2010.
Investor verification checklist
- Reconcile reported growth with management’s currency-neutral and “excluding impairment” measures.
- Assess the sustainability of earnings excluding the $4.2 million U.K. tax benefit, $2.0 million tax-reserve release and prior-year impairment comparison.
- Verify debt maturities, covenant compliance, floating-rate exposure and available revolving capacity.
- Monitor cash conversion, journal subscription collections and higher-education seasonality against planned capital spending.
- Evaluate Professional/Trade weakness, returns reserves and exposure to major book customers and subscription agents.
- Track the performance and adoption of Wiley Online Library, WileyPLUS, eBooks and other digital initiatives.