John Wiley & Sons, Inc. Fiscal 2011 Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2011. The request metadata references “2010 Q4,” but the supplied filing is the fiscal 2011 annual report and includes fourth-quarter results.
Business Context
Wiley is a global publisher of scientific, technical, medical and scholarly content; professional and consumer books; and higher-education materials and digital learning products. Operations span the United States, Europe, Asia, Canada and Australia, with approximately 5,100 full-time-equivalent employees. Fiscal 2011 revenue was approximately 49% billed in non-U.S. markets.
- Scientific, Technical, Medical and Scholarly: 57% of revenue.
- Professional/Trade: 25% of revenue.
- Higher Education: 18% of revenue.
Financial Performance and Liquidity
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Revenue | $1,742.6 million | $1,699.1 million | Up 3% |
| Gross profit | $1,203.5 million | $1,165.1 million | Up 3% |
| Gross margin | 69.1% | 68.6% | Up 50 basis points |
| Operating income | $248.1 million | $242.6 million | Up 2% |
| Operating margin | 14.2% | 14.3% | Approximately flat |
| Net income | $171.9 million | $143.5 million | Up 20% |
| Diluted EPS | $2.80 | $2.41 | Up 16% |
| Cash from operating activities | $375.6 million | $315.0 million | Up $60.6 million |
| Cash and cash equivalents | $201.9 million | $153.5 million | Up $48.3 million |
| Total debt | $454.2 million | $649.0 million | Down $194.8 million |
| Shareholders’ equity | $977.9 million | $722.4 million | Up $255.5 million |
Net income benefited from lower interest expense, lower foreign-exchange transaction losses and a lower effective tax rate. The fiscal 2011 effective tax rate was 25.6%, including a $4.2 million non-cash U.K. deferred-tax benefit and approximately $1.9 million of state net operating loss benefits. Excluding those benefits, management reported an effective rate of approximately 28.3%.
Investing cash outflows were $113.0 million, including $51.5 million of composition spending, $54.4 million for technology, property and equipment, and $7.2 million for acquisitions and publishing rights. Financing cash outflows were $230.0 million, primarily reflecting debt repayment, dividends and share repurchases.
Working capital was negative $228.9 million, principally because $321.4 million of deferred subscription revenue was collected in advance. The company reported approximately $697.4 million of unused revolving-credit capacity and no off-balance-sheet debt. The revolving facility terminates February 2, 2012, and the term loan matures February 2, 2013.
Material Changes Versus the Prior Comparable Period
- Revenue increased 3%, or 4% excluding unfavorable foreign exchange, with growth in all three operating businesses.
- Higher Education was the strongest segment: revenue increased 9% to $306.6 million and direct contribution increased 17% to $101.0 million. Digital and non-traditional content revenue increased 26%.
- STMS revenue increased 1% to $998.9 million, or 4% excluding foreign exchange. Digital revenue represented 59% of STMS revenue; digital journal revenue represented 81% of journal revenue.
- Professional/Trade revenue increased 2% to $437.1 million. Digital revenue reached 10% of segment revenue, and eBook sales reached $23 million.
- Consolidated operating and administrative expenses increased 4% to $910.8 million, including approximately $15 million of additional technology costs and $8 million of higher employment costs.
- Operating income included a $9.3 million bad-debt provision related to Borders Group, which filed for Chapter 11 bankruptcy. Management stated it did not anticipate additional Borders bad-debt expense.
- Fiscal 2010 included $15.1 million of impairment and restructuring charges, principally related to GIT Verlag and offshore activities; no additional charges related to those programs were recorded in fiscal 2011.
- The quarterly dividend increased 14.3% to $0.16 per share. The company repurchased 577,405 shares during fiscal 2011 at an average price of $48.42.
Guidance, Outlook, Risks and Unusual Items
- Management forecast fiscal 2012 spending of approximately $75 million for technology, property and equipment and $55 million for composition, plus approximately $102 million for author advances.
- Management expected a further U.K. corporate tax-rate reduction from 27% to 25% to produce an estimated non-cash tax benefit of approximately $10 million, or $0.16 per share, if enacted.
- Management believed operating cash flow, cash balances and available credit would meet foreseeable operating, investing and financing needs, while acknowledging risks from capital-market volatility and access to credit.
- Key operating risks include migration from print to digital formats, technology failures or data breaches, copyright protection, competition, journal-renewal rates, open-access mandates, textbook rentals, used books, paper costs, foreign exchange, interest rates, pension funding and global economic conditions.
- Customer concentration remains relevant: subscription agents represented approximately 23% of consolidated revenue, while the top 10 book customers represented approximately 18% of revenue and 44% of accounts receivable before reserves.
- The company had $38.1 million of unrecognized tax benefits, of which approximately $35.0 million could reduce future tax expense if recognized. Up to approximately $11 million could decrease within the following 12 months.
- Defined-benefit pension plans were underfunded by approximately $96.0 million in aggregate at year-end, and expected fiscal 2012 employer contributions were approximately $20.3 million.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Investor Verification Points
- Verify the fiscal 2012 refinancing or renewal of the revolving credit facility, which was scheduled to terminate in February 2012.
- Assess whether Higher Education digital growth and Wiley Online Library investments translated into sustainable revenue and margin expansion.
- Review the collectability of receivables following the Borders bankruptcy and monitor exposure to concentrated book customers and subscription agents.
- Separate recurring earnings from the $4.2 million U.K. tax benefit, approximately $1.9 million state tax benefits and the $9.3 million Borders provision.
- Monitor foreign-exchange effects, interest-rate exposure on variable-rate debt and the adequacy of the $125 million interest-rate swap.
- Evaluate pension funding requirements, sales-return estimates, inventory-obsolescence reserves and the sensitivity of reported earnings to these assumptions.
- Confirm compliance with debt covenants, including the approximately $92 million availability for restricted payments at April 30, 2011.