John Wiley & Sons, Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2015, the first quarter of fiscal 2016. Comparative period was the three months ended July 31, 2014. Results include three months of CrossKnowledge operations in fiscal 2016 versus one month in the prior-year comparable period.
Business Context
Wiley provides digital and print content and knowledge-enabled services through Research, Professional Development, and Education. The company operates primarily in North America, Europe, Asia, and Australia. Its businesses are seasonal, with substantial cash receipts from research subscriptions and education activity occurring later in the fiscal year.
Key Financial Metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $423.0 million | $437.9 million | Down 3%; up 2% excluding foreign exchange |
| Operating income | $44.9 million | $49.6 million | Down 10% |
| Operating margin | 10.6% | 11.3% | Down approximately 70 basis points |
| Net income | $32.5 million | $33.6 million | Down 4% |
| Diluted EPS | $0.55 | $0.56 | Down $0.01; $0.04 unfavorable FX impact |
| Gross margin | 71.7% | 71.7% | Flat |
| Effective tax rate | 22.6% | 26.3% | Lower due principally to income from lower-tax jurisdictions |
| Cash used in operating activities | $124.1 million | $102.2 million | Higher use of $21.9 million |
| Cash used in investing activities | $32.8 million | $190.8 million | Prior year included CrossKnowledge acquisition |
| Cash provided by financing activities | $65.3 million | $62.9 million | Up $2.3 million |
Segment Performance
- Research: Revenue was $237.4 million, down 7% reported and approximately flat excluding foreign exchange. Contribution to profit was $65.6 million versus $70.0 million. Journal subscription renewals were 0.4% above the prior year on a constant-currency basis, with 98% of targeted business closed as of July 31, 2015.
- Professional Development: Revenue was $98.7 million, up 7% reported and 10% excluding foreign exchange. Contribution to profit increased to $19.0 million from $7.5 million, driven by CrossKnowledge, restructuring savings, and improved gross margin.
- Education: Revenue was $86.9 million, down 4% reported and 1% excluding foreign exchange. Contribution to profit declined to $4.7 million from $8.7 million, primarily due to lower print textbook revenue and increased investment in Online Program Management.
Financial Position, Liquidity, and Debt
- Cash and cash equivalents were $369.4 million at July 31, 2015, compared with $255.9 million a year earlier and $457.4 million at April 30, 2015.
- Total debt was approximately $850.5 million, including $100.0 million of short-term debt and $750.5 million of long-term debt. The company reported approximately $197 million of unused borrowing capacity.
- Current liabilities included $281.1 million of deferred revenue collected in advance, primarily from subscriptions. This contributes to seasonal working-capital fluctuations.
- The company stated that operating cash flow, revolving credit facilities, and other available financing should be adequate for foreseeable operating, investing, and financing needs, subject to capital-market access and other risks.
- Approximately $350.2 million of cash was held outside the United States and is generally intended to remain reinvested outside the United States.
- Variable-rate loans outstanding totaled $850.4 million. Interest-rate swaps with aggregate notional value of $300 million hedged part of the exposure. A hypothetical one-percentage-point change in rates on approximately $550 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $3.4 million.
Material Changes Versus the Prior Comparable Period
- Reported revenue declined because of unfavorable foreign exchange and lower Research and Education print-related revenue; on a currency-neutral basis, consolidated revenue increased approximately 2%.
- CrossKnowledge contributed $12.7 million of revenue and a $0.4 million operating loss, including two additional reported months compared with the prior year.
- Professional Development improved substantially, while Education contribution declined and Research contribution was lower on a reported basis.
- Operating and administrative expenses decreased 4%, reflecting restructuring and cost savings, partly offset by CrossKnowledge costs, Online Program Management growth, and enterprise-resource-system investments.
- Restructuring charges were $3.4 million versus a $0.2 million credit in the prior-year quarter. Cumulative charges under the program were $99.4 million and management expected the program to be fully recovered by the end of fiscal 2016.
- Operating cash use increased primarily because of timing of vendor payments, lower collections relative to the unusually strong prior year, and higher pension contributions.
- Foreign currency translation produced $19.1 million of other comprehensive income in the quarter, reducing accumulated other comprehensive loss to $387.9 million.
- The quarterly dividend increased to $0.30 per share from $0.29. The company repurchased 230,400 shares at an average price of $55.22.
Guidance, Outlook, Risks, and Unusual Items
- Fiscal 2016 projected spending was approximately $110 million for technology, property, and equipment; $38 million for composition; and $100 million for author advances. Technology spending included approximately $35 million for new enterprise-resource systems and headquarters transformation.
- Beginning with calendar-year 2016 journal subscriptions, the company planned to move to time-based digital subscription agreements. Management estimated that this would shift approximately $35 million of revenue and $0.35 of EPS from fiscal 2016 to fiscal 2017, with no expected impact on free cash flow.
- Swets Information Services’ bankruptcy was expected to reduce fiscal 2016 journal subscription revenue by approximately $3 million; the filing separately described an approximately $5 million impact on calendar-year 2015 journal subscription revenue.
- The company had deposited €48 million with German tax authorities through July 31, 2015 in connection with a disputed tax step-up. It expected additional deposits of up to €10 million plus interest while the appeal proceeds. The related U.S.-dollar deposit and accrued interest totaled $58.9 million; no charge was recorded because management believed it was more likely than not to prevail.
- Net print-book sales-return reserves were $31.4 million. A one-percentage-point change in the estimated return rate could affect net income by approximately $2.3 million.
- Key risks include foreign exchange, interest rates, journal renewal rates, financial stability of subscription agents, seasonality, used-book markets, customer concentration, intellectual-property protection, integration of acquisitions, and access to credit markets.
- On August 6, 2015, after the quarter end, a Santander revolving facility was increased from $50 million to $100 million; the additional $50 million was drawn and used to repay part of the revolving credit facility.
- Management stated that disclosure controls were effective and that no material changes had affected internal controls over financial reporting.
Important Facts for Investors to Verify
- Reconcile reported revenue and EPS trends with the effects of foreign exchange, CrossKnowledge’s additional reporting months, and the planned journal-contract revenue shift.
- Assess whether restructuring savings and the anticipated recovery of the $99.4 million cumulative program cost are being realized.
- Monitor Education profitability, print textbook declines, Online Program Management investment, and the growth and integration of CrossKnowledge.
- Evaluate liquidity during the seasonal cash-use period, including approximately $850 million of debt, variable-rate exposure, and reliance on revolving facilities.
- Track the German tax appeal and potential additional deposits of up to €10 million plus interest.
- Review journal renewal rates, subscription-agent credit exposure, sales-return assumptions, and foreign-currency movements.