Business Context and Reporting Period
John Wiley & Sons, Inc. is a global provider of research, professional development, and education content and services. This Form 10-Q covers the second quarter and six months of fiscal 2015 ended October 31, 2014, compared with the corresponding fiscal 2014 periods.
- Research generated 55.5% of quarterly revenue, Professional Development 22.1%, and Education 22.3%.
- The company completed acquisitions of CrossKnowledge for approximately $166 million and Profiles International for approximately $47.5 million in cash during fiscal 2015.
Financial Performance and Liquidity
| Metric | Three months ended October 31, 2014 | Year-over-year change | Six months ended October 31, 2014 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $477.0 million | 6% | $914.9 million | 6% |
| Operating income | $76.0 million | 52% | $125.6 million | 47% |
| Net income | $53.8 million | 49% | $87.4 million | 21% |
| Diluted EPS | $0.90 | 48% | $1.46 | 20% |
| Operating margin | 15.9% | Approximately 4.8 percentage points | 13.7% | Approximately 3.8 percentage points |
| Net margin | 11.3% | Approximately 3.3 percentage points | 9.6% | Approximately 1.2 percentage points |
- Gross margin was 71.8% in the quarter and 71.7% for the six-month period, each approximately 80 basis points above the prior year.
- Cash used in operating activities was $94.1 million for the six months, compared with $66.5 million in the prior year, primarily reflecting working-capital needs, incentive compensation, royalty advances, and restructuring payments.
- Cash used in investing activities was $217.6 million, including approximately $166 million for CrossKnowledge, versus $46.2 million in the prior year.
- Cash provided by financing activities was $33.6 million, compared with cash used of $73.6 million in the prior year. The company paid $34.4 million in dividends and repurchased $41.5 million of stock.
- Cash and cash equivalents were $198.9 million at October 31, 2014, compared with $149.7 million a year earlier and $486.4 million at April 30, 2014.
- Total debt was approximately $799.5 million, including $50 million drawn under a new 364-day revolving facility. The company reported approximately $204.7 million of unused borrowing capacity and compliance with debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by CrossKnowledge and Profiles contributions, a $10 million backfile license sale, journal subscriptions, Education custom products, WileyPLUS, Deltak Education Services, and online test preparation. Growth was partially offset by lower print-book revenue.
- Professional Development revenue increased 14% in the quarter and 12% for the six months, primarily from the acquisitions. Excluding the acquisitions, the segment declined because lower print-book sales exceeded digital and assessment growth.
- Research revenue increased 5% in the quarter and 4% for the six months. Journal-related revenue increased, while print-book and certain advertising and reprint revenue declined.
- Education revenue increased 3% in the quarter and 7% for the six months. WileyPLUS, custom products, and Deltak growth more than offset declines in books.
- Operating results benefited from the absence of prior-year restructuring and impairment charges. The prior-year quarter included $15.3 million of restructuring charges and $4.8 million of impairment charges.
- Operating and administrative expenses increased because of acquisitions, Deltak program growth, technology investments, and employment costs, partly offset by restructuring and other cost savings.
- The effective tax rate increased to 26.1% for the quarter and 26.2% for the six months, compared with 22.5% and 10.7%, respectively. The prior year benefited from a $10.6 million non-cash U.K. deferred-tax benefit and a tax reserve release.
- Other comprehensive income was adversely affected by foreign-currency translation losses of $63.9 million in the quarter and $66.8 million for the six months.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected approximately $18 million of restructuring charges in the third quarter of fiscal 2015, primarily for facility consolidations, dispositions, severance, and reorganization in Research and books.
- Fiscal 2015 projected spending was approximately $80 million for technology, property and equipment, $40 million for composition, and $110 million for author advances.
- Management stated that operating cash flow, revolving facilities, and other financing sources should be adequate for foreseeable operating, investing, and financing needs, while cautioning that capital-market volatility could impair access or increase costs.
- Swets Information Services declared bankruptcy. Wiley reported no material current-period financial impact but expected possible disruption to 2015 journal sourcing and approximately $5 million of potential calendar-year 2015 journal subscription revenue impact.
- Wiley is appealing an unfavorable German tax-court decision concerning approximately €50 million of tax deductions associated with a historical asset basis step-up. Tax deposits totaled €45 million, or approximately $64.0 million including accrued interest, at October 31, 2014; additional deposits of up to €12 million plus interest may be required. No tax charge was recorded because management believed it was more likely than not to prevail.
- Interest-rate exposure remained significant: $798.1 million of variable-rate loans were outstanding, with $450 million of interest-rate swap notional amounts. A hypothetical 1% change in rates on approximately $348.1 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $2.2 million.
- Estimated sales-return reserves were $39.9 million. A 1% change in the estimated return rate could affect net income by approximately $2.5 million.
- The company renewed its Hoboken headquarters lease through March 2033, creating total future minimum payments of approximately $223 million.
Investor Verification Points
- Verify the sustainability of revenue growth after adjusting for acquisitions, the one-time backfile license sale, foreign exchange, and other timing-related items.
- Assess whether CrossKnowledge and Profiles can achieve expected synergies and overcome their initial earnings dilution and higher amortization expense.
- Track the announced restructuring charges and whether the targeted $67 million cumulative program investment is recovered through recurring savings.
- Monitor operating cash conversion, seasonal working-capital requirements, acquisition financing, and debt covenant headroom.
- Follow the German tax appeal, future tax deposits, and potential outcomes affecting the $64 million income-tax deposit.
- Evaluate the effect of Swets’ bankruptcy on 2015 journal subscription collections and renewals.
- Consider foreign-currency translation volatility, variable-rate debt exposure, sales-return assumptions, and the concentration of journal-agent and book-customer receivables.