John Wiley & Sons, Inc. — Form 10-Q Summary
Business context and reporting period
Global provider of research, professional development, and education content and services, including journals, books, databases, online training, assessment, and online program management. The filing covers the three months ended July 31, 2013, the first quarter of fiscal year 2014, with comparisons to the prior-year quarter.
Key financial metrics
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Revenue | $411.0 million | $410.7 million |
| Gross profit margin | 70.9% | 69.0% |
| Operating income | $35.6 million | $39.0 million |
| Operating margin | 8.7% | 9.5% |
| Net income | $35.9 million | $36.1 million |
| Diluted EPS | $0.61 | $0.60 |
| Cash used in operating activities | $56.7 million | $78.3 million |
| Cash and cash equivalents at period end | $189.8 million | $149.3 million |
- Research revenue increased 4% to $245.8 million, driven by journal subscriptions and other publishing income. Contribution to profit increased 13% to $66.2 million.
- Professional Development revenue declined 18% to $84.1 million, primarily because of divested consumer publishing programs and lower print book revenue. The segment reported a contribution loss of $1.9 million versus contribution profit of $0.3 million.
- Education revenue increased 11% to $81.1 million, including $14.7 million from Deltak. Contribution to profit declined 32% to $6.0 million because of investment in new university programs, higher technology costs, and lower print textbook revenue.
- Cost of sales decreased 6% to $119.8 million, improving gross margin by 190 basis points. Operating and administrative expenses increased 3% to $237.0 million, while restructuring charges rose to $7.8 million from $4.8 million.
- The reported 5.3% tax benefit included a $10.6 million non-cash deferred tax benefit from U.K. tax-rate changes. Excluding this benefit, the effective tax rate decreased to 25.8% from 26.5%.
- Long-term debt was $660.0 million at July 31, 2013, compared with $514.0 million a year earlier. Management reported approximately $176 million of unused borrowing capacity and no off-balance-sheet debt.
- Total assets were $2.66 billion and shareholders’ equity was $996.2 million at July 31, 2013. Current liabilities included $264.6 million of deferred revenue collected in advance.
Material changes versus the prior comparable period
- Revenue was essentially flat on a reported basis but increased 1% excluding foreign exchange effects. Acquisitions contributed approximately $17 million, while divestitures reduced revenue by approximately $12 million and lower print book revenue reduced revenue by approximately $14 million.
- Operating income decreased $3.4 million, reflecting higher operating and administrative expenses, restructuring charges, and amortization, despite improved gross margin.
- Net income was broadly unchanged because the U.K. tax benefit offset lower operating income and higher interest expense.
- Cash used in operations improved by $21.6 million, primarily because German tax deposits were $5.9 million in the current period versus $29.7 million in the prior-year period.
- Financing activities used $61.3 million compared with $8.2 million provided in the prior year, including $135.5 million of debt repayments, $122.5 million of borrowings, $14.7 million of dividends, and $14.6 million of treasury-stock purchases.
- The company repurchased 350,100 shares at an average price of $41.68 and increased its quarterly dividend 4% to $0.25 per share.
Guidance, outlook, risks, contingencies, and unusual items
- The restructuring and reinvestment program generated $7.8 million of pre-tax charges in the quarter. The company expects additional fiscal 2014 charges and anticipates approximately $8 million in the second quarter. It expects the current program’s charge to be fully recovered by January 31, 2015.
- Fiscal 2014 projected spending is approximately $70 million for technology, property and equipment and $50 million for composition. Projected royalty advances are approximately $110 million.
- Management believes operating cash flow, revolving credit facilities, and other available debt financing will meet foreseeable operating, investing, and financing needs, although access to capital markets could be affected by volatility.
- The company has deposited approximately $53.5 million with German tax authorities, including accrued interest, while contesting tax treatment of stepped-up assets. It may be required to deposit up to an additional €21 million plus interest. Resolution could take several years; management believes its position is more likely than not to prevail.
- The company had $660 million of variable-rate loans, with a $250 million interest-rate swap. A hypothetical 1% change in rates on the $410 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $2.5 million.
- Foreign currency translation produced a $9.8 million other comprehensive loss. Key risks include journal-renewal rates, subscription-agent liquidity, book-retailer concentration, higher-education seasonality, used-book competition, technology investment, intellectual-property protection, acquisition integration, and global economic conditions.
- The company reported approximately $0.3 million of revenue and $0.1 million of net profit from transactions involving Iranian public institutions and states that it believes these activities comply with applicable sanctions.
Important facts for investors to verify
- Whether restructuring savings are realized as planned and whether further charges exceed the anticipated approximately $8 million in the second quarter.
- The sustainability of Research journal-subscription growth and renewal rates, including the financial condition of subscription agents.
- Education segment performance, Deltak program profitability, and the impact of university bookstore ordering patterns and seasonality.
- Debt reduction, variable-rate exposure, unused borrowing capacity, and cash generation after seasonal working-capital needs, capital spending, and royalty advances.
- The status and ultimate outcome of the German tax dispute and recovery of the $53.5 million tax deposit.
- The effect of foreign exchange movements, book-return estimates, retailer concentration, and continued migration from print to digital products.