John Wiley & Sons, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended July 31, 2012, the first quarter of fiscal 2013, compared with the three months ended July 31, 2011. Wiley provides scientific, technical, medical and scholarly publishing; professional and trade content and services; and global education products, including digital offerings.
Key financial metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $410.7 million | $430.1 million | Down 4%; down 2% excluding foreign exchange |
| Gross profit margin | 69.0% | 69.8% | Down 80 basis points |
| Operating income | $39.0 million | $60.2 million | Down 35% |
| Income before taxes | $37.7 million | $58.8 million | Down 36% |
| Net income | $36.1 million | $50.8 million | Down 29% |
| Diluted EPS | $0.60 | $0.82 | Down 27% |
| Cash used in operating activities | $78.3 million | $35.3 million | Higher use of $42.9 million |
Operating and administrative expenses were $230.0 million, down 1% reported but up 2% excluding foreign exchange. Restructuring charges were $4.8 million, compared with none in the prior-year quarter. Interest expense increased to $2.8 million from $1.7 million, while the company recorded a $1.0 million foreign-exchange transaction gain versus a $0.2 million loss previously.
The effective tax rate was 4.2%, compared with 13.6%. Both periods benefited from non-cash U.K. deferred tax remeasurement benefits of approximately $8.4 million in 2012 and $8.8 million in 2011. Excluding those benefits, the effective tax rate declined to 26.5% from 28.5%.
Cash and cash equivalents were $149.3 million at July 31, 2012, versus $121.7 million a year earlier and $259.8 million at April 30, 2012. Total debt was approximately $514.0 million, all presented as long-term debt at quarter-end, with approximately $196 million of unused revolving-credit capacity. Net debt increased $11.4 million from the prior-year quarter.
Investing cash use was $29.5 million, including $11.9 million of composition spending, $15.9 million of technology and property additions, and $1.7 million for acquisitions. Financing activities provided $8.2 million and included $109.7 million of borrowings, $70.7 million of debt repayments, $14.4 million of dividends, and $10.6 million of treasury-stock purchases.
Material changes versus the prior comparable period
- STMS revenue declined 7% to $235.9 million, or 4% excluding foreign exchange; contribution to profit declined 21% to $57.5 million. Lower journal subscriptions and other publishing income, higher royalty rates, and higher technology and employment costs pressured results.
- Professional/Trade revenue increased 3% to $102.0 million, or 4% excluding foreign exchange, primarily because of the Inscape assessment and training business acquired in fiscal 2012. Contribution to profit was $0.3 million versus $0.8 million.
- Global Education revenue declined 7% to $72.8 million, or 5% excluding foreign exchange, as print-book revenue fell 15%. Non-traditional and digital content increased 15%, but contribution to profit fell 45% to $8.9 million.
- Digital activity continued to expand: STMS digital books represented 23% of STMS book revenue versus 15% previously; P/T digital revenue increased 43%; and GEd non-traditional and digital content represented 29% of segment revenue versus 23%.
- Comprehensive income declined to a loss of $1.6 million from income of $47.5 million, primarily because of a $41.0 million foreign-currency translation loss recorded in other comprehensive income.
- The company changed segment reporting effective May 1, 2012 by allocating certain shared-services and administrative costs to segments; prior-year segment information was restated for comparability.
Outlook, commentary, risks and unusual items
Management stated that the restructuring supports the transition to digital products and services through activities that will be discontinued, outsourced, or relocated. The $4.8 million charge is expected to be fully recovered within 18 months. Approximately $4.1 million remained accrued for severance at July 31, 2012, with payments expected to be completed by July 31, 2013.
After quarter-end, Wiley agreed to sell key travel-publishing assets, including Frommer’s, Unofficial Guides, and WhatsonWhen, to Google for approximately $22 million in cash. The transaction became effective August 31, 2012, and Wiley expected to record an approximately $6.6 million after-tax gain in the second quarter of fiscal 2013. The company is also evaluating sales of other consumer assets.
Fiscal 2013 projected spending was approximately $85 million for technology, property and equipment, $55 million for composition, and $110 million for author advances. Management believed operating cash flow, revolving facilities, and other financing sources would meet foreseeable needs, while noting potential limits from volatility in global capital and credit markets.
Key risks include seasonal working-capital requirements, journal-subscription renewal and agent liquidity, concentration among major book customers, the used-book and rental market, retailer and wholesaler consolidation, foreign-exchange exposure, interest-rate increases, digital-transition execution, intellectual-property protection, acquisition integration, and global economic conditions.
German tax authorities challenged the company’s treatment of amortization of stepped-up assets. Wiley deposited €24 million in June 2012 and may be required to deposit up to an additional €33 million plus interest. Management believes it is more likely than not to prevail; resolution could take several years. The July 31, 2012 deposit and accrued interest totaled approximately $30.4 million.
The company had $514 million of variable-rate loans, with $375 million notionally covered by interest-rate swaps. A hypothetical one-percentage-point change in rates on the $139 million of unhedged variable-rate debt would affect annual net income and cash flow by approximately $0.9 million.
Facts investors should verify
- Whether the decline in STMS and Global Education revenue and margins persists beyond seasonal effects.
- The timing and amount of the expected $6.6 million after-tax gain from the Google travel-asset sale.
- Execution of the digital transformation, including the projected $140 million of technology, property, equipment, and composition spending.
- Cash-flow seasonality, subscription collections, deferred revenue, and the company’s ability to fund dividends, repurchases, acquisitions, and debt service.
- Resolution and additional funding requirements related to the German tax audit.
- Exposure to variable interest rates, foreign-currency translation losses, customer concentration, and sales-return estimates.
- The effect of the changed segment-allocation methodology when comparing future segment performance.