Washington, D.C. 20549
For the quarterly period ended January 31, 2013 Commission File No. 1-11507
JOHN WILEY & SONS, INC.
Former name, former address, and former fiscal year, if changed since last report
The number of shares outstanding of each of the Registrant’s classes of Common Stock as of February 28, 2013 were:
JOHN WILEY & SONS, INC.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial condition, results of operations, comprehensive income and cash flows for the periods presented. Operating results for the interim period are not necessarily indicative of the results expected for the full year. These financial statements should be read in conjunction with the most recent audited financial statements included in the Company’s Form 10-K for the fiscal year ended April 30, 2012.
The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
There have been no new accounting standards issued that have had, or are expected to have a material impact on the Company’s consolidated financial statements.
The Company has share-based compensation plans under which employees may be granted options to purchase shares of Company common stock at the fair market value at the time of grant. In addition to stock options, the Company grants performance-based stock awards and other restricted stock awards to certain management level employees. The Company recognizes the grant date fair value of share-based compensation in net income on a straight-line basis over the requisite service period. The measurement of performance for performance-based stock awards is based on actual financial results for targets established three years in advance. For the three months ended January 31, 2013 and 2012, the Company recognized share-based compensation expense, on a pre-tax basis, of $2.0 million and $5.3 million, respectively. For the nine months ended January 31, 2013 and 2012, the Company recognized share-based compensation expense, on a pre-tax basis, of $10.0 million and $13.1 million, respectively. In the third quarter of fiscal year 2013, the Company reduced the estimated number of performance-based restricted shares to be distributed under its long-term incentive plans based on the Company’s expected operating performance relative to targets previously established resulting in a decrease in share-based compensation expense.
The following table provides share-based compensation data for awards granted by the Company:
The weighted average Black-Scholes fair value assumptions for stock option grants are as follows:
The components of accumulated other comprehensive loss were as follows (in thousands):
A reconciliation of the shares used in the computation of earnings per share follows (in thousands):
Since their inclusion in the calculation of diluted earnings per share would have been anti-dilutive, options to purchase 2,717,744 shares of Class A Common Stock have been excluded for both the three and nine months ended January 31, 2013, and options to purchase 1,655,362 shares have been excluded for both the three and nine months ended January 31, 2012. For the three and nine months ended January 31, 2013, unearned restricted shares of 30,750 and 23,000, respectively, have been excluded as their inclusion would have been anti-dilutive. The three and nine month periods ended January 31, 2012 exclude 5,000 and 48,150 anti-dilutive shares, respectively.
On October 25, 2012, the Company acquired all of the stock of Deltak.edu, LLC (“Deltak”) for approximately $220 million in cash, net of cash acquired. Deltak works in close partnership with leading colleges and universities to develop and support online degree and certificate programs. The business provides technology platforms and services including market research to validate program demand, instructional design, marketing, and student recruitment and retention services to leading national and regional colleges and universities throughout the United States. Deltak currently supports more than 100 online programs and was generating annual revenue of approximately $54 million prior to the acquisition. The acquisition will enable Wiley’s Global Education business to accelerate its digital learning strategy and diversify its service offerings to include operational and academic solutions for higher education institutions.
The acquisition was financed through additional borrowings under the Company’s revolving credit facility, which included an increase in the facility’s credit limit from $700 million to $825 million. There were no other changes to the terms of the Company’s revolving credit facility which were previously disclosed in the Company’s April 30, 2012 Form 10-K. The $220 million purchase price was allocated on a preliminary basis to identifiable long-lived intangible assets ($99.4 million) comprised primarily of institutional relationships; and long-term deferred tax liabilities ($34.4 million); with the remainder allocated to technology and working capital. The excess of the purchase price over the fair value of net assets acquired ($149.6 million) was recorded as goodwill. Goodwill represents the estimated value of Deltak’s workforce, unidentifiable intangible assets and the fair value of expected synergies. None of the goodwill is deductible for tax purposes. The identifiable long-lived intangible assets are primarily amortized over an estimated useful life of approximately 20 years. Unaudited proforma financial information has not been presented since the effects of the acquisition were not material. The Company expects the purchase accounting to be substantially completed by April 30, 2013.
On November 1, 2012, the Company acquired all of the stock of Efficient Learning Systems, Inc. (“ELS”) for approximately $24 million in cash, net of cash acquired. ELS is an e-learning system provider focused in the areas of professional finance and accounting. ELS’ flagship product, CPAexcel, is a modular, digital platform comprised of online self-study, videos, mobile apps, and sophisticated planning tools that has helped over 65,000 professionals prepare for the CPA exam since 1998. The acquisition enhances Wiley’s position in the growing CPA test preparation market and provides the Company with a scalable platform that can be leveraged across other areas of its Professional Development business. ELS was generating annual revenue of approximately $7 million prior to the acquisition. The $24 million purchase price was allocated on a preliminary basis to identifiable long-lived intangible assets ($7.0 million); technology ($3.6 million); and long-term deferred tax liabilities ($3.1 million); with the remainder allocated to working capital. The excess of the purchase price over the fair value of net assets acquired ($16.7 million) was recorded as goodwill. Goodwill represents the estimated value of ELS’ workforce, unidentifiable intangible assets and the fair value of expected synergies. None of the goodwill is deductible for tax purposes. Unaudited proforma financial information has not been presented since the effects of the acquisition were not material. The Company expects the purchase accounting to be substantially completed by April 30, 2013.
In March 2012, the Company announced that it intended to explore opportunities to sell a number of its consumer publishing assets in its Professional Development business as they no longer align with the Company’s long-term business strategy. Those assets include travel (including the well-known Frommer’s brand), culinary, general interest, nautical, pets, crafts, Webster’s New World, and CliffsNotes.
On August 10, 2012, the Company entered into a definitive agreement with Google, Inc. (“Google”) for the sale of its travel publishing program, including all of its interests in the Frommer’s, Unofficial Guides, and WhatsonWhen brands for $22 million in cash, of which $3.3 million is held in escrow related to standard commercial representations and warranties. The effective date of the transaction was August 31, 2012. As a result, the Company recorded a $9.8 million pre-tax gain on the sale, or $6.2 million after tax ($0.10 per share), in the second quarter of fiscal year 2013. In connection with the sale, the Company also entered into a transition services agreement.
Sale and Impairment of the Culinary, CliffsNotes and Webster’s New World Publishing Programs:
In September 2012, the Company entered into negotiations with Houghton Mifflin Harcourt (“HMH”) regarding the sale of the Company’s culinary, CliffsNotes, and Webster’s New World Dictionary consumer publishing programs. As a result, the Company began accounting for these publishing programs as Assets Held for Sale and recorded a pre-tax impairment charge of $12.1 million ($0.12 per share) in the second quarter of fiscal year 2013 to reduce the carrying value of the assets within these programs to approximately $9.9 million, which represented their fair value based on the estimated sales price, less costs to sell of $1.1 million. On November 5, 2012, the Company completed the sale of these publishing programs to HMH for $11.0 million in cash, which approximated the estimated sale price, of which $1.1 million is held in escrow related to standard commercial representations and warranties. In connection with the sale, the Company also entered into a transition services agreement.
The Company is continuing to explore opportunities to sell its remaining consumer publishing programs which include pets, crafts, nautical and general interest. If a sale is not feasible, the Company plans to discontinue publishing within these remaining programs. As a result, in the second quarter of fiscal year 2013, the Company recorded a pre-tax impairment charge of $3.4 million, or $2.1 million after tax ($0.04 per share), to reduce the carrying value of inventory and royalty advances within the consumer publishing programs to their estimated realizable value.
As part of the Company’s ongoing transition and transformation to digital products and services, certain activities have been identified that will either be discontinued, outsourced, or relocated to a lower cost region. As a result, the Company recorded a pre-tax restructuring charge of approximately $4.8 million, or $3.5 million after tax ($0.06 per share), in the first quarter of fiscal year 2013 for redundancy and separation benefits, which is reflected in the Restructuring Charges line item of the Condensed Consolidated Statements of Income. Approximately $3.0 million, $1.3 million and $0.2 million of the restructuring charge was recorded within the Scientific, Technical, Medical and Scholarly (“STMS”), Professional Development (“PD”), and Global Education (“GEd”) reporting segments, respectively, with the remainder recognized in Shared Service costs.
During the three and nine months ended January 31, 2013, the Company made severance payments of approximately $1.2 million and $2.5 million, respectively, resulting in a remaining liability of approximately $2.3 million as of January 31, 2013, which is reflected in the Accrued Employment Costs line item in the Condensed Consolidated Statements of Financial Position. The remaining severance payments are expected to be completed by April 30, 2013.
The Company provides content and content-enabled digital services to customers worldwide. Core businesses produce scientific, technical, medical and scholarly journals, reference works, books, database services and advertising; professional books, subscription products, certification and training services and online applications; and educational content and services. Education content and services includes integrated online teaching and learning resources for undergraduate and graduate students, educators and lifelong learners worldwide as well as secondary school students in Australia. The Company takes full advantage of its content from all three core businesses in developing and cross-marketing products to its diverse customer base of researchers, professionals, students, and educators. The use of technology enables the Company to make its content efficiently more accessible to its customers around the world. The Company maintains publishing, marketing, and distribution centers in Asia, Australia, Canada, Europe and the United States.
In fiscal year 2013, the Company changed the name of its Professional/Trade segment to Professional Development. The change is part of a portfolio realignment to focus on content and workflow solutions for professionals in business, finance, accounting, talent management, leadership, technology, behavioral health, engineering/architecture and professional education.
As of May 1, 2012, the Company changed its internal reporting of segment measures for the purposes of assessing performance and making resource allocation decisions. Accordingly, the Company now reports on segment performance after the allocation of certain direct Shared Services and Administrative Costs, identified as Contribution to Profit. These costs were previously reported as independent activities and not reflected within each segment's operating results. In addition, the management responsibility and reporting of certain PD and GEd product lines were realigned as of May 1, 2012. Prior year results have been restated for comparative purposes for each of the changes described above.
(*) Professional Development Direct Contribution to Profit and Contribution to Profit for the nine months ended January 31, 2013 include the effects of a $15.5 million impairment charge on certain assets within its consumer publishing programs and a $9.8 million gain on the sale of its travel publishing program (see Note 7 for further discussion of these items).
The acquisitions for PD and GEd relate to the ELS and Deltak acquisitions, respectively. The divestments reflect the portion of goodwill allocated to the divestment of the consumer publishing programs.
In the third quarter of fiscal year 2013, the Company completed its annual review of goodwill and indefinite-lived intangible assets. No impairments were required.
The effective tax rate for the first nine months of fiscal year 2013 was 22.6% compared to 19.9% in the prior year. During the first quarters of fiscal years 2013 and 2012, the Company recorded non-cash deferred tax benefits of $8.4 million ($0.14 per share) and $8.8 million ($0.14 per share), respectively, principally associated with new tax legislation enacted in the United Kingdom (“U.K.”) that reduced the U.K. statutory income tax rates by 2% in each period. The benefits recognized by the Company reflect the remeasurement of all applicable U.K. deferred tax balances to the new income tax rates. The U.K. statutory tax rate as of January 31, 2013 is 23%. During the third quarter of fiscal year 2012, the Company released an income tax reserve of approximately $7.5 million ($0.12 per share) due to the expiration of the statute of limitations. The $7.5 million was originally recorded in conjunction with the purchase accounting for the Blackwell acquisition. Excluding the impact of the tax benefits described above, the Company’s effective tax rate decreased from 27.9% to 27.3% principally due to lower U.S. earnings in the first nine months of fiscal year 2013 due to the consumer publishing program impairment charges.
In fiscal year 2003, the Company merged several of its German subsidiaries into a new operating entity which enabled the Company to increase (“step-up”) the tax deductible net asset basis of the merged subsidiaries to fair market value. The expected tax benefits to be derived from the step-up are approximately 50 million euros claimed as amortization over 15 years beginning in fiscal year 2003. As part of its routine tax audit process, the German tax authorities notified the Company in May 2012 that they are challenging the Company’s tax position with respect to the amortization of certain stepped-up assets. The Company’s management and its advisors believe that it is “more likely than not” to successfully defend the tax treatment as proper and in accordance with German tax regulations. The circumstances are not unique to the Company.
In June 2012, the Company made a 24 million euro deposit related to amortization claimed on certain “stepped-up” assets through fiscal year 2007. Under German tax law, the Company must pay all contested taxes and the related interest to have the right to defend its position challenged by the authorities. The Company expects that it will be required to deposit additional amounts up to 33 million euros plus interest in future periods until the issue is resolved. The challenge is expected to ultimately be decided in court and could take several years to reach resolution. If the Company is successful, as expected, the tax deposits will be returned with 6% simple interest, based on current German legislation. As of January 31, 2013, the USD equivalent of the deposit and accrued interest is approximately $34.1 million and is recorded within Other Assets on the Condensed Consolidated Statements of Financial Position. The Company records the accrued interest at 6% within the Provision for Income Taxes in the Condensed Consolidated Statements of Income.
The components of net pension expense for the defined benefit plans were as follows (in thousands):
Employer pension plan contributions were $15.6 million and $15.1 million for the nine months ended January 31, 2013 and 2012, respectively.
The Company, from time-to-time, enters into forward exchange and interest rate swap contracts as a hedge against foreign currency asset and liability commitments, changes in interest rates and anticipated transaction exposures, including intercompany purchases. All derivatives are recognized as assets or liabilities and measured at fair value. Derivatives that are not determined to be effective hedges are adjusted to fair value with a corresponding adjustment to earnings. The Company does not use financial instruments for trading or speculative purposes.
The Company had $734.8 million of variable rate loans outstanding at January 31, 2013, which approximated fair value. As of both January 31, 2013 and 2012, the Company maintained interest rate swap agreements that were designated as fully effective cash flow hedges as defined under Accounting Standards Codification (“ASC”) 815 “Derivatives and Hedging”. As a result, there was no impact on the Company’s Condensed Consolidated Statements of Income for changes in the fair value of the interest rate swaps. Under ASC 815, fully effective derivative instruments that are designated as cash flow hedges have changes in their fair value recorded initially within Accumulated Other Comprehensive Loss in the Condensed Consolidated Statements of Financial Position. As interest expense is recognized based on the variable rate loan agreements, the corresponding deferred gain or loss on the interest rate swaps is reclassified from Accumulated Other Comprehensive Loss to Interest Expense in the Condensed Consolidated Statements of Income. It is management’s intention that the notional amount of interest rate swaps be less than the variable rate loans outstanding during the life of the derivatives.
On August 19, 2010, the Company entered into an interest rate swap agreement which fixed a portion of the variable interest due on its variable rate loans outstanding. Under the terms of the agreement, the Company paid a fixed rate of 0.8% and received a variable rate of interest based on one-month LIBOR (as defined) from the counterparty which was reset every month for a twenty-nine month period ending January 19, 2013, the date that the swap expired. As of January 31, 2012, the notional amount of the interest rate swap was $125.0 million.
On March 30, 2012, the Company entered into an interest rate swap agreement which fixed a portion of the variable interest due on its variable rate loans outstanding. Under the terms of the agreement, the Company pays a fixed rate of 0.645% and receives a variable rate of interest based on one-month LIBOR (as defined) from the counterparty which is reset every month for a three-year period ending March 31, 2015. As of January 31, 2013, the notional amount of the interest rate swap was $250.0 million.
The Company records the fair value of its interest rate swaps on a recurring basis using Level 2 inputs of quoted prices for similar assets or liabilities in active markets. The fair value of the interest rate swaps as of January 31, 2013 and 2012 and April 30, 2012 was a net deferred loss of $1.4 million, $0.7 million, and $1.7 million, respectively. Based on the maturity dates of the contracts, the deferred loss as of January 31, 2013 and 2012 was recorded in Other Long-Term Liabilities and Other Accrued Liabilities in the Condensed Consolidated Statements of Financial Position, respectively, and $0.5 million and $1.2 million of the deferred loss at April 30, 2012 was recorded in Other Accrued Liabilities and Other Long-Term Liabilities, respectively. Net losses that were reclassified from Accumulated Other Comprehensive Loss into Interest Expense for the three months ended January 31, 2013 and 2012 were $0.4 million and $0.2 million, respectively. Net losses that were reclassified from Accumulated Other Comprehensive Loss into Interest Expense for the nine months ended January 31, 2013 and 2012 were $1.3 million and $0.6 million, respectively.
The Company may enter into forward exchange contracts to manage the Company’s exposure on certain foreign currency denominated assets and liabilities. The forward exchange contracts are marked to market through Foreign Exchange Transaction Losses in the Condensed Consolidated Statements of Income, and carried at their fair value in the Condensed Consolidated Statements of Financial Position. Foreign currency denominated assets and liabilities are remeasured at spot rates in effect on the balance sheet date, with the effects of changes in spot rates reported in Foreign Exchange Transaction Losses. As of January 31, 2013, the total notional amount of the open forward exchange contract in U.S. dollars was $60.0 million. The Company did not maintain any open forward contracts as of January 31, 2012 and April 30, 2012. During the first nine months of fiscal years 2013 and 2012, the Company did not designate any forward exchange contracts as hedges under current accounting standards as the benefits of doing so were not material due to the short-term nature of the contracts. The fair value changes in the forward exchange contracts substantially mitigated the changes in the value of the applicable foreign currency denominated assets and liabilities. The fair values of the contracts were measured on a recurring basis using Level 2 inputs. As of January 31, 2013, the fair value of the open forward exchange contract was a loss of approximately $1.3 million and was recorded within Other Accrued Liabilities. For the three months ended January 31, 2013 and 2012, the losses recognized on the forward contracts were $1.3 million and $2.2 million, respectively. For the nine months ended January 31, 2013 and 2012, the losses recognized on the forward contracts were $0.7 million and $2.4 million, respectively.
In March, Wiley announced a program to restructure and realign the Company’s cost base with current and anticipated future market conditions. When implemented, the plan is expected to improve margins by reducing operating expenses and cost of sales and accelerate earnings growth while providing increased capacity for investment to grow our digital businesses. Working with a third-party restructuring firm since January, the Company is progressing towards finalizing plans.
As part of the implementation of the restructuring program, Wiley expects to record a restructuring charge of approximately $25 million in the fourth quarter of this fiscal year. At least one additional charge is expected as phases of the program are implemented over the course of fiscal 2014. The charges will be related principally to severance and other employee separation-related benefits as well as other business transition-related costs.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS – THIRD QUARTER ENDED JANUARY 31, 2013
Throughout this report, references to amounts “excluding foreign exchange”, “currency neutral basis” and “performance basis” exclude both foreign currency translation effects and transactional gains and losses. Foreign currency translation effects are based on the change in average exchange rates for each reporting period multiplied by the current period’s volume of activity in local currency for each non-U.S. location. For the third quarters of fiscal years 2013 and 2012, the quarterly average exchange rates to convert British pounds sterling to U.S. dollars were 1.60 and 1.57, respectively. The quarterly average exchange rates to convert euros into U.S. dollars for the same periods were 1.30 and 1.33, respectively. Unless otherwise noted, all variance explanations below are on a currency neutral basis.
Revenue, Cost of Sales and Gross Profit:
Revenue for the third quarter of fiscal year 2013 increased 5% to $472.4 million, or 4% excluding the favorable impact of foreign exchange. The growth was mainly driven by incremental revenue from the Deltak, Inscape and ELS acquisitions ($23 million), partially offset by the impact of winding down the Professional Development (“PD”) consumer publishing programs ($6 million) and lower Scientific, Technical, Medical and Scholarly (“STMS”) journal revenue and other publishing income.
Cost of sales for the third quarter of fiscal year 2013 of $141.8 million was flat with the prior year, but decreased 1% excluding the unfavorable impact of foreign exchange mainly due to the impact of winding down the PD consumer publishing programs ($2 million); lower costs digital products; and lower royalties due to timing offset by incremental cost of sales from acquisitions ($5 million).
Gross profit for the third quarter of fiscal year 2013 of 70.0% was 150 basis points higher than prior year mainly due to the continued migration to digital products in Global Education (“GEd”) and PD, lower royalties due to timing and higher margin incremental revenue from acquisitions (40 basis points).
Operating and Administrative Expenses:
Operating and administrative expenses for the third quarter of fiscal year 2013 increased 6% to $235.9 million. The increase was mainly driven by incremental operating and administrative expenses from acquisitions ($14 million) and higher technology costs ($6 million), partially offset by a reduction related to the winding down of the PD consumer publishing programs ($3 million); cost containment initiatives ($2 million); lower journal and book distribution costs due to lower volume and the migration from print to digital products ($1 million); and lower facility costs ($1 million).
Amortization of Intangibles:
Amortization of intangibles increased $2.3 million to $11.2 million in the third quarter of fiscal year 2013. The increase was mainly driven by incremental amortization related to the Deltak and Inscape acquisitions.
Interest Expense/Income, Foreign Exchange and Other:
Interest expense for the third quarter of fiscal year 2013 increased $1.1 million to $3.8 million mainly due to higher average debt from financing the acquisitions. In the third quarters of fiscal years 2013 and 2012, the Company recognized foreign exchange transaction losses of $1.1 million and $0.2 million, respectively. Interest income and other for the third quarters of fiscal years 2013 and 2012 were $0.3 million and $0.4 million, respectively.
Provision for Income Taxes:
The effective tax rate for the third quarter of fiscal year 2013 was 27.7% compared to 17.1% in the prior year. In the third quarter of fiscal year 2012, the Company released an income tax reserve of approximately $7.5 million ($0.12 per share) due to the expiration of the statute of limitations. The $7.5 million was originally recorded in conjunction with the purchase accounting for the Blackwell acquisition. Excluding the impact of the prior year reserve release, the effective tax rate for the third quarter of fiscal year 2013 increased from 27.1% to 27.7% mainly due lower tax benefits on non-U.S. earnings.
Earnings Per Share:
Earnings per diluted share for the third quarter of fiscal year 2013 decreased 8% to $0.95. Excluding the impact of the prior year tax reserve release, earnings per diluted share increased 4% or $0.04 per share mainly due to higher gross profit margin, cost containment initiatives and acquisitions ($0.01 per share).
Future Restructuring Program and Charge:
In March, Wiley announced a program to restructure and realign the Company’s cost base with current and anticipated future market conditions. When implemented, the plan is expected to improve margins by reducing operating expenses and cost of sales and accelerate earnings growth while providing increased capacity for investment to grow our digital businesses. Working with a third-party restructuring firm since January, the Company is progressing towards finalizing plans to realize approximately $80 million in cost savings on a run-rate basis by the end of April 2014. The Company is targeting a majority of the cost savings to improve margins and earnings, with the remainder reinvested in high growth digital business opportunities.
As part of the implementation of the restructuring program, Wiley expects to record a restructuring charge of approximately $25 million in the fourth quarter of this fiscal year. At least one additional charge is expected as phases of the program are implemented over the course of fiscal 2014. The charges will be related principally to severance and other employee separation-related benefits as well as other business transition-related costs.
Third Quarter Segment Results
Scientific, Technical, Medical and Scholarly (STMS):
| | | For the Three Months | | |
| | | Ended January 31, | | % change |
| | Dollars in thousands | 2013 | 2012 | % change | w/o FX |
| | | | | | |
| | Journal Subscriptions | $143,768 | $145,394 | -1% | -2% |
| | Books | 48,171 | 47,959 | 0% | 0% |
| | Other Publishing Income | 48,963 | 52,123 | -6% | -6% |
| | TOTAL REVENUE | $240,902 | $245,476 | -2% | -3% |
| | | | | | |
| | Cost of Sales | (64,564) | (69,634) | -7% | -8% |
| | | | | | |
| | GROSS PROFIT | 176,338 | 175,842 | 0% | 0% |
| | Gross Profit Margin | 73.2% | 71.6% | | |
| | | | | | |
| | Direct Expenses | (69,255) | (70,418) | -2% | -2% |
| | Amortization of Intangibles | (6,714) | (6,440) | 4% | 3% |
| | | | | | |
| | DIRECT CONTRIBUTION TO PROFIT | $100,369 | $98,984 | 1% | 1% |
| | Direct Contribution Margin | 41.7% | 40.3% | | |
| | | | | | |
| | Allocated Shared Services and Administrative Costs: | | | | |
| | Distribution | (11,495) | (11,513) | 0% | -1% |
| | Technology Services | (17,694) | (16,561) | 7% | 6% |
| | Occupancy and Other | (4,642) | (4,104) | 13% | 11% |
| | CONTRIBUTION TO PROFIT | $66,538 | $66,806 | 0% | -1% |
| | Contribution Margin | 27.6% | 27.2% | | |
Revenue:
STMS revenue for the third quarter of fiscal year 2013 decreased 2% to $240.9 million, or 3% excluding the favorable impact of foreign exchange. The decline was driven by lower journal subscriptions and other publishing income.
Journal Subscriptions
Journal subscription revenue for the third quarter of fiscal year 2013 decreased 1% to $143.8 million, or 2% excluding the favorable impact of foreign exchange. The decline was driven by publication timing versus prior year and a change in journal subscription license terms that affects the timing of subscription revenue recognition as noted below ($2 million) and continued softness in library funding, particularly in Europe and much of the Middle East ($1 million). Calendar year 2013 journal subscription renewals are up approximately 5% over calendar year 2012 with 77% of expected calendar 2013 business closed as of January 31, 2013.
For calendar year 2013, the Company has introduced an alternative subscription license structure for some customers which previously was based on a commitment by the Company to provide a discrete number of online journal issues. The alternative license is based upon online access for a calendar year and is not issue-specific. This resulted in a $1.5 million shift of revenue which would have been otherwise recognized in the third quarter to later in the calendar year. The shift is expected to impact fiscal year 2013 revenue but have no impact on calendar 2013 journal revenue growth as it will be earned over the course of the calendar year.
Books
Book revenue for the third quarter of fiscal year 2013 was flat at $48.2 million. Growth in digital books ($2 million) was offset by lower print book revenue.
Other Publishing Income
Other publishing income for the third quarter of fiscal year 2013 declined 6% to $49.0 million. The decrease was driven by lower revenue from backfiles ($2 million), advertising ($1 million) and journal reprints ($1 million), partially offset by growth in funded open access and pay-per-article revenue ($1 million).
Total STMS Revenue by Region (on a currency neutral basis)
| · | Americas grew 1% to $95.3 million |
| · | EMEA declined 5% to $129.6 |
| · | Asia-Pacific declined 3% to $16.1 million |
Cost of Sales:
Cost of sales for the third quarter of fiscal year 2013 decreased 7% to $64.6 million, or 8% excluding the unfavorable impact of foreign exchange mainly due to lower royalty costs ($3 million), lower sales volume ($2 million) and growth in lower cost digital products ($1 million).
Gross Profit:
Gross profit margin for the third quarter of fiscal year 2013 of 73.2% was 160 basis points higher than prior year. The improvement was mainly driven by lower royalty costs and the ongoing transition to digital products and services.
Direct Expenses and Amortization:
Direct expenses for the third quarter of fiscal year 2013 of $69.3 million were 2% lower than prior year. The decline was mainly driven by cost containment initiatives ($2 million) and a prior year bad debt provision related to an outstanding receivable with a university in Iran ($1 million), partially offset by higher employment costs ($1 million).
Amortization of intangibles increased $0.3 million to $6.7 million in the third quarter of fiscal year 2013 mainly due to the acquisition of publication rights for new society journals.
Contribution to Profit:
Contribution to profit for the third quarter of fiscal year 2013 of $66.5 million was flat with the prior year, but declined 1% excluding the favorable impact of foreign exchange. Contribution margin in the third quarter improved 40 basis points to 27.6% mainly due to higher gross profit margins.
Society Partnerships
| · | 2 new society journals were signed in the quarter with combined annual revenue of approximately $0.1 million |
| · | 40 renewals/extensions were signed with approximately $26 million in combined annual revenue |
| · | No society contracts were lost |
Acquisitions
In January, Wiley acquired the assets of the FIZ Chemie Berlin, a provider of online database products for organic and industrial chemists. The products include the ChemInform weekly abstracting service and reaction database (CIRX), as well as the abstracting journal Chemisches Zentralblatt, the InfoTherm database of thermophysical properties, and eLearning tools and services.
Global Citizenship and Research4Life
Wiley announced that its 12,200 online books would be made available through the Research4Life initiatives of HINARI, AGORA and OARE, benefitting research and academic communities in 80 low- and middle-income countries. Research4Life provides 6,000 institutions in developing countries with free or low cost access to peer-reviewed online content from the world’s leading scientific, technical and medical publishers. The addition of Wiley’s online books brings the total number of peer reviewed scientific journals, books and databases now available through the public-private Research4life partnership to almost 30,000.
Professional Development (PD):
| | | For the Three Months | | |
| | | Ended January 31, | | % change |
| | Dollars in thousands | 2013 | 2012 | % change | w/o FX |
| | | | | | |
| | Books | $95,041 | $95,656 | -1% | -1% |
| | Training and Assessment | 7,336 | 960 | | |
| | Other Publishing Income | 10,729 | 9,568 | 12% | 12% |
| | TOTAL REVENUE | $113,106 | $106,224 | 6% | 6% |
| | | | | | |
| | Cost of Sales | (42,018) | (40,945) | 3% | 2% |
| | | | | | |
| | GROSS PROFIT | 71,088 | 65,279 | 9% | 8% |
| | Gross Profit Margin | 62.9% | 61.5% | | |
| | | | | | |
| | Direct Expenses | (38,246) | (37,144) | 3% | 2% |
| | Amortization of Intangibles | (2,062) | (1,229) | 68% | 68% |
| | | | | | |
| | DIRECT CONTRIBUTION TO PROFIT | $30,780 | $26,906 | 14% | 14% |
| | Direct Contribution Margin | 27.2% | 25.3% | | |
| | | | | | |
| | Allocated Shared Services and Administrative Costs: | | | | |
| | Distribution | (10,196) | (11,221) | -9% | -10% |
| | Technology Services | (7,357) | (6,426) | 14% | 14% |
| | Occupancy and Other | (1,469) | (1,998) | -26% | -26% |
| | CONTRIBUTION TO PROFIT | $11,758 | $7,261 | 62% | 61% |
| | Contribution Margin | 10.4% | 6.8% | | |
Revenue:
PD revenue for the third quarter of fiscal year 2013 increased 6% to $113.1 million. The growth was driven by incremental revenue from the Inscape ($5 million) and ELS ($2 million) acquired online training and assessment businesses and other publishing income, partially offset by lower book revenue. The decline in book revenue was driven by the impact of winding down the consumer publishing programs ($5 million), partially offset by growth in the business and technology categories. Lower print book revenue ($3 million) was partially offset by growth in digital books ($2 million). Digital book revenue grew 20% in the third quarter of fiscal year 2013 to approximately $13 million. Total digital revenue accounted for 18% of PD revenue in the third quarter of fiscal year 2013, approximately a 70% increase over prior year driven by eBooks and acquired online assessment and e-learning businesses. The growth in other publishing income reflects revenue from the Company’s transition services agreements related to the sale of the consumer publishing programs.
Total PD Revenue by Region (on a currency neutral basis)
| · | Americas increased 5% to $88.4 million |
| · | EMEA grew 12% to $17.4 million |
| · | Asia-Pacific increased 1% to $7.4 million |
Total PD Revenue by Major Category (on a currency neutral basis)
| · | Business rose 28% to $42.1 million, with solid growth from Inscape and the Certified Financial Analyst Institute (CFA) partnership |
| · | Consumer fell 18% to $26.5 million |
| · | Technology grew 6% to $24.8 million |
| · | Professional Education was down 2% to $5.9 million |
| · | Architecture declined 1% to $6.8 million |
| · | Psychology increased 12% to $3.7 million |
Cost of Sales
Cost of sales for the third quarter of fiscal year 2013 increased 3% to $42.0 million, or 2% excluding the unfavorable impact of foreign exchange mainly due to incremental cost of sales from acquisitions ($1 million). Lower costs due to the winding down of the consumer publishing programs ($2 million) were offset by higher sales volumes of retained programs.
Gross Profit:
Gross profit margin for the third quarter of fiscal year 2013 of 62.9% was 140 basis points higher than prior year reflecting higher margin digital revenue from the Inscape and ELS acquisitions.
Direct Expenses and Amortization:
Direct expenses increased 3% to $38.2 million in the third quarter of fiscal year 2013, or 2% excluding the unfavorable impact of foreign exchange. The increase reflects incremental costs from acquisitions ($4 million), partially offset by lower employment costs ($3 million) mainly due to reduced headcount and lower incentive compensation.
Amortization of intangibles increased $0.8 million to $2.1 million in the third quarter of fiscal year 2013 principally due to intangible assets associated with the Inscape acquisition.
Contribution to Profit:
Contribution to profit for the third quarter of fiscal year 2013 grew $4.5 million to $11.8 million mainly due to the Inscape and ELS acquisitions. Contribution margin in the third quarter improved 360 basis points to 10.4% mainly due to higher margin digital revenue from acquisitions and lower distribution costs due to the consumer program divestment and growth in digital products.
Acquisitions and Alliances
In November, the Company acquired Efficient Learning Systems, Inc. (“ELS”) an e-learning system provider focused in the areas of professional finance and accounting, for $24 million. The acquisition helps Wiley become a leader in the growing global online CPA exam preparation market and will accelerate our e-learning strategies with capabilities that can be leveraged with other accounting and financial certifications. Annual revenue is expected to be approximately $7 million and modestly dilutive to fiscal year 2013 earnings after financing costs.
In December, PD completed the acquisition of assets from Stevenson, Inc., a leading resource for newsletters and online events in fundraising, nonprofit management, and communications. The assets include six well-respected newsletters and a variety of online events. The acquisition will enable Wiley to expand its strategy for digital delivery of content to the growing nonprofit market globally, providing practical, must-have information to nonprofit professionals.
During the quarter, Wiley signed a Financial Industry Regulatory Authority (FINRA) series test preparation agreement with the Securities Institute of America (SIA) to provide preparatory exam content for financial brokers and advisors.
Global Education (GEd):
| | | For the Three Months | | |
| | | Ended January 31, | | % change |
| | Dollars in thousands | 2013 | 2012 | % change | w/o FX |
| | | | | | |
| | Print Books | $62,848 | $68,984 | -9% | -10% |
| | Non-Traditional & Digital | 36,699 | 28,255 | 30% | 30% |
| | Online Program Management (Deltak) | 17,145 | - | | |
| | Other Publishing Income | 1,735 | 2,172 | -20% | -20% |
| | TOTAL REVENUE | $118,427 | $99,411 | 19% | 18% |
| | | | | | |
| | Cost of Sales | (35,212) | (31,552) | 12% | 11% |
| | | | | | |
| | GROSS PROFIT | 83,215 | 67,859 | 23% | 22% |
| | Gross Profit Margin | 70.3% | 68.3% | | |
| | | | | | |
| | Direct Expenses | (32,457) | (23,456) | 38% | 38% |
| | Amortization of Intangibles | (2,382) | (1,206) | 98% | 98% |
| | | | | | |
| | DIRECT CONTRIBUTION TO PROFIT | $48,376 | $43,197 | 12% | 11% |
| | Direct Contribution Margin | 40.8% | 43.5% | | |
| | | | | | |
| | Allocated Shared Services and Administrative Costs: | | | | |
| | Distribution | (4,074) | (4,362) | -7% | -7% |
| | Technology Services | (8,300) | (6,896) | 20% | 20% |
| | Occupancy and Other | (1,198) | (531) | 126% | 126% |
| | CONTRIBUTION TO PROFIT | $34,804 | $31,408 | 11% | 10% |
| | Contribution Margin | 29.4% | 31.6% | | |
Revenue:
GEd revenue for the third quarter of fiscal year 2013 increased 19% to $118.4 million, or 18% excluding the favorable impact of foreign exchange. The increase was driven by incremental revenue from the Deltak acquisition in the second quarter of fiscal year 2013 ($17 million) and growth in non-traditional and digital revenue, partially offset by lower revenue from print books and other publishing income.
Print Books
Print book revenue for the third quarter of fiscal year 2013 declined 9% to $62.8 million, or 10% excluding the favorable impact of foreign exchange. The decrease was mainly driven by enrollment declines, particularly in the for-profit schools sector, and the impact of rentals on the traditional textbook business.
Non-Traditional & Digital Content
Non-traditional and digital content revenue, which includes WileyPLUS, eBooks, digital content sold directly to institutions and custom publishing, increased 30% to $36.7 million in the third quarter of fiscal year 2013 principally due to growth in WileyPLUS, eBooks, and digital sales to institutions. Non-traditional and digital content revenue accounted for 31% of total GEd revenue, as compared to 28% in the prior year.
Total GEd Revenue by Region (on a currency neutral basis)
| · | Americas increased 1% to $68.4 million, excluding incremental Deltak revenue of $17.1 million |
| · | EMEA fell 15% to $4.7 million |
| · | Asia-Pacific grew 5% to $28.2 million |
Total GEd Revenue by Major Subject (on a currency neutral basis)
| · | Engineering and Computer Science grew 10% to $14.2 million |
| · | Science fell 10% to $16.8 million |
| · | Business and Accounting increased 3% to $26.3 million |
| · | Social Science decreased 3% to $15.0 million |
| · | Math increased 2% to $6.8 million |
| · | Microsoft Official Academic Course grew 9% to $3.3 million |
Cost of Sales:
Cost of sales for the third quarter of fiscal year 2013 increased 12% to $35.2 million, or 11% excluding the unfavorable impact of foreign exchange. The increase was driven by incremental costs from the Deltak acquisition ($4 million), partially offset by the continued transition to digital products ($1 million).
Gross Profit:
Gross profit margin for the third quarter of fiscal year 2013 of 70.3% was 200 basis points higher than prior year principally due to higher margin incremental revenue from the Deltak acquisition (100 basis points) and the continued transition to digital products.
Direct Expenses and Amortization:
Direct expenses increased 38% to $32.5 million in the third quarter of fiscal year 2013 principally due to incremental costs from the Deltak acquisition ($9 million) and higher employment costs ($1 million), partially offset by lower editorial costs ($1 million) and cost containment initiatives ($1 million).
Amortization of intangibles increased $1.2 million to $2.4 million in the third quarter of fiscal year 2013 primarily due to intangible assets associated with the Deltak acquisition.
Contribution to Profit:
Contribution to profit for the third quarter of fiscal year 2013 increased 11% to $34.8 million, or 9% excluding the unfavorable impact of foreign exchange. The increase in Contribution to profit reflected higher digital revenue and gross profit and contribution from acquisitions.
Shared Services and Administrative Costs
| | | For the Three Months | | |
| | | Ended January 31, | | % change |
| | Dollars in thousands | 2013 | 2012 | % change | w/o FX |
| | | | | | |
| | Distribution | $25,911 | $27,110 | -4% | -6% |
| | Technology Services | 41,699 | 34,880 | 20% | 19% |
| | Finance | 10,955 | 11,098 | -1% | -2% |
| | Other Administration | 17,334 | 17,542 | -1% | -2% |
| | Total | $95,899 | $90,630 | 6% | 5% |
Shared services and administrative costs for the third quarter of fiscal year 2013 increased 6% to $95.9 million, or 5% excluding the unfavorable impact of foreign exchange. Higher technology costs ($7 million), which includes incremental costs from the Deltak acquisition ($1 million), were partially offset by other costs ($2 million), mainly lower print journal and book distribution costs and lower facility costs.
RESULTS OF OPERATIONS – NINE MONTHS ENDED JANUARY 31, 2013
Throughout this report, references to amounts “excluding foreign exchange”, “currency neutral basis” and “performance basis” exclude both foreign currency translation effects and transactional gains and losses. Foreign currency translation effects are based on the change in average exchange rates for each reporting period multiplied by the current period’s volume of activity in local currency for each non-U.S. location. For the first nine months of fiscal years 2013 and 2012, the average exchange rates to convert British pounds sterling to U.S. dollars were 1.59 and 1.60, respectively. The average exchange rates to convert euros into U.S. dollars for the same periods were 1.28 and 1.39, respectively. Unless otherwise noted, all variance explanations below are on a currency neutral basis.
Revenue, Cost of Sales and Gross Profit:
Revenue for the first nine months of fiscal year 2013 decreased 1% to $1,314.9 million, but was flat excluding the unfavorable impact of foreign exchange. Incremental revenue from the Deltak, Inscape and ELS acquisitions ($35 million) was offset by the impact of winding down the PD consumer publishing programs ($13 million) and other declines in each of the Company’s three core businesses.
Cost of sales for the first nine months of fiscal year 2013 decreased 1% to $398.6 million mainly due to the impact of winding down the PD consumer publishing programs ($4 million); lower sales volume ($6 million); growth in lower cost digital products ($7 million), partially offset by incremental cost of sales from acquisitions ($6 million); higher royalty and composition costs ($8 million)
Gross profit for the nine months ending January 31, 2013 of 69.7% was 20 basis points higher than prior year mainly due to higher margin incremental revenue from acquisitions.
Operating and Administrative Expenses:
Operating and administrative expenses for the first nine months of fiscal year 2013 increased 1% to $689.8 million. The increase was mainly driven by incremental operating and administrative expenses from acquisitions ($19 million); higher technology costs ($6 million); and higher employment costs ($2 million), partially offset by cost containment initiatives ($6 million); a reduction related to the winding down of the PD consumer publishing programs ($5 million); lower journal and book distribution costs due to lower volume and the migration from print to digital products ($2 million) and lower facility costs ($3 million). Prior year facility costs included duplicate rent as the Company was transitioning to new facilities.
Restructuring Charges:
In the first quarter of fiscal year 2013, the Company recorded a restructuring charge of $4.8 million ($0.06 per share) related to certain activities that will be discontinued, outsourced, or relocated to a lower cost region. Approximately $3.0 million, $1.3 million and $0.2 million of the restructuring charge was recorded within STMS, PD and GEd, respectively, with the remainder recognized in shared services and administrative costs. The charge is expected to be fully recovered within 18 months.
Impairment of Consumer Publishing Programs:
In September 2012, the Company entered into negotiations with Houghton Mifflin Harcourt (“HMH”) regarding the sale of the Company’s culinary, CliffsNotes, and Webster’s New World Dictionary consumer publishing programs. As a result, the Company began accounting for these publishing programs as Assets Held for Sale and recorded a pre-tax impairment charge of $12.1 million ($0.12 per share) in the second quarter of fiscal year 2013 to reduce the carrying value of the assets within these programs to their fair value, based on the estimated sales price, less costs to sell. On November 5, 2012, the Company completed the sale of these publishing programs to HMH for $11.0 million in cash, which approximated the estimated sale price, of which $1.1 million is held in escrow related to standard commercial representations and warranties. In connection with the sale, the Company also entered into a transition services agreement.
The Company is also continuing to explore opportunities to sell its remaining consumer publishing programs which include pets, crafts, nautical and general interest. If a sale is not feasible, the Company plans to discontinue publishing within these remaining programs. In the second quarter of fiscal year 2013, the Company recorded a pre-tax impairment charge of $3.4 million ($0.04 per share) to reduce the carrying value of inventory and royalty advances within these consumer publishing programs to their estimated realizable value.
Amortization of Intangibles:
Amortization of intangibles increased $3.4 million to $30.4 million in the first nine months of fiscal year 2013. The increase was mainly driven by incremental amortization related to the Deltak and Inscape acquisitions.
Gain on Sale of Travel Publishing Program:
On August 10, 2012, the Company entered into a definitive agreement with Google, Inc. (“Google”) for the sale of key assets of its travel publishing program, including all of its interests in the Frommer’s, Unofficial Guides, and WhatsonWhen brands for $22 million in cash, of which $3.3 million is held in escrow related to standard commercial representations and warranties. The effective date of the transaction was August 31, 2012. As a result, the Company recorded a $9.8 million gain on the sale ($0.10 per share) in the second quarter of fiscal year 2013. In connection with the sale, the Company also entered into a transition services agreement.
Interest Expense/Income, Foreign Exchange and Other:
Interest expense for the first nine months of fiscal year 2013 increased $3.3 million to $9.6 million. Higher interest rates and higher average debt contributed approximately $2.4 million and $0.9 million to the increase, respectively. The Company’s average cost of borrowing during the first nine months of fiscal years 2013 and 2012 was 2.0% and 1.5%, respectively. In the first nine months of fiscal years 2013 and 2012, the Company recognized foreign exchange transaction losses of $1.6 million and $1.1 million, respectively. Interest income and other decreased $0.7 million to $1.6 million in the first nine months of fiscal year 2013.
Provision for Income Taxes:
The effective tax rate for the first nine months of fiscal year 2013 was 22.6% compared to 19.9% in the prior year. During the first quarters of fiscal years 2013 and 2012, the Company recorded non-cash deferred tax benefits of $8.4 million ($0.14 per share) and $8.8 million ($0.14 per share), respectively, principally associated with new tax legislation enacted in the U.K. that reduced the U.K. statutory income tax rates by 2% in each period. The benefits recognized by the Company reflect the measurement of all applicable U.K. deferred tax balances to the new income tax rates. The U.K. statutory tax rate as of January 31, 2013 is 23%. During the third quarter of fiscal year 2012, the Company released an income tax reserve of approximately $7.5 million ($0.12 per share) due to the expiration of the statute of limitations. The $7.5 million was originally recorded in conjunction with the purchase accounting for the Blackwell acquisition. Excluding the impact of the tax benefits described above, the Company’s effective tax rate decreased from 27.9% to 27.3% principally due to lower U.S. earnings in the first nine months of fiscal year 2013 due to the consumer publishing program impairment charges.
Earnings Per Share:
Earnings per diluted share for the first nine months of fiscal year 2013 decreased 16% to $2.26 reflecting the consumer publishing program impairment charges ($0.16 per share); the restructuring charges ($0.06 per share); and the prior year income tax reserve release ($0.12 per share) partially offset by the gain on sale of the travel publishing program ($0.10 per share). Excluding these items, earnings per diluted share decreased 7% to $2.38 mainly due to lower revenue and higher technology costs.
Future Restructuring Program and Charge:
In March, Wiley announced a program to restructure and realign the Company’s cost base with current and anticipated future market conditions. When implemented, the plan is expected to improve margins by reducing operating expenses and cost of sales and accelerate earnings growth while providing increased capacity for investment to grow our digital businesses. Working with a third-party restructuring firm since January, the Company is progressing towards finalizing plans to realize approximately $80 million in cost savings on a run-rate basis by the end of April 2014. The Company is targeting a majority of the cost savings to improve margins and earnings, with the remainder reinvested in high growth digital business opportunities.
As part of the implementation of the restructuring program, Wiley expects to record a restructuring charge of approximately $25 million in the fourth quarter of this fiscal year. At least one additional charge is expected as phases of the program are implemented over the course of fiscal 2014. The charges will be related principally to severance and other employee separation-related benefits as well as other business transition-related costs.
Segment Results for the Nine Months Ended January 31, 2013
As of May 1, 2012, the Company changed its internal reporting of segment measures for the purposes of assessing performance and making resource allocation decisions. As a result, the Company now reports on segment performance after the allocation of certain direct Shared Services and Administrative Costs, identified as Contribution to Profit. These costs were previously reported as independent activities and not reflected within each segment's operating results. We will continue to report total Shared Services and Administrative Costs by function as management believes they are useful in understanding the Company’s overall performance. In addition, management responsibility and reporting of certain PD and GEd product lines were realigned as of May 1, 2012. Prior year results have been restated for comparative purposes for each of the changes described above.
Scientific, Technical, Medical and Scholarly (STMS):
| | | For the Nine Months | | |
| | | Ended January 31, | | % change |
| | Dollars in thousands | 2013 | 2012 | % change | w/o FX (a) |
| | | | | | |
| | Journal Subscriptions | $461,611 | $468,823 | -2% | -1% |
| | Books | 126,409 | 129,775 | -3% | -2% |
| | Other Publishing Income | 138,659 | 150,663 | -8% | -6% |
| | TOTAL REVENUE | $726,679 | $749,261 | -3% | -2% |
| | | | | | |
| | Cost of Sales | (195,589) | (203,484) | -4% | -3% |
| | | | | | |
| | GROSS PROFIT | 531,090 | 545,777 | -3% | -2% |
| | Gross Profit Margin | 73.1% | 72.8% | | |
| | | | | | |
| | Direct Expenses | (207,737) | (213,857) | -3% | -1% |
| | Amortization of Intangibles | (19,763) | (19,597) | 1% | 1% |
| | Restructuring Charges (see Note 8) | (2,966) | - | | |
| | | | | | |
| | DIRECT CONTRIBUTION TO PROFIT | $300,624 | $312,323 | -4% | -2% |
| | Direct Contribution Margin | 41.4% | 41.7% | | |
| | | | | | |
| | Allocated Shared Services and Administrative Costs: | | | | |
| | Distribution | (34,813) | (36,358) | -4% | -3% |
| | Technology Services | (52,878) | (49,230) | 7% | 8% |
| | Occupancy and Other | (16,412) | (15,392) | 7% | 7% |
| | CONTRIBUTION TO PROFIT | $196,521 | $211,343 | -7% | -5% |
| | Contribution Margin | 27.0% | 28.2% | | |
| (a) | Adjusted to exclude the fiscal year 2013 restructuring charges. |
Revenue:
STMS revenue for the first nine months of fiscal year 2013 decreased 3% to $726.7 million, or 2% excluding the unfavorable impact of foreign exchange. The decline was driven by other publishing income, journal subscriptions and print books.
Journal Subscriptions
Journal subscription revenue for the first nine months of fiscal year 2013 decreased 2% to $461.6 million, or 1% excluding the unfavorable impact of foreign exchange. The decline was driven by publication timing versus prior year and a change in journal subscription license terms that affects the timing of subscription revenue recognition as noted below ($4 million), partially offset by increased revenue from new society business ($1 million). Calendar year 2013 journal subscription renewals are up approximately 5% over calendar year 2012 with 77% of expected calendar 2013 business closed as of January 31, 2013.
For calendar year 2013, the Company has introduced an alternative subscription license structure for some customers which previously was based on a commitment by the Company to provide a discrete number of online journal issues. The alternative license is based upon online access for a calendar year and is not issue-specific. This resulted in a $1.5 million shift of revenue which would have been otherwise recognized in the third quarter to later in the calendar year. The shift is expected to impact fiscal year 2013 revenue but have no impact on calendar 2013 journal revenue growth as it will be earned over the course of the calendar year.
Books
Book revenue for the first nine months of fiscal year 2013 of $126.4 million declined 3% from prior year, or 2% excluding the unfavorable impact of foreign exchange as lower print book revenue ($7 million) was partially offset by growth in digital books ($5 million).
Other Publishing Income
Other publishing income for the first nine months of fiscal year 2013 decreased 8% to $138.7 million, or 6% excluding the unfavorable impact of foreign exchange. The decline was driven by lower sales of journal reprints ($7 million), backfiles ($5 million) and advertising ($2 million), partially offset by growth in funded open access ($2 million), pay-per-article revenue ($2 million) and the sale of publishing rights ($1 million).
Total STMS Revenue by Region (on a currency neutral basis)
| · | Americas fell 1% to $279.2 million |
| · | EMEA declined 3% to $401.8 million |
| · | Asia-Pacific decreased 3% to $45.7 million |
Cost of Sales:
Cost of sales for the nine months ending January 31, 2013 decreased 4% to $195.6 million, or 3% excluding the favorable impact of foreign exchange. The decline was mainly driven by growth in lower cost digital products ($6 million) and lower sales volume ($4 million), partially offset by higher royalty rates on new society journals ($3 million) and higher composition costs ($1 million).
Gross Profit:
Gross profit margin for the first nine months of fiscal year 2013 of 73.1% was 30 basis points higher than prior year mainly due to the ongoing transition to digital products, partially offset by higher royalty rates on new society journals and higher composition costs.
Direct Expenses and Amortization:
Direct expenses for the first nine months of fiscal year 2013 of $207.7 million decreased 3% from prior year, or 1% excluding the favorable impact of foreign exchange. The decline was driven by cost containment initiatives ($2 million) and a prior year bad debt provision related to an outstanding receivable with a university in Iran ($1 million), partially offset by higher employment costs ($2 million).
Amortization of intangibles increased $0.2 million to $19.8 million for the first nine months of fiscal year 2013 mainly due to the acquisition of publication rights for new society journals.
Contribution to Profit:
Contribution to profit for the nine months ending January 31, 2013 decreased 7% to $196.5 million, or 5% excluding the unfavorable impact of foreign exchange and the restructuring charge. Contribution margin for the first nine months of fiscal year 2013 was 27.0% compared to 28.2% in the prior year principally due to lower revenue and higher allocated technology costs due to investments in digital products and infrastructure.
Society Partnerships
| · | 25 new society journals were signed with combined annual revenue of approximately $27 million |
| · | 62 renewals/extensions were signed with approximately $41 million in combined annual revenue |
| · | 2 journal society contracts were lost with combined annual revenue of approximately $6 million |
Professional Development (PD):
In the second quarter of fiscal year 2013, the Company changed the name of its Professional/Trade segment to Professional Development. The change is part of a portfolio realignment to focus on content and workflow solutions for professionals in business, finance, accounting, talent management, leadership, technology, behavioral health, engineering/architecture and professional education.
| | | For the Nine Months | | |
| | | Ended January 31, | | % change |
| | Dollars in thousands | 2013 | 2012 | % change | w/o FX (a) |
| | | | | | |
| | Books | $262,569 | $278,380 | -6% | -5% |
| | Training and Assessment | 21,047 | 3,054 | | |
| | Other Publishing Income | 32,744 | 33,529 | -2% | -1% |
| | TOTAL REVENUE | $316,360 | $314,963 | 0% | 1% |
| | | | | | |
| | Cost of Sales | (115,756) | (117,296) | -1% | -1% |
| | | | | | |
| | GROSS PROFIT | 200,604 | 197,667 | 1% | 2% |
| | Gross Profit Margin | 63.4% | 62.8% | | |
| | | | | | |
| | Direct Expenses | (115,661) | (115,228) | 0% | 1% |
| | Amortization of Intangibles | (6,048) | (3,751) | 61% | 61% |
| | Restructuring Charges (see Note 8) | (1,254) | - | | |
| | Impairment of Consumer Publishing Programs (see Note 7) | (15,521) | - | | |
| | Gain on Sale of Travel Publishing Program (see Note 7) | 9,829 | - | | |
| | | | | | |
| | DIRECT CONTRIBUTION TO PROFIT | $71,949 | $78,688 | -9% | 1% |
| | Direct Contribution Margin | 22.7% | 25.0% | | |
| | | | | | |
| | Allocated Shared Services and Administrative Costs: | | | | |
| | Distribution | (30,937) | (34,132) | -9% | -9% |
| | Technology Services | (21,908) | (18,680) | 17% | 17% |
| | Occupancy and Other | (8,054) | (9,584) | -16% | -16% |
| | CONTRIBUTION TO PROFIT | $11,050 | $16,292 | -32% | 12% |
| | Contribution Margin | 3.5% | 5.2% | | |
(a) Adjusted to exclude the fiscal year 2013 gain on sale of the travel publishing program, the asset impairment charges related to the consumer publishing programs and the restructuring charges.
Revenue:
PD revenue for the first nine months of fiscal year 2013 of $316.4 million was flat with the prior year, but grew 1% excluding the unfavorable impact of foreign exchange. The growth was driven by incremental revenue from the acquired Inscape ($16 million) and ELS ($2 million) online training and assessment businesses, partially offset by a decline in books and other publishing income. The decline in book revenue was driven by continued softness in global retail channels in the print book business, particularly divested consumer titles ($11 million). Digital book revenue grew 12% in the first nine months of fiscal year 2013 to approximately $37 million. The decline in other publishing income reflects lower advertising revenue ($1 million) and copyright revenue ($1 million), partially offset by revenue from the Company’s transition services agreements related to the sales of the consumer publishing programs.
Total PD Revenue by Region (on a currency neutral basis)
| · | Americas were flat at $250.2 million |
| · | EMEA increased 1% to $43.9 million |
| · | Asia-Pacific increased 3% to $22.3 million |
Total PD Revenue by Major Category (on a currency neutral basis)
| · | Business rose 19% to $119.4 million, with solid growth from Inscape and the CFA product launch |
| · | Consumer fell 17% to $74.1 million |
| · | Technology declined 1% to $63.9 million |
| · | Professional Education fell 1% to $21.3 million |
| · | Architecture decreased 6% to $19.2 million |
| · | Psychology increased 3% to $10.4 million |
Cost of Sales:
Cost of sales for the first nine months of fiscal year 2013 declined 1% to $115.8 million. The decline was driven by the impact of winding down the consumer publishing programs ($4 million), partially offset by incremental costs from acquisitions ($2 million) and higher royalty rates ($1 million).
Gross Profit:
The gross profit margin for the first nine months of fiscal year 2013 of 63.4% was 60 basis points higher than prior year reflecting higher margin digital revenue from acquisitions, partially offset by higher royalty rates and lower sales volume.
Direct Expenses and Amortization:
Direct expenses for the first nine months of fiscal year 2013 of $115.7 million were flat with the prior year, but increased 1% excluding the favorable impact of foreign exchange. The increase on a currency neutral basis reflects incremental costs from acquisitions ($8 million), partially offset by lower employment costs ($4 million), mainly due to reduced headcount and lower incentive compensation, and cost containment initiatives ($3 million).
Amortization of intangibles increased $2.3 million to $6.0 million for the first nine months of fiscal year 2013 mainly due to acquired intangible assets associated with Inscape.
Contribution to Profit:
Contribution to profit decreased $5.2 million to $11.1 million for the first nine months of fiscal year 2013. The restructuring and impairment charges ($17 million); lower contribution from the divested consumer programs ($4 million) and higher technology costs ($3 million) were partially offset by the gain on sale of the travel program ($10 million); contributions from acquisitions ($6 million) and lower distribution costs ($3 million).
Global Education (GEd):
| | | For the Nine Months | | |
| | | Ended January 31, | | % change |
| | Dollars in thousands | 2013 | 2012 | % change | w/o FX (a) |
| | | | | | |
| | Print Books | $159,908 | $182,587 | -12% | -12% |
| | Non-Traditional & Digital Content | 87,334 | 73,377 | 19% | 19% |
| | Deltak | 17,145 | - | | |
| | Other Publishing Income | 7,498 | 7,977 | -6% | -5% |
| | TOTAL REVENUE | $271,885 | $263,941 | 3% | 3% |
| | | | | | |
| | Cost of Sales | (87,247) | (83,692) | 4% | 4% |
| | | | | | |
| | GROSS PROFIT | 184,638 | 180,249 | 2% | 3% |
| | Gross Profit Margin | 67.9% | 68.3% | | |
| | | | | | |
| | Direct Expenses | (80,726) | (72,731) | 11% | 11% |
| | Amortization of Intangibles | (4,593) | (3,617) | 27% | 27% |
| | Restructuring Charges (see Note 8) | (169) | - | | |
| | | | | | |
| | DIRECT CONTRIBUTION TO PROFIT | $99,150 | $103,901 | -5% | -4% |
| | Direct Contribution Margin | 36.5% | 39.4% | | |
| | | | | | |
| | Allocated Shared Services and Administrative Costs: | | | | |
| | Distribution | (11,646) | (11,985) | -3% | -3% |
| | Technology Services | (23,047) | (19,872) | 16% | 16% |
| | Occupancy and Other | (4,893) | (4,033) | 21% | 21% |
| | CONTRIBUTION TO PROFIT | $59,564 | $68,011 | -12% | -12% |
| | Contribution Margin | 21.9% | 25.8% | | |
| (a) | Adjusted to exclude the fiscal year 2013 restructuring charges. |
Revenue:
GEd revenue for the first nine months of fiscal year 2013 increased 3% to $271.9 million mainly driven by incremental revenue from the Deltak acquisition ($17 million) and growth in non-traditional and digital content, partially offset by lower revenue from print books.
Print Books
Print book revenue for the first nine months of fiscal year 2013 declined 12% to $159.9 million. The decrease was mainly driven by enrollment declines, particularly in the for-profit school sector, and the impact of rentals on the traditional textbook business.
Non-Traditional & Digital Content
Non-traditional and digital content revenue, which includes WileyPLUS, eBooks, digital content sold directly to institutions, binder editions and custom publishing, increased 19% to $87.3 million in the first nine months of fiscal year 2013. The growth mainly reflects higher revenue from WileyPLUS, eBooks and digital sales institutions.
Total GEd Revenue by Region (on a currency neutral basis)
| · | Americas fell 4% to $185.3 million, excluding incremental Deltak revenue of $17.1 million |
| · | EMEA decreased 8% to $16.5 million |
| · | Asia-Pacific increased 1% to $53.0 million |
Total GEd Revenue by Major Subject (on a currency neutral basis)
| · | Engineering and Computer Science grew 6% to $37.5 million |
| · | Science fell 10% to $53.4 million |
| · | Business and Accounting declined 6% to $64.5 million |
| · | Social Science decreased 3% to $41.8 million |
| · | Math fell 7% to $21.4 million |
| · | Microsoft Official Academic Course (MOAC) increased 9% to $8.5 million |
Cost of Sales:
Cost of sales for the first nine months of fiscal year 2013 increased 4% to $87.2 million. The increase was driven by incremental costs from the Deltak acquisition ($4 million), partially offset by lower costs digital products.
Gross Profit:
Gross profit margin for the first nine months of fiscal year 2013 declined 40 basis points to 67.9%. The decline was driven by higher composition costs to support WileyPLUS course development and higher inventory and royalty provisions, partially offset by higher margin incremental Deltak revenue and growth in digital products.
Direct Expenses and Amortization:
Direct expenses increased 11% to $80.7 million in the first nine months of fiscal year 2013 principally due to incremental costs from the Deltak acquisition ($9 million) and higher employment costs ($1 million), partially offset by cost containment initiatives ($2 million).
Amortization of intangibles increased $1.0 million to $4.6 million in the first nine months of fiscal year 2013 primarily due acquired intangible assets associated with Deltak.
Contribution to Profit:
Contribution to profit for the first nine months of fiscal year 2013 declined 12% to $59.6 million. Contribution margin was 21.9% compared to 25.8% in the prior year with the decrease reflecting lower revenue and lower contribution margins from Deltak, as planned.
Acquisition
On October 25, 2012, the Company acquired Deltak.edu (“Deltak”) for approximately $220 million. Deltak, based in Chicago, creates and manages online degree programs for traditional non-profit colleges and universities. This acquisition increases Wiley’s presence in online Educational Services. Through Deltak, Wiley will now provide a complete solution to help traditional colleges and universities transition their programs into valuable online experiences offering market research, instructional design, marketing, and student recruitment and retention services with the goal of boosting the quality and efficacy of online and hybrid programs. Deltak also provides Wiley with access to high-growth markets and a variety of capabilities and technologies for its expansion into custom online courses and curriculum development. Wiley offers Deltak, the ability to accelerate their growth globally, access to professional consumers and expanded offerings of content and faculty development. Today Deltak supports more than 100 online programs. Deltak reported revenue of $54 million for its most recently completed fiscal year end, September 30, 2012, representing growth of 23% over the prior fiscal year. For fiscal year 2013, Deltak is expected to contribute approximately $34 million of revenue and be modestly dilutive to earnings per share. Revenue related to Deltak was approximately $17 million for the third quarter of fiscal year 2013.
Shared Services and Administrative Costs
| | | For the Nine Months | | |
| | | Ended January 31, | | % change |
| | Dollars in thousands | 2013 | 2012 | % change | w/o FX (a) |
| | | | | | |
| | Distribution | $77,589 | $82,511 | -6% | -5% |
| | Technology Services | 113,246 | 103,916 | 9% | 9% |
| | Finance | 33,179 | 33,032 | 0% | 2% |
| | Other Administration | 62,147 | 64,857 | -4% | -4% |
| | Total | $286,161 | $284,316 | 1% | 1% |
(a) Adjusted to exclude a fiscal year 2013 restructuring charge of $0.5 million related to activities that will be discontinued, outsourced, or relocated to a lower cost region.
Shared services and administrative costs for the first nine months of fiscal year 2013 increased 1% to $286.2 million. The increase was driven by higher technology costs ($6 million), which includes incremental costs from the Deltak acquisition ($1 million), and higher employment costs ($4 million), partially offset by lower facility costs ($3 million), lower journal and book distribution costs due to the migration from print to digital products ($2 million) and cost containment initiatives ($1 million).
LIQUIDITY AND CAPITAL RESOURCES
The Company’s Cash and Cash Equivalents balance was $285.9 million at the end of the third quarter of fiscal year 2013, compared with $284.5 million a year earlier.
Cash Provided by Operating Activities for the first nine months of fiscal year 2013 decreased $103.8 million to $162.2 million principally due to changes in deferred revenue ($42 million); an income tax deposit paid in Germany ($30 million); and increased cash used for operating assets and liabilities ($25 million). The change in deferred revenue primarily reflects the timing of journal cash collections. Higher cash used for operating assets and liabilities primarily reflects lower income taxes payable ($32 million) and higher accounts receivable due to timing ($7 million) partially offset by other ($14 million), mainly lower incentive compensation payments.
Cash used for Investing Activities for the first nine months of fiscal year 2013 was $307.3 million compared to $91.6 million in the prior year. The Company invested $258.7 million in acquisitions of publishing assets and rights, principally the Deltak and ELS acquisitions, compared to $6.4 million in the prior year. During fiscal 2013 the Company sold the assets of the Travel program for $22 million, and the Culinary, CliffsNotes and Websters New World consumer publishing programs for $11 million, of which $3.3 million and $1.1 million remain in escrow, respectively. Cash used for technology, property and equipment decreased to $41.6 million compared to $47.9 million in the prior year.
Cash provided by Financing Activities was $175.8 million in the first nine months of fiscal 2013, as compared to a use of $84.5 million in the prior year period. The Company’s net debt (debt less cash and cash equivalents) increased $250.4 million from January 31, 2012. The increase in the net debt position in the current period is primarily the result of funds borrowed to finance the acquisitions of Deltak for $220 million and ELS for $24 million. These acquisitions did not have an impact on the Company’s ability to meet other operating, investing and financing needs. Net borrowings through the first nine months of fiscal 2013 were $259.8 million compared to $28.8 million in the prior year period. Financing activities in both periods included net borrowings under the credit facility, payments of dividends to shareholders, purchase of treasury shares and proceeds from stock option exercises. The Company increased its quarterly dividend to shareholders by 20% to $0.24 per share versus $0.20 per share in the prior year. The Company repurchased 1,105,684 treasury shares in the first nine months of fiscal 2013 at an average price of $40.85 per share compared to 1,304,700 treasury shares at an average price of $46.48 in the prior year period.
The Company’s operating cash flow is affected by the seasonality and timing of receipts from its STMS journal subscriptions and its Global Education business. Cash receipts for calendar year STMS subscription journals occur primarily from November through March. Reference is made to the Credit Risk section, which follows, for a description of the impact on the Company as it relates to independent journal agents’ financial position and liquidity. Sales primarily in the U.S. higher education market tend to be concentrated in June through August, and again in November through January. Due to this seasonality, the Company normally requires increased funds for working capital from May through September.
Cash and Cash Equivalents held outside the U.S. were approximately $283 million as of January 31, 2013. The balances were comprised primarily of euros, British pound sterling, U.S. dollars and Australian dollars. Maintenance of these non-U.S. dollar cash balances does not have a material impact on the liquidity or capital resources of the Company.
As of January 31, 2012, the Company had approximately $735 million of debt outstanding and approximately $101 million of unused borrowing capacity under the Revolving Credit Facility. The Company believes that our operating cash flow, together with our revolving credit facilities and other available debt financing, will be adequate to meet our operating, investing and financing needs in the foreseeable future, although there can be no assurance that continued or increased volatility in the global capital and credit markets will not impair our ability to access these markets on terms commercially acceptable to us or at all. As disclosed in Note 6, on October 18, 2012 the Company increased its credit limit under the Revolving Credit Facility from $700 million to $825 million.
The Company’s working capital can be negative due to the seasonality of its businesses. The primary driver of the negative working capital is unearned deferred revenue related to subscriptions for which cash has been collected in advance. Cash received in advance for subscriptions is used by the Company for a number of purposes including acquisitions; debt repayments; funding operations; dividends payments; and purchasing treasury shares. The deferred revenue will be recognized in income as the products are shipped or made available online to the customers over the term of the subscription.
Projected composition and technology, property and equipment capital spending for fiscal year 2013 is forecast to be approximately $75 million and $55 million, respectively, primarily to enhance system functionality and drive future business growth. Projected spending for author advances, which is classified as an operating activity, is forecast to be approximately $110 million for fiscal year 2013.
“Safe Harbor” Statement under the
Private Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements concerning the Company’s operations, performance, and financial condition. Reliance should not be placed on forward-looking statements, as actual results may differ materially from those in any forward-looking statements. Any such forward-looking statements are based upon a number of assumptions and estimates that are inherently subject to uncertainties and contingencies, many of which are beyond the control of the Company, and are subject to change based on many important factors. Such factors include, but are not limited to (i) the level of investment in new technologies and products; (ii) subscriber renewal rates for the Company’s journals; (iii) the financial stability and liquidity of journal subscription agents; (iv) the consolidation of book wholesalers and retail accounts; (v) the market position and financial stability of key online retailers; (vi) the seasonal nature of the Company’s educational business and the impact of the used book market; (vii) worldwide economic and political conditions; and (viii) the Company’s ability to protect its copyrights and other intellectual property worldwide; (ix) the ability of the Company to successfully integrate acquired operations and realize expected opportunities and (x) other factors detailed from time to time in the Company’s filings with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise any such forward-looking statements to reflect subsequent events or circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The Company is exposed to market risk primarily related to interest rates, foreign exchange, and credit risk. It is the Company’s policy to monitor these exposures and to use derivative financial instruments and/or insurance contracts from time to time to reduce fluctuations in earnings and cash flows when it is deemed appropriate to do so. The Company does not use derivative financial instruments for trading or speculative purposes.
Interest Rates
The Company had $734.8 million of variable rate loans outstanding at January 31, 2013, which approximated fair value. On March 30, 2012, the Company entered into an interest rate swap agreement which fixed a portion of the variable interest due on its variable rate loans outstanding. Under the terms of the agreement, the Company pays a fixed rate of 0.645% and receives a variable rate of interest based on one month LIBOR (as defined) from the counterparty which is reset every month for a three-year period ending March 31, 2015. As of January 31, 2013, the notional amount of the interest rate swap was $250.0 million.
It is management’s intention that the notional amount of interest rate swaps be less than the variable rate loans outstanding during the life of the derivatives. During the three and nine months ended January 31, 2013, the Company recognized losses on its hedge contracts of approximately $0.4 million and $1.3 million, respectively, which are reflected in Interest Expense in the Condensed Consolidated Statements of Income. At January 31, 2013, the fair value of the outstanding interest rate swap was a net deferred loss of $1.4 million and was recorded in Other Long-Term Liabilities in the Condensed Consolidated Statements of Financial Position. On an annual basis, a hypothetical one percent change in interest rates for the $484.8 million of unhedged variable rate debt as of January 31, 2013 would affect net income and cash flow by approximately $3.0 million.
Foreign Exchange Rates
Fluctuations in the currencies of countries where the Company operates outside the U.S. may have a significant impact on financial results. The Company is primarily exposed to movements in British pound sterling, euros, Canadian and Australian dollars, and certain Asian currencies. The Statements of Financial Position of non-U.S. business units are translated into U.S. dollars using period-end exchange rates for assets and liabilities and weighted-average exchange rates for revenues and expenses. Adjustments resulting from translating assets and liabilities are reported as a separate component of Accumulated Other Comprehensive Loss within Shareholders’ Equity under the caption Foreign Currency Translation Adjustment. The Company also has significant investments in non-US businesses that are exposed to foreign currency risk. During the three and nine months ended January 31, 2013, the Company recorded foreign currency translation losses in other comprehensive income of approximately $5.7 million and $11.6 million, respectively, primarily as a result of the strengthening of the U.S. dollar relative to the British pound sterling and euro.
Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in the Condensed Consolidated Statements of Income as incurred. Under certain circumstances, the Company may enter into derivative financial instruments in the form of foreign currency forward contracts to hedge against specific transactions, including intercompany purchases and loans. The Company does not use derivative financial instruments for trading or speculative purposes.
The Company may enter into forward exchange contracts to manage the Company’s exposure on certain foreign currency denominated assets and liabilities. The forward exchange contracts are marked to market through Foreign Exchange Transaction Losses on the Condensed Consolidated Statements of Income, and carried at their fair value on the Condensed Consolidated Statements of Financial Position. Foreign currency denominated assets and liabilities are remeasured at spot rates in effect on the balance sheet date, with the effects of changes in spot rates reported in Foreign Exchange Transaction Losses. As of January 31, 2013, the total notional amount of the open forward exchange contract in U.S. dollars was approximately $60.0 million. During the three and nine months ended January 31, 2013, the Company did not designate any forward exchange contracts as hedges under current accounting standards as the benefits of doing so were not material due to the short-term nature of the contracts. The fair value changes in the forward exchange contracts substantially mitigated the changes in the value of the applicable foreign currency denominated assets and liabilities. As of January 31, 2013, the fair value of the open forward exchange contract was a loss of $1.3 million, which was measured on a recurring basis using Level 2 inputs and recorded within the Other Accrued Liabilities line item on the Condensed Consolidated Statements of Financial Position. For the three and nine months ended January 31, 2013, the losses recognized on the forward exchange contracts were $1.3 million and $0.7 million, respectively.
Sales Return Reserves
The Company provides for sales returns based upon historical return experience and current market trends in the various markets and geographic regions in which the Company does business. Associated with the estimated sales return reserves, the Company also includes a related reduction in inventory and royalty costs as a result of the expected returns.
Net sales return reserves amounted to $45.9 million, $54.3 million and $35.8 million as of January 31, 2013 and 2012, and April 30, 2012, respectively. The reserves are reflected in the following accounts of the Condensed Consolidated Statements of Financial Position – increase (decrease):
| | | January 31, 2013 | | January 31, 2012 | | April 30, 2012 |
| | | | | | | |
| | Accounts Receivable | $(62,258) | | $(72,905) | | $(48,612) |
| | Inventory | 8,508 | | 10,072 | | 7,246 |
| | Accounts and Royalties Payable | (7,805) | | (8,503) | | (5,593) |
| | Decrease in Net Assets | $(45,945) | | $(54,330) | | $(35,773) |
The change in the sales return reserve compared to January 31, 2012 was principally driven by the Company’s ongoing migration to eBooks. On an annual basis, a hypothetical one percent change in the estimated sales return rate could affect net income by approximately $3.1 million. A change in the pattern or trends in returns could affect the estimated allowance.
Customer Credit Risk
In the journal publishing business, subscriptions are primarily sourced through journal subscription agents who, acting as agents for library customers, facilitate ordering by consolidating the subscription orders/billings of each subscriber with various publishers. Cash is generally collected in advance from subscribers by the subscription agents and is principally remitted to the Company between the months of November and January. Future calendar-year subscription receipts from these agents are highly dependent on their financial condition and liquidity. Subscription agents account for approximately 24% of total annual consolidated revenue and no one agent accounts for more than 10% of total annual consolidated revenue.
The Company’s book business is not dependent upon a single customer; however, the industry is concentrated in national, regional, and online bookstore chains. Although no one book customer accounts for more than 10% of total annual consolidated revenue and 16% of accounts receivable at January 31, 2013, the top 10 book customers account for approximately 20% of total annual consolidated revenue and approximately 44% of accounts receivable at January 31, 2013.
Disclosure of Certain Activities Relating to Iran
The European Union, Canada and United States have imposed sanctions on business relationships with Iran, including restrictions on financial transactions and prohibitions on direct and indirect trading with listed “designated persons.” In the first nine months of fiscal year 2013, the Company recorded revenue and net profits of approximately $0.2 million and $0.1 million, respectively, related to the sale of scientific and medical content to certain publicly funded universities, hospitals and institutions that meet the definition of the “Government of Iran” as defined under section 560.304 of title 31, Code of Federal Regulations. The Company has assessed its business relationship and transactions with Iran and believes it is in compliance with the regulations governing the sanctions. The Company intends to continue in these or similar sales as long as they continue to be consistent with all applicable sanctions-related regulations.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and regulations. The Company's Chief Executive Officer and Chief Financial Officer, together with the Chief Accounting Officer and other members of the Company's management, have conducted an evaluation of these disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective.
There were no changes in the Company’s internal controls over financial reporting during the third quarter of fiscal year 2013 that have materially affected, or are reasonably likely to materially affect, internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the third quarter of fiscal year 2013, the Company made the following purchases of Class A Common Stock under its stock repurchase program:
| | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as part of a Publicly Announced Program | | Maximum Number of Shares that May be Purchased Under the Program |
| | November 2012 | - | | - | | - | | 2,138,492 |
| | December 2012 | 467,818 | | $37.74 | | 467,818 | | 1,670,674 |
| | January 2013 | 419,833 | | $40.27 | | 419,833 | | 1,250,841 |
| | Total | 887,651 | | $38.94 | | 887,651 | | |
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
31.1 – Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
31.2 – Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
32.1 – 18 U.S.C. Section 1350 Certificate by the President and Chief Executive Officer
32.2 – 18 U.S.C. Section 1350 Certificate by the Chief Financial and Operations Officer
101.INS – XBRL Instance Document*
101.SCH – XBRL Taxonomy Extension Schema Document*
101.CAL – XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB – XBRL Taxonomy Extension Label Linkbase Document*
101.PRE – XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF – XBRL Taxonomy Extension Definition Linkbase Document*
| | (b) | The following reports on Form 8-K were submitted to the Securities and Exchange Commission since the filing of the Company’s 10-Q on December 10, 2012. |
| | i. | Earnings release on the third quarter fiscal 2013 results issued on Form 8-K dated March 7, 2013 which included the condensed financial statements of the Company |
*Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized
| | | JOHN WILEY & SONS, INC. |
| | | Registrant |
| | By | /s/ Stephen M. Smith | |
| | | Stephen M. Smith | |
| | | President and | |
| | | Chief Executive Officer | |
| | By | /s/ Ellis E. Cousens | |
| | | Ellis E. Cousens | |
| | | Executive Vice President and | |
| | | Chief Financial & Operations Officer | |
| | By | /s/ Edward J. Melando | |
| | | Edward J. Melando | |
| | | Vice President, Controller and | |
| | | Chief Accounting Officer | |
