SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT 1934
For the quarterly period ended January 31, 2002 Commission File No. 1-11507
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES ACT OF 1934
For the transition period from to
JOHN WILEY & SONS, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 13-5593032
- ------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
605 THIRD AVENUE, NEW YORK, NY 0158-0012
- -------------------------- ------------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (212) 850-6000
- ------------------------------------
NOT APPLICABLE
-----------------------------------------------------------------
Former name, former address, and former fiscal year,
if changed since last report
Indicate by check mark, whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
The number of shares outstanding of each of the Registrant's classes of common
stock as of January 31, 2002 were:
Class A, par value $1.00 - 49,701,167
Class B, par value $1.00 - 11,650,764
This is the first page of a 22 page document
JOHN WILEY & SONS, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements.
Condensed Consolidated Statements of Financial Position - Unaudited
as of January 31, 2002 and 2001, and April 30, 2001............. 3
Condensed Consolidated Statements of Income - Unaudited
for the Three and Nine Months ended January 31, 2002 and 2001... 4
Condensed Consolidated Statements of Cash Flows - Unaudited
for the Nine Months ended January 31, 2002 and 2001............. 5
Notes to Unaudited Condensed Consolidated Financial Statements.. 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 13-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 19-20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K/A................................ 20
"Safe Harbor" Statement under the
Private Securities Litigation Reform Act of 1995........................ 21
SIGNATURES ................................................................. 22
EXHIBITS
None
JOHN WILEY & SONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
(UNAUDITED)
January 31, April 30,
---------------------------------------
Assets 2002 2001 2001
------------------- ------------------ ------------------
Current Assets
Cash and cash equivalents $ 80,487 80,151 $ 52,947
Accounts receivable 137,535 94,145 62,514
Income tax receivable 10,168 - -
Inventories 68,994 49,691 50,763
Deferred income tax benefits 34,915 14,642 13,331
Prepaid expenses 11,194 9,023 9,980
------------------- ------------------ ------------------
Total Current Assets 343,293 247,652 189,535
Product Development Assets 63,266 41,219 41,191
Property and Equipment 63,501 44,329 52,255
Intangible Assets 420,093 288,249 283,761
Deferred Income Tax Benefits 2,182 3,388 3,380
Other Assets 20,230 14,040 17,880
-------------------- ------------------ ------------------
Total Assets $ 912,565 638,877 $ 588,002
=================== ================== ====================
Liabilities & Shareholders' Equity
Current Liabilities
Notes payable and current portion of long-term debt $ 30,000 30,344 $ 30,000
Accounts and royalties payable 87,870 75,634 42,520
Deferred subscription revenues 146,224 134,618 117,103
Accrued income taxes 18,897 13,796 9,586
Other accrued liabilities 63,312 50,838 47,552
---------------- ------------------ ------------------
Total Current Liabilities 346,303 305,230 246,761
Long-Term Debt 235,000 65,000 65,000
Other Long-Term Liabilities 46,428 34,334 34,901
Deferred Income Taxes 10,324 17,264 21,317
Shareholders' Equity 274,510 217,049 220,023
------------------ ------------------ ------------------
Total Liabilities & Shareholders' Equity $ 912,565 638,877 $ 588,002
=================== ================== ====================
The accompanying Notes are an integral part of the condensed consolidated
financial statements.
JOHN WILEY & SONS, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(In thousands except per share information)
Three Months Nine Months
Ended January 31, Ended January 31,
--------------------------------------- ------------------------------------
2002 2001 2002 2001
-------------------- ---------------- ------------------- --------------
Revenues $ 207,981 163,800 $ 545,226 478,287
Costs and Expenses
Cost of sales 70,657 53,308 177,542 152,577
Operating and administrative expenses 98,213 77,117 260,457 227,657
Amortization of intangibles 4,395 4,679 13,061 13,109
-------------------- ---------------- ------------------- --------------
Total Costs and Expenses 173,265 135,104 451,060 393,343
=================== =============== =================== ==============
Operating Income 34,716 28,696 94,166 84,944
Interest Income and Other (215) 538 43 1,420
Interest Expense (2,149) (2,020) (5,108) (6,522)
-------------------- ---------------- ------------------- --------------
Interest Expense - Net (2,364) (1,482) (5,065) (5,102)
-------------------- ---------------- ------------------- --------------
Income Before Taxes 32,352 27,214 89,101 79,842
Provision For Income Taxes 11,000 9,933 30,294 29,142
------------------ ---------------- ---------------- --------------
Net Income $ 21,352 17,281 $ 58,807 50,700
==================== ================ =================== ==============
Income Per Share
Diluted $ 0.34 0.27 $ 0.93 0.80
Basic $ 0.35 0.28 $ 0.97 0.84
Cash Dividends Per Share
Class A Common $ 0.05 0.04 $ 0.14 0.12
Class B Common $ 0.05 0.04 $ 0.14 0.12
Average Shares
Diluted 63,376 63,414 63,036 63,378
Basic 60,961 60,644 60,632 60,484
The accompanying Notes are an integral part of the condensed consolidated
financial statements.
JOHN WILEY & SONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
For The Nine Months
Ended January 31,
------------------------------------------
2002 2001
-------------------- -------------------
Operating Activities
Net income $ 58,807 50,700
Non cash items
Amortization of intangibles 13,061 13,109
Amortization of composition costs 18,206 16,911
Depreciation of property and equipment 12,315 10,019
Other non-cash items 29,351 20,805
Net change in operating assets and liabilities (1,635) (12,079)
Payment of acquisition related liabilities (12,544) -
-------------------- -------------------
Cash Provided by Operating Activities 117,561 123,623
-------------------- -------------------
Investing Activities
Additions to product development assets (32,921) (25,733)
Additions to property and equipment (20,059) (16,648)
Proceeds from sale of publishing assets - 2,500
Acquisitions, net of cash acquired (200,599) (7,052)
-------------------- -------------------
Cash Used for Investing Activities (253,579) (46,933)
-------------------- -------------------
Financing Activities
Net borrowings of short-term debt - 351
Borrowings of long-term debt 200,000 -
Repayment of long-term debt (30,000) (30,000)
Cash dividends (8,245) (7,294)
Purchase of treasury shares (2,783) (2,694)
Proceeds from issuance of stock on option exercises and other 3,722 1,490
-------------------- -------------------
Cash Provided (Used for) by Financing Activities 162,694 (38,147)
-------------------- -------------------
Effect of Exchange Rate Changes on Cash 864 (691)
-------------------- -------------------
Cash and Cash Equivalents
Increase for Period 27,540 37,852
Balance at Beginning of Period 52,947 42,299
-------------------- -------------------
Balance at End of Period $ 80,487 80,151
==================== ===================
Supplemental Information
Businesses Acquired:
Fair value of assets acquired $ 268,258 7,188
Liabilities assumed (67,659) (136)
-------------------- -------------------
Cash paid for businesses acquired $ 200,599 7,052
-------------------- -------------------
Interest $ 5,028 7,169
Income taxes $ 10,261 15,369
The accompanying Notes are an integral part of the condensed
consolidated financial statements.
JOHN WILEY & SONS, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. 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 Company's
consolidated financial position as of January 31, 2002 and 2001, and April
30, 2001, and results of operations and cash flows for the periods ended
January 31, 2002 and 2001. The results for the three and nine months ended
January 31, 2002 are not necessarily indicative of the results to be
expected for the full year. These statements should be read in conjunction
with the most recent audited financial statements contained in the
Company's Form 10-K for the fiscal year ended April 30, 2001.
The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenues and expenses during
the reporting period. Actual results could differ from those estimates.
2. Certain prior year amounts have been restated to conform to the current
year's presentation including the adoption in the fourth quarter of the
prior fiscal year of the consensus of the Emerging Issues Task Force Issue
00-10, "Accounting for Shipping and Handling Fees and Costs" which resulted
in the reclassification of shipping and handling fee income from cost of
sales and operating and administrative expenses, where it was previously
recorded, to revenues. This reclassification had the effect of increasing
revenues and the prior year's costs and expenses in the third quarter and
nine months ended January 31, 2001 by $2.8 million and $9.3 million,
respectively, with no effect on operating income or net income. Shipping
and handling costs included in operating and administrative expenses
amounted to $5.5 and $5.8 million, in the first nine months of fiscal year
2002 and 2001, respectively.
3. At the beginning of the current fiscal year, the Company adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137 and No. 138, which specifies the accounting and
disclosure requirements for such instruments. Under the new standard, 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 effect on earnings. Changes in
the fair value of derivatives that are designated and determined to be
effective as part of a hedge transaction will have no immediate effect on
earnings and depending on the type of hedge, are recorded either as part of
other comprehensive income and will be included in earnings in the periods
in which earnings are affected by the hedged item, or are included in
earnings as an offset to the earnings impact of the hedged item. Any
ineffective portions of hedges are reported in earnings as they occur. The
adoption of these new standards as of May 1, 2001 resulted in a transition
adjustment loss of $.5 million which is included as part of other
comprehensive income.
For a derivative to qualify as a hedge at inception and throughout the
hedged period, the Company formally documents the nature and relationships
between the hedging instruments and hedged items, as well as its
risk-management objectives, strategies for undertaking the various hedge
transactions and method of assessing hedge effectiveness. For hedges of
forecasted transactions, the significant characteristics and expected terms
of a forecasted transaction are specifically identified, and it must be
probable that each forecasted transaction will occur. If it is deemed
probable that the forecasted transaction will not occur, the gain or loss
is recognized in earnings currently.
During the period ending January 31, 2002, there was no material
ineffectiveness related to the cash flow hedges, and the estimated amount
of gains or losses that are expected to be reclassified into earnings over
the next year are not material. The Company does not use derivative
financial instruments for trading or speculative purposes. At January 31,
2002, the Company had open foreign exchange forward contracts expiring
through January 2003 as follows:
Currency Purchased U.S. $ Value Average Contract Rate
------------------ ------------ ---------------------
UK(pound) $ 11,844 $ 1.4992
Euro $ 599 $ .9212
The U.K. (pound) contract has been designated a cash flow hedge of foreign
currency exposures related to the payment of facility construction
commitments.
4. Comprehensive income was as follows:
Three Months Nine Months
Ended January 31, Ended January 31,
--------------------------------- --------------------------------
2002 2001 2002 2001
-------------- ------------- -------------- --------------
(thousands)
Net Income $21,352 17,281 $58,807 50,700
Other Comprehensive Income (Loss) - Transition
adjustment for cash flow hedges as of May
1, 2001 - - (454) -
Current period change in fair value of cash flow
hedges (115) - (212) -
Foreign currency translation adjustments (447) 1,711 (714) 825
-------------- ------------- -------------- --------------
Comprehensive Income $20,790 18,992 $57,427 51,525
-------------- ------------- -------------- --------------
A reconciliation of accumulated other comprehensive loss follows:
Three Months Ended January 31, 2002 Nine Months Ended January 31, 2002
----------------------------------- ----------------------------------
Foreign Foreign
Currency Cash Currency Cash
Translation Flow Translation Flow
Adjustments Hedges Total Adjustments Hedges Total
----------- ------ ----- ----------- ------ -----
Beginning Balance $ (3,384) (551) (3,935) $ (3,117) - (3,117)
Transition adjustment - - - - (454) (454)
Change for period (447) (115) (562) (714) (212) (926)
Reclassification to
earnings - - - - - -
-------------- ------------- ------------- --------------- ------------ ----------
Ending Balance $ (3,831) (666) (4,497) $ (3,831) (666) (4,497)
-------------- ------------- ------------- --------------- ------------ ----------
5. In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for by
a single method - the purchase method. In addition, the statement requires
the purchase price to be allocated to identifiable intangible assets in
addition to goodwill if certain criteria are met. The statement also
requires additional disclosures related to the reasons for the business
combination, the allocation of the purchase price, and if significant by
reportable segment, to the assets acquired and liabilities assumed.
SFAS No. 142 eliminates the requirement to amortize goodwill and those
intangible assets that have indefinite useful lives, but requires an annual
test for impairment at the reporting unit level. Intangible assets that
have finite useful lives will continue to be amortized over their useful
lives. SFAS No. 142 will be effective for the Company's next fiscal year
beginning May 1, 2002 for goodwill and other intangible assets acquired
prior to July 1, 2001, and is effective immediately for acquisitions
occurring after June 30, 2001. The Company is in the process of evaluating
and reassessing its goodwill and other intangible assets to determine the
impact of any impairment and the related useful lives and the corresponding
amortization expense to be recorded. The Company anticipates that
substantially all amortization of goodwill as a charge to earnings will be
eliminated.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations". This standard addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. The standard is effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a
material impact on the Company's financial results.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This
standard addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The standard is effective for fiscal years
beginning after June 15, 2002. The adoption of SFAS No. 144 is not expected
to have a material impact on the Company's financial results.
6. A reconciliation of the shares used in the computation of income per share
follows:
Three Months Nine Months
Ended January 31, Ended January 31,
---------------------------------- -- ---------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- --------------
(thousands)
Weighted average shares outstanding
61,238 60,983 60,901 60,821
Less: Unearned deferred compensation
shares (277) (339) (269) (337)
--------------- --------------- --------------- --------------
Shares used for basic income per share
60,961 60,644 60,632 60,484
Dilutive effect of stock options and
other stock awards 2,415 2,770 2,404 2,894
--------------- --------------- --------------- --------------
Shares used for diluted income per share 63,376 63,414 63,036 63,378
--------------- --------------- --------------- --------------
7. Inventories were as follows:
January 31, April 30,
--------------------------------
2002 2001 2001
-------------- -------------- -------------
(thousands)
Finished goods $62,278 45,839 $46,353
Work-in-process 5,602 2,492 4,481
Paper, cloth and other 4,505 4,999 3,020
-------------- -------------- -------------
72,385 53,330 53,854
LIFO reserve (3,391) (3,639) (3,091)
-------------- -------------- -------------
Total inventories $68,994 49,691 $50,763
-------------- -------------- -------------
8. The Company is a global publisher providing must-have content and services
to customers worldwide. Core businesses include scientific, technical, and
medical journals, encyclopedias, books and online products and services;
professional and consumer books and subscription services; and textbooks
and educational materials for undergraduate and graduate students and
lifelong learners. The Company has publishing, marketing, and distribution
centers in the United States, Canada, Europe, Asia, and Australia. The
Company's reportable segments are based on the management reporting
structure used to evaluate performance. Segment information is as follows:
Three Months Ended January 31,
-----------------------------------------------------------------------------------
2002 2001
----------------------------------------- ---------------------------------------
(thousands)
Inter- Inter-
External segment External segment
Revenues Customers Sales Total Customers Sales Total
-------------- ------------ ------------- -------------- ----------- ------------
Domestic Segments:
Scientific, Technical, and Medical $36,619 $2,126 $38,745 $34,928 $2,311 $37,239
Professional/Trade 76,105 3,569 79,674 40,171 3,707 43,878
Higher Education 36,071 5,730 41,801 33,513 5,384 38,897
European Segment 38,229 3,251 41,480 34,773 3,900 38,673
Other Segments 20,957 153 21,110 20,415 242 20,657
Eliminations - (14,829) (14,829) - (15,544) (15,544)
-------------- ------------ ------------- -------------- ----------- ------------
Total Revenues $207,981 - $207,981 $163,800 - $163,800
-------------- ------------ ------------- -------------- ----------- ------------
Direct Contribution to Profit
Domestic Segments:
Scientific, Technical, and Medical $15,162 $15,293
Professional/Trade 20,797 11,376
Higher Education 16,729 14,828
European Segment 13,541 11,304
Other Segments 6,101 6,293
------------- ------------
Total Direct Contribution to Profit 72,330 59,094
Shared Services and
Administrative Costs (37,614) (30,398)
------------- ------------
Operating Income 34,716 28,696
Interest Expense - Net (2,364) (1,482)
------------- ------------
Income Before Taxes $32,352 $27,214
------------- ------------
Certain prior year amounts have been reclassified to conform to the current
year's presentation, including the restatement of revenues to include shipping
and handling fee income in accordance with the new accounting standard as
outlined in note 2. Previously, such amounts were classified as offsets to cost
of sales and operating and administrative expenses.
JOHN WILEY & SONS, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended January 31,
-----------------------------------------------------------------------------------
2002 2001
--------------------------------------- ---------------------------------------
(thousands)
Inter- Inter-
External segment External segment
Revenues Customers Sales Total Customers Sales Total
------------- ------------ ------------ ------------- ------------ ------------
Domestic Segments:
Scientific, Technical, and Medical $115,388 5,253 120,641 $108,523 5,775 114,298
Professional/Trade 165,656 11,000 176,656 112,906 11,630 124,536
Higher Education 100,300 18,773 119,073 99,367 18,118 117,485
European Segment 111,139 9,312 120,451 105,712 9,108 114,820
Other Segments 52,743 558 53,301 51,779 897 52,676
Eliminations - (44,896) (44,896) - (45,528) (45,528)
------------- ------------ ------------ ------------- ------------ ------------
Total Revenues $545,226 - 545,226 $478,287 - $478,287
------------- ------------ ------------ ------------- ------------ ------------
Direct Contribution to Profit
Domestic Segments:
Scientific, Technical, and Medical $51,797 $49,938
Professional/Trade 43,079 28,643
Higher Education 44,843 43,191
European Segment 40,037 36,555
Other Segments 12,473 13,252
------------ ------------
Total Direct Contribution to Profit 192,229 171,579
Shared Services and
Administrative Costs (98,063) (86,635)
------------ ------------
Operating Income 94,166 84,944
Interest Expense - Net (5,065) (5,102)
------------ ------------
Income Before Taxes $89,101 $79,842
------------ ------------
Certain prior year amounts have been reclassified to conform to the current
year's presentation, including the restatement of revenues to include shipping
and handling fee income in accordance with the new accounting standard as
outlined in note 2. Previously, such amounts were classified as offsets to cost
of sales and operating and administrative expenses.
9. In September 2001, the Company acquired 100% of the outstanding shares of
Hungry Minds, Inc. (Hungry Minds) for a total purchase price of
approximately $184.7 million, consisting of approximately $90.2 million in
cash for the common stock of Hungry Minds, $92.5 million in cash to enable
Hungry Minds to repay its outstanding debt, and fees and expenses of
approximately $2 million.
Hungry Minds is a leading global knowledge company with an outstanding
collection of respected brands in such areas as technology, business,
consumer and how-to brands, computer-based learning tools, Web-based
products and Internet e-services. Best-selling brands include the For
Dummies series, the Unofficial Guide, the technological Bible and Visual
series, Frommer's travel guides, CliffsNotes, Webster's New World
Dictionary, Betty Crocker, Weight Watchers, and other market-leading
brands. Hungry Minds has 2,500 active titles in 39 languages, including 600
frontlist titles and revisions per year. The acquisition of Hungry Minds'
world-renowned brands is an excellent opportunity to accelerate revenue and
earnings growth by enhancing the Company's already strong presence in the
professional/trade market and exploiting its strong global position. The
Company will obtain synergies by leveraging its sales forces and worldwide
distribution channels, and eliminating redundant infrastructure costs.
The cost of the acquisition has been allocated on the basis of preliminary
estimates of the fair values of the assets acquired and the liabilities
assumed. Final asset and liability fair values may differ based on
finalization of appraisals, tax bases, and other considerations; however,
it is anticipated that any changes will not have a material effect, in the
aggregate, on the consolidated financial position of the Company. The
excess of cost over the preliminary estimate of the fair value of the net
tangible assets acquired relates primarily to goodwill and branded
trademarks with indefinite lives that are not being amortized, and to
acquired publication rights that are being amortized over lives ranging
from ten to fifteen years. The accompanying condensed financial statements
include the results of operations of Hungry Minds since the date of
acquisition. The following unaudited pro forma financial information
presents the results of operations of the Company as if the acquisition had
been consummated as of May 1, 2000. The unaudited pro forma financial
information is not necessarily indicative of the actual results that would
have been achieved had the acquisition actually been consummated as of May
1, 2000, nor is it necessarily indicative of future results of operations.
Three Months Nine Months
Ended January 31, Ended January 31,
---------------------------------- -- ---------------------------------
2002 2001 2002 2001
--------------- --------------- -------------- ---------------
(thousands except per share data)
Revenues $207,981 213,340 $615,129 646,449
Net Income $21,352 14,958 $52,180 49,551
Income Per Share $.34 .24 $.83 .78
The pro forma financial information for the nine months ended January
31, 2001 included a non-recurring gain related to Hungry Minds revision
of certain assumptions in the calculation of its sales returns reserve
resulting in increased revenues, net income and income per share of
approximately $5 million, $3 million, and $.05 per share, respectively.
10. To finance the Hungry Minds acquisition, as well as to provide funds
for general working capital and other needs, the Company obtained an
additional $300 million bank credit facility with 13 banks, consisting
of a $200 million five-year term loan facility to be repaid in
September 2006, and a $100 million five-year revolving credit facility
expiring in September 2006. The Company has the option of borrowing at
the following floating interest rates: (i) at a rate based on the
London Interbank Offered Rate (LIBOR) plus an applicable margin
ranging from .625% to 1.375% depending on the coverage ratio of debt
to EBITDA; or (ii) at the higher of (a) the Federal Funds Rate plus
.5% or (b) UBS's prime rate, plus an applicable margin ranging from 0%
to .375% depending on the coverage ratio of debt to EBITDA. In
addition, the Company pays a commitment fee ranging from .125% to
.225% on the unused portion of the facility depending on the coverage
ratio of debt to EBITDA. In the event of a change of control, as
defined, the banks have the option to terminate the agreement and
require repayment of any amounts outstanding. The credit facility
contains certain restrictive covenants similar to the Company's
existing credit agreements related to minimum net worth, funded debt
levels, and interest coverage ratio, and restricted payments,
including a cumulative limitation for dividends paid and share
repurchases.
11. In November 2001, the Company acquired 47 higher education titles from
Thomson for approximately $16 million in cash. The titles are in such
publishing areas as business, earth and biological sciences, foreign
languages, mathematics, nutrition and psychology.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
Operating activities provided $117.6 million in cash, or $6.1 million less than
the prior year's comparable period. The decrease was primarily due to the
paydown of acquisition related liabilities.
Investing activities used $253.6 million during the current year-to-date, or
$206.6 million more than the comparable prior year period. Investing activities
included the acquisition of Hungry Minds and certain other publishing assets
amounting to $200.6 million.
Current year financing activities primarily reflect the purchase of treasury
shares, dividend payments, the $30 million scheduled repayment of existing
long-term debt and new long-term borrowings of $200 million to finance the
acquisition of Hungry Minds.
Although the statement of financial condition indicates a negative working
capital of $3 million, current liabilities include $146.2 million of deferred
income related to journal subscriptions for which the cash has been received and
which will be recognized in income as the journals are delivered to customers.
In addition, the Company believes its cash balances together with existing
credit facilities are sufficient to meet its obligations.
RESULTS OF OPERATIONS
THIRD QUARTER ENDED JANUARY 31, 2002
Revenues for the third quarter advanced 27% to $208 million compared with $163.8
million in the prior year period. Operating income for the current quarter
increased 21% to $34.7 million compared with $28.7 million in the prior year.
Net income advanced 24% to $21.4 million, and income per diluted share increased
26% to $.34 compared with $.27 in the prior year. In a difficult environment
resulting from a sluggish economy and increased anxiety in world financial
markets, the Company continued to report strong results. The combination of
organic growth and strategic acquisitions have resulted in consistent increases
in revenues, earnings, cash flow and shareholder value during the past decade,
and continues to have a positive effect on current performance.
The third quarter results were primarily driven by the inclusion of Hungry Minds
results, which was acquired on September 21, 2001, and the Scientific, Technical
and Medical journal programs in the United States and Europe. Excluding Hungry
Minds, revenues for the quarter were up 4% over the prior year and operating
income was approximately $1.5 million above the prior year period. Operating
margins decreased to 16.7% from 17.5% in the prior year, primarily due to
reduced STM margins attributable to new society journals and lower gross margins
on the IEEE book publishing program.
Hungry Minds has been performing better than expected and the integration is
proceeding smoothly. The Company is forecasting the acquisition will be slightly
accretive to earnings in fiscal year 2002, which is better that previously
forecast. Hungry Minds revenues are currently forecast to be in the range of
$80-85 million, also better than previous projections. The planned $10 million
in annualized cost savings will be achieved by the end of this fiscal year.
Cost of sales as a percentage of revenues increased to 34% compared with 32.5%
in the prior year, primarily due to the inclusion of Hungry Minds, which has
lower gross margins than Wiley's other businesses. Operating expenses as a
percentage of revenues were 47.2% in the current quarter, essentially flat with
the prior year's second quarter. Operating expenses increased 27.4% over the
prior year, primarily due to the inclusion of Hungry Minds. Excluding Hungry
Minds and foreign currency translation effects, operating expenses increased
approximately 5% over the prior year period. The operating margin was 16.7% in
the current quarter, compared with 17.5% in the prior year's second quarter.
The effective tax rate was 34% in the current quarter, compared with 36.5% in
the prior year. The decrease was due to lower state income taxes resulting from
settlement of open tax issues at the end of the prior fiscal year, as well as
lower foreign taxes on settlement of open tax issues during the current year.
Corporate Headquarters Relocation
- ---------------------------------
The upcoming relocation of our corporate headquarters may result in one-time
charges to earnings for payments through April 2003 for the existing lease on
the New York location after the premises is vacated and for the write-off of
furniture, fixtures and leasehold improvements that will be disposed. The amount
of any charge will be dependent upon the completion date, which at present is
uncertain. Such charges however, may be recorded in the fourth quarter of this
fiscal year. In addition, to complete the physical relocation, Wiley will incur
one-time moving and other relocation-related expenses in fiscal year 2003.
The Company's relocation will provide a significantly improved and efficient
work environment and will meet the Company's growth needs. This is being
accomplished on attractive financial terms, including the one-time relocation
charges, which were anticipated when analyzing a variety of options.
SEGMENT RESULTS
Scientific, Technical And Medical (STM)
- ---------------------------------------
Domestic STM revenues of $38.7 million increased 4% over the prior year, led by
increases in the journal programs, which had stronger renewal rates compared
with the prior year, as well as the addition of three society journals. The
direct contribution to profit was essentially flat. The direct contribution
margin declined to 39.1% in the current quarter compared with 41.1% in the prior
year, as a result of higher royalties related to the new society journals, as
well as lower gross margins on the IEEE book publishing program.
During the quarter, Wiley InterScience continued to evolve as a global
enterprise, with its growth underpinning the global research communities' need
for quality content, when and where they want it. Over the past year, the online
service experienced a significant increase in user sessions, with over 31,000
sessions recorded on a daily basis by the end of the quarter, as compared with
about 18,000 sessions per day a year ago. This growth is also reflected in the
number of full-text article views by institutional customers, which increased
more than 50% during the fall. The number of academic institutions, companies,
and consortia signing on quadrupled during 2001; Wiley InterScience is now
licensed by customers in 87 countries - delivering must-have content to almost
six million scientists, researchers, academics, and professionals around the
world.
The growth in usage also reflects the value to customers of its linking
agreements with third party providers. The Company is adding functionality and
features to make Wiley InterScience an even more powerful tool for its
customers, thereby expanding its revenue base. During the quarter, Wiley and the
International Union of Cancer (UICC) launched TNM MobileEdition, the first
portable electronic version of the TNM classification system, which Wiley
publishes in print. TNM MobileEdition is designed specifically for use on
Personal Digital Assistants and wireless devices.
Article Select, a feature launched last year that allows Wiley InterScience's
customers to purchase individual journal articles not covered by their
subscriptions, has now been extended to include OnlineBook chapters from the 136
titles now available through that service. Researchers can search the complete
content of Wiley InterScience's books together with that of its online journals
and reference works. If a customer is not subscribed to a certain book, but
finds a particular chapter imperative to ongoing research, Article Select allows
immediate access for a limited period of time.
The Company also continued to build Wiley InterScience by adding more content.
In January, five more reference works were added to the growing selection of
online major reference works. The addition of these titles brings the total
number of major reference works and Current Protocols online to twenty-four,
representing in excess of 100,000 pages of equivalent print information, but
with the added value of online functionality.
Dr. H. Robert Horvitz of the Massachusetts Institute of Technology and Dr.
Stanley J. Korsmeyer of the Dana Farber Cancer Institute were named as the
winners of the first annual Wiley Prize in the Biomedical Sciences. The
researchers were chosen for their work in defining the genetic and molecular
basis of programmed cell death -- findings that may lead to understanding the
molecular basis of human development and the development of many diseases. The
Company has developed a successful business and a strong reputation by
publishing and disseminating information on significant advances in science,
technology, and medicine, contributed by prominent researchers and scientists
from a vast community of scholars. By creating this prize, the company wishes to
acknowledge the contributions of that community, as well as to recognize and
foster ongoing excellence in scientific achievement and discovery.
Professional/Trade
- ------------------
Domestic Professional/Trade segment revenues of $79.7 million for the third
quarter advanced 82% over the comparable prior year period, and the direct
contribution to profit advanced 83% to $20.8 million. The increase was
attributable to the inclusion of Hungry Minds. The direct contribution margin
increased from 25.9% in the prior year to 26.1%.
The Professional/Trade business continued to experience some negative effects of
the slowdown in retail and corporate sales in the early part of the quarter, the
after-effects of the September 11th terrorist attacks. Business and travel books
have been most affected. The culinary, architecture, psychology and general
interest areas continue to perform well. The pace of sales improved in the
latter part of the quarter.
During the quarter, the Company launched TheraForms, a new website from which
customers can purchase single-copy downloads of forms from its best-selling
Practice Planners, Healing Journeys, and other practice management books. The
site includes over 250 handouts and homework exercises for adults, children,
couples, and families.
The Company's successful partnership with the National Restaurant Association's
Educational Foundation was reinforced with the execution of an agreement
covering a major new edition of the Foundation's flagship publication, ServSafe,
which instructs readers on food sanitation procedures and leads to certification
required for food service employees in nearly all states.
The Company's culinary books won three awards at the Gourmand World Cookbook
Awards in France: Sweet Seasons by Richard Leach won Best Desserts Book; Barbara
Ostmann's The Recipe Writer's Handbook was selected Best Book for Food
Professionals and Le Cordon Bleu's Wine Essentials was named Best Wine Education
Book.
Higher Education
- ----------------
Domestic Higher Education segment revenues of $41.8 million increased 7% for the
quarter from the prior year and the direct contribution to profit increased 13%
to $16.7 million. The revenue growth was in part attributable to the November
acquisition of certain higher education titles from Thomson. The list
strengthens the Company's positions in key markets. The Company's programs in
psychology and geography continue to perform well.
Higher Education rolled out a strong frontlist, publishing 26 textbooks during
the quarter, including the innovative Chemistry, Third Edition, by John Olmsted
and Gregory Williams.
Overall enrollments in higher education continue to increase with more high
school students going onto college than ever before. Moreover, the softening
economy has resulted in more students applying to graduate programs than in the
past. We anticipate some positive effects from this trend beginning this fall,
partially offsetting continued sluggish engineering enrollments.
The Company continues to combat used books. The Web Access License (WAL) program
gained traction during the quarter, with the first orders coming in for
fee-based access to online supplements from customers who have not purchased new
textbooks.
Other initiatives counter the used book market by adding value to learning
materials for students and professors, thereby impacting adoptions and sales.
Market penetration of eGrade, our online homework and quizzing system, expanded
during the quarter. The Company extended its Faculty Resource Network (FRN),
which it established to provide professor-to-professor support for its textbooks
and technology products.
Two agreements were signed during the quarter to produce a series of books with
the magazine, Fast Company, as well as a series of laboratory manuals with
PASCO, a company that produces microcomputer-based physics labs.
Europe
- ------
European revenues of $41.5 million advanced 7% over the prior year's third
quarter. The revenue growth was driven by STM journals and Higher Education
programs. The direct contribution to profit of $13.5 million was 20% over the
prior year. The direct contribution margin was 32.6% in the current period
compared with 29.2% in the prior year.
In Europe, the journals business is strong with lower-than-expected attrition
rates and growing electronic access revenues. The Company's major reference
works program is also a key revenue driver.
Over the past year, the Company joined forces with the Publishers' Association
(UK), the Association of American Publishers, the International Publishers
Association and other companies to urge the Chinese government to remedy a
long-standing problem: the proliferation of pirated journals in library
collections. Over the last quarter, our efforts have resulted in concrete
results, with the Chinese government closing down the largest publisher of
unlicensed reprints and issuing a decree to universities banning use of pirated
journals. These developments are already having a positive impact on our
business results.
Other Segments
- --------------
The other segment revenues advanced 2% for the quarter primarily as a result of
a strong performance in Australia and Canada, and the inclusion of Hungry Minds'
international sales, offset to a large degree by market softness throughout
Asia.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 31, 2002
Revenues for the first nine months of $545.2 million advanced 14% compared with
$478.3 million in the prior year period. Operating income increased 11% to $94.2
million, compared with $84.9 million in the prior year. Net income advanced 16%
to $58.8 million, and income per diluted share increased 16% to $.93 compared
with $.80 in the prior year. Excluding the results of Hungry Minds, revenues
advanced 3%, for the first nine months of the fiscal year.
Cost of sales as a percentage of revenues was 32.6% compared with 31.9% in the
prior year. Operating expenses as a percentage of revenues were 47.8%, compared
with 47.6% in the prior year's first nine months. Operating expenses increased
14% over the prior year. Excluding Hungry Minds and foreign currency translation
effects, operating expenses increased 4% from the prior year period. The
operating margin was 17.3% compared with 17.8% in the prior year period.
Interest expense net of interest income remained essentially flat mostly due to
lower interest income offset by lower interest expense resulting from the
decline in interest rates.
The effective tax rate was 34% in the current period compared with 36.5% in the
prior year. The decrease was due to lower state income taxes resulting from
settlement of open tax issues at the end of the prior fiscal year, as well as
lower foreign taxes on settlement of open tax issues during the current year.
SEGMENT RESULTS
Scientific, Technical and Medical (STM)
- --------------------------------------
Domestic STM revenues of $120.6 million increased 6% over the prior year led by
stronger renewal rates in the journal programs and the addition of three new
society journals. The direct contribution to profit increased 4% to $51.8
million. The direct contribution margin was 42.9% compared with 43.7% in the
prior year.
Professional/Trade
- ------------------
Domestic Professional/Trade revenues of $176.7 million for the first nine months
advanced 42% over the comparable prior year period and the direct contribution
to profit advanced 50% to $43.1 million, reflecting the positive effect of the
Hungry Minds acquisition. The direct contribution margin increased from 23% in
the prior year to 24.4%.
Higher Education
- ----------------
Domestic Higher Education revenues of $119.1 million increased 1% from the prior
year. The direct contribution to profit increased 4% to $44.8 million. The
direct contribution margin improved to 37.7% compared with 36.8% in the prior
year. Higher Education results were helped by the titles acquired from Thomson
in November.
Europe
- ------
European revenues of $120.5 million for the first nine months advanced 5% and
the direct contribution to profit of $40 million increased 10% over the prior
year. The direct contribution margin was 33.2% compared with 31.8% in the prior
year. The improvement was primarily attributable to higher journal revenues.
Other Segments
- --------------
The other segment revenues advanced 1% for the first nine months as higher
Australian and Canadian revenues and the inclusion of Hungry Minds'
international operations were offset to a large extent by recessionary
environments in some key Asian markets.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for by a single
method - the purchase method. In addition, the statement requires the purchase
price to be allocated to identifiable intangible assets in addition to the
goodwill if certain criteria are met. The statement also requires additional
disclosures related to the reasons for the business combination, the allocation
of the purchase price, and if significant by reportable segment, to the assets
acquired and liabilities assumed.
SFAS No. 142 eliminates the requirement to amortize goodwill and those
intangible assets that have indefinite useful lives, but requires an annual test
for impairment at the reporting unit level. Intangible assets that have finite
useful lives will continue to be amortized over their useful lives. SFAS No. 142
will be effective for the Company's next fiscal year beginning May 1, 2002 for
goodwill and other intangible assets acquired prior to July 1, 2001, and is
effective immediately for acquisitions occurring after June 30, 2001. The
Company is in the process of evaluating and reassessing its goodwill and other
intangible assets to determine the impact of any impairment and the related
useful lives and the corresponding amortization expense to be recorded. The
Company anticipates that substantially all amortization of goodwill as a charge
to earnings will be eliminated.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations". This standard addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The standard is effective for fiscal years beginning after June 15, 2002.
The adoption of SFAS No. 143 is not expected to have a material impact on the
Company's financial results.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". This standard
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The standard is effective for fiscal years beginning after
June 15, 2002. The adoption of SFAS No. 144 is not expected to have a material
impact on the Company's financial results.
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 earning and cash flows when it is
deemed appropriate to do so. The Company does not use derivative financial
investments for trading or speculative purposes.
Interest Rates
The Company had $265 million of variable rate loans outstanding at January 31,
2002, which approximated fair value. The Company did not use any derivative
financial investments to manage this exposure. The weighted average interest
rate as of January 31, 2002 was approximately 2.7%. A hypothetical 10% change in
interest rates for the variable rate debt would affect annual net income and
cash flow by approximately $1.1 million.
Foreign Exchange Rates
The Company is exposed to foreign currency exchange movements primarily in
European, Asian, Canadian and Australian currencies. Consequently, the Company
and its subsidiaries, from time to time, enter into foreign exchange forward
contracts as a hedge against foreign currency asset, liability, commitment, and
anticipated transaction exposures, including intercompany purchases. The Company
does not use derivative financial instruments for trading or speculative
purposes. For a more detailed description, reference is made to note 3 of the
condensed financial statements.
Credit Risk
The Company's business is not dependent upon a single customer, however, the
book publishing business has witnessed a significant concentration in national,
regional and online bookstore chains in recent years. Although no one of such
customers accounted for more than 6% of total annual consolidated revenues in
fiscal year 2001, to mitigate its credit risk exposure the Company obtains
credit insurance where available. In the journal publishing business,
subscriptions are primarily sourced through independent subscription agents who
facilitate the journal-ordering process by consolidating the subscription
orders/billings of each subscriber with various publishers. Monies are collected
in advance from subscribers by the subscription agents and are remitted to the
journal publishers, including the Company, generally prior to the commencement
of the subscriptions. Future calendar-year subscription receipts from these
agents are highly dependent on their financial position and liquidity.
Subscription agents accounted for approximately 24% of total annual consolidated
revenues and no one agent accounted for more than 8% of total annual
consolidated revenues in fiscal year 2001. Insurance for these accounts is not
commercially feasible and/or available.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K/A dated September 21, 2001 relating to
the acquisition of Hungry Minds, Inc.
"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) 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.
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/William J. Pesce
--------------
William J. Pesce
President and
Chief Executive Officer
By /s/Ellis E. Cousens
--------------
Ellis E. Cousens
Executive Vice President and
Chief Financial Officer
Dated: March 12, 2002