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, 2007 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)
111 RIVER STREET, HOBOKEN NJ 07030
- --------------------------------------- ------------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (201) 748-6000
---------------------------
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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |X| Accelerated filer | | Non-accelerated filer | |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The number of shares outstanding of each of the Registrant's classes of common
stock as of February 28, 2007 were:
Class A, par value $1.00 - 47,514,946
Class B, par value $1.00 - 9,912,287
This is the first page of a 38-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, 2007 and 2006, and April 30, 2006........................................3
Condensed Consolidated Statements of Income - Unaudited
for the three and nine months ending January 31, 2007 and 2006.............................4
Condensed Consolidated Statements of Cash Flows - Unaudited
for the nine months ending January 31, 2007 and 2006.......................................5
Notes to Unaudited Condensed Consolidated Financial Statements.............................6-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................................18-30
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................. 30
Item 4. Controls and Procedures......................................................................32
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..................................32
Item 6. Exhibits and Reports on Form 8-K.............................................................33
SIGNATURES AND CERTIFICATIONS........................................................................34-36
EXHIBITS.............................................................................................37-38
JOHN WILEY & SONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
(UNAUDITED)
January 31, April 30,
--------------------------------------- ----------------
2007 2006 2006
----------------- ------------------- ----------------
Assets:
Current Assets
Cash and cash equivalents $ 25,024 $ 75,301 $ 60,757
Accounts receivable 186,506 177,118 158,275
Inventories 95,033 88,318 88,578
Deferred Income Tax Benefit 8,427 9,815 5,536
Prepaids and other 12,571 12,670 13,162
----------------- ------------------- ----------------
Total Current Assets 327,561 363,222 326,308
Product Development Assets 66,835 63,402 65,641
Property, Equipment and Technology 108,420 102,594 102,123
Intangible Assets 308,211 304,541 302,384
Goodwill 206,600 197,380 198,416
Deferred Income Tax Benefit 11,440 5,356 3,809
Other Assets 29,713 27,351 27,328
----------------- ------------------- ----------------
Total Assets $ 1,058,780 $ 1,063,846 $ 1,026,009
================= =================== ================
Liabilities & Shareholders' Equity:
Current Liabilities
Accounts and royalties payable $ 107,893 $ 99,449 $ 97,231
Deferred revenue 156,075 150,614 143,923
Accrued income taxes 23,811 31,140 24,226
Accrued pension liability 6,091 6,609 6,074
Other accrued liabilities 66,144 66,912 90,655
----------------- ------------------- ----------------
Total Current Liabilities 360,014 354,724 362,109
Long-Term Debt 82,073 190,000 160,496
Accrued Pension Liability 62,216 67,614 56,068
Other Long-Term Liabilities 33,635 35,291 35,627
Deferred Income Taxes 17,554 10,057 9,869
Shareholders' Equity
Class A & Class B common stock 83,191 83,191 83,191
Additional paid-in-capital 91,922 65,193 69,587
Retained earnings 664,630 587,189 596,474
Accumulated other comprehensive gain/(loss) 16,042 (517) 7,669
Unearned deferred compensation - (3,851) (3,512)
Treasury stock (352,497) (325,045) (351,569)
----------------- ------------------- ----------------
Total Shareholders' Equity 503,288 406,160 401,840
----------------- ------------------- ----------------
Total Liabilities & Shareholders' Equity $ 1,058,780 $ 1,063,846 $ 1,026,009
================= =================== ================
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)
For the Three Months For the Nine Months
Ending January 31, Ending January 31,
------------------------------------- -----------------------------------
2007 2006 2007 2006
----------------- ---------------- ----------------- ----------------
Revenue $ 296,808 $ 278,189 $ 844,742 $ 777,621
Costs and Expenses
Cost of sales 96,823 91,207 275,293 254,617
Operating and administrative expenses 145,351 129,007 430,641 383,286
Amortization of intangibles 3,972 3,874 11,151 9,990
----------------- ---------------- ----------------- ----------------
Total Costs and Expenses 246,146 224,088 717,085 647,893
----------------- ---------------- ----------------- ----------------
Operating Income 50,662 54,101 127,657 129,728
Operating Margin 17.1% 19.4% 15.1% 16.7%
Interest Income and Other, net 457 293 995 689
Interest Expense (3,101) (3,700) (8,342) (7,927)
----------------- ---------------- ----------------- ----------------
Net Interest Expense and Other (2,644) (3,407) (7,347) (7,238)
----------------- ---------------- ----------------- ----------------
Income Before Taxes 48,018 50,694 120,310 122,490
Provision For Income Taxes 14,607 9,745 35,062 26,680
----------------- ---------------- ----------------- ----------------
Net Income $ 33,411 $ 40,949 $ 85,248 $ 95,810
================= ================ ================= ================
Income Per Share
Diluted $ 0.57 $ 0.69 $ 1.47 $ 1.59
Basic $ 0.59 $ 0.71 $ 1.50 $ 1.64
Cash Dividends Per Share
Class A Common $ 0.10 $ 0.09 $ 0.30 $ 0.27
Class B Common $ 0.10 $ 0.09 $ 0.30 $ 0.27
Average Shares
Diluted 58,306 59,459 58,051 60,187
Basic 56,913 57,711 56,812 58,400
The accompanying Notes are an integral part of the condensed consolidated
financial statements.
JOHN WILEY & SONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW - UNAUDITED
(In thousands)
For The Nine Months
Ending January 31,
--------------------------------------
2007 2006
--------------- ----------------
Operating Activities
- --------------------
Net income $ 85,248 $ 95,810
Adjustments to reconcile net income to cash provided by (used for)
operating activities:
Amortization of intangibles 11,152 9,990
Amortization of composition costs 28,004 26,688
Depreciation of property, equipment and technology 20,895 24,301
Stock-based compensation (net of tax) 9,177 2,729
Non-cash charges & other 44,141 50,926
Non-cash tax benefits (5,468) (14,252)
Change in deferred revenue 10,058 7,008
Net change in operating assets and liabilities, excluding acquisitions (48,286) (35,796)
--------------- ----------------
Cash Provided by Operating Activities, excluding acquisitions 154,921 167,404
--------------- ----------------
Investing Activities
- --------------------
Additions to product development assets (53,537) (52,156)
Additions to property, equipment and technology (22,904) (14,084)
Acquisitions, net of cash acquired (17,313) (29,055)
Sales of marketable securities - 10,000
--------------- ----------------
Cash Used for Investing Activities (93,754) (85,295)
--------------- ----------------
Financing Activities
- --------------------
Repayments of long-term debt (129,536) (282,809)
Borrowings of long-term debt 48,579 279,842
Purchase of treasury stock (7,278) (82,549)
Cash dividends (17,092) (15,870)
Proceeds from exercise of stock options and other 7,864 5,460
--------------- ----------------
Cash Used for Financing Activities (97,463) (95,926)
--------------- ----------------
Effects of Exchange Rate Changes on Cash 563 (283)
--------------- ----------------
Cash and Cash Equivalents
Decrease for Period (35,733) (14,100)
Balance at Beginning of Period 60,757 89,401
--------------- ----------------
Balance at End of Period $ 25,024 $ 75,301
=============== ================
Supplemental Information
Cash Paid During the Period for:
Interest $ 8,690 $ 4,487
Income taxes $ 36,309 $ 24,814
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. Basis of Presentation
---------------------
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
consolidated financial position of John Wiley & Sons, Inc., and
Subsidiaries (the "Company") as of January 31, 2007 and 2006, and results
of operations and cash flows for the three and nine month periods ended
January 31, 2007 and 2006. The results for the three and nine months ended
January 31, 2007 are not necessarily indicative of the results 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, 2006.
The preparation of financial statements in conformity with U.S. 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 revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Certain prior-year amounts have been reclassified to conform to the current
year's presentation.
2. Recent Accounting Standards
---------------------------
In July 2006, the FASB issued FASB Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in a company's financial
statements in accordance with SFAS No. 109 "Accounting for Income Taxes".
FIN 48 provides guidance on recognizing, measuring, presenting and
disclosing in the financial statements uncertain tax positions that a
company has taken or expects to take on a tax return. FIN 48 is effective
for the Company as of May 1, 2007. The Company is currently assessing the
impact, if any, of FIN 48 on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements"
("SFAS 157"). SFAS 157 provides a new single authoritative definition of
fair value and provides enhanced guidance for measuring the fair value of
assets and liabilities and requires additional disclosures related to the
extent to which companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair value
measurements on earnings. SFAS 157 is effective for the Company as of May
1, 2008. The adoption of SFAS 157 is not expected to have a material impact
on the Company's consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158 "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of
FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"). SFAS 158
requires balance sheet recognition of the funded status of pension and
postretirement benefit plans. Under SFAS 158, actuarial gains and losses,
prior service costs or credits, and any remaining transition assets or
obligations that have not been recognized under previous accounting
standards must be recognized as a component of accumulated other
comprehensive income (loss) within stockholders' equity, net of tax
effects, until they are amortized as a component of net periodic benefit
cost. In addition, the measurement date and the date at which plan assets
and the benefit obligation are measured are required to be the company's
fiscal year end, which is the date currently used by the Company. SFAS 158
is effective for the Company as of April 30, 2007. Since the Company
measures plan assets and obligations on an annual basis, it cannot estimate
the impact of SFAS 158 in advance of the Company's April 30, 2007
measurement date. If the Company had been required to adopt the provisions
of SFAS 158 as of April 30, 2006, the Company estimates that Shareholders'
Equity would have decreased and the accrued pension liability would have
increased approximately $15 million.
However, the Balance Sheet impact of adoption on April 30, 2007 will differ
as it will reflect asset performance through the end of fiscal year 2007 as
well as interest rates and other factors which are applicable as of April
30, 2007. The adoption of SFAS 158 is not expected to impact the Company's
results of operations and cash flows, or any of the Company's financial
agreements or covenants.
In September 2006, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements (SAB 108), to address diversity in practice in quantifying
financial statement misstatements. SAB 108 requires that the Company
quantify misstatements based on their impact on each of our financial
statements and related disclosures. SAB 108 is effective as of April 30,
2007. The adoption of SAB 108 is not expected to have a material impact on
the Company's consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides
companies with an option to irrevocably elect to measure certain financial
assets and financial liabilities at fair value on an
instrument-by-instrument basis with the resulting changes in fair value
recorded in earnings. The objective of SFAS 159 is to reduce both the
complexity in accounting for financial instruments and the volatility in
earnings caused by using different measurement attributes for financial
assets and liabilities. The Company is currently evaluating the impact of
SFAS 159 to determine the effect, if any, it will have on the consolidated
financial position and results of operations. The Company is required to
adopt SFAS 159 as of May 1, 2008.
3. Share-Based Compensation
------------------------
All equity compensation plans have been approved by security holders. Under
the Key Employee Stock Plan ("the Plan"), qualified employees are eligible
to receive awards that may include stock options, performance-based stock
awards, and restricted stock awards. Under the Plan, a maximum number of
8,000,000 shares of Company Class A stock may be issued. As of January 31,
2007 there were 5,615,847 securities remaining available for future
issuance under the Plan. The Company issues treasury shares to fund stock
options and performance-based and restricted stock awards.
Accounting for Share-Based Compensation:
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). SFAS 123R requires that companies recognize
share-based compensation to employees in the Statement of Income based on
the fair value of the share-based awards. The Company adopted SFAS 123R on
May 1, 2006, the beginning of the Company's 2007 fiscal year.
Prior to the adoption of SFAS 123R, the Company accounted for stock-based
compensation using the "intrinsic value" method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and using the disclosure-only provisions of SFAS 123, as
amended by SFAS 148. Under this approach, the value of restricted stock
awards was expensed over their requisite service periods and the imputed
cost of stock options were disclosed only in footnotes to the financial
statements.
The Company adopted SFAS 123R effective May 1, 2006 using the modified
prospective approach. Under this approach, awards that are granted,
modified or settled after May 1, 2006 are measured and expensed in
accordance with SFAS 123R. Unvested awards that were granted prior to May
1, 2006 are expensed and recognized in the Company's results of operations,
prospectively. No previous periods are restated.
Pursuant to the provisions of SFAS 123R, the Company records share-based
compensation as a charge to earnings reduced by the estimated cost of
anticipated forfeited awards. As such, share-based compensation expense is
only recognized for those awards that are expected to ultimately vest.
Stock-based compensation expense associated with performance restricted
share awards is recognized based on management's best estimates of the
achievement of the performance goals specified in such awards and the
estimated number of shares that will be earned. The cumulative effect on
current and prior periods of a change in the estimated number of
performance share awards, or estimated forfeiture rate is recognized as an
adjustment to earnings in the period of the revision.
Concurrent with the adoption of SFAS 123R the Company accelerated the
recognition of compensation expense related to post-adoption awards granted
to near-retirement and retirement-eligible employees to reflect accelerated
vesting as provided in the Company's Key Employee Stock Plan. The impact of
the change was not significant.
The adoption of SFAS 123R resulted in the recognition of an incremental
share-based compensation expense of $3.0 million ($1.9 million after taxes)
and $8.3 million ($5.2 million after taxes) for the three and nine months
ended January 31, 2007, which is reflected in operating and administrative
expenses. For the prior year periods, this portion of stock-based
compensation was reflected in the Company's disclosures, but was not
recognized in the consolidated income statements. For comparative purposes,
the following adjusted net income and earnings per share for the three and
nine months ended January 31, 2006 reflect the amounts which would have
been reported in the income statement if the provisions of SFAS 123R were
in effect at that time.
For the Three Months For the Nine Months
(in thousands, except per share amounts) Ending January 31, Ending January 31,
------------------------------------ ----------------------------------
2007 2006 2007 2006
---------------- ---------------- -------------- ---------------
Net income, as reported $33,411 $40,949 $85,248 $95,810
Add: Stock-based compensation expense
included in reported net income, net of taxes 2,979 703 9,177 2,729
Deduct: Total stock-based compensation expense
determined under fair-value based
method for all awards, net of taxes (1) (2,979) (2,225) (9,177) (7,295)
---------------- ---------------- -------------- ---------------
Adjusted net income $33,411 $39,427 $85,248 $91,244
================ ================ ============== ===============
Reported earnings per share:
Diluted $0.57 $0.69 $1.47 $1.59
Basic $0.59 $0.71 $1.50 $1.64
Adjusted earnings per share:
Diluted $0.57 $0.66 $1.47 $1.52
Basic $0.59 $0.68 $1.50 $1.56
(1) Total stock-based compensation expense for all awards presented in the
table above is net of taxes of $1.8 million and $1.3 million for the three
months ended January 31, 2007 and 2006, respectively, and net of taxes of
$5.5 million and $4.4 million for the nine months ended January 31, 2007
and 2006, respectively.
Stock Option Activity:
Under the terms of the Company's stock option plan the exercise price of
stock options granted under the plan may not be less than 100% of the fair
market value of the stock at the date of grant. Options are exercisable,
over a maximum period of 10 years from the date of grant, and generally
vest 50% on the fourth and fifth anniversary date after the award is
granted. Under certain circumstances relating to a change of control, as
defined, the right to exercise options outstanding could be accelerated.
The following table provides the estimated weighted average fair value,
under the Black-Scholes option-pricing model, for each option granted
during the periods and the significant weighted average assumptions used in
their determination. The expected life represents an estimate of the period
of time stock options are outstanding based on the historical exercise
behavior of the employees. The risk-free interest rate is based on the
corresponding U.S. Treasury yield curve in effect at the time of the grant.
Similarly, the volatility is estimated based on the expected volatility
over the estimated life, while the dividend yield is based on expected
dividend payments to be made by the Company.
For the Nine Months
Ending January 31,
------------------------
2007 2006
--------- --------
Expected life of options (years) 7.8 8.0
Risk-free interest rate 5.2% 3.9%
Expected volatility 29.1% 27.1%
Expected dividend yield 1.2% 0.9%
Per share fair value of options granted $12.65 $13.61
A summary of the activity and status of the Company's stock option plans
was as follows:
Weighted
Average
Weighted Remaining Aggregate
Shares Average Option Contractual Intrinsic Value
Stock Options (in thousands) Price Term (in years) (in millions)
- ------------- -------------------- ------------------- ------------------ -----------------
Outstanding at April 30, 2006 6,084 $25.95
Granted 640 $33.05
Exercised (277) $17.99
Expired or forfeited (34) $30.35
--------------------
Outstanding at January 31, 2007 6,413 $26.98 5.8 $66.7
====================
Vested and expected to vest in the future 6,314 $26.95 5.8 $65.8
at January 31, 2007
Exercisable at January 31, 2007 2,505 $19.88 3.1 $43.3
The intrinsic value is the difference between the Company's common stock
price and the option exercise price. Total intrinsic value of options
exercised during the nine months ended January 31, 2007 and 2006 were $5.5
million and $8.4 million, respectively. The Aggregate Intrinsic Value in
the table above represents the value option holders would have received on
options that were exercisable as of January 31, 2007.
As of January 31, 2007, there was $22.1 million of unrecognized share-based
compensation expense related to stock options, which is expected to be
recognized over a period up to 5 years, or 2.5 years on a weighted average
basis.
Performance-Based and Other Restricted Stock Activity:
Under the terms of the Company's long-term incentive plans, upon the
achievement of certain three-year financial performance-based targets,
awards are payable in restricted shares of the Company's Class A common
stock. During each three-year period the Company adjusts compensation
expense based upon its best estimate of expected performance. The
restricted shares vest 50% on the first and second anniversary date after
the award is earned.
The Company also grants restricted shares of the Company's Class A Common
Stock to key employees in connection with their employment. The restricted
shares generally vest 50% at the end of the fourth and fifth years
following the date of the grant.
Under certain circumstances relating to a change of control or termination,
as defined, the restrictions would lapse and shares would vest earlier.
Activity for these restricted stock awards during the nine months ended
January 31, 2007 was as follows:
Shares Weighted Average
(in thousands) Grant Date Value
---------------------- ------------------------
Nonvested shares at April 30, 2006 609 $30.47
Shares granted 338 $32.82
Shares vested (21) $24.43
----------------------
Nonvested shares at January 31, 2007 926 $31.46
======================
As of January 31, 2007, there was $13.3 million of unrecognized share-based
compensation cost related to restricted stock awards, which is expected to
be recognized over a period up to 5 years, or 2.9 years on a weighted
average basis. Compensation expense for restricted stock awards is computed
using the closing market price of the Company's Class A Common Stock at the
date of grant. Total grant date value of shares vested during the nine
months ended January 31, 2007 and 2006 was $0.5 million and $0.5 million,
respectively.
Director Stock Awards:
Under the terms of the Company's Director Stock Plan (the "Director Plan"),
each non-employee director receives an annual award of Class A Common Stock
equal in value to 100% of the annual director fee, based on the stock price
on the date of grant. The granted shares may not be sold or transferred
during the time the non-employee director remains a director. There were
6,642 shares and 7,608 shares awarded under the Director Plan for the nine
months ending January 31, 2007 and 2006, respectively.
4. Comprehensive Income
--------------------
Comprehensive income was as follows (in thousands):
For the Three Months For the Nine Months
Ending January 31, Ending January 31,
------------------------------- ------------------------------
2007 2006 2007 2006
-------------- --------------- -------------- --------------
Net income $33,411 $40,949 $85,248 $95,810
Change in other comprehensive income, net of taxes:
Foreign currency translation adjustment 4,115 1,618 8,373 (2,499)
-------------- --------------- -------------- --------------
Comprehensive income $37,526 $42,567 $93,621 $93,311
============== =============== ============== ==============
A reconciliation of accumulated other comprehensive gain (loss) follows (in
thousands):
For the Three Months
Ending January 31, 2007
--------------------------------------------------------
October 31, Change for January 31,
2006 Period 2007
----------------- ---------------- ---------------
Foreign currency translation adjustment $29,998 4,115 $34,113
Minimum pension liability, net of tax (18,071) - (18,071)
----------------- ---------------- ---------------
Total $11,927 4,115 $16,042
================= ================ ===============
For the Nine Months
Ending January 31, 2007
--------------------------------------------------------
April 30, Change for January 31,
2006 Period 2007
----------------- ---------------- ---------------
Foreign currency translation adjustment $25,740 8,373 $34,113
Minimum pension liability, net of tax (18,071) - (18,071)
----------------- ---------------- ---------------
Total $7,669 8,373 $16,042
================= ================ ===============
5. Weighted Average Shares for Earnings Per Share
A reconciliation of the shares used in the computation of income per share
follows (in thousands):
For the Three Months For the Nine Months
Ending January 31, Ending January 31,
------------------------------- ------------------------------
2007 2006 2007 2006
-------------- --------------- -------------- --------------
Weighted average shares outstanding 57,311 58,057 57,184 58,719
Less: Unvested restricted shares outstanding (398) (346) (372) (319)
-------------- -------------- ------------- --------------
Shares used for basic income per share 56,913 57,711 56,812 58,400
Dilutive effect of stock options and other stock awards 1,393 1,748 1,239 1,787
-------------- -------------- -------------- -------------
Shares used for diluted income per share 58,306 59,459 58,051 60,187
============== ============== ============== =============
For the three months ended January 31, 2007 and 2006, options to purchase
Class A Common Stock of 1,636,960 and 1,005,000, respectively, have been
excluded from the shares used for diluted income per share, as their
inclusion would have been anti-dilutive. For the nine months ended January
31, 2007 and 2006, 2,595,000 and 830,000 options, respectively, have been
excluded due to the anti-dilutive impact.
6. Inventories
Inventories were as follows (in thousands):
As of
As of January 31, April 30,
---------------------------------------- -------------------
2007 2006 2006
------------------ ------------------ -------------------
Finished goods $82,937 $75,054 $79,389
Work-in-process 7,772 7,620 6,704
Paper, cloth and other 8,163 8,274 6,024
------------------ ------------------ -------------------
98,872 90,948 92,117
LIFO reserve (3,839) (2,630) (3,539)
------------------ ------------------ -------------------
Total inventories $95,033 $88,318 $88,578
================== ================== ===================
7. Acquisitions
------------
Fiscal Year 2007:
During the first nine months of fiscal year 2007, the Company acquired
certain businesses, assets and rights for $17.3 million, including
acquisition costs plus liabilities assumed. Approximately $13.0 million of
brands, trademarks and acquired publishing rights and $6.6 million of
goodwill were recorded in the aggregate. The brands, trademarks and
acquired publishing rights are being amortized over a weighted average
period of approximately 11 years. The acquisitions consist primarily of the
following:
On July 20, 2006, the Company acquired the assets of a publisher of two
medical journals. The acquisition has been recorded primarily as acquired
publication rights and is being amortized over a 15-year period.
On October 18, 2006, Wiley acquired a U.K.-based provider of travel-related
online content, technology, and services. The acquisition cost was
allocated to goodwill, branded trademarks and the net tangible assets
acquired, which consisted primarily of computer software. The branded
trademarks are being amortized over a 10-year period. The Company is in the
process of completing valuations necessary to finalize the purchase price
allocations.
On January 24, 2007, the Company acquired the assets of a publisher of
three advertising based journals. The acquisition has been primarily
recorded as acquired publication rights and is being amortized over a
10-year period.
Fiscal Year 2006:
During the first nine months of fiscal year 2006, the Company acquired
certain businesses, assets and rights for $29.1 million, including
acquisition costs plus liabilities assumed. Approximately $26.4 million of
brands, trademarks and acquired publishing rights and $3.8 million of
goodwill were recorded in the aggregate. The brands, trademarks and
acquired publishing rights are being amortized over a weighted average
period of approximately 10 years. The acquisitions consist primarily of the
following:
On May 31, 2005, Wiley acquired substantially all the assets of a global
publisher of computer books and software, specializing in IT business
certification materials. The acquisition cost was allocated to branded
trademarks and the net tangible assets acquired, which consisted primarily
of accounts receivable, inventory, accrued royalties, accounts payable and
other accrued liabilities. The branded trademarks are being amortized over
a 10-year period.
On July 11, 2005, the Company acquired the rights to a newsletter
publishing division of a leading publisher of mental health and addiction
information. The majority of the acquisition was recorded as acquired
publication rights and is being amortized over a 10-year period.
On October 6, 2005, the Company acquired a leading provider of
evidence-based medicine content and web-based search tools. The acquisition
cost was primarily allocated to goodwill, trademarks, customer
relationships and the net tangible assets acquired, which consisted
primarily of accounts receivable, capitalized software and deferred
revenues. The trademarks and customer relationships are being amortized
over a 10-year period.
On November 7, 2005, the Company acquired the rights to the journal of
Dialysis and Transplantation, a provider of nephrology and renal
transplantation information to nephrologists, surgeons, internists and
other physicians and healthcare professionals. The majority of the
acquisition is recorded as acquired publication rights and is being
amortized over a 10-year period.
8. Segment Information
The Company is a global publisher of print and electronic products,
providing content and services to customers worldwide. Core businesses
include professional and consumer books and subscription services;
scientific, technical, and medical journals, encyclopedias, books and
online products and services; 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:
For The Three Months Ending January 31,
--------------------------------------------------------------------------------
2007 2006
------------------------------------ ---------------------------------------
(thousands)
Inter- Inter-
External segment External segment
Customers Sales Total Customers Sales Total
------------------------------------ ---------------------------------------
Revenue
-------
U.S. segments:
Professional/Trade $92,412 $10,970 $103,382 $89,246 $11,931 $101,177
Scientific, Technical, and Medical 51,702 2,600 54,302 46,847 3,078 49,925
Higher Education 40,927 7,110 48,037 38,402 7,954 46,356
European segment 69,174 6,093 75,267 64,383 8,487 72,870
Asia, Australia & Canada 42,593 743 43,336 39,311 445 39,756
Eliminations - (27,516) (27,516) - (31,895) (31,895)
------------------------------------ ---------------------------------------
Total Revenue $296,808 $ - $296,808 $278,189 $ - $278,189
==================================== =======================================
Direct Contribution to Profit
-----------------------------
U.S. segments:
Professional/Trade $27,767 $32,606
Scientific, Technical, and Medical 23,632 20,839
Higher Education 15,450 14,935
European segment 23,290 22,506
Asia, Australia & Canada 13,130 12,558
--------- ---------
Total Direct Contribution to Profit 103,269 103,444
Shared Services and
Administrative Costs
--------------------
Distribution (12,939) (11,878)
Information technology (15,647) (14,822)
Finance (8,626) (7,369)
Other administrative (15,395) (15,274)
--------- ---------
Total Shared Services and
Administrative Costs (52,607) (49,343)
--------- ---------
Operating Income $50,662 $54,101
---------------- ========= =========
For The Nine Months Ending January 31,
--------------------------------------------------------------------------------
2007 2006
------------------------------------ ---------------------------------------
(thousands)
Inter- Inter-
External segment External segment
Customers Sales Total Customers Sales Total
------------------------------------ ---------------------------------------
Revenue
-------
U.S. segments:
Professional/Trade $263,887 $29,430 $293,317 $243,535 $31,101 $274,636
Scientific, Technical, and Medical 153,751 7,011 160,762 140,437 7,596 148,033
Higher Education 113,838 23,917 137,755 108,398 25,300 133,698
European segment 211,377 16,646 228,023 192,489 20,289 212,778
Asia, Australia & Canada 101,889 1,749 103,638 92,762 1,329 94,091
Eliminations - (78,753) (78,753) - (85,615) (85,615)
------------------------------------ ---------------------------------------
Total Revenue $844,742 $ - $844,742 $777,621 $ - $777,621
==================================== =======================================
Direct Contribution to Profit
-----------------------------
U.S. segments:
Professional/Trade $76,090 $77,009
Scientific, Technical, and Medical 71,680 68,856
Higher Education 44,472 43,655
European segment 75,568 66,398
Asia, Australia & Canada 22,586 22,479
--------- ---------
Total Direct Contribution to Profit 290,396 278,397
Shared Services and
Administrative Costs
--------------------
Distribution (38,418) (36,335)
Information technology (46,148) (44,952)
Finance (26,406) (23,672)
Other administrative (51,767) (43,710)
--------- ---------
Total Shared Services and (162,739) (148,669)
Administrative Costs
--------- ---------
Operating Income $127,657 $129,728
---------------- ========= =========
9. Intangible Assets
Intangible assets consisted of the following (in thousands):
As of
As of January 31, April 30,
----------------------------------- ---------------
2007 2006 2006
---------------- -------------- ---------------
Intangible assets not subject to amortization
Branded trademarks $57,900 $57,900 $57,900
Acquired publication rights 118,969 117,800 117,911
---------------- -------------- ---------------
Total intangible assets not subject to amortization 176,869 175,700 175,811
Net intangible assets subject to amortization, principally
acquired publication rights 131,342 128,841 126,573
---------------- -------------- ---------------
Total $308,211 $304,541 $302,384
================ ============== ===============
10. Marketable Securities
---------------------
During the first quarter of fiscal year 2006, the Company sold its
remaining marketable securities for approximately $10.0 million. The
marketable securities consisted entirely of shares of variable rate
securities issued by closed-end funds that invest in a diversified
portfolio of government and corporate securities. Generally, these
securities do not have a stated maturity date and reset their dividends
every 28 days. These securities were accounted for as available-for-sale in
accordance with SFAS No. 115 "Accounting for Certain Investments in Debt
and Equity Securities."
11. Income Taxes
------------
The effective tax rate for the first nine months of fiscal year 2007 was
29.1%. The tax provision for the third quarter and the first nine months of
fiscal year 2007 included tax benefits of $1.3, or $0.02 per diluted share
and $5.5, or $0.09 per diluted share, respectively. These benefits coincide
with the resolution and settlements of certain tax matters with local
authorities in the countries where the Company operates. Excluding the tax
benefits described above, the effective tax rate for the first nine months
of fiscal year 2007 was 33.7%.
The effective tax rate for the first nine months of fiscal year 2006 was
21.8%. The tax provision for the first nine months of fiscal year 2006
included a tax benefit of $6.8 million, or $0.11 per diluted share, related
to a favorable resolution of certain matters with tax authorities. The
nine-month period also included $7.5 million, or $0.12 per diluted share,
of tax benefits associated with the reversal of a tax accrual recorded on
the repatriation of dividends from European subsidiaries in the fourth
quarter of fiscal year 2005. On May 10, 2005, the U.S. Internal Revenue
Service issued Notice 2005-38. The notice provided for a tax benefit that
fully offset the tax accrued by the Company on foreign dividends in the
fourth quarter of fiscal year 2005. Neither the tax benefit associated with
the $7.5 million tax accrual reversal, nor the corresponding fourth quarter
fiscal year 2005 tax accrual had a cash impact on the Company. Excluding
the tax benefits described above, the effective tax rate for the first nine
months of fiscal year 2006 was 33.4%.
12. Retirement Plans
The components of net pension expense for the defined benefit plans were as
follows:
For the Three Months For the Nine Months
Ending January 31, Ending January 31,
---------------------------------- --------------------------------
Dollars in thousands) 2007 2006 2007 2006
---------------- -------------- --------------- -------------
Service Cost $3,016 $2,642 $8,964 $8,245
Interest Cost 3,546 2,889 10,521 8,707
Expected Return of Plan Assets (3,363) (2,732) (9,980) (8,253)
Net Amortization of Prior Service Cost 182 220 541 465
Recognized Net Actuarial Loss 503 748 1,473 2,394
---------------- -------------- --------------- -------------
Net Pension Expense $3,884 $3,767 $11,519 $11,558
================ ============== =============== =============
Pension plan contributions were $6.9 million and $4.8 million for the nine
months ended January 31, 2007 and 2006, respectively.
13. Subsequent Events
-----------------
Effective February 2, 2007 the Company finalized the previously announced
acquisition of all of the outstanding shares of Blackwell Publishing
(Holdings) Ltd. ("Blackwell"). Blackwell publishes journals and books for
the academic, research and professional markets focused on science and
technology, medicine and social sciences and humanities. Headquartered in
Oxford, England, Blackwell also maintains publishing locations in the
United States, Asia, Australia, Denmark and Germany. Approximately 50% of
revenue is from the United States. The combination of Blackwell's
publications with the Company's existing scientific, technical and medical
business results in an extensive portfolio of approximately 1,250 journals.
The purchase price of $1.1 billion ((pound)572 million) was financed with a
combination of debt and cash. Blackwell's results of operations subsequent
to February 2, 2007 will be included in the Company's consolidated results.
The tangible assets and liabilities acquired consisted primarily of
accounts receivable, deferred subscription revenue, accounts and royalties
payable and approximately (pound)118 million in cash and cash equivalents.
In addition, acquired assets included Blackwell's intellectual property
consisting primarily of acquired journal and book publication rights. The
Company has not completed a purchase accounting valuation of Blackwell nor
completed the conversion of Blackwell financial statements to U.S. GAAP.
Accordingly it is not practicable to disclose a condensed balance sheet for
Blackwell including amounts assigned to intangible asset categories or the
assignment of amortization lives, where applicable.
In conjunction with the acquisition of Blackwell on February 2, 2007, the
Company and certain subsidiaries entered into a new Credit Agreement with
Bank of America and Royal Bank of Scotland as Co-Lead Arrangers in the
aggregate amount of $1.35 billion. The financing is comprised of a six-year
Term Loan (Term Loan) in the amount of $675 million and a $675 million
five-year revolving credit facility (Revolver) which can be drawn in
multiple currencies. The agreement provides financing to complete the
acquisition, refinance the existing revolving debt of the Company, as well
as meet future seasonal operating cash requirements. The Company has the
option of borrowing at the following floating interest rates: (i) at the
rate as announced from time to time by Bank of America as its prime rate or
(ii) at a rate based on the London Bank Interbank Offered Rate (LIBOR) plus
an applicable margin ranging from .37% to 1.05% for the Revolver and .45%
to 1.25% for the Term Loan depending on the Company's consolidated leverage
ratio, as defined. In addition, the Company will pay a facility fee ranging
from .08% to .20% on the Revolver depending on the Company's consolidated
leverage ratio, as defined.
The Company has the option to request an increase of up to $250 million in
the size of the revolving credit facility in minimum amounts of $50
million. The credit agreement contains certain restrictive covenants
similar to those in the Company's prior credit agreements related to an
interest coverage ratio, funded debt levels and restricted payments,
including a limit on dividends paid and share repurchases. The Term Loan
matures on February 2, 2013 and the Revolver will terminate on February 2,
2012.
Immediately following the acquisition, the Company had approximately $1.2
billion of debt outstanding with approximately $0.1 million of unused
borrowing capacity.
Simultaneous with the execution of the new Credit Agreement, the Company
terminated all of its previous credit agreements and paid in full amounts
outstanding under those agreements by utilizing funds from the new Credit
facility. In connection with the early termination of the previous credit
agreements, the Company will write off approximately $0.5 million of
unamortized debt origination fees in the fourth quarter of fiscal year
2007.
On February 16, 2007, the Company entered into an interest rate swap
agreement, designated as a cash flow hedge as defined under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The hedge
will fix a portion of the variable interest due on the new Term Loan. Under
the terms of the interest rate swap, the Company will pay a fixed rate of
5.076% and will receive a variable rate of interest based on three month
LIBOR (as defined) from the counterparty which will be reset every three
months for a four-year period ending February 8, 2011. The notional amount
of the rate swap is initially $660 million which will decline through
February 8, 2011, based on the expected amortization of the Term Loan. It
is management's intention that the notional amount of the interest rate
swap be less than the Term Loan outstanding during the life of the
derivative.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THIRD QUARTER ENDED JANUARY 31, 2007
Revenue for the third quarter of fiscal year 2007 of $296.8 million
increased 7% from $278.2 million in the prior year's third quarter, or 5%
excluding the favorable impact of foreign exchange. All of the Company's
businesses contributed to the year-on-year growth. Global STM's results
reflected higher journal subscriptions and increases in non-subscription
journal revenue and STM reference books. The U.S. P/T business contributed
to the growth with solid performances in technology publishing, the sale of
electronic rights and lower sales returns. U.S. Higher Education revenue
reflected growth from new editions of accounting and business titles.
Gross profit margin for the third quarter of fiscal year 2007 was 67.4%
compared to 67.2% in the prior year's quarter, mainly due to favorable
product mix in US P/T and lower delivery costs associated with STM
products.
Operating and administrative expenses for the third quarter increased 13%
to $145.4 million, or 10% excluding the effect of foreign currency. Higher
selling, marketing and editorial/production costs to support business
growth and acquisitions, a $4.7 million bad debt provision related to the
bankruptcy of Advanced Marketing Services, a distributor to warehouse
clubs, and higher performance-based compensation were partially offset by
the timing of a relocation incentive settlement with the State of New
Jersey of approximately $2.9 million.
Stock option expense of $3.0 million associated with the adoption of
Statement of Financial Accounting Standard 123R, "Share-Based Payments"
(SFAS 123R) also adversely effected operating expenses.
Operating income declined 6% to $50.7 million in the third quarter of
fiscal year 2007. The third quarter operating margin declined approximately
230 basis points to 17.1%. Higher operating and administrative expenses
including the adoption of SFAS 123R, and the AMS bad debt provision were
partially offset by the improvement in gross margin. Incremental expenses
associated with the adoption of SFAS 123R contributed approximately 100
basis points to the decline. Net interest expense and other decreased $0.8
million as lower outstanding debt was partially offset by an increase in
the average borrowing rate.
The effective tax rate for the third quarter of fiscal year 2007 was 30.4%.
In the third quarter of fiscal year 2007, the Company recorded a $1.3
million tax benefit associated with the resolution and settlement of
certain tax matters. In the third quarter of fiscal year 2006, the Company
recorded a $6.8 million tax benefit associated with the resolution and
settlement of certain tax matters with authorities abroad. Excluding these
tax benefits, the effective tax rates for the third quarters ending January
31, 2007 and 2006 were 33.1% and 32.6%, respectively. None of the tax
benefits had a cash impact to the Company.
Reported earnings per diluted share and net income for the third quarter of
fiscal year 2007 were $0.57 and $33.4 million, respectively. Earnings per
diluted share and net income for the third quarter of fiscal year 2007
adjusted to exclude the $1.3 million tax benefit described above were $0.55
and $32.1 million, respectively. See Non-GAAP Financial Measures described
below. The third quarter 2007 results included an incremental $1.9 million
after-tax charge ($.03 per diluted share) related to the adoption of SFAS
123R.
Reported earnings per diluted share and net income for the third quarter of
fiscal year 2006 were $0.69 and $40.9 million, respectively. Earnings per
diluted share and net income for the third quarter of fiscal year 2006
adjusted to exclude the $6.8 million tax benefit described above were $0.57
and $34.2 million, respectively. See Non-GAAP Financial Measures described
below.
Non-GAAP Financial Measures:
The Company's management evaluates operating performance excluding unusual
and/or nonrecurring events. The Company believes excluding such events
provides a more effective and comparable measure of performance. Since
adjusted net income and adjusted earnings per share are not measures
calculated in accordance with GAAP, they should not be considered as a
substitute for other GAAP measures, including net income and earnings per
share as indicators of operating performance. Adjusted net income and
adjusted earnings per diluted share excluding the tax benefits discussed
above are as follows:
For the Three Months
Reconciliation of non-GAAP financial disclosure Ending January 31,
----------------------------------------------- ------------------------------------
Net Income (in millions): 2007 2006
---------------- ----------------
As reported $33,411 $40,949
Tax benefit on resolution of tax matters (1,275) (6,776)
---------------- ----------------
Adjusted $32,136 $34,173
================ ================
2007 2006
---------------- ----------------
Earnings per Diluted Share:
As reported $0.57 $0.69
Tax benefit on resolution of tax matters (0.02) (0.11)
Adjusted $0.55 $0.57
================ ================
SEGMENT RESULTS
In the first quarter of fiscal year 2007, the Company finalized a review of
certain product prices used to settle inter-segment sales. As a result of
the study, certain intersegment product prices were modified. While the
modification had no effect on consolidated financial results, it did impact
individual segment operating results. Below is a supplemental segment
report adjusting prior year results to reflect the current modified product
prices:
Adjusted Segment Results For the Three Months Ending January 31,
(amounts in millions) 2007 2006
-------------- -------------------------------------------
Inter-
As As Segment % Change
Reported Reported Impact Adjusted Adjusted As Reported
-------------- --------------- ------------ ------------ ------------- ---------------
Revenue:
Professional/Trade $103.4 $101.2 $(2.2) $99.0 4% 2%
Scientific, Technical and Medical 54.3 49.9 (0.3) 49.6 9% 9%
Higher Education 48.0 46.4 (0.9) 45.5 6% 4%
European Segment 75.3 72.9 (1.2) 71.7 5% 3%
Asia, Australia & Canada 43.3 39.7 - 39.7 9% 9%
Intersegment Sales Eliminations (27.5) (31.9) 4.6 (27.3) (1%) 14%
------------------------------------------------------------------------------------------
Total Revenue $296.8 $278.2 $ - $278.2 7% 7%
==========================================================================================
Direct Contribution to Profit:
Professional/Trade $27.8 $32.6 $(1.5) $31.1 (11%) (15%)
Scientific, Technical and Medical 23.6 20.8 - 20.8 13% 13%
Higher Education 15.5 14.9 (0.8) 14.1 9% 3%
European Segment 23.3 22.5 1.3 23.8 (2%) 3%
Asia, Australia & Canada 13.1 12.6 1.0 13.6 (3%) 5%
------------------------------------------------------------------------------------------
Total Direct Contribution to Profit $103.3 $103.4 $ - $103.4 0% 0%
Shared Services and Admin. Costs (52.6) (49.3) - (49.3) 7% 7%
------------------------------------------------------------------------------------------
Operating Income $50.7 $54.1 $ - $54.1 (6%) (6%)
==========================================================================================
Professional/Trade (P/T)
------------------------
U.S. P/T revenue for the third quarter of fiscal year 2007 advanced 2% over
the prior year to $103.4 million. Adjusting for the effect of the change in
inter-segment product prices, revenue for the third quarter increased 4%.
The increase was driven primarily by backlist sales through all major
accounts and sales channels, as well as a number of new publication
releases at the end of the quarter. The strong performance of technology
publishing, the sale of electronic rights and lower sales returns
contributed positively to these results.
Direct contribution to profit for the third quarter decreased $4.8 million
to $27.8 million. On an adjusted basis for inter-segment prices, direct
contribution margin for the quarter decreased approximately 460 basis
points to 26.8%, principally due to a bad debt provision related to the
bankruptcy of Advanced Marketing Services of $4.7 million, or 475 basis
points.
Third quarter highlights include the successful publication of The Only
Three Questions That Count: Investing by Knowing What Others Don't by Ken
Fisher, a long-time Forbes columnist, and founder, Chairman, and CEO of
Fisher Investments, an independent global money management firm with over
$30 billion in assets. The publication of a number of titles was timed to
coincide with the release of Microsoft's new VISTA software, resulting in
robust sales.
During the quarter, P/T published Second Life: The Official Guide by
Michael Rymaszewski, et al. Wiley is the exclusive publisher of Linden
Labs, the owners of the popular virtual world known as Second Life. Our
first book derived from a popular blog, LifeHacker by Gina Trapani, rose to
the top of Amazon's bestseller list for computers, after it was featured in
The Wall Street Journal and Newsweek. Two new releases on health and
nutrition, The Cure by Tim Brantley and Reverse Diet by Heidi Skolnick,
have also generated considerable interest among customers and the media.
Barbara Fairchild's The Bon Appetit Cookbook, Weight Watchers New Complete
Cookbook, the 8th edition of The Culinary Institute of America's
Professional Chef and Marcus Samuelson's Soul of a New Cuisine all
delivered excellent results.
P/T's online business had an active quarter with the launch of new
products, such as TheraScribe 5.0, TheraScribe Essentials, Wiley's highly
regarded treatment planning and clinical record management system; Wiley
CPA Examination Review for Windows, 12.0; and an annual update to LPI
Online, Wiley's leading online management assessment tool. New interactive
mapping functionality for points of interest in U.S. cities was added to
Frommers.com, allowing users to set up their own maps and populate them
with Frommer's recommended hotels, restaurants and attractions. P/T's
branded websites continue to generate new advertising and licensing revenue
through co-promotions with major corporations and the launch of Podcasts to
promote books.
Several P/T books continue to enjoy bestseller status on the Business Week,
The Wall Street Journal, The New York Times, and USA Today lists, including
The Five Dysfunctions of a Team, The Little Book That Beats the Market, The
Little Book of Value Investing, J.K. Lasser's Income Tax 2007, SuDoku For
Dummies, The Sales Bible and The Leadership Challenge.
Several P/T titles were honored with awards during the third quarter. The
Chicago Tribune named Soul of a New Cuisine by Marcus Samuelson its "Book
of the Year." Peter Meltzer's Keys to the Cellar won the "2006 Georges
Duboeuf Award for Wine Book of the Year. "The prestigious North American
Travel Journalists Association named Pauline Frommer's New York City the
"Best Travel Guide of 2006." Landscape Architectural Graphic Standards won
a Merit Award at the 2007 New York Book Show in the category of "Scholarly
& Reference, One-Color Book."
Scientific, Technical, and Medical (STM)
----------------------------------------
U.S. STM revenue for the third quarter increased 9% to $54.3 million. The
improvement was driven by all of STM's major programs, including journal
subscription revenue, non-subscription revenue, such as advertising and the
sale of journal reprints, and reference books. New businesses and
publications acquired during the past year, such as InfoPOEMs, Dialysis &
Transplantation, The Hospitalist, the Journal of Orthopaedic Research,
Clinical Cardiology, and the Carpe Diem publications, contributed
approximately $1.3 million of the revenue growth in the quarter.
Direct contribution to profit for the third quarter was $23.6 million, up
13% from the same period in the previous year. The third quarter direct
contribution margin improved to 43.5% from 41.7% in the prior year. The
improvement was mainly due to lower costs associated with the delivery of
electronic products, lower vendor costs and timing.
Customers continue to take advantage of Wiley InterScience's content. The
number of visits during the third quarter increased by 20% over the same
period of last year. There was an approximate 60% increase in the number of
online book chapters downloaded, the result of a broader selection of
online books.
Wiley signed an agreement during the quarter with the New York Public
Library to provide public online access to over 300 peer-reviewed journals
that until now have been available principally through academic or
corporate collections. The Library patrons will be able to electronically
access the full-text of journal articles online via Wiley InterScience.
Journals featured in this program include Advanced Engineering Materials,
American Journal of Physical Anthropology, Cancer, Flavour and Fragrance,
Journal of Field Robotics, and International Journal of Imaging Systems &
Technology. The objectives of this pilot project are to accumulate usage
data on high-level journal content in a public library setting. This is
Wiley's first license for journal content with a major public library in
North America.
During the quarter, Wiley and The Society of Hospital Medicine extended
their agreement to launch POEMs for Hospitalists and began to syndicate
evidence-based medicine content in print and online for the growing
hospitalist market. The Journal of Hospital Medicine, which Wiley publishes
for the Society, was accepted by the National Library of Medicine for
inclusion in MEDLINE. In addition, the Company and The American Society for
Lasers in Surgery and Medicine renewed a multi-year agreement to publish
Lasers in Surgery and Medicine. The first issue of the journal Biochemistry
and Molecular Biology Education published during the third quarter. This
journal is published by Wiley on behalf of the International Union of
Biochemistry and Molecular Biology Education and is edited by Donald Voet
and Judith G. Voet, authors of the Wiley Higher Education textbook,
Biochemistry.
Higher Education
----------------
U.S. Higher Education revenue for the third quarter of $48.0 million
increased 4% over the prior year. Adjusting for the effect of the change in
inter-segment product prices, revenue for the third quarter improved 6%.
Growth in accounting and business, which benefited from WileyPLUS, and
sales of Microsoft Official Academic Course (MOAC) titles, were partially
offset by sluggish sales in mathematics, sciences and engineering.
Direct contribution to profit for the third quarter increased 3% to $15.5
million, or 9% after adjusting for the effect of the change in
inter-segment product prices. Also on an adjusted basis, direct
contribution margin improved to 32.2% from 31.1% in the prior year. The
improvement was due to renegotiation of vendor contracts, the transfer of
some composition to lower-cost off-shore facilities and changes in paper
grade, partially offset by additional costs associated with WileyPLUS
development.
The accounting and social sciences programs continued their strong results,
particularly new editions of Kimmel/Financial Accounting 4e;
Kieso/Intermediate Accounting 12e; deBlij/Regions 12e and Human Geography
8e; and Huffman/Psychology 8e. Although engineering sales were generally
soft, a number of mechanical engineering titles performed quite well,
including Callister/Materials 7e; Incropera/Heat Transfer 6e; and
Meriam/Statistics Dynamics 6e.
Europe
------
Wiley Europe's third quarter revenue of $75.3 million increased 3% over
prior year, but declined 3% excluding favorable foreign exchange. Adjusting
for the effect of the change in inter-segment product prices, as well as
foreign exchange, Wiley Europe's revenue for the third quarter decreased
approximately 1%. The anticipated reduction in SuDoku for Dummies sales and
lower STM reference books and journal backfile sales were partially offset
by higher journal revenue.
Direct contribution to profit for the third quarter improved over prior
year by 3% to 23.3 million. Adjusting for the effect of the change in
inter-segment product prices, as well as foreign exchange, direct
contribution to profit for the third quarter declined 6%. The decline in
the third quarter was principally driven by lower revenue and higher
employment costs. Also on an adjusted basis, the direct contribution margin
decreased to 31.7% from 33.2% in the prior year.
In November, Wiley Europe completed the acquisition of Health Economics
Evaluation Database (HEED). HEED is a UK-based online provider of health
economics information and evaluation developed as a joint initiative
between the Office of Health Economics and the International Federation.
The acquisition complements Wiley's expanding health economics and database
portfolio, which includes the world's leading health economics journal.
During the quarter Wiley Europe also acquired the journal European
Transactions on Telecommunications, which it has been publishing for years.
Wiley and the British Journal of Surgery Society renewed their contract,
while our company in Germany launched a number of new journals in the life
Sciences and physics. The first webinar on SpectroscopyNOW has been
scheduled for March, with Perkin Elmer as sponsor. This represents a new
revenue stream for the analytic chemistry portals and for Microscopy &
Analysis.
Asia, Australia, and Canada
---------------------------
Wiley's revenue in Asia, Australia and Canada advanced 9% to $43.3 million,
or 6% excluding favorable foreign exchange. Growth was driven by P/T in
Asia and Canada and the sale of reprint licenses in Australia.
Direct contribution to profit increased 5% versus the prior year to $13.1
million. Excluding the effect of foreign exchange and the change in
inter-segment product prices, direct contribution to profit decreased 6%
for the third quarter. Also on an adjusted basis, the direct contribution
margin decreased to 30.1% from 34.1% in the prior year, principally due to
product mix and higher sales, marketing and composition costs associated
with new business development in Asia and Canada.
Wiley Asia published several key P/T titles during the quarter including
the English language edition of the official Chinese government annual
report, China's Banking and Financial Markets: The Internal Research Report
of the Chinese Government by Robert Kuhn and Li Yang; Islamic Finance: The
Regulatory Challenge by two of the world's leading practitioners in this
area - Professors Rifaat and Archer; and Mutual Funds in the Mark Mobius
Master Class series. Warren Buffett: An Illustrated Biography of the
World's Most Successful Investor was selected by Warren Buffett as one of
only two books to be presented at this year's Berkshire Hathaway
shareholders' meeting.
WileyPLUS continued to gain momentum, particularly in Malaysia, where the
government is funding new universities. Microsoft Official Academic Course
books are eliciting much interest, especially in Malaysia and India.
WileyPLUS related titles were successfully rolled out during the third
quarter. A new partnership with the Association of Professional Engineers,
Scientists and Managers (APESMA), the largest national non-profit
organization representing professional employees in Australia, was formed.
APESMA's agreement with Wiley Australia will provide its 40,000+
professional and student members a link to johnwiley.com.au to purchase
books.
Wiley Canada exhibited strength in its indigenous P/T business and Higher
Education. Wiley Canada's P/T growth was driven by demand for local real
estate titles and frontlist releases, as well as strong demand for For
Dummies titles. An indigenous title, Beyond the Crease by hockey player
Martin Brodeur, has been selling well globally. Sales of WileyPLUS have
exceeded expectations in Canada.
Shared Services and Administrative Costs
----------------------------------------
Shared services and administrative costs for the third quarter increased 7%
to $52.6 million, or 4% excluding the unfavorable impact of foreign
exchange. Higher compensation costs associated with business growth and
performance, and the shared service and administrative portion of
additional share-based compensation costs of $1.6 million associated with
the adoption of SFAS 123R, were partially offset by the timing of a
relocation incentive settlement with the State of New Jersey of
approximately $2.9 million, which was received in the prior year's second
quarter.
NINE MONTHS ENDED JANUARY 31, 2007
Revenue for the first nine months of fiscal year 2007 of $844.7 million
increased 9% from $777.6 million in the prior year, or 7% excluding the
favorable impact of foreign exchange. Revenue growth over the prior year
reflected continued momentum in all of the Company's global businesses.
Global STM results reflect growth in journal subscriptions, controlled
circulation advertising and increased sales of reference books. The U.S.
P/T business contributed to the year-on-year growth with solid performances
in consumer cooking and business. The U.S. Higher Education business also
contributed to the growth due to new editions in accounting and social
sciences.
Gross profit margin for the nine-month period was 67.4% compared to 67.3%
in the prior year. Operating and administrative expenses increased 12% over
the prior year, or 10% excluding the adverse impact of foreign exchange.
The increase primarily reflects increased selling, marketing and
editorial/production costs to support business growth and acquisitions,
additional stock option costs of $8.3 million associated with the adoption
of SFAS 123R, and a $4.7 million bad debt provision related to the
bankruptcy of Advanced Marketing Services and accrued performance
compensation.
Operating income declined 2% to $127.7 million in the first nine of fiscal
year 2007. The operating margin for the first nine months of fiscal year
2007 was 15.1% as compared to 16.7% in the prior year period. Incremental
expenses associated with the adoption of SFAS 123R contributed
approximately 100 basis points to the decline. Higher operating and
administrative costs, including the adoption of SFAS 123R and the AMS bad
debt provision, were partially offset by improved product mix. Net interest
expense and other increased $0.1 million to $7.3 million as higher
borrowing rates were partially offset by lower outstanding debt during the
nine-month period.
The effective tax rate for the first nine months of fiscal year 2007 was
29.1% compared to 21.8% in the prior year period. The first nine months of
fiscal year 2007 and 2006 include tax benefits of $5.5 million and $6.8
million, respectively, due to the resolution and settlements of certain tax
matters. The nine-month period ending January 31, 2006 also includes a $7.5
million tax benefit associated with the reversal of a tax accrual recorded
on the repatriation of dividends from European subsidiaries in the fourth
quarter of fiscal year 2005. On May 10, 2005, the U.S. Internal Revenue
Service issued Notice 2005-38. The notice provided for a tax benefit that
fully offset the tax accrued by the Company on foreign dividends in the
fourth quarter of fiscal year 2005. None of the tax benefits had a cash
impact on the Company. The effective tax rates excluding these benefits for
the first nine months of fiscal years 2007 and 2006 were 33.7% and 33.4%,
respectively.
Reported earnings per diluted share and net income for the first nine
months of fiscal year 2007 were $1.47 and $85.2 million, respectively.
Excluding the tax benefits, earnings per diluted share for the first nine
months of fiscal year 2007 and 2006 were $1.37 and $1.36, respectively. See
Non-GAAP Financial Measures described below. The results for the first nine
months of fiscal year 2007 included an incremental $5.2 million after-tax
charge, or $0.09 per diluted share, related to the adoption of SFAS 123R.
Non-GAAP Financial Measures: The Company's management evaluates operating
performance excluding unusual and/or nonrecurring events. The Company
believes excluding such events provides a more effective and comparable
measure of performance. Since adjusted net income and adjusted earnings per
share are not measures calculated in accordance with GAAP, they should not
be considered as a substitute for other GAAP measures, including net income
and earnings per share as indicators of operating performance. Adjusted net
income and adjusted earnings per diluted share, for the nine months ended
January 31, 2007 and 2006, excluding the tax benefits discussed above are
as follows:
Reconciliation of non-GAAP financial disclosure
----------------------------------------------- For the Nine Months
Ending January 31,
---------------------------------
Net Income (in millions) 2007 2006
--------------- --------------
As reported $85,248 $95,810
Tax benefit on resolution of tax matters (5,468) (6,776)
Tax benefit on dividends repatriated - (7,476)
--------------- --------------
Adjusted $79,780 $81,558
=============== ==============
Earnings per Diluted Share 2007 2006
--------------- --------------
As reported $1.47 $1.59
Tax benefit on resolution of tax matters (0.09) (0.11)
Tax benefit on dividends repatriated - (0.12)
Adjusted $1.37 $1.36
=============== ==============
SEGMENT RESULTS
As reported in the first quarter of fiscal year 2007, the Company finalized
a review of certain product prices used to settle inter-segment sales. As a
result of the study, certain intersegment product prices were modified.
While the modification had no effect on consolidated financial results, it
did impact individual segment operating results. Below is a supplemental
segment report adjusting prior year results to reflect the current modified
product prices:
Adjusted Segment Results For the Nine Months Ending January 31,
(amounts in millions) 2007 2006
-------------- -------------------------------------------
Inter-
As As Segment % Change
Reported Reported Impact Adjusted Adjusted As Reported
-------------- --------------- ------------ ------------ ------------- ---------------
Revenue:
Professional/Trade $293.3 $274.6 $(5.5) $269.1 9% 7%
Scientific, Technical and Medical 160.8 148.0 (0.8) 147.2 9% 9%
Higher Education 137.8 133.7 (2.9) 130.8 5% 3%
European Segment 228.0 212.8 (2.8) 210.0 9% 7%
Asia, Australia & Canada 103.6 94.1 (0.1) 94.0 10% 10%
Intersegment Sales Eliminations (78.8) (85.6) 12.1 (73.5) (7%) 8%
------------------------------------------------------------------------------------------
Total Revenue $844.7 $777.6 $ - $777.6 9% 9%
==========================================================================================
Direct Contribution to Profit:
Professional/Trade $76.1 $77.0 $(4.2) $72.8 5% (1%)
Scientific, Technical and Medical 71.6 68.8 - 68.8 4% 4%
Higher Education 44.5 43.7 (2.6) 41.1 8% 2%
European Segment 75.6 66.4 4.5 70.9 7% 14%
Asia, Australia & Canada 22.6 22.5 2.3 24.8 (9%) 0%
------------------------------------------------------------------------------------------
Total Direct Contribution to Profit $290.4 $278.4 $ - $278.4 4% 4%
Shared Services and Admin. Costs (162.7) (148.7) - (148.7) 9% 9%
------------------------------------------------------------------------------------------
Operating Income $127.7 $129.7 $ - $129.7 (2%) (2%)
==========================================================================================
Professional/Trade (P/T)
------------------------
U.S. P/T revenue for the first nine months of fiscal year 2007 advanced 7%
to $293.3 million. P/T's consumer cooking, travel and business titles, as
well as the sale of electronic rights and online advertising, contributed
to the growth. As expected, lower sales of SuDoku for Dummies offset the
improvement.
Direct contribution to profit for the nine-month period was $76.1 million
compared to $77.0 million in the prior year period. Adjusting for the
effect of the change in inter-segment product prices noted above, revenue
improved 9% and direct contribution to profit improved 5%. Also on an
adjusted basis, direct contribution margin declined by approximately 120
basis points to 25.9%, principally due to a $4.7 million bad debt provision
related to the bankruptcy of Advanced Marketing Services and stock option
costs associated SFAS 123R of approximately $1.1 million.
Scientific, Technical, and Medical (STM)
----------------------------------------
U.S. STM revenue for the first nine months of fiscal year 2007 increased 9%
to $160.8 million. The improvement was driven by all of STM's major
programs including subscription and non-subscription journal revenue, such
as advertising and the sale of journal reprints, and STM reference book
sales. New businesses and publications acquired during the past year
contributed approximately $3.1 million to year-to-date revenue growth.
Direct contribution to profit improved 4% to $71.7 million. Direct
contribution margin for the first nine months of fiscal year 2007 declined
200 basis points to 44.6%, reflecting the initial costs associated with new
businesses and acquisitions, royalty costs on society-owned journals and
stock option costs associated with the adoption of SFAS 123R of $0.9
million.
Higher Education
----------------
Revenue of Wiley's U.S. Higher Education business increased 3% during the
first nine months of fiscal year 2007 to $137.8 million. Adjusting for the
effect of the change in inter-segment prices, revenue grew 5% for the first
nine months of fiscal year 2007, driven by new editions of accounting and
social sciences titles, sales of Microsoft Academic Course titles and
reprints, partially offset by lower sales in math, science and engineering.
Direct contribution to profit improved 2% to $44.5 million. On an adjusted
basis, direct contribution margin for the first nine months of fiscal year
2007 improved by approximately 90 basis points due to cost reduction
initiatives in composition, paper purchasing and printing, partially offset
by higher costs associated with WileyPLUS.
Year-to-date WileyPLUS sales were up 90% over the previous year period.
Usage continued on an upward trend around the world. WileyPLUS sales are
deferred and the revenue recognized over the course of the semester. As of
January 31st, 2007, approximately $1.8 million of revenue from current
WileyPLUS sales was deferred until the final quarter of fiscal year 2007
compared to $1.1 million as of January 31, 2006.
Europe
------
Wiley Europe's revenue for the first nine months of fiscal year 2007 was up
7% over prior year to $228.0 million, or 4% excluding the favorable impact
of foreign exchange. Adjusting for the effect of the change in
inter-segment product prices and foreign exchange, Wiley Europe's revenue
for the first nine months of fiscal year 2007 improved 5%. Growth in
journal revenue and P/T sales were partially offset by lower sales of
SuDoku for Dummies, as expected.
Direct contribution to profit improved 14% to $75.6 million. Adjusting for
the effects of the change in inter-segment prices and foreign currency, the
improvement in direct contribution to profit improvement was consistent
with top-line growth at 5%.
Asia, Australia, and Canada
---------------------------
Wiley's revenue in Asia, Australia, and Canada was up 10% to $103.6 million
during the first nine months of fiscal year 2007, or 7% excluding foreign
exchange. P/T and Higher Education growth in Asia and Australia, higher
sales of P/T titles in Canada and the sale of reprint licenses in Australia
drove the improvement.
Direct contribution to profit increased $0.1 million to $22.6 million, or
declined $1.0 million excluding the impact of foreign exchange. Adjusting
for the effects of the change in inter-segment prices and foreign currency,
direct contribution profit for the nine-month period declined by $3.3
million mainly due to unfavorable product mix and higher sales, marketing
and composition costs associated with new business development.
Shared Services and Administrative Costs
----------------------------------------
Shared services and administrative costs for the first nine months of
fiscal year 2007 increased 9% to $162.7 million, or 8% excluding foreign
exchange. Shared Service and Administrative stock option costs associated
with the adoption of SFAS 123R were $4.5 million. Excluding stock option
costs and the adverse effect of foreign exchange, shared services and
administrative costs increased 5% principally due to higher employment,
facility and distribution costs attributable to business growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents balance was $25.0 million at the
end of the third quarter of fiscal 2007, compared with $75.3 million a year
earlier. The decline was primarily related to the repayment of long-term
debt. Cash provided by operating activities in fiscal year 2007 was $154.9
million compared to cash provided of $167.4 million in the prior year. The
timing of vendor and author payments, increased incentive compensation
payments related to fiscal year 2006 performance and higher income tax
payments were partially offset by higher subscription journal receipts and
improved trade collections.
Cash used for investing activities for the first nine months of 2007 was
$93.8 million compared to $85.3 million in the prior year. The Company
invested $17.3 million in acquisitions of publishing assets and rights
compared to $29.1 million in the prior year. The current year acquisitions
primarily consisted of a provider of travel-related online content,
technology and services and other STM journal related acquisitions.
The Company increased spending for investments in product development and
property, equipment and technology by approximately $10.2 million. Spending
in the nine-month period includes approximately $5.7 million associated
with additional publishing facilities in the United Kingdom. The Company
sold $10 million of marketable securities during the first quarter of 2006
consisting of shares of variable rate securities issued by closed-end
funds. Projected product development and property, equipment and technology
capital spending for fiscal year 2007 is forecast to be approximately $75
million and $35 million, respectively.
Cash used in financing activities was $97.5 million in the first nine
months of fiscal 2007, as compared to $95.9 million in the prior period.
Higher payments on outstanding debt were mostly offset by a reduction in
the repurchase of treasury shares under the Company's stock repurchase
program. For the first nine months of fiscal year 2007 the Company
repurchased 205,700 shares at an average price of $35.38. No treasury
shares were repurchased in the third quarter of fiscal year 2007.
The Company increased its quarterly dividend to shareholders by 11% to
$0.10 per share versus $0.09 per share in the prior year.
As of January 31, 2007 and immediately following the financing of the
Blackwell acquisition, the Company believes its cash balances together with
existing and committed credit facilities are sufficient to meet its
obligations. At January 31, 2007 the Company had $82.1 million of variable
rate loans outstanding and approximately $316.4 million of unused borrowing
capacity available under its revolving credit facilities and other
short-term lines of credit.
The Company announced on February 2, 2007 that it finalized the acquisition
of the outstanding shares of Blackwell Publishing (Holdings) Ltd.
("Blackwell"), one of the world's foremost academic and professional
publishers. The purchase price of $ 1.1 billion ((pound)572 million) was
financed with a combination of debt and cash. As part of the acquisition,
the Company acquired (pound)118 million in cash and cash equivalents.
In conjunction with the acquisition of Blackwell on February 2, 2007, the
Company and certain subsidiaries entered into a new Credit Agreement with
Bank of America and Royal Bank of Scotland as Co-Lead Arrangers in the
aggregate amount of $1.35 billion. The financing is comprised of a six-year
Term Loan (Term Loan) in the amount of $675 million and a $675 million
five-year revolving credit facility (Revolver) which can be drawn in
multiple currencies. The agreement provides financing to complete the
acquisition, refinance the existing revolving debt of the Company, as well
as meet future seasonal operating cash requirements. The Company has the
option of borrowing at the following floating interest rates: (i) at the
rate as announced from time to time by Bank of America as its prime rate or
(ii) at a rate based on the London Bank Interbank Offered Rate (LIBOR) plus
an applicable margin ranging from .37% to 1.05% for the Revolver and .45%
to 1.25% for the Term Loan depending on the Company's consolidated leverage
ratio, as defined. In addition, the Company will pay a facility fee ranging
from .08% to .20% on the Revolver depending on the Company's consolidated
leverage ratio, as defined. The Company has the option to request an
increase of up to $250 million in the size of the facility in minimum
amounts of $50 million. The credit agreement contains certain restrictive
covenants similar to those in the Company's prior credit agreements related
to an interest coverage ratio, funded debt levels and restricted payments,
including a limit on dividends paid and share repurchases. The Term Loan
matures on February 2, 2013 and the Revolver will terminate on February 2,
2012.
Immediately following the acquisition, the Company had approximately $1.2
billion of debt outstanding with approximately $0.1 million of unused
borrowing capacity.
Simultaneous with the execution of the new Credit Agreement, the Company
terminated all of it's previous credit agreements and paid in full amounts
outstanding under those agreements by utilizing funds from the new Credit
Agreement. In connection with the early termination of the previous credit
agreements, the Company will write off approximately $0.5 million of
unamortized origination fees in the fourth quarter of fiscal year 2007.
On February 16, 2007, the Company entered into an interest rate swap
agreement, designated by the Company as a cash flow hedge as defined under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The hedge will fix a portion of the variable interest due on
the new Term Loan. Under the terms of the interest rate swap, the Company
will pay a fixed rate of 5.076% and will receive a variable rate of
interest based on three month LIBOR (as defined) from the counterparty
which will be reset every three months for a four-year period ending
February 8, 2011. The notional amount of the rate swap is initially $660
million which will decline through February 8, 2011, based on the expected
amortization of the Term Loan. It is management's intention that the
notional amount of the interest rate swap be less than the Term Loan
outstanding during the life of the derivative.
"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) 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 investments for trading or speculative purposes.
Interest Rates
The Company had $82.1 million of variable rate loans outstanding at January
31, 2007, 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, 2007 was approximately 5.77%. A
hypothetical 1% change in interest rates for the variable rate debt would
affect annual net income and cash flow by approximately $0.5 million. See
Liquidity and Capital Resources section for discussion of interest rate
swap related to new debt facility. Immediately following the financing of
the Blackwell acquisition, a hypothetical 1% change in interest rates for
the variable rate debt, including the impact of the interest rate swap,
would affect annual net income and cash flow by approximately $4.6 million.
Sales Return Reserves
Sales return reserves, net of estimated inventory and royalty costs, are
reported as a reduction of accounts receivable in the Condensed
Consolidated Statement of Financial Position and amounted to $60.3 million
and $55.8 million at January 31, 2007 and April 30, 2006, respectively. The
Company provides for sales returns based upon historical experience. A
change in the pattern of trends in returns could affect the estimated
allowance. On an annual basis, a one percent change in the estimated sales
return rate could affect net income by approximately $3.6 million.
Foreign Exchange Rates
The Company is exposed to foreign exchange movements primarily in sterling,
euros, Canadian and Australian dollars, and certain Asian currencies. Under
certain circumstances, the Company enters into derivative financial
instruments in the form of forward contracts as a hedge against foreign
currency fluctuation of specific transactions, including inter-company
purchases. No material derivative financial instruments were in effect
during these reporting periods.
Customer Credit Risk
The Company's 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 7% of total
consolidated revenue, the top 10 book customers account for approximately
25% of total consolidated revenue and approximately 46% of total gross
trade accounts receivable at April 30, 2006. During the third quarter for
fiscal year 2007 a professional trade customer Advanced Marketing Services
filed for bankruptcy under Chapter 11 under U.S. federal law. The Company
provided for approximately $4.7 million in the third quarter for the
potential loss.
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 remitted to the journal publisher, including the Company, generally
prior to the commencement of the subscriptions. Although at fiscal year-end
the Company had minimal credit risk exposure to these agents, future
calendar-year subscription receipts from these agents are highly dependent
on their financial condition and liquidity. Subscription agents' account
for approximately 17% of total consolidated revenue and no one agent
accounts for more than 7% of total consolidated revenue for the fiscal year
ended April 30, 2006. Insurance for these accounts is not commercially
feasible and/or available.
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 a date within 90 days prior to the date of filing 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 or in
other factors that could materially affect such internal controls
subsequent to this evaluation.
In addition, there were no changes in the Company's internal controls over
financial reporting during the third fiscal quarter of 2007 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 ending on January 31, 2007 the Company did not
repurchase shares of Common Stock under its stock repurchase program.
Remaining shares to be repurchased under the approved plan were 1,905,030
as of January 31, 2007. The program was approved by the Company's Board of
Directors and publicly announced in June 2005.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 - 18 U.S.C. Section 1350 Certificate by the President and Chief
Executive Officer
99.2 - 18 U.S.C. Section 1350 Certificate by the Chief Financial and
Operations Officer
(b) The following reports on Form 8-K were furnished to the Securities and
Exchange Commission since the filing of the Company's 10-Q on December
11, 2006.
i. Earnings release on the third quarter fiscal 2007 results issued
on Form 8-K dated March 7, 2007 which include the condensed
financial statements of the Company.
The following reports on Form 8-K were filed with the Securities and
Exchange Commission since the filing of the Company's third quarter
10-Q on December 11, 2006.
ii. Announcement of completion of the acquisition of Blackwell
Publishing Ltd. and the related new credit agreement with Bank of
America issued on Form 8-K dated February 8, 2007.
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 & Operations Officer
By /s/ Edward J. Melando
-----------------------
Edward J. Melando
Vice President, Controller and
Chief Accounting Officer
Dated: March 9, 2007
CERTIFICATIONS PERSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
------------------------------------------------------------------------
I, William J. Pesce, certify that:
I have reviewed this quarterly report on Form 10-Q of John Wiley & Sons, Inc.:
- - Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
- - Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented.
- - The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f) for the Company and we have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the Company's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report, based on such
evaluation; and
d. Disclosed in this report any change in the Company's internal
control over financial reporting that occurred during the
Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
- - The Company's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
Company's auditors and the audit committee of the board of directors:
a. all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
that are reasonably likely to adversely affect the Company's
ability to record, process, summarize and report financial
information; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
By /s/ William J. Pesce
-----------------------
William J. Pesce
President and
Chief Executive Officer
Dated: March 9, 2007
I, Ellis E. Cousens, certify that:
I have reviewed this quarterly report on Form 10-Q of John Wiley & Sons, Inc.;
- - Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
- - Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented
- - The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f) for the Company and we have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the Company's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report, based on such
evaluation; and
d. Disclosed in this report any change in the Company's internal
control over financial reporting that occurred during the
Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
- - The Company's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
Company's auditors and the audit committee of the board of directors:
a. all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting
that are reasonably likely to adversely affect the Company's
ability to record, process, summarize and report financial
information; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
By /s/ Ellis E. Cousens
-----------------------
Ellis E. Cousens
Executive Vice President and
Chief Financial & Operations Officer
Dated: March 9, 2007
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of John Wiley & Sons, Inc. (the
"Company") on Form 10-Q for the period ending January 31, 2007 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, William
J. Pesce, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that based on my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15
(d) of the Securities Exchange Act of 1934 (as amended), as
applicable; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ William J. Pesce
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William J. Pesce
President and
Chief Executive Officer
Dated: March 9, 2007
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of John Wiley & Sons, Inc. (the
"Company") on Form 10-Q for the period ending January 31, 2007 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Ellis
E. Cousens, Executive Vice President and Chief Financial & Operations Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15
(d) of the Securities Exchange Act of 1934 (as amended), as
applicable; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Ellis E. Cousens
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Ellis E. Cousens
Executive Vice President and
Chief Financial & Operations Officer
Dated: March 9, 2007