XNYS:JW.B John Wiley & Sons Inc Class B Quarterly Report 10-Q Filing - 1/31/2012

Effective Date 1/31/2012

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fy12q3_10q.htm



 
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, 2012                                                                                                                     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 of other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [x]   No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X]                                         Accelerated filer [  ]                                      Non-accelerated filer [  ]
Smaller reporting company  [  ]                              
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 29, 2012 were:

Class A, par value $1.00 – 50,342,862
Class B, par value $1.00 – 9,537,216

This is the first page of a 36 page document

 
 
1

 
 
 
 
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, 2012 and 2011, and April 30, 2011
 
3
         
   
Condensed Consolidated Statements of Income - Unaudited for the three and nine months ended January 31, 2012 and 2011
 
4
         
   
Condensed Consolidated Statements of Cash Flows – Unaudited for the nine months ended January 31, 2012 and 2011
 
5
         
   
Notes to Unaudited Condensed Consolidated Financial Statements
 
6-13
         
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
14-27
         
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
28-29
         
Item 4.
 
Controls and Procedures
 
30
         
PART II
-
OTHER INFORMATION
   
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
30
         
Item 6.
 
Exhibits and Reports on Form 8-K
 
31
         
SIGNATURES AND CERTIFICATIONS
 
32
     
EXHIBITS
 
33-36


 
2

 


JOHN WILEY & SONS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION - UNAUDITED
 
(In thousands)
 
             
   
January 31,
   
April 30,
 
   
2012
   
2011
   
             2011
 
Assets:
                 
Current Assets
                 
Cash and cash equivalents
  $ 284,456     $ 305,441     $ 201,853  
Accounts receivable
    218,370       208,768       168,310  
Inventories
    104,948       110,231       106,423  
Prepaid and other
    34,070       40,943       50,904  
Total Current Assets
    641,844       665,383       527,490  
                         
Product Development Assets
    113,993       114,700       109,554  
Technology, Property & Equipment
    172,527       153,367       165,541  
Intangible Assets
    873,741       911,798       932,730  
Goodwill
    624,448       627,385       642,898  
Other Assets
    52,088       48,225       51,928  
Total Assets
  $ 2,478,641     $ 2,520,858     $ 2,430,141  
                         
Liabilities & Shareholders' Equity:
                       
Current Liabilities
                       
Accounts and royalties payable
  $ 204,304     $ 207,336     $ 155,262  
Deferred revenue
    303,646       265,180       321,409  
Accrued employment costs
    52,056       57,218       87,770  
Accrued income taxes
    18,668       27,781       5,924  
Accrued pension liability
    4,326       2,274       4,447  
Other accrued liabilities
    51,620       48,853       57,853  
Current portion of long-term debt
    -       106,875       123,700  
Total Current Liabilities
    634,620       715,517       756,365  
                         
Long-Term Debt
    483,000       525,025       330,500  
Accrued Pension Liability
    85,012       123,787       91,594  
Deferred Income Tax Liabilities
    183,788       172,148       192,909  
Other Long-Term Liabilities
    68,773       77,531       80,884  
                         
Shareholders’ Equity
                       
Class A & Class B common stock
    83,190       83,191       83,190  
Additional paid-in-capital
    267,014       236,689       247,046  
Retained earnings
    1,264,395       1,117,406       1,136,224  
Accumulated other comprehensive loss
    (177,066 )     (187,195 )     (127,741 )
Treasury stock
    (414,085 )     (343,241 )     (360,830 )
Total Shareholders’ Equity
    1,023,448       906,850       977,889  
Total Liabilities & Shareholders' Equity
  $ 2,478,641     $ 2,520,858     $ 2,430,141  
   
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
 
3

 
 
 
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
 
   
Ended January 31,
   
Ended January 31,
 
   
           2012
   
         2011
   
            2012
   
        2011
 
                         
Revenue
  $ 451,111     $ 447,855     $ 1,328,165     $ 1,297,637  
                                 
Costs and Expenses
                               
Cost of sales
    142,131       137,909       404,472       402,717  
Operating and administrative expenses
    221,648       222,206       686,132       649,097  
Additional provision for doubtful trade account
    -       9,290       -       9,290  
Amortization of intangibles
    8,875       8,800       26,965       26,094  
Total Costs and Expenses
    372,654       378,205       1,117,569       1,087,198  
                                 
Operating Income
    78,457       69,650       210,596       210,439  
                                 
Interest Expense
    (2,768 )     (4,630 )     (6,270 )     (15,161 )
Foreign Exchange Transaction Losses
    (184 )     (887 )     (1,149 )     (1,646 )
Interest Income and Other
    421       743       2,294       1,626  
 
                               
                                 
Income Before Taxes
    75,926       64,876       205,471       195,258  
Provision For Income Taxes
    13,017       19,259       40,990       51,938  
                                 
Net Income
  $ 62,909     $ 45,617     $ 164,481     $ 143,320  
                                 
Earnings Per Share
                               
Diluted
  $ 1.03     $ 0.74     $ 2.69     $ 2.34  
Basic
  $ 1.05     $ 0.76     $ 2.72     $ 2.39  
                                 
Cash Dividends Per Share
                               
Class A Common
  $ 0.20     $ 0.16     $ 0.60     $ 0.48  
Class B Common
  $ 0.20     $ 0.16     $ 0.60     $ 0.48  
                                 
Average Shares
                               
Diluted
    60,845       61,549       61,255       61,175  
Basic
    59,993       60,384       60,392       60,083  
                                 
The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
 
 
4

 
 

 
JOHN WILEY & SONS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW – UNAUDITED
 
(In thousands)
 
   
For The Nine Months
 
   
Ended January 31,
 
   
2012
   
2011
 
Operating Activities
           
Net income
  $ 164,481     $ 143,320  
Adjustments to reconcile net income to cash provided by operating activities:
               
Amortization of intangibles
    26,965       26,094  
Amortization of composition costs
    36,877       37,381  
Depreciation of technology, property and equipment
    37,350       33,806  
Additional provision for doubtful trade account (net of tax)
    -       6,039  
One-time non-cash tax benefits
    (16,293 )     (4,155 )
Stock-based compensation
    13,055       12,630  
Excess tax benefits from stock-based compensation
    (1,362 )     (2,529 )
Pension expense, net of contributions
    635       8,788  
Royalty advances
    (82,083 )     (76,992 )
Earned royalty advances
    69,367       65,057  
Other non-cash charges
    32,325       25,981  
Change in deferred revenue
    (10,632 )     (14,456 )
Net change in operating assets and liabilities, excluding acquisitions
    (4,700 )     15,239  
Cash Provided by Operating Activities
    265,985       276,203  
Investing Activities
               
Composition spending
    (37,302 )     (37,060 )
Additions to technology, property and equipment
    (47,928 )     (32,704 )
Acquisitions, net of cash acquired
    (6,386 )     (6,452 )
Cash Used for Investing Activities
    (91,616 )     (76,216 )
Financing Activities
               
Repayment of long-term debt
    (789,137 )     (271,900 )
Borrowings of long-term debt
    817,937       254,800  
Change in book overdrafts
    (27,278 )     (27,874 )
Cash dividends
    (36,310 )     (28,969 )
Purchase of treasury stock
    (60,638 )     (10,142 )
Debt financing costs
    (3,119 )     -  
Proceeds from exercise of stock options and other
    12,674       24,595  
Excess tax benefits from stock-based compensation
    1,362       2,529  
Cash Used for Financing Activities
    (84,509 )     (56,961 )
Effects of Exchange Rate Changes on Cash
    (7,257 )     8,902  
Cash and Cash Equivalents
               
Increase for the Period
    82,603       151,928  
Balance at Beginning of Period
    201,853       153,513  
Balance at End of Period
  $ 284,456     $ 305,441  
Cash Paid During the Period for:
               
Interest
  $ 4,745     $ 15,235  
Income taxes, net
  $ 26,771     $ 14,215  
                 
The accompanying notes are an integral part of the condensed consolidated financial statements.
               

 
 
5

 
 
 
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 financial condition, results of operations and cash flows for the periods presented.  Operating results for the interim period are not necessarily indicative of the results expected for the full year.  These financial statements should be read in conjunction with the most recent audited financial statements included in the Company’s Form 10-K for the fiscal year ended April 30, 2011.
 
The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
 
The Company has historically reported sales return reserves, net of an inventory and royalty recovery, as a component of Accounts Receivable in the Condensed Consolidated Statements of Financial Position. In the fourth quarter of fiscal year 2011, the Company changed the presentation of the net sales return reserve to reflect each respective balance sheet account. As such, the Company has reclassified approximately $11.8 million to increase Inventory and $9.9 million to reduce Accounts and Royalties Payable from the previously reported January 31, 2011 Accounts Receivable balance.
 
The Company has historically presented author advance payments as a component of Investing Activities in the Condensed Consolidated Statements of Cash Flows. In the fourth quarter of fiscal year 2011, the Company changed the presentation of royalty advance payments from an Investing Activity to an Operating Activity. To be consistent with current year presentation, the Company reclassified approximately $77.0 million of royalty advance payments for the nine months ended January 31, 2011 from Investing Activities to Operating Activities.
 
Certain other prior year amounts have been reclassified to conform to the current year’s presentation.
 
 
2.
Recent Accounting Standards
 
In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-13 “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”).  ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products and services separately rather than as a combined unit. Specifically, this guidance amends the existing criteria for separating consideration received in multiple-deliverable arrangements, eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method.  The guidance also establishes a hierarchy for determining the selling price of a deliverable, which is based on vendor-specific objective evidence; third-party evidence; or management estimates.  Expanded disclosures related to the Company’s multiple-deliverable revenue arrangements are also required.  The new guidance was adopted by the Company for all revenue arrangements entered into or materially modified on and after May 1, 2011 and did not have a significant impact on the Company’s consolidated financial statements.
 
In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”).  ASU 2010-06 requires new disclosures for transfers in and out of Levels 1 and 2 of the fair value measurement hierarchy, and expands disclosures related to activity in Level 3 fair value measurements.  ASU 2010-06 also clarifies existing disclosures on the level of detail required for assets and liabilities measured at fair value from their respective line items on the statement of financial position, and the valuation techniques and inputs used in fair value measurements that fall within Level 2 or Level 3 of the fair value hierarchy. Except for the disclosures related to the activity in Level 3 fair value measurements, the Company adopted ASU 2010-06 as of May 1, 2010. The requirement to provide detailed disclosures about the activity for Level 3 fair value measurements was adopted by the Company as of May 1, 2011. Since the revised guidance only required additional disclosures about the Company’s fair value measurements, its adoption did not affect the Company’s financial position or results of operations.
 
 
6

 
 
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”) which amends U.S. GAAP to provide common fair value measurement and disclosure requirements with International Financial Reporting Standards. The Company does not expect ASU 2011-04 to have a significant effect on its current fair value measurements within the consolidated financial statements, however, the new guidance will result in additional disclosures which will include quantitative information about the unobservable inputs used in all Level 3 fair value measurements. ASU 2011-04 will be effective for the Company as of May 1, 2012.
 
 
There have been no other new accounting pronouncements issued that have had, or are expected to have a material impact on the Company’s consolidated financial statements.
 
 
3.
Share-Based Compensation
 
The Company has share-based compensation plans under which employees may be granted options to purchase shares of Company common stock at the fair market value at the time of grant.  In addition to stock options, the Company grants performance-based stock awards and other restricted stock awards to certain management level employees. The Company recognizes the grant date fair value of share-based compensation in net income on a straight-line basis over the requisite service period. The measurement of performance for performance-based stock awards is based on actual financial results for targets established three years in advance. For the three months ended January 31, 2012 and 2011, the Company recognized share-based compensation expense, on a pre-tax basis, of $5.3 million and $4.3 million, respectively. For the nine months ended January 31, 2012 and 2011, the Company recognized share-based compensation expense, on a pre-tax basis, of $13.1 million and $12.6 million, respectively.
 
The following table provides share-based compensation data for awards granted by the Company:
 
 
For the Nine Months
Ended January 31,
 
   2012
 
   2011
Restricted Stock:
     
Awards granted (in thousands)
259
 
256
Weighted average fair value of grant
$49.49
 
$39.94
       
Stock Options:
     
Awards granted (in thousands)
411
 
413
Weighted average fair value of grant
$14.11
 
$11.97
 
The weighted average Black-Scholes fair value assumptions for stock option grants are as follows:
 
 
For the Nine Months
Ended January 31,
 
   2012
 
   2011
Expected life of options (years)
7.3
 
7.7
Risk-free interest rate
  2.3%
 
2.7%
Expected volatility
  29.0%
 
28.9%
Expected dividend yield
  1.6%
 
1.6%
Fair value of common stock on grant date
$49.55
 
$40.02
 
 
 
7

 
 
4.      Comprehensive Income (Loss)
 
Comprehensive income (loss) was as follows (in thousands):
 
 
For the Three Months
Ended January 31,
 
For the Nine Months
Ended January 31,
 
  2012
 
2011
 
 2012
 
2011
Net income
$62,909
 
$45,617
 
$164,481
 
$143,320
Changes in other comprehensive income (loss):
 
           
Foreign currency translation adjustment
(21,162)
 
603
 
(53,112)
 
33,188
Unamortized retirement costs, net of tax
1,490
 
1,345
 
3,887
 
2,712
Unrealized gain (loss) on interest rate swaps, net of tax
17
 
1,992
 
(100)
 
4,551
Comprehensive income
$43,254
 
$49,557
 
$115,156
 
$183,771
 
A reconciliation of accumulated other comprehensive income (loss) follows (in thousands):
 
 
For the Three Months
 
October 31, 2011
 
Change for Period
 
January 31, 2012
Foreign currency translation adjustment
$(97,758)
 
$(21,162)
 
$(118,920)
Unamortized retirement costs, net of tax
(59,239)
 
1,490
 
(57,749)
Unrealized loss on interest rate swaps, net of tax
(414)
 
17
 
(397)
Total
$(157,411)
 
$(19,655)
 
$(177,066)
 

 
For the Nine Months
 
April 30, 2011
 
Change for Period
 
January 31, 2012
Foreign currency translation adjustment
$(65,808)
 
$(53,112)
 
$(118,920)
Unamortized retirement costs, net of tax
(61,636)
 
3,887
 
(57,749)
Unrealized loss on interest rate swaps, net of tax
(297)
 
(100)
 
(397)
Total
$(127,741)
 
$(49,325)
 
$(177,066)
 
 
5.
Reconciliation of Weighted Average Shares Outstanding
 
A reconciliation of the shares used in the computation of earnings per share follows (in thousands):
 
 
For the Three Months
Ended January 31,
 
For the Nine Months
Ended January 31,
 
  2012
 
2011
 
  2012
 
2011
Weighted average shares outstanding
60,197
 
60,747
 
60,592
 
60,426
Less: Unearned restricted shares
(204)
 
(363)
 
(200)
 
(343)
Shares used for basic earnings per share
59,993
 
60,384
 
60,392
 
60,083
Dilutive effect of stock options and other stock awards
852
 
1,165
 
863
 
1,092
Shares used for diluted earnings per share
60,845
 
61,549
 
61,255
 
61,175
 
 
 
8

 
 
Since their inclusion in the calculation of diluted earnings per share would have been anti-dilutive, options to purchase 1,655,362 shares of Class A Common Stock have been excluded for both the three and nine months ended January 31, 2012, and options to purchase 1,656,166 shares have been excluded for both the three and nine months ended January 31, 2011.  For the three and nine months ended January 31, 2012, unearned restricted shares of 5,000 and 48,150, respectively, have also been excluded.  There were no unearned restricted shares excluded from the calculation for the three and nine months ended January 31, 2011.
 
6.      Inventories
 
 
Inventories were as follows (in thousands):
 
As of January 31,
 
As of April 30,
 
    2012
 
    2011
 
          2011
Finished goods
$79,920
 
$80,512
 
$87,080
Work-in-process
8,567
 
8,858
 
7,850
Paper, cloth and other
11,621
 
12,856
 
7,940
 
100,108
 
102,226
 
102,870
Inventory value from estimated returns
10,072
 
11,804
 
9,485
LIFO reserve
(5,232)
 
(3,799)
 
(5,932)
Total inventories
$104,948
 
$110,231
 
$106,423
 
7.      Segment Information
 
The Company is a global publisher of print and electronic products, providing content and digital solutions to customers worldwide. Core businesses produce scientific, technical, medical and scholarly journals, encyclopedias, books, online products and services; professional and consumer books, subscription products, certification and training materials, online applications and websites; and educational materials in all media, including integrated online teaching and learning resources, for undergraduate, graduate and advanced placement students, educators and lifelong learners worldwide as well as secondary school students in Australia. The Company maintains publishing, marketing, and distribution centers in Asia, Australia, Canada, Germany, the United Kingdom and the United States. The Company’s reportable segments are based on the management reporting structure used to evaluate performance.
 
 
 
9

 
 
Segment information is as follows (in thousands):
 
 
           For the Three Months
 
        For the Nine Months
 
             Ended January 31,
 
            Ended January 31,
 
          2012
 
      2011
 
         2012
 
    2011
Revenue
             
Scientific, Technical, Medical and Scholarly
$245,476
 
$237,939
 
$749,261
 
$712,220
Professional/Trade
107,973
 
114,468
 
320,007
 
327,191
Global Education
97,662
 
95,448
 
258,897
 
258,226
Total
$451,111
 
$447,855
 
$1,328,165
 
$1,297,637
               
Direct Contribution to Profit
             
Scientific, Technical, Medical and Scholarly
$98,984
 
$97,061
 
$312,323
 
$293,955
Professional/Trade
27,848
 
20,555
 
81,633
 
71,392
Global Education
42,255
 
40,177
 
100,956
 
104,192
Total
$169,087
 
$157,793
 
$494,912
 
$469,539
               
Shared Services and Administration Costs
             
Distribution
$(27,110)
 
$(27,612)
 
$(82,511)
 
$(81,833)
Technology Services
(34,880)
 
(31,453)
 
(103,916)
 
(87,028)
Finance
(11,098)
 
(11,198)
 
(33,032)
 
(31,580)
Other Administration
(17,542)
 
(17,880)
 
(64,857)
 
(58,659)
Total
$(90,630)
 
$(88,143)
 
$(284,316)
 
$(259,100)
Operating Income
$78,457
 
$69,650
 
$210,596
 
$210,439
 
 
 
8.
Intangible Assets
 
Intangible assets consisted of the following (in thousands):
 
 
  As of January 31,
 
As of
April 30,
 
       2012
 
     2011
 
        2011
Intangible assets with indefinite lives:
         
Brands and trademarks
$162,560
 
$170,540
 
$175,193
Acquired publishing rights
101,421
 
104,916
 
111,908
 
$263,981
 
$275,456
 
$287,101
           
Net intangible assets with determinable lives:
   
 
   
Acquired publishing rights
$552,299
 
$574,236
 
$583,549
Customer relationships
46,397
 
49,850
 
50,157
Brands and trademarks
10,796
 
12,177
 
11,870
Covenants not to compete
268
 
79
 
53
 
$609,760
 
$636,342
 
$645,629
Total
$873,741
 
$911,798
 
$932,730
           
 
The changes in intangible assets at January 31, 2012 compared to January 31, 2011 and April 30, 2011 are primarily due to foreign exchange translation and amortization expense.
 
 
10

 
 
 
9.
Income Taxes
 
The effective tax rate for the first nine months of fiscal year 2012 was 19.9% compared to 26.6% in the prior year.  During the first quarters of fiscal years 2012 and 2011, the Company recorded non-cash deferred tax benefits of $8.8 million ($0.14 per share) and $4.2 million ($0.07 per share), respectively, principally associated with new tax legislation enacted in the United Kingdom (“U.K.”) that reduced the U.K. statutory income tax rates by 2% and 1%, respectively. The benefits recognized by the Company reflect the remeasurement of all applicable U.K. deferred tax balances to the new income tax rates as of April 1, 2012 and 2011, respectively. In addition, during the third quarter of fiscal year 2012 the Company released an income tax reserve of approximately $7.5 million ($0.12 per share). The $7.5 million reserve was originally recorded in conjunction with the purchase accounting for the Blackwell acquisition and was reversed due to the expiration of the statute of limitations.  Excluding the tax benefits described above, the Company’s effective tax rate for the nine month period ending January 31, 2012 was 27.9% compared to 28.7% in the prior year.  The decrease was mainly due to higher tax benefits on non-U.S. earnings.
 
 
 
10.
Defined Benefit Retirement Plans
 
The components of net pension expense for the defined benefit plans were as follows (in thousands):
 
 
For the Three Months
Ended January 31,
 
For the Nine Months
Ended January 31,
 
   2012
 
2011
 
   2012
 
2011
Service Cost
$3,615
 
$4,210
 
$12,023
 
$12,142
Interest Cost
6,966
 
6,676
 
20,960
 
20,011
Expected Return on Plan Assets
(7,198)
 
(6,456)
 
(21,840)
 
(19,109)
Net Amortization of Prior Service Cost
324
 
222
 
778
 
664
Recognized Net Actuarial Loss
1,326
 
1,894
 
3,836
 
5,418
Net Pension Expense
$5,033
 
$6,546
 
$15,757
 
$19,126
 
Employer pension plan contributions were $15.1 million and $10.3 million for the nine months ended January 31, 2012 and 2011, respectively.
 
 
      11.
Debt Refinancing
 
On November 2, 2011, the Company amended and restated its existing credit facility, previously described in the Company’s Form 10-K filed on June 24, 2011, with Bank of America - Merrill Lynch and The Royal Bank of Scotland plc as joint lead arrangers and Bank of America as administrative agent.  The new agreement consists of a $700 million five-year senior revolving credit facility, which can be drawn in multiple currencies. The proceeds of the new revolving credit facility will be used to pay down the Company’s prior credit facility and meet future seasonal operating cash requirements.  The Company has the option of borrowing at the following floating interest rates:  (i) at a rate based on the London Interbank Offered Rate (“LIBOR”) plus an applicable margin ranging from 1.05% to 1.65%, depending on the Company’s consolidated leverage ratio, as defined, or (ii) for U.S. dollar-denominated loans only, at the lender’s base rate plus an applicable margin ranging from zero to 0.65%, depending on the Company’s consolidated leverage ratio.  The lender’s base rate is defined as the highest of (i) the U.S. federal funds effective rate plus a 0.50% margin, (ii) the Eurocurrency rate, as defined, plus a 1.00% margin, or (iii) the Bank of America prime lending rate.  In addition, the Company will pay a facility fee ranging from 0.20% to 0.35% depending on the Company’s consolidated leverage ratio.  The Company also has the option to request a credit limit increase of up to $250 million in minimum increments of $50 million.  The new agreement contains certain restrictive covenants related to the Company’s consolidated leverage ratio and interest coverage ratio.  Due to the fact that there are no principal payments due until the end of the new agreement, the Company has classified its entire debt obligation as of January 31, 2012 as long-term.  
 
 
11

 
 
 
 
12.
Derivative Instruments and Hedging Activities
 
The Company, from time-to-time, enters into forward exchange and interest rate swap contracts as a hedge against foreign currency asset and liability commitments, changes in interest rates and anticipated transaction exposures, including intercompany purchases. All derivatives are recognized as assets or liabilities and measured at fair value.  Derivatives that are not determined to be effective hedges are adjusted to fair value with a corresponding adjustment to earnings.  The Company does not use financial instruments for trading or speculative purposes.
 
The Company had approximately $483.0 million of variable rate loans outstanding at January 31, 2012, which approximated fair value. As of January 31, 2012, the Company had an interest rate swap agreement that was designated as a fully effective cash flow hedge as defined under Accounting Standards Codification (“ASC”) 815. During the first nine months of fiscal year 2011, the Company maintained two interest rate swap agreements which were also designated as fully effective cash flow hedges.  As a result, there was no impact on the Company’s Condensed Consolidated Statements of Income for changes in the fair value of the interest rate swaps.  Under ASC 815, fully effective derivative instruments that are designated as cash flow hedges have changes in their fair value recorded initially within Accumulated Other Comprehensive Loss on the Condensed Consolidated Statements of Financial Position. As interest expense is recognized based on the variable rate loan agreements, the corresponding deferred gain or loss on the interest rate swaps is reclassified from Accumulated Other Comprehensive Loss to Interest Expense in the Condensed Consolidated Statements of Income. It is management’s intention that the notional amount of interest rate swaps be less than the variable rate loans outstanding during the life of the derivatives.
 
On February 16, 2007, the Company entered into an interest rate swap agreement which fixed variable interest due on a portion of its term loan (“Term Loan”). Under the terms of the agreement, the Company paid a fixed rate of 5.076% and received a variable rate of interest based on three month LIBOR (as defined) from the counterparty which was reset every three months for a four-year period ending February 8, 2011, the date that the swap expired.  As of January 31, 2011, the notional amount of the interest rate swap was $200 million.
 
On October 19, 2007, the Company entered into an interest rate swap agreement which fixed a portion of the variable interest due on its revolving credit facility (“Revolving Credit Facility”).  Under the terms of this interest rate swap, the Company paid a fixed rate of 4.60% and received a variable rate of interest based on three month LIBOR (as defined) from the counterparty which was reset every three months for a three-year period. This interest rate swap expired on August 8, 2010.
 
On August 19, 2010, the Company entered into an interest rate swap agreement which fixed a portion of the variable interest due on its variable rate loans outstanding.  Under the terms of the agreement, the Company pays a fixed rate of 0.8% and receives a variable rate of interest based on one-month LIBOR (as defined) from the counterparty which is reset every month for a twenty-nine month period ending January 19, 2013.  As of January 31, 2012, the notional amount of the interest rate swap was $125.0 million.
 
The Company records the fair value of its interest rate swaps on a recurring basis using Level 2 inputs of quoted prices for similar assets or liabilities in active markets.  The fair value of the interest rate swaps as of January 31, 2012 and 2011 and April 30, 2011 was a net deferred loss of $0.7 million, $2.7 million and $0.5 million, respectively. As of January 31, 2012 and January 31, 2011, the deferred losses were recorded in Other Accrued Liabilities, and as of April 30, 2011 the deferred losses were recorded in Other Long-Term Liabilities on the Condensed Consolidated Statements of Financial Position, based on the maturity dates of the contracts. Net losses that were reclassified from Accumulated Other Comprehensive Loss into Interest Expense for the three months ended January 31, 2012 and 2011 were $0.2 million and $2.6 million, respectively.  Net losses that were reclassified from Accumulated Other Comprehensive Loss into Interest Expense for the nine months ended January 31, 2012 and 2011 were $0.6 million and $8.7 million, respectively.
 
 
12

 
 
During fiscal years 2012 and 2011, the Company entered into forward exchange contracts to manage the Company’s exposure on certain foreign currency denominated assets and liabilities. Foreign currency denominated assets and liabilities are remeasured at spot rates in effect on the balance sheet date, with the effects of changes in spot rates reported in Foreign Exchange Transaction Losses on the Condensed Consolidated Statements of Income.  The Company did not designate these forward exchange contracts as hedges under current accounting standards as the benefits of doing so were not material due to the short-term nature of the contracts. Therefore, the forward exchange contracts were marked to market through Foreign Exchange Transaction Losses, and carried at their fair value on the Condensed Consolidated Statements of Financial Position. Accordingly, the fair value changes in the forward exchange contracts substantially mitigated the changes in the value of the remeasured foreign currency denominated assets and liabilities attributable to changes in foreign currency exchange rates. The fair value of the contracts were measured on a recurring basis using Level 2 inputs. As of January 31, 2012 and 2011 and April 30, 2011, the Company did not have any open forward contracts. For the three and nine months ended January 31, 2012, the losses recognized on the forward contracts were $2.2 million and $2.4 million, respectively.  For the three and nine months ended January 31, 2011, the losses/(gains) recognized on the forward contracts were $0.8 million and $(0.6) million, respectively.
 
 
 
13.
Additional Provision for Doubtful Trade Account
 
In the third quarter of fiscal year 2011, the Company recorded a pre-tax bad debt provision of $9.3 million, or $6.0 million after-tax ($0.10 per share), related to Borders Group, Inc. (“Borders”).  The net charge was reflected in the Additional Provision for Doubtful Trade Account line item in the Condensed Consolidated Statements of Income and represented the Company’s outstanding receivable with Borders, net of existing reserves and expected recoveries. On February 16, 2011, Borders filed a petition for reorganization relief under Chapter 11 of the U.S. Bankruptcy code. There were no additional charges or bad debt expense with respect to this customer.
 
 
 
14.
Subsequent Events
 
On February 16, 2012, the Company acquired all of the stock of Inscape Holdings, Inc. (“Inscape”) for $85 million in cash.  Inscape is a leading provider of DiSC®-based assessments and training products that develop critical interpersonal business skills. The acquisition will enable Wiley’s Professional/Trade business to capitalize on both companies’ content, assets, and relationships, enhance its global reach, and move more aggressively into digital delivery to the growing workplace learning and assessment market. Annually, Inscape generates approximately $20 million in revenue. The Company has not yet completed the initial purchase accounting for this acquisition.
 
On March 7, 2012, Wiley announced that it will explore opportunities to sell a number of its consumer print and digital publishing assets in its Professional/Trade business as they no longer align with the company’s long-term business strategy.  Fiscal year 2011 revenue associated with the assets to be sold was approximately $85 million with a direct contribution to profit, before shared service expenses, of approximately $6 million.  Assets include travel (including the Frommer’s brand), culinary, general interest, nautical, pets, crafts, Webster’s New World, and CliffsNotes. Wiley will re-deploy resources in its Professional/Trade business to build on its global market-leading positions in business, finance, accounting, leadership, technology, architecture, psychology, education, and through the For Dummies brand.

 
13

 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
RESULTS OF OPERATIONS – THIRD QUARTER ENDED JANUARY 31, 2012
 
Throughout this report, references to amounts “excluding foreign exchange”, “currency neutral basis” and “performance basis” exclude both foreign currency translation effects and transactional gains and losses.  Foreign currency translation effects are based on the change in average exchange rates for each reporting period multiplied by the current period’s volume of activity in local currency for each non-U.S. location. Unless otherwise noted, the impact of foreign exchange on the variance explanations below is not significant.
 
Revenue and Gross Profit:
 
Revenue for the third quarter of fiscal year 2012 increased 1% to $451.1 million.  Growth in Scientific, Technical, Medical and Scholarly (“STMS”) and Global Education (“GEd”) was partially offset by a decline in Professional/Trade (“P/T”).  Gross profit margin for the third quarter of fiscal year 2012 of 68.5% was 70 basis points lower than prior year.  The decrease was mainly driven by lower P/T sales volume and higher STMS royalty rates, partially offset by an increase in higher margin digital products in all segments.
 
Operating and Administrative Expenses:
 
Operating and administrative expenses for the third quarter of fiscal year 2012 of $221.6 million were flat with the prior year.  Lower employment costs ($2 million); and a reduction in P/T marketing and advertising costs ($2 million) due to cost containment initiatives were offset by higher technology costs ($3 million) to support investments in digital products and infrastructure and a bad debt provision related to an outstanding receivable with a university in Iran ($1.4 million).
 
In the third quarter of fiscal year 2011, the Company recorded a pre-tax bad debt provision of $9.3 million, or $6.0 million after-tax ($0.10 per share), within the P/T reporting segment related to Borders Group, Inc. (“Borders”). The provision represented the Company’s outstanding receivable with Borders, net of existing reserves and expected recoveries. On February 16, 2011, Borders filed a petition for reorganization relief under Chapter 11 of the U.S. Bankruptcy code. There were no additional charges or bad debt expense with respect to this customer.
 
Operating Income:
 
Operating income for the third quarter of fiscal year 2012 increased 13% to $78.5 million, but declined 1% on a currency neutral basis and excluding the prior year Borders bad debt provision mainly due to lower gross profit margins.
 
Other:
 
Interest expense for the third quarter of fiscal year 2012 decreased $1.9 million to $2.8 million.  Lower average debt and lower interest rates contributed approximately $1.1 million and $0.8 million to the decrease, respectively.  Losses on foreign currency transactions for the third quarters ended January 31, 2012 and 2011 were $0.2 million and $0.9 million, respectively.  Interest income and other for the third quarter of fiscal years 2012 and 2011 were $0.4 million and $0.7 million, respectively.
 
Provision for Income Taxes:
 
The effective tax rate for the third quarter of fiscal year 2012 was 17.1% compared to 29.7% in the prior year.  In the third quarter of fiscal year 2012, the Company released an income tax reserve of approximately $7.5 million ($0.12 per share).  The $7.5 million reserve was originally recorded in conjunction with the purchase accounting for the Blackwell acquisition and was reversed due to the expiration of the statute of limitations. Excluding the impact of the purchase accounting reserve, the Company’s effective tax rate for the third quarter of fiscal year 2012 decreased to 27.1% mainly due to higher tax benefits on non-U.S. earnings and lower interest on tax reserves.
 
 
14

 
 
Earnings Per Share:
 
Earnings per diluted share for the third quarter of fiscal year 2012 increased 39% to $1.03. Excluding the effects of favorable foreign exchange of approximately $0.02 per share, the prior year Borders bad debt provision and the current year tax reserve release, earnings per diluted share increased 6%.
 
Third Quarter Segment Results
 
Scientific, Technical, Medical and Scholarly (STMS):
 
 
For the Three Months
   
 
Ended January 31,
 
% change
Dollars in thousands
        2012
      2011
% change
w/o FX
         
Journal Subscriptions
$145,394
$139,541
4%
4%
Books
47,959
45,500
5%
6%
Other Publishing Income
52,123
52,898
-1%
-1%
Total Revenue
$245,476
$237,939
3%
3%
         
Gross Profit
175,842
172,424
2%
2%
Gross Profit Margin
71.6%
72.5%
 
 
         
Direct Expenses & Amortization
76,858
75,363
2%
2%
         
Direct Contribution to Profit
$98,984
$97,061
2%
1%
Direct Contribution Margin
40.3%
40.8%
 
 
 
 
Revenue:
 
STMS revenue for the third quarter of fiscal year 2012 increased 3% to $245.5 million.  The growth was driven by journal subscriptions and books, partially offset by a decline in other publishing income.
 
 
Journal Subscriptions
 
Journal subscription revenue for the third quarter of fiscal year 2012 of $145.4 million increased 4% from the prior year.  The growth was driven by new subscriptions ($5 million) and new society business ($1 million).
 
 
Books
 
Book revenue for the third quarter of fiscal year 2012 increased 5% to $48.0 million, or 6% excluding the unfavorable impact of foreign exchange mainly due to growth in digital reference books and eBooks.
 
 
Other Publishing Income
 
Other publishing income for the third quarter of fiscal year 2012 decreased 1% to $52.1 million.  The decline was mainly driven by lower journal reprint revenue ($2 million), partially offset by increased revenue from journal advertising ($1 million).
 
 
15

 
 
Gross Profit:
 
Gross profit margin for the third quarter of fiscal year 2012 declined 90 basis points to 71.6% principally due to higher royalty rates.
 
 
Direct Expenses and Amortization:
 
Direct expenses and amortization for the third quarter of fiscal year 2012 increased 2% to $76.9 million.  The increase was mainly driven by higher editorial costs to support business growth ($1 million) and a bad debt provision related to an outstanding receivable with a university in Iran ($1.4 million).
 
 
Direct Contribution to Profit:
 
Direct contribution to profit increased 2% to $99.0 million, or 1% excluding the favorable impact of foreign exchange.  Direct contribution margin in the third quarter of fiscal year 2012 was 40.3% compared to 40.8% in the prior year.  The decline was driven by lower gross profit margins and higher direct expenses.
 
 
Society Partnerships
·  
2 new society journals were signed with combined annual revenue of $1.4 million
·  
39 renewals/extensions were signed with approximately $20 million in combined annual revenue
·  
2 journals lost with combined annual revenue of $0.6 million
 
New Society Contracts
·  
Journal of the American Heart Association for the American Heart Association – the first open access online-only journal for the AHA. The online journal has been launched on-time and on-budget.  This is a new society relationship for STMS, and one that was enabled by our Gold (Funded) Open Access publishing capabilities.
·  
British Educational Research Journal (BERJ) and a new start review journal for the British Educational Research Association (BERA).  BERA is the largest educational research organization outside of the U.S., with 1,800 members.
 
Alliances
·  
Wiley has been selected as preferred publisher by both the Society for Information Display (SID) and the American Society for Engineering Education (ASEE)
·  
An agreement has been signed by Asian Chemical Editorial Society and Wiley-VCH to collaborate on European Journal of Organic Chemistry and Asian Journal of Organic Chemistry.
 
Online Library Usage and Other Digital Initiatives
·  
Overall, full-text accesses (FTAs) on Wiley Online Library grew by 12% for the quarter.  Total visits were up 19% compared to the previous quarter
·  
Wiley completed and deployed custom websites for six of its society partners
 
 
 
16

 
 
Professional/ Trade (P/T):
 
 
For the Three Months
   
 
Ended January 31,
 
% change
Dollars in thousands
        2012
     2011
% change
w/o FX (a)
         
Books
$96,285
$102,503
-6%
-6%
Other Publishing Income
11,688
11,965
-2%
-1%
Total Revenue
$107,973
$114,468
-6%
-5%
         
Gross Profit
66,221
71,809
-8%
-8%
Gross Profit Margin
61.3%
62.7%
 
 
         
Direct Expenses & Amortization
38,373
51,254
-25%
-8%
         
Direct Contribution to Profit
$27,848
$20,555
35%
-6%
Direct Contribution Margin
25.8%
18.0%
 
 
 
(a)  
Adjusted to exclude the fiscal year 2011 bad debt provision of $9.3 million related to Borders from direct expenses and direct contribution.
 
 
Revenue:
 
P/T revenue for the third quarter of fiscal year 2012 decreased 6% to $108.0 million, or 5% excluding the unfavorable impact of foreign exchange. The decline in books was driven by softness in the consumer line ($4 million), primarily cooking and travel, and business ($4 million), principally as a result of a weak global economy and reduced retail shelf space for some consumer print categories.
 
Total P/T Revenue by Major Category (on a currency neutral basis)
·  
Business down 10% to $32.6 million, with solid growth in digital sales
·  
Consumer fell 10% to $33.7 million due in large part to Borders
·  
Technology grew 2% to $23.2 million
·  
Professional Education grew 7% to $6.1 million
·  
Architecture down 3% to $6.7 million
·  
Psychology grew 4% to $3.3 million
 
Digital Revenue
·  
eBook sales increased approximately $5 million in the quarter to approximately $9 million, accounting for 9% of P/T revenue. Strong growth at Amazon, Barnes and Noble and Apple drove results.
 
Gross Profit:
 
Gross profit margin for the third quarter of fiscal year 2012 of 61.3% was 140 basis points lower than prior year mainly due to the decline in top-line results.
 
Direct Expenses and Amortization:
 
Direct expenses and amortization for the third quarter of fiscal year 2012 decreased 25% to $38.4 million, or 8% on a currency neutral basis and excluding the Borders bad debt provision in the prior year, mainly driven by lower marketing and advertising costs ($2 million) due to cost containment initiatives and lower accrued incentive compensation ($1 million).
 
 
17

 
 
Direct Contribution to Profit:
 
Direct contribution to profit for the third quarter of fiscal year 2012 increased 35% to $27.8 million, but declined 6% on a currency neutral basis and excluding the Borders bad debt provision in the prior year. Excluding the Borders bad debt provision, direct contribution margin declined 30 basis points due to the top-line results, partially offset by lower direct expenses due to cost containment initiatives.
 
New Titles/Products of Note
 
·  
Business and Finance:  GMAT Business Ready is a digital "boot camp" product for GMAC, aimed primarily at students starting business school. The product contains four modules (Accounting, Finance, Statistics, and Quantitative Skills) that can be purchased separately or in combination.   The Advantage Audit Guides are workflow tools that allow users to download targeted business forms to use when performing an audit.  The CPA Test Bank is an online test preparation product that is targeted to users studying for the CPA exam. It consists of sample test questions, and enables users to create and take exams in various modes, see their results and track their progress.
·  
Technology: iPad 2 For Dummies, 3rd Edition, by Edward C. Baig and Bob LeVitus; iPhone 4S Portable Genius, Second Edition by Paul McFedries; Liars and Outliers by Bruce Schneier.
·  
Consumer:  Small Business For Dummies, 4/e by Eric Tyson and Jim Schell; The Paleo Answer; Frommer’s France Day by Day; Frommer’s Toronto; Better Homes & Gardens Ultimate Low-Calorie Cookbook, Weight Watchers One-Pot Cookbook, and the Digital Edition of The Culinary Institute of America’s The Professional Chef, 9

XNYS:JW.B John Wiley & Sons Inc Class B Quarterly Report 10-Q Filling

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XNYS:JW.B John Wiley & Sons Inc Class B Quarterly Report 10-Q Filing - 1/31/2012
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