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JW-A > SEC Filings for JW-A > Form 10-Q on 12-Mar-2014All Recent SEC Filings

Show all filings for WILEY JOHN & SONS, INC.

Form 10-Q for WILEY JOHN & SONS, INC.


12-Mar-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS - THIRD QUARTER ENDED JANUARY 31, 2014

Throughout this report, references to variances "excluding foreign exchange", "currency neutral basis" and "performance basis" exclude both foreign currency translation effects and transactional gains and losses. Foreign currency translation effects are based on the change in average exchange rates for each reporting period multiplied by the current period's volume of activity in local currency for each non-U.S. location. For the third quarters of fiscal years 2014 and 2013, the average exchange rates to convert British pounds sterling to U.S. dollars were 1.63 and 1.60, respectively; the average exchange rates to convert euros into U.S. dollars were 1.36 and 1.30, respectively; and the average exchange rates to convert Australian dollars to U.S. dollars were 0.91 and 1.04, respectively. Unless otherwise noted, all variance explanations below are on a currency neutral basis.

Revenue:

Revenue for the third quarter of fiscal year 2014 decreased 3% to $457.9 million, or 2% excluding the unfavorable impact of foreign exchange. The decline was driven by a reduction in revenue from the divested consumer publishing programs in fiscal year 2013 ($14 million) and other declines in print book revenue in each of the Company's three core businesses ($18 million), partially offset by higher journal subscription revenue ($10 million) and open access fees ($3 million) in Research; and other ($7 million) mainly growth in digital products. Approximately $4 million of print book revenue was delayed from the second quarter of the prior year into the third quarter due to distribution interruptions caused by Hurricane Sandy.

Cost of Sales and Gross Profit:

Cost of sales for the third quarter of fiscal year 2014 decreased 8% to $130.6 million, or 7% excluding the favorable impact of foreign exchange. The decrease was mainly driven by the divested consumer publishing programs ($9 million) and lower cost digital products, partially offset by higher royalty rates on society owned journals.

Gross profit for the third quarter of fiscal year 2014 of 71.5% was 150 basis points higher than prior year due to the impact of the divested consumer publishing programs (110 basis points); growth in higher-margin Deltak revenue (20 basis points); restructuring and other cost savings (10 basis points); and growth in other digital products, partially offset by higher royalty rates on society owned journals (50 basis points).

Operating and Administrative Expenses:

Operating and administrative expenses for the third quarter of fiscal year 2014 increased 1% to $238.6 million. The increase was mainly driven by higher employment costs ($13 million) due to higher accrued incentive compensation and merit increases; a lower property tax incentive ($3 million); higher technology costs ($2 million); and higher operating expenses to support new business in Deltak ($3 million) and ELS ($1 million), partially offset by restructuring and other cost savings ($15 million) and a reduction related to the divestment of the consumer publishing programs ($3 million).

Restructuring Charges:

As previously announced in fiscal year 2013, the Company initiated a Restructuring and Reinvestment Program to restructure and realign the Company's cost base with current and anticipated future market conditions. The Company is targeting that a majority of the anticipated cost savings will improve margins and earnings, while the remainder will be reinvested in high growth digital business opportunities. In the third quarter of fiscal year 2014, the Company recorded pre-tax restructuring charges of $4.3 million, or $2.9 million after tax ($0.05 per share) related to this Program which included net redundancy and separation credits of ($0.3) million, process


reengineering consulting costs of $2.2 million and other costs of $2.4 million, mainly consisting of lease termination costs. Approximately ($0.8) million, ($0.8) million and $0.1 million of the net restructuring charge (credit) was recorded within the Research, PD and Education reporting segments, respectively, with the remainder recognized in Shared Service costs. The Research and PD restructuring charges (credits) for the three months ended January 31, 2014 include credits of approximately ($0.9) million and ($1.2) million, respectively, related to reversals of severance provisions previously recorded by the Company due to employees who have accepted different positions within the Company, or who voluntarily resigned. The cumulative charge recorded to-date related to the Restructuring and Reinvestment Program of $51.8 million is expected to be fully recovered by January 31, 2015. The Company expects to record additional pre-tax restructuring charges for the remainder of fiscal year 2014 of approximately $10 million.

Amortization of Intangibles:

Amortization of intangibles in the third quarter of fiscal year 2014 was $11.2 million and flat with the prior year period.

Interest Expense/Income, Foreign Exchange and Other:

Interest expense for the third quarter of fiscal year 2014 decreased $0.3 million to $3.5 million. The decrease was driven by lower average debt and lower interest rates. The Company's average cost of borrowing during the third quarters of fiscal years 2014 and 2013 was 1.8% and 1.9%, respectively. In the third quarter of fiscal year 2013, the Company recognized foreign exchange transaction losses of $1.1 million on intercompany loans.

Provision for Income Taxes:

The effective tax rate for the third quarter of fiscal year 2014 was 25.4% compared to 27.7% in the prior year. The decrease was driven by a $1 million tax reserve release and lower U.K. income tax rates.

Earnings Per Share:

Earnings per diluted share for the third quarter of fiscal year 2014 decreased 7% to $0.88 per share. Excluding the current year restructuring charges ($0.05 per share), earnings per diluted share decreased 2% principally due to lower property tax incentives and higher technology investments.


THIRD QUARTER SEGMENT RESULTS
                                     For the Three Months
                                       Ended January 31,              % change
  RESEARCH:                            2014        2013     % change w/o FX (a)

  Revenue by Product/Service:
  Journal Subscriptions                  $154,035  $143,768       7%         7%
  Print Books                              30,990    37,078     -16%       -16%
  Digital Books                            12,636    11,092      14%        12%
  Open Access                               4,347     1,310     232%       232%
  Other Publishing Income                  46,789    47,654      -2%        -2%
  Total Revenue                       $248,797     $240,902       3%         3%

  Cost of Sales                       (68,885)     (64,564)       7%         6%

  Gross Profit                        $179,912     $176,338       2%         2%
  Gross Profit Margin                    72.3%        73.2%

  Direct Expenses                     (70,337)     (69,255)       2%         1%
  Amortization of Intangibles          (7,113)      (6,714)       6%         6%
  Restructuring Credit (see Note 7)        782            -
  Direct Contribution to Profit       $103,244     $100,369       3%         2%
  Direct Contribution Margin             41.5%        41.7%

  Shared Service Costs:
  Distribution                        (11,011)     (11,495)      -4%        -4%
  Technology                          (17,727)     (16,517)       7%         7%
  Occupancy and Other                  (4,707)      (4,642)       1%         1%
  Contribution to Profit               $69,799      $67,715       3%         2%
  Contribution Margin                    28.1%        28.1%

(a) Adjusted to exclude the fiscal year 2014 Restructuring Credit.

Revenue:

Research revenue for the third quarter of fiscal year 2014 increased 3% to $248.8 million. The growth was driven by Journal Subscriptions, Digital Books and Open Access fees, partially offset by declines in Print Books and Other Publishing Income. Journal subscription revenue growth was driven by the favorable timing of production scheduling ($5 million), new society business ($3 million) and the timing of subscription revenue recognition ($3 million). As noted in the prior fiscal year, a change in subscription licensing terms affected the timing of subscription revenue but had no impact on full calendar year 2013 revenue. As of January 31, 2014, calendar year 2014 journal subscription renewals were up approximately 4% over calendar year 2013 with 81% of targeted business closed.

The decline in Print Books ($6 million) was partially offset by growth in Digital Books ($1 million). For the third quarter of fiscal year 2014, Print Book revenue represented 12% of total Research revenue as compared to 15% in the prior year. Open Access revenue, which represents article publication fees from authors that provide immediate free access to the author's article on the Company's website, grew $3.0 million during the quarter. Other Publishing Income, which includes revenue from journal page and color charges, advertising, sale of rights, journal backfiles and reprints, declined mainly due to lower sales of journal reprints and supplements ($2 million), partially offset by growth in page charges ($1 million).


Revenue by Subject and Region is as follows:

                                  For the Three Months
                                    Ended January 31,       % of  % change
                                       2014      2013     Revenue  w/o FX
  Revenue by Subject Category:
  Medicine                           $68,264    $69,275       27%      -1%
  Physical Sciences & Engineering     71,643     69,788       29%       1%
  Life Sciences                       61,639     54,128       25%      13%
  Social Sciences & Humanities        46,252     46,807       19%      -1%
  Other                                  999        904        0%      11%
  Total Revenue                     $248,797   $240,902      100%       3%

  Revenue by Region
  Americas                           $97,477    $95,269       39%       2%
  EMEA                               138,013    129,576       56%       5%
  Asia-Pacific                        13,307     16,057        5%      -8%
  Total Revenue                     $248,797   $240,902      100%       3%

The growth in Life Sciences revenue was mainly driven by the acquisition of publication rights from the American Geophysical Union ("AGU") effective January 1, 2013. AGU is one of the world's leading societies of Earth and space science.

Cost of Sales:

Cost of Sales for the third quarter of fiscal year 2014 increased 7% to $68.9 million, or 6% excluding the unfavorable impact of foreign exchange. The increase was mainly due to higher royalty rates on new society business ($5 million) and higher sales volume ($2 million), partially offset by lower cost digital products.

Gross Profit:

Gross Profit Margin for the third quarter of fiscal year 2014 of 72.3% was 90 basis points lower than prior year mainly due to higher royalty rates on new society journals (210 basis points), partially offset by higher margin digital products.

Direct Expenses and Amortization:

Direct Expenses for the third quarter of fiscal year 2014 of $70.3 million increased 2% from prior year, or 1% excluding the unfavorable impact of foreign exchange. The increase was mainly driven by higher accrued incentive compensation ($2 million) and higher editorial costs associated with new society business ($1 million), partially offset by restructuring and other cost savings ($2 million).

Amortization of Intangibles increased $0.4 million to $7.1 million in the third quarter of fiscal year 2014 mainly due to the acquisition of publication rights for new society journals.

Contribution to Profit:

Contribution to Profit for the third quarter of fiscal year 2014 increased 3% to $69.8 million, or 2% excluding the favorable impact of foreign exchange and the current year Restructuring Credit. Contribution Margin of 28.1% was flat with the prior year as growth in higher margin digital products and restructuring and other cost savings were offset by higher royalty rates on society-owned journals, higher accrued incentive compensation and higher technology costs.


Society Partnerships
2 new society journals were signed during the third quarter with combined annual revenue of approximately $2 million

50 renewals/extensions were signed with approximately $19 million in combined annual revenue

8 journals with combined annual revenue of approximately $5 million were not renewed, primarily due to the conclusion of one society relationship

Other Key Developments

In January, Wiley announced a partnership with the technology company Knode to
provide customized portals to learned societies and other academic organizations
worldwide. Wiley's cloud-based portal is populated with more than 20 million
documents and millions of expert profiles. Researchers are using Knode to find
experts, identify and connect with collaborators, and promote their expertise to
the world. For society executives and institutional research managers, custom
analytics provide aggregated views of research expertise and output.

                                                 For the Three Months
                                                   Ended January 31,             % change
    PROFESSIONAL DEVELOPMENT (PD):                  2014       2013    % change w/o FX (a)

    Revenue by Product/Service:
    Print Books                                     $64,757    $71,465      -9%        -9%
    Digital Books                                    11,459     10,507       9%         9%
    Online Training & Assessment                      8,792      7,336      20%        20%
    Other Publishing Income                           9,193      9,940      -8%        -7%
    Divested Consumer Publishing Programs                 -     13,858
    Total Revenue                                   $94,201   $113,106     -17%       -16%

    Cost of Sales                                  (28,520)   (42,018)     -32%       -32%

    Gross Profit                                    $65,681    $71,088      -8%        -7%
    Gross Profit Margin                               69.7%      62.9%

    Direct Expenses                                (33,104)   (38,246)     -13%       -13%
    Amortization of Intangibles                     (1,670)    (2,062)     -19%       -19%
    Restructuring Credit (see Note 7)                   833          -
    Direct Contribution to Profit                   $31,740    $30,780       3%         1%
    Direct Contribution Margin                        33.7%      27.2%

    Shared Services and Administrative Costs:
    Distribution                                    (9,320)   (10,196)      -9%        -8%
    Technology Services                             (7,543)    (7,238)       4%         4%
    Occupancy and Other                             (2,117)    (1,469)      44%        51%
    Contribution to Profit                          $12,760    $11,877       7%         0%
    Contribution Margin                               13.5%      10.5%

(a) Adjusted to exclude the fiscal year 2014 Restructuring Credit.

Revenue:

PD revenue for the third quarter of fiscal year 2014 decreased 17% to $94.2 million, or 16% excluding the unfavorable impact of foreign exchange. The decline was driven by the divestment of the consumer publishing programs in fiscal year 2013 ($14 million) and other declines in print book revenue ($6 million), partially offset by growth in Digital Books ($1 million) and Online Training and Assessment revenue ($1 million). Print Book revenue of $64.8 million decreased 9% in the third quarter of fiscal year 2014 mainly due to lower demand for technology titles and the discontinuation of certain non-divested consumer titles. The decline in Print Book revenue also included the impact of approximately $2 million of revenue that was delayed from the second quarter of the prior year into the third quarter due to distribution interruptions caused by Hurricane Sandy. Growth in Digital Books reflects the Company's ongoing transition to digital products. Online Training and Assessment revenue growth reflects higher revenue from Inscape and ELS products and services.


Revenue by Subject and region is as follows:

                                        For the Three Months
                                          Ended January 31,        % of   % change
                                             2014      2013      Revenue   w/o FX
  Revenue by Subject Category:
  Business                                 $42,298    $42,048        45%        1%
  Technology                                21,863     24,747        23%      -11%
  Consumer                                  10,709     12,642        11%      -15%
  Professional Education                     6,515      5,939         7%       11%
  Architecture                               6,685      6,764         7%       -1%
  Psychology                                 4,576      3,694         5%       24%
  Other                                      1,555      3,414         2%      -52%
  Divested Consumer Publishing Programs          -     13,858
  Total Revenue                            $94,201   $113,106       100%      -16%

  Revenue by Region:
  Americas                                 $73,498    $88,405        78%      -17%
  EMEA                                      15,121     17,358        16%      -15%
  Asia-Pacific                               5,582      7,343         6%      -19%
  Total Revenue                            $94,201   $113,106       100%      -16%

Cost of Sales:

Cost of Sales for the third quarter of fiscal year 2014 decreased 32% to $28.5 million mainly driven by the divested consumer publishing programs ($9 million) and lower sales volume for Print Books in the continuing business.

Gross Profit:

Gross Profit Margin increased from 62.9% to 69.7% in the third quarter of fiscal year 2014. The improvement was mainly driven by the divestment of the low margin consumer publishing programs (400 basis points), higher margin digital revenue (170 basis points) and lower composition costs due to a managed reduction in title count.

Direct Expenses and Amortization:

Direct Expenses for the third quarter of fiscal year 2014 declined 13% to $33.1 million. The decrease was driven by restructuring and other cost savings ($5 million) and the divestment of the consumer publishing programs ($3 million), partially offset by higher employment costs ($2 million) mainly merit and benefit increases and business transformation consulting costs ($1 million).

Amortization of Intangibles decreased $0.4 million to $1.7 million in the third quarter of fiscal year 2014 principally due to intangible assets that have become fully amortized.

Contribution to Profit:

Contribution to Profit increased 7% to $12.8 million in the third quarter of fiscal year 2014, but was flat on a currency neutral basis and excluding the current year Restructuring Credit. Contribution Margin increased 300 basis points to 13.5% in the third quarter of fiscal year 2014, or 220 basis points excluding the current year Restructuring Credit mainly due to the divestment of the consumer publishing programs in fiscal year 2013 and restructuring and other cost savings.


Acquisitions

In January, Wiley acquired the assets of Elan Guides, an early-stage Chartered
Financial Analyst test preparation company.  Elan's CFA materials will be
incorporated into Wiley's CPAExcel test preparation platform. Terms were not
disclosed.

                                     For the Three Months
                                       Ended January 31,             % change
  EDUCATION:                            2014       2013    % change w/o FX (a)

  Revenue by Product/Service:
  Print Textbooks                       $54,358    $62,395     -13%        -8%
  Binder and Custom Products             12,896     12,463       3%         3%
  Online Program Management (Deltak)     19,145     17,145      12%        12%
  Digital Books                           7,964      8,803     -10%        -8%
  WileyPLUS                              18,578     15,554      19%        20%
  Other Publishing Income                 1,994      2,067      -4%         1%
  Total Revenue                        $114,935   $118,427      -3%         0%

  Cost of Sales                        (33,158)   (35,212)      -6%        -3%

  Gross Profit                           81,777    $83,215      -2%         1%
  Gross Profit Margin                     71.2%      70.3%

  Direct Expenses                      (34,773)   (32,457)       7%         9%
  Amortization of Intangibles           (2,382)    (2,382)       0%         0%
  Restructuring Charge (see Note 7)       (117)          -
  Direct Contribution to Profit         $44,505    $48,376      -8%        -4%
  Direct Contribution Margin              38.7%      40.8%

  Shared Service Costs:
  Distribution                          (4,012)    (4,074)      -2%         1%
  Technology Services                   (8,429)    (8,049)       5%         6%
  Occupancy and Other                   (1,687)    (1,198)      41%        49%
  Contribution to Profit                $30,377    $35,055     -13%        -9%
  Contribution Margin                     26.4%      29.6%

(a) Adjusted to exclude the fiscal year 2014 Restructuring Charge

Revenue:

Education revenue for the third quarter of fiscal year 2014 decreased 3% to $114.9 million, but was flat excluding the unfavorable impact of foreign exchange. Growth from WileyPLUS ($3 million), Online Program Management (Deltak) ($2 million) and Binder and Custom Products was offset by declines in Print Textbooks ($5 million) and Digital Books ($1 million). Third quarter revenue comparisons include the unfavorable impact of $2 million of sales delayed from the second quarter of the prior year and recognized in the third quarter due to Hurricane Sandy, in addition to earlier-than-usual ordering in the Australia schools business in the second quarter of fiscal year 2014. The decline in Print Textbooks reflects the transition to custom and digital products and the timing items described above. The decline in Digital Books was mainly driven by weakened enrollment at for-profit institutions. Deltak revenue increased by approximately 12% in the third quarter of fiscal year 2014. Deltak was acquired on October 25, 2012. Revenue in the third quarter of fiscal year 2013 included an extra week of revenue, approximately $1 million, due to closing the acquisition just prior to the end of the second quarter of fiscal year 2013.

WileyPLUS revenue is earned ratably over the school semester. Unearned deferred WileyPLUS revenue as of January 31, 2014 was $12.8 million as compared to $11.7 million as of January 31, 2013.


Revenue by Subject and Region is as follows:

                                       For the Three Months
                                        Ended January 31,     % of   % change
                                         2014        2013    Revenue  w/o FX
  Revenue by Subject Category:
  Business                               $26,259     $26,620     23%       1%
  Sciences                                16,587      17,101     14%      -1%
  Social Sciences                         14,444      15,193     13%      -4%
  Engineering & Computer Science          12,865      14,388     11%      -9%
  Mathematics & Statistics                 6,843       6,981      6%      -2%
  Schools (Australia K-12)                13,906      17,040     12%      -7%
  Online Program Management (Deltak)      19,145      17,145     17%      12%
  Other                                    4,886       3,959      4%      26%
  Total Revenue                         $114,935    $118,427    100%       0%

  Revenue by Region:
  Americas                               $88,583     $85,519     77%       4%
  EMEA                                     4,274       4,675      4%     -11%
  Asia-Pacific                            22,078      28,233     19%     -11%
  Total Revenue                         $114,935    $118,427    100%       0%

Cost of Sales:

Cost of Sales for the third quarter of fiscal year 2014 decreased 6% to $33.2 million, or 3% excluding the favorable impact of foreign exchange mainly driven by lower sales volume.

Gross Profit:

Gross Profit Margin for the third quarter of fiscal year 2014 improved 90 basis points to 71.2% principally due to higher margin revenue from the Deltak acquisition, partially offset by higher royalty rates.

Direct Expenses and Amortization:

Direct Expenses increased 7% to $34.8 million in the third quarter of fiscal year 2014 or 9% excluding the favorable impact of foreign exchange. The increase was mainly driven by higher Deltak employment costs to support business growth ($3 million) and higher accrued incentive compensation ($2 million), partially offset by restructuring and other cost savings ($2 million).

Amortization of Intangibles was $2.4 million in the third quarters of fiscal years 2014 and 2013.

Contribution to Profit

Contribution to Profit for the third quarter of fiscal year 2014 decreased 13% to $30.4 million, or 9% excluding the unfavorable impact of foreign exchange and the current year Restructuring Charge. Contribution Margin decreased 320 basis points to 26.4% in the third quarter of fiscal year 2014 mainly driven by Deltak's continued investment in new university programs that are not yet generating revenue (50 basis points), higher accrued incentive compensation (170 basis points) and higher royalty rates, partially offset by restructuring and other cost savings.

Deltak Update

Deltak accounted for 17% of total Education revenue in the quarter compared to 14% in the prior year. As of January 31, 2014, Deltak had 36 institutions under contract, 120 programs generating revenue and 45 programs under contract and in development but not yet generating revenue. At the time of the Deltak acquisition in October 2012, there were 95 programs generating revenue and 12 programs under contract and in development but not yet generating revenue.


                                                 For the Three Months
                                                   Ended January 31,             % change
    SHARED SERVICES AND ADMINISTRATIVE COSTS:       2014       2013    % change w/o FX (a)

    Distribution                                    $24,367    $25,911      -6%        -4%
. . .
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