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, 2006 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 [ ] Check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ] 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, 2006 were: Class A, par value $1.00 - 46,857,955 Class B, par value $1.00 - 10,671,743 This is the first page of a 30-page document
JOHN WILEY & SONS, INC. INDEX <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION PAGE NO. <S> <C> Item 1. Financial Statements. Condensed Consolidated Statements of Financial Position - Unaudited as of January 31, 2006 and 2005, and April 30, 2005...........................................3 Condensed Consolidated Statements of Income - Unaudited for the three and nine months ended January 31, 2006 and 2005.................................4 Condensed Consolidated Statements of Cash Flows - Unaudited for the nine months ended January 31, 2006 and 2005...........................................5 Notes to Unaudited Condensed Consolidated Financial Statements................................6-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................................15 Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................24 Item 4. Controls and Procedures.........................................................................25 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................................................25 SIGNATURES AND CERTIFICATIONS...........................................................................26-28 EXHIBITS................................................................................................29-30 </TABLE>
JOHN WILEY & SONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands) <TABLE> <CAPTION> (UNAUDITED) January 31, April 30, --------------------------------------- ---------------- 2006 2005 2005 ----------------- ------------------- ---------------- <S> <C> <C> <C> Assets Current Assets Cash and cash equivalents $ 75,301 125,841 $ 89,401 Marketable securities - 14,000 10,000 Accounts receivable 177,118 166,588 137,787 Inventories 88,318 78,133 83,372 Deferred income tax benefits 9,815 9,909 5,921 Prepaids and other 12,670 13,597 12,437 ----------------- ------------------- ---------------- Total Current Assets 363,222 408,068 338,918 Product Development Assets 63,402 59,755 61,511 Property, Equipment and Technology 102,594 115,083 115,383 Intangible Assets 304,541 285,337 291,041 Goodwill 197,380 195,034 195,563 Deferred Income Tax Benefits 5,356 7,772 4,285 Other Assets 27,351 22,679 25,868 ----------------- ------------------- ---------------- Total Assets $ 1,063,846 1,093,728 $ 1,032,569 ================= =================== ================ Liabilities & Shareholders' Equity Current Liabilities Accounts and royalties payable $ 99,449 91,996 $ 70,958 Deferred subscription revenue 150,614 143,510 142,766 Accrued income taxes 31,140 42,329 36,376 Accrued pension liability 6,609 5,159 6,229 Other accrued liabilities 66,912 69,952 84,982 ----------------- ------------------- ---------------- Total Current Liabilities 354,724 352,946 341,311 Long-Term Debt 190,000 200,000 196,214 Accrued Pension Liability 67,614 53,919 62,116 Other Long-Term Liabilities 35,291 32,940 34,652 Deferred Income Taxes 10,057 106 1,702 Shareholders' Equity Class A & Class B common stock 83,191 83,190 83,191 Additional paid-in-capital 65,193 53,205 55,478 Retained earnings 587,189 506,980 507,249 Accumulated other comprehensive (loss)/gain (517) 11,822 1,982 Unearned deferred compensation (3,851) (3,069) (3,074) Treasury stock (325,045) (198,311) (248,252) ----------------- ------------------- ---------------- Total Shareholders' Equity 406,160 453,817 396,574 ----------------- ------------------- ---------------- Total Liabilities & Shareholders' Equity $ 1,063,846 1,093,728 $ 1,032,569 ================= =================== ================ </TABLE> 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) <TABLE> <CAPTION> Three Months Nine Months Ended January 31, Ended January 31, ------------------------------------- ----------------------------------- 2006 2005 2006 2005 ----------------- ---------------- ----------------- ---------------- <S> <C> <C> <C> <C> Revenue $ 278,189 258,428 $ 777,621 732,417 Costs and Expenses Cost of sales 91,207 85,708 254,617 246,184 Operating and administrative expenses 129,007 119,630 383,286 357,232 Amortization of intangibles 3,874 2,665 9,990 7,675 ----------------- ---------------- ----------------- ---------------- Total Costs and Expenses 224,088 208,003 647,893 611,091 ----------------- ---------------- ----------------- ---------------- Operating Income 54,101 50,425 129,728 121,326 Interest Income and Other, net 293 180 689 281 Interest Expense (3,700) (2,154) (7,927) (5,002) ----------------- ---------------- ----------------- ---------------- Net Interest Expense and Other (3,407) (1,974) (7,238) (4,721) ----------------- ---------------- ----------------- ---------------- Income Before Taxes 50,694 48,451 122,490 116,605 Provision For Income Taxes 9,745 15,660 26,680 37,471 ----------------- ---------------- ----------------- ---------------- Net Income $ 40,949 32,791 $ 95,810 79,134 ================= ================ ================= ================ Income Per Share Diluted $ 0.69 0.53 $ 1.59 1.27 Basic $ 0.71 0.54 $ 1.64 1.30 Cash Dividends Per Share Class A Common $ 0.09 0.08 $ 0.27 0.23 Class B Common $ 0.09 0.08 $ 0.27 0.23 Average Shares Diluted 59,459 62,064 60,187 62,539 Basic 57,711 60,513 58,400 60,998 </TABLE> 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) <TABLE> <CAPTION> For The Nine Months Ended January 31, ----------------------------------- 2006 2005 ----------------- ---------------- <S> <C> <C> Operating Activities - -------------------- Net income $ 95,810 $ 79,134 Adjustments to reconcile net income to cash provided by (used for) operating activities Amortization of intangibles 9,990 7,675 Amortization of composition costs 26,688 25,590 Depreciation of property, equipment and technology 24,301 23,084 Non-cash charges & other 53,409 43,520 Non-cash tax benefits (14,252) - Change in deferred subscription revenue 7,008 14,722 Net change in operating assets and liabilities, excluding acquisitions (35,550) (4,890) ----------------- ---------------- Cash Provided by Operating Activities 167,404 188,835 ----------------- ---------------- Investing Activities - -------------------- Additions to product development assets (52,156) (45,285) Additions to property, equipment and technology (14,084) (17,948) Acquisitions, net of cash acquired (29,055) (13,697) Sales (Purchase) of marketable securities 10,000 (14,000) ----------------- ---------------- Cash Used for Investing Activities (85,295) (90,930) ----------------- ---------------- Financing Activities - -------------------- Repayments of long-term debt (282,809) - Borrowings of long-term debt 279,842 - Purchase of treasury stock (82,549) (45,416) Cash dividends (15,870) (13,687) Proceeds from exercise of stock options and other 5,460 3,922 ----------------- ---------------- Cash Used for Financing Activities (95,926) (55,181) ----------------- ---------------- Effects of Exchange Rate Changes on Cash (283) 1,090 ----------------- ---------------- Cash and Cash Equivalents Increase (Decrease) for Period (14,100) 43,814 Balance at Beginning of Period 89,401 82,027 ----------------- ---------------- Balance at End of Period $ 75,301 $ 125,841 ================= ================ Supplemental Information Businesses/Rights Acquired: Fair value of assets acquired $ 35,364 $ 13,697 Liabilities assumed (6,309) - ----------------- ---------------- Cash Paid for Businesses/Rights Acquired $ 29,055 $ 13,697 ================= ================ Cash Paid During the Period for: Interest $ 4,487 $ 3,725 Income taxes $ 24,814 $ 10,066 </TABLE> 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, 2006 and 2005, and results of operations and cash flows for the three and nine month periods ended January 31, 2006 and 2005. The results for the three months and nine months ended January 31, 2006 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, 2005. 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 December 2004, the FASB issued Statement No. 123 (revised 2004) ("SFAS 123R") "Share-Based Payments." SFAS 123R will require the Company to measure the cost of all employee stock-based compensation awards based on the grant-date-fair-value and to record that cost as compensation expense over the period during which the employee is required to perform service under the terms of the award. The statement eliminates the alternative method of accounting for the employee share-based payments previously available under Accounting Principles Board Opinion No. 25. SFAS 123R will be adopted by the Company in the first quarter of fiscal year 2007. The Company currently discloses the pro forma effect of SFAS 123 in the notes to these financial statements. The impact of SFAS 123R adoption has not yet been quantified but is expected to approximate the pro forma effect as disclosed in the notes to the financial statements. 3. Stock-Based Compensation ------------------------ Stock options and restricted stock grants are accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." Accordingly, the Company recognizes no compensation expense for fixed stock option grants since the exercise price is equal to the fair value of the shares at date of grant. For restricted stock grants, compensation cost is generally recognized ratably over the vesting period based on the fair value of shares.
Pro forma information under SFAS No. 123 and SFAS No. 148 - --------------------------------------------------------- The per share value of options granted in connection with the Company's stock option plans during the following periods are estimated using the Black Scholes option pricing model with the following weighted average assumptions: <TABLE> <CAPTION> For the Three and Nine Months Ending January 31, ---------------------------------------- 2006 2005 ----------------- ----------------- <S> <C> <C> Expected life of options (years) 8.0 8.1 Risk-free interest rate 3.9% 4.5% Volatility 27.1% 26.2% Dividend yield 0.9% 0.9% Per share fair value of options granted $13.61 $11.00 </TABLE> For purposes of the following pro forma disclosure, the fair value of the awards was estimated at the date of grant using the Black Scholes option-pricing model and amortized to expense over the options vesting periods. <TABLE> <CAPTION> For the Three Months For the Nine Months Ending January 31, Ending January 31, ------------------------------------- ---------------------------------- (in thousands except per share amount) 2006 2005 2006 2005 ----------------- --------------- -------------- --------------- <S> <C> <C> <C> <C> Net income as reported $40,949 $32,791 $95,810 $79,134 Stock-based compensation, net of tax, included in the determination of net income as reported - Restricted stock plans 653 962 2,483 2,481 Director stock plan 50 14 246 43 Stock-based compensation costs, net of tax, that would have been included in the determination of net income had the fair value-based method been applied (2,225) (2,295) (7,295) (6,550) ----------------- --------------- -------------- --------------- Pro forma net income $39,427 $31,472 $91,244 $75,108 ================= =============== ============== =============== Reported earnings per share Diluted $0.69 $0.53 $1.59 $1.27 Basic $0.71 $0.54 $1.64 $1.30 Pro forma earnings per share Diluted $0.66 $0.51 $1.52 $1.20 Basic $0.68 $0.52 $1.56 $1.23 </TABLE>
In accordance with current accounting requirements, the Company discloses pro forma compensation expense reflecting stock options granted to all employees, including near-retirement and retirement-eligible employees. The fair value of these stock based awards are amortized to expense over the normal vesting period. Upon the adoption of SFAS 123R, in the first quarter of fiscal year 2007, compensation expense will be recognized over the requisite service period to achieve vesting for awards granted to retirement-eligible employees, which may be shorter than the normal vesting period. If the Company had previously been computing pro forma compensation expense over the shorter requisite service period for stock options granted to retirement-eligible employees, the effect on pro forma earnings per share, for all periods presented, would not have been significant. <TABLE> <CAPTION> 4. Comprehensive Income -------------------- Comprehensive income was as follows (in thousands): For the Three Months Ending For the Nine Months Ending January 31, January 31, ------------------------------------ ---------------------------------- 2006 2005 2006 2005 ---------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> Net income $40,949 $32,791 $95,810 $79,134 Change in other comprehensive income, net of taxes: Foreign currency translation adjustment 1,618 4,161 (2,499) 9,625 ---------------- --------------- --------------- --------------- Comprehensive income $42,567 $36,952 $93,311 $88,759 ================ =============== =============== =============== </TABLE> A reconciliation of accumulated other comprehensive gain (loss) follows (in thousands): <TABLE> <CAPTION> Three Months Ended January 31, 2006 ----------------------------------------------------- Beginning Change for Ending Balance Period Balance ------------- --------------- -------------- <S> <C> <C> <C> Foreign currency translation adjustment $24,414 1,618 26,032 Minimum pension liability, net of tax (26,549) - (26,549) ------------- --------------- -------------- Total $(2,135) 1,618 (517) ============= =============== ============== Nine Months Ended January 31, 2006 ------------------------------------------------------- Beginning Change for Ending Balance Period Balance ------------- --------------- -------------- Foreign currency translation adjustment $28,531 (2,499) 26,032 Minimum pension liability, net of tax (26,549) - (26,549) ------------- --------------- -------------- Total $1,982 (2,499) (517) ============= =============== ============== </TABLE>
5. Weighted Average Shares for Earnings Per Share --------------------------------------------- A reconciliation of the shares used in the computation of income per share follows (in thousands): <TABLE> <CAPTION> For the Three Months Ending For the Nine Months Ending January 31, January 31, -------------------------------- ------------------------------- 2006 2005 2006 2005 ------------ -------------- ------------ -------------- <S> <C> <C> <C> <C> Weighted average shares outstanding 58,057 60,819 58,719 61,285 Less: Unearned deferred compensation shares (346) (306) (319) (287) ------------- -------------- ------------ -------------- Shares used for basic income per share 57,711 60,513 58,400 60,998 Dilutive effect of stock options and other stock awards 1,748 1,551 1,787 1,541 ------------- -------------- ------------ -------------- Shares used for diluted income per share 59,459 62,064 60,187 62,539 ============= ============== ============ ============== </TABLE> For the three months ended January 31, 2006 and 2005, options to purchase Class A Common Stock of 1,005,000 and zero 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, 2006 and 2005, 830,000 and zero shares, respectively, have been excluded due to the anti-dilutive impact. 6. Inventories ----------- <TABLE> <CAPTION> As of As of January 31, April 30, ----------------------------------- --------------- 2006 2005 2005 --------------- -------------- --------------- <S> <C> <C> <C> Finished goods $75,054 $66,621 $72,931 Work-in-process 7,620 7,070 6,743 Paper, cloth and other 8,274 7,242 6,028 --------------- -------------- --------------- 90,948 80,933 85,702 LIFO reserve (2,630) (2,800) (2,330) --------------- -------------- --------------- Total inventories $88,318 $78,133 $83,372 =============== ============== =============== </TABLE> 7. Acquisitions ------------ 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 related acquisition costs plus liabilities assumed. Approximately $25.1 million of brands, trademarks and acquired publishing rights and $3.8 million of goodwill were recorded in the aggregate. The aggregate effect of the business acquisitions did not have a material impact on the Company's results of operations. The brands, trademarks and acquired publishing rights will be amortized over a weighted average period of approximately 10 years. The acquisitions consisted 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 has been primarily 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. The Company is in the process of completing valuations necessary to finalize the purchase price allocation. 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 is recorded as acquired publication rights and is 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 has been primarily allocated to goodwill, trademarks, customer relationships and the net tangible assets acquired, which consisted primarily of accounts receivable, capitalized software and deferred subscription revenues. The trademarks and customer relationships are being amortized over a 10-year period. The Company is in the process of completing valuations necessary to finalize the purchase price allocation. On November 7, 2005, the Company acquired the rights to the journal Dialysis & 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. Fiscal Year 2005: During the first nine months of fiscal year 2005, the Company acquired certain business assets and rights for $13.7 million, including related acquisitions costs plus liabilities assumed. The acquisition consisted primarily of the following: In the first quarter of fiscal year 2005, the Company acquired the Journal of Microscopy and Analysis, a controlled circulation journal, for approximately $5.4 million, which is recorded as acquired publication rights. The acquired publication rights are being amortized over a 15-year period. In the third quarter of fiscal year 2005, the Company acquired the rights to the reference portfolio of the Macmillan Nature Publishing Group for approximately $4.5 million. The acquired publication rights are being amortized over a 10-year period.
8. Segment Information ------------------- The Company is a global publisher of print and electronic products, providing must-have 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: <TABLE> <CAPTION> For The Three Months Ended January 31, ------------------------------------------------------------------------------------- 2006 2005 ----------------------------------------- ---------------------------------------- (thousands) <S> <C> <C> <C> <C> <C> <C> Inter- Inter- External segment External segment Customers Sales Total Customers Sales Total -------------- ------------- ------------ ------------- ----------- -------------- Revenue ------- U.S. segments: Professional/Trade $89,246 11,931 101,177 $81,848 10,000 91,848 Scientific, Technical, and Medical 46,847 3,078 49,925 40,995 2,238 43,233 Higher Education 38,402 7,954 46,356 38,242 6,952 45,194 European segment 64,383 8,487 72,870 60,789 5,655 66,444 Asia, Australia & Canada 39,311 445 39,756 36,554 372 36,926 Eliminations - (31,895) (31,895) - (25,217) (25,217) -------------- ------------- ------------ ------------- ----------- -------------- Total Revenue $278,189 - 278,189 $258,428 - 258,428 -------------- ------------- ------------ ------------- ----------- -------------- Direct Contribution to Profit ----------------------------- U.S. segments: Professional/Trade $32,606 $30,938 Scientific, Technical, and Medical 20,839 18,635 Higher Education 14,935 15,220 European segment 22,506 20,339 Asia, Australia & Canada 12,261 12,251 ------------ -------------- Total Direct Contribution to Profit 103,147 97,383 Shared Services and Administrative Costs ---------------------------------------- Distribution (11,960) (11,550) Information technology (14,822) (12,777) Finance (7,173) (9,119) Other administrative (15,091) (13,512) ------------ -------------- Total Shared Services and Administrative Costs (49,046) (46,958) ------------ -------------- Operating Income $54,101 $50,425 ---------------- ============ ============== </TABLE>
<TABLE> <CAPTION> For The Nine Months Ended January 31, ------------------------------------------------------------------------------------ 2006 2005 ---------------------------------------- ---------------------------------------- (thousands) <S> <C> <C> <C> <C> <C> <C> External Inter-segment External Inter-segment Customers Sales Total Customers Sales Total -------------- ------------ ------------ ------------- ------------- ------------- Revenue ------- U.S. segments: Professional/Trade $243,535 31,101 274,636 $229,959 26,886 256,845 Scientific, Technical, and Medical 140,437 7,596 148,033 130,300 5,835 136,135 Higher Education 108,398 25,300 133,698 107,382 23,962 131,344 European segment 192,489 20,289 212,778 178,692 15,000 193,692 Asia, Australia & Canada 92,762 1,329 94,091 86,084 1,240 87,324 Eliminations - (85,615) (85,615) - (72,923) (72,923) ------------ ------------ ------------ ------------- ------------- ------------- Total Revenue $777,621 - 777,621 $732,417 - 732,417 ------------- ------------ ------------ ------------- ------------- ------------- Direct Contribution to Profit ----------------------------- U.S. segments: Professional/Trade $77,009 $72,644 Scientific, Technical, and Medical 68,856 62,301 Higher Education 43,655 43,663 European segment 66,398 60,847 Asia, Australia & Canada 21,461 21,255 ------------ ----------- Total Direct Contribution to Profit 277,379 260,710 Shared Services and Administrative Costs ---------------------------------------- Distribution (36,414) (35,308) Information technology (45,063) (38,009) Finance (22,782) (24,359) Other administration (43,392) (41,708) ------------ ----------- Total Shared Services and Administrative Costs (147,651) (139,384) ------------ ----------- Operating Income $129,728 $121,326 ---------------- ============ =========== </TABLE>
<TABLE> <CAPTION> 9. Intangible Assets ----------------- Intangible assets consist of the following (in thousands): As of January 31, As of April 30, ----------------------------------- --------------- 2006 2005 2005 ---------------- -------------- --------------- <S> <C> <C> <C> Intangible assets not subject to amortization Branded trademarks $57,900 $57,900 $57,900 Acquired publication rights 117,800 120,272 120,426 ---------------- -------------- --------------- Total intangible assets not subject to amortization 177,700 178,172 178,326 Net intangible assets subject to amortization, principally acquired publication rights 128,841 107,165 112,715 ---------------- -------------- --------------- Total $304,541 $285,337 $291,041 ================ ============== =============== </TABLE> 10. Marketable Securities --------------------- During the third quarter of fiscal year 2005, the Company acquired marketable securities for approximately $14.0 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." During the first quarter of fiscal year 2006, the Company sold its remaining marketable securities for approximately $10.0 million. There were no comparable investments at January 31, 2006. 11. Income Taxes ------------ The tax provision for the third quarter of fiscal year 2006 includes a tax adjustment of $6.8 million, or $0.11 per diluted share, related to a favorable resolution of certain matters with tax authorities. The tax provision for the nine months ending January 31, 2006 also includes $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 current 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 nine months ending January 31, 2006 increased to 33.4% as compared to 32.1% for the nine months ending January 31, 2005, mainly due to lower U.S. and foreign tax benefits.
<TABLE> <CAPTION> 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 Ending January 31, January 31, ------------------------------- ---------------------------- (Dollars in thousands) 2006 2005 2006 2005 ------------- -------------- ----------- ------------ <S> <C> <C> <C> <C> Service Cost $2,642 $2,258 $8,245 $6,248 Interest Cost 2,889 2,523 8,707 7,896 Expected Return of Plan Assets (2,732) (2,145) (8,253) (6,679) Net Amortization of Prior Service Cost 220 108 465 387 Recognized Net Actuarial Loss 748 519 2,394 1,457 ------------- -------------- ----------- ------------- Net Pension Expense $3,767 $3,263 $11,558 $9,309 ============= ============== =========== ============= </TABLE> Pension plan contributions were $4.8 million and $4.2 million for the nine months ended January 31, 2006 and 2005, respectively. 13. Long-term Debt -------------- On November 9, 2005, the Company entered into a new $300 million revolving credit agreement with Bank of America as Administrative Agent and 14 other lenders. The interest rate on the initial borrowings was equal to LIBOR plus .37%. 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 .37% to .825% depending on the coverage ratio of debt to EBITDA; or (ii) at the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its prime rate; and (iii) LIBOR plus or minus an amount determined through a competitive bidding process among the lenders. The maximum amount outstanding at any time under option (iii) above cannot exceed $25 million. In addition, the Company will pay a facility fee ranging from .08% to .175% on the facility depending on the coverage ratio of debt to EBITDA. The Company has the option to request an increase of up to $100 million in the size of the facility in minimum amounts of $25 million. The credit agreement contains certain restrictive covenants similar to those in the Company's former credit agreements related to an interest coverage ratio, funded debt levels, and restricted payments, including a limit on dividends paid and share repurchases. The credit agreement will terminate on November 9, 2010. At January 31, 2006, $190 million was outstanding under this agreement. Simultaneous with the execution of this agreement, the Company terminated its previous credit agreement with UBS AG and paid in full the amounts outstanding under that agreement. In connection with the early termination of the credit agreement, $0.5 million of unamortized organization fees were expensed in the third quarter of fiscal year 2006.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - THIRD QUARTER ENDED JANUARY 31, 2006 Revenue for the third quarter of fiscal year 2006 of $278.2 million increased 8% from $258.4 million in the prior year's third quarter. The third quarter revenue increase was driven by year-on-year growth in the global Scientific, Technical and Medical (STM) and Professional/Trade (P/T) businesses. U.S. Higher Education revenue also increased compared with last year's third quarter. Gross profit margin for the third quarter was 67.2% compared to 66.8% in the prior year's quarter, primarily due to higher sales of global STM products. Operating and administrative expenses increased 8% over last year's third quarter, mainly due to investments in technology to deliver products to our customers and increased selling, marketing and editorial costs to support revenue growth, partially offset by lower professional fees associated with Sarbanes-Oxley compliance. Operating income advanced 7% to $54.1 million in the third quarter of fiscal year 2006 primarily due to increased revenue. Operating margin for the third quarter was 19.4% compared with 19.5% in the prior year. Interest expense increased $1.5 million primarily due to higher borrowing rates and the one-time write-off of unamortized debt financing costs associated with the termination of the Company's previous credit agreement. Excluding a favorable tax adjustment associated with the resolution of certain matters with tax authorities, the effective tax rate for the third quarter of fiscal year 2006 increased to 32.6% as compared to 32.3% in the third quarter of fiscal year 2005. Including the tax adjustment, the reported third quarter effective tax rate was 19.2%. Earnings per diluted share and net income for the third quarter of fiscal year 2006 were $0.69 and $40.9 million, respectively. Excluding the favorable tax adjustment further discussed below, adjusted earnings per diluted share and adjusted net income for the third quarter of fiscal year 2006 rose 8% to $0.57 and 4% to $34.2 million, respectively. Earnings per diluted share outpaced growth in net income due to the accretive effect of treasury stock purchases. During the third quarter of fiscal year 2006, the Company repurchased approximately 708,400 million shares of common stock at an average price of $39.04. 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 a measure calculated in accordance with GAAP, it should not be considered as a substitute for other GAAP measures, including net income and earnings per share, as reported, as an indicator of operating performance.
Adjusted net income and adjusted earnings per diluted share, which exclude the tax benefit associated with the resolution of certain matters with tax authorities, for the three months ended January 31, 2006 and 2005, are as follows: <TABLE> <CAPTION> Reconciliation of non-GAAP financial disclosure ----------------------------------------------- Net Income (in millions) 2006 2005 ------------------------ -------------- -------------- <S> <C> <C> As Reported $40,949 $32,791 Favorable resolution of tax matters (6,776) - -------------- -------------- Adjusted $34,173 $32,791 ============== ============== Earnings per Diluted Share -------------------------- As Reported $0.69 $0.53 Favorable resolution of tax matters (0.11) - Adjusted $0.57 $0.53 ============== ============= </TABLE> SEGMENT RESULTS Professional/Trade (P/T) - ------------------------ Wiley's U.S. P/T revenue of $101.2 million for the third quarter advanced 10% over the prior year, bolstered by a solid holiday season and strong performances of its business, technology, and architecture/engineering categories. P/T's finance and leadership lists, as well as the Sybex technology titles it acquired in May 2005, helped to deliver the positive results. The Sybex acquisition contributed approximately $1.9 million to the revenue growth. Revenue from licensing and website advertising, particularly Frommers.com, was very strong during the quarter. Direct contribution margin declined 150 basis points to 32.2% for the quarter, principally due to product mix, specifically higher inventory provisions and higher-cost imported titles. A number of titles published during the quarter contributed to the performance. Most notable was The Little Book That Beats the Market by Joel Greenblatt, which published in November and was featured in The Wall Street Journal. This book has earned a place on most of the major bestseller lists, alongside other Wiley titles such as SuDoku For Dummies, Volumes I and 2 by Andrew Heron and Edmund James; Empire of Debt: The Rise of an Epic Financial Crisis by William Bonner and Addison Wiggin; J.K. Lasser's Income Tax 2006; Investing For Dummies by Eric Tyson: and Five Dysfunctions of a Team by Patrick Lencioni. Lencioni's latest book, Silos, Politics, and Turf Wars, was successfully released during the quarter, as was Hedgehogging by Barton Biggs, the well known Morgan Stanley investment management chairman turned hedge fund entrepreneur. Several magazines and newspapers cited Wiley cookbooks in holiday best-of-the-year round-ups, including Paula Wolfert's Cooking of Southwest France (New York Times, National Public Radio); Lisa Yockelson's ChocolateChocolate (New York Times, Boston Globe); Elizabeth Karmel's Taming the Flame: Secrets for Hot-and-Quick Grilling and Low-and-Slow BBQ (Boston Globe, Chicago Tribune); Leslie Revsin and Rick Rodgers' The Simpler the Better: Sensational One Dish Meals (Boston Globe); Laxmi Hiremath's The Dance of Spices: Classic Indian Cooking for Today's Home Kitchen (Boston Globe, Chicago Tribune); and Cecilia Hae-Jin Lee's Eating Korean: From Barbecue to Kimchi, Recipes from My Home (Boston Globe).
P/T is delivering its content to customers in a variety of new formats. Audio downloads to facilitate study for the CPA exam were published in the quarter. Four Web courses, which provide test banks and supplementary course material for professors and students, were released in November. In January, Wiley acquired the publishing assets of the Stock Trader's Almanac from the Hirsch Organization. Since 2004, Wiley has been the co-publisher of this unique and popular suite of print and online books, newsletters, and analytical tools for the finance market, but will now have the opportunity to extend the brand by developing new products. Scientific, Technical, and Medical (STM) - ---------------------------------------- Wiley's U.S. STM business continued to deliver excellent results in the third quarter with revenue of $49.9 million up 15% over the previous year's comparable period. Subscription and non-subscription journal revenue, from advertising, commercial reprints, and journal backfiles contributed to these results. The reference book program continued its strong performance, driven by title output and global market strength. STM's direct contribution to profit increased 12%. Direct contribution margin for the third quarter decreased 140 basis points to 41.7%, principally due to increased revenue from lower margin professional society journals and planned increases in sales and marketing costs to drive revenue growth. The value of Wiley's journals to the research community was evident in the 26% increase in the number of full-text accesses to the more than one million journal articles available on the Company's online service, Wiley InterScience. This significant gain was fueled by increased traffic from search engines and the addition of backfile articles. The value of Wiley's content is also reflected in the results of the ISI Impact Factor Analysis released in 2005, an independent ranking that measures how often individual journal articles are cited by researchers. Many of Wiley's journals, such as the Journal of Biomedical Materials Research, Catheterization and Cardiovascular Intervention, Neurology and Urodynamics, Head and Neck, and the American Journal of Physical Anthropology, showed significant increases. In November, STM acquired Dialysis and Transplantation, an advertising focused publication that is the world's oldest peer reviewed journal for renal care, catering to nephrologists, internists, surgeons, and other physicians in more than 130 countries. Multi-year agreements were signed with the Crohn's and Colitis Foundation of America to publish the journal, Inflammatory Bowel Diseases, beginning in 2007, and the National Association of Research in Science Teaching to continue publishing the Journal of Research in Science Teaching. Soon after the close of the third quarter, STM signed a multi-year agreement with The American Ceramic Society to publish 20-30 books and conference proceedings. STM also renewed its book publishing agreement with the IEEE, the premier professional organization for electrical and electronics engineers around the world.
Higher Education - ----------------- Revenue of Wiley's U.S. Higher Education business increased 3% during the third quarter to $46.4 million, mainly driven by year-on-year growth in science and mathematics. Higher Education's direct contribution to profit declined $0.3 million, reflecting higher marketing and sales costs, as planned. WileyPLUS (formerly known as eGrade Plus) continued to gather momentum around the world with significant adoptions in the U.S., Canada, Europe, and Asia, as well as in non-traditional academic settings. Wiley PLUS delivers to students and instructors an integrated suite of resources (including an online version of the textbook), that is organized in one easy-to-use website around teaching and learning activities. WileyPLUS allows instructors to customize course content, create class presentations, assign homework and quizzes for automatic grading, and track student progress. Revenue from the sale of WileyPlus is deferred and recognized over the course of the semester. As of January 31, 2006 the Company deferred approximately $1 million of WileyPLUS revenue which will be recognized in the fourth quarter of fiscal year 2006. Since it was first introduced in 2003, more than 250,000 students have purchased WileyPLUS with their course materials. In a recent survey of students who used WileyPLUS, 89% responded that it increased their understanding of the course material and 69% said it helped them achieve a better grade. WileyPLUS was named a finalist by the Software & Information Industry Association in its 21st Annual CODiE Awards. WileyPLUS was named one of five finalists in the Education Category for "Best Postsecondary Course or Content Management Solution." During the third quarter, Higher Education signed a new agreement with the National Geographic Society, extending Wiley's global partnership with the Society, to create new products sold exclusively with Wiley textbooks and WileyPLUS. Europe - ------ Wiley Europe's revenue increased 10% during the third quarter to $72.9 million, or 16% excluding foreign currency effects. Higher revenue from STM journal and book programs, as well as P/T products, specifically SuDoku For Dummies, contributed to the improvement. Excluding foreign currency effects, the direct contribution margin of 30.9% for the third quarter was on par with the prior year third quarter, or up 30 basis points including foreign exchange effects. The European market for STM products delivered through Wiley InterScience remained strong. Sales of SuDoku For Dummies, Volumes I, 2, and 3 by Andrew Heron and Edmund James continued at a phenomenal pace. In December, Kakuro For Dummies by Andrew Heron published to similarly strong demand. Neuro-linguistic Programming For Dummies and EBay.co.uk For Dummies were also top performers. Eleven German-language For Dummies titles were published successfully during the third quarter. During the quarter, Wiley-VCH, which is based in Germany, announced a publishing partnership with leading chemical societies in China, India, Korea and Germany to publish a new journal, Chemistry - An Asian Journal. Nobel Laureate, Ryoji Noyori will serve as Chairman of the Editorial Board. Complementing its sister journals, Chemistry - A European Journal (published on behalf of the Editorial Union of European Chemical Societies) and Angewandte Chemie (published on behalf of the German Chemical Society), the new journal will provide a highly visible arena for prominent researchers from around the world, especially from Asia.
Asia, Australia, and Canada - --------------------------- Wiley's revenue in Asia, Australia, and Canada increased by 8% to $39.8 million during the third quarter. Contributing to theses results were revenue growth in Wiley Australia's Higher Education business; strong sales in Asia, especially in India, Japan and China; and improved sell-through of Higher Education products and P/T sales in Canada. The segment's direct contribution to profit was flat in comparison to the prior year. Higher revenue was offset by product mix and higher selling and shipping costs. At the close of the quarter, Wiley Asia completed the acquisition of the outstanding shares of Wiley Dreamtech (India) Private Ltd. This acquisition is an important step in the Company's plans to grow Wiley's presence in India, extending its sales and marketing reach for all Wiley products in an important and rapidly growing market. Wiley acquired a majority interest in Dreamtech in 2001 as part of its highly successful acquisition of Hungry Minds Inc., which brought to the Company such well known brands as For Dummies, Frommer's, and CliffsNotes, among others. Wiley has had a presence in India since 1965. Shared Services and Administrative Costs - ---------------------------------------- Shared services and administrative costs for the third quarter increased by 4% to $49.0 million. The increase is primarily attributable to increases in technology investments to deliver products to our customers and timing of facility costs, partially offset by lower professional fees associated with Sarbanes-Oxley compliance. NINE MONTHS ENDED JANUARY 31, 2006 Revenue for the first nine months of fiscal year 2006 of $777.6 million increased 6% from $732.4 million in the prior year. The revenue increase was driven by year-on-year growth in the global STM business, with subscription journals, non-subscription journal products, such as advertising, reprints and backfiles, and books each contributing to these results. The U.S. P/T business also contributed to the year-on-year growth with solid performances in technology and business. Revenue from the Company's acquisition of Sybex contributed approximately $6.6 million to the improvement. Gross profit margin for the nine-month period was 67.3% compared to 66.4% in the prior year. Improvements in STM product mix, principally higher journal revenues, improvements in STM reference book margins and journal backfile sales contributed to the improvement. Operating and administrative expenses increased 7% over the prior year. The increase primarily reflects investments in technology to deliver products to our customers, increased marketing and editorial costs to support revenue growth and higher facility costs, partially offset by reduced professional costs associated with Sarbanes-Oxley compliance. Operating income advanced 7% to $129.7 million in the first nine months of fiscal year 2006. Revenue and product mix more than offset increases in technology expenses to drive the year-on-year growth. Operating margin improved to 16.7% from 16.6% in the prior year. Interest expense increased $2.9 million primarily due to higher interest rates and a $0.5 million write-off of unamortized debt costs in connection with the early termination of the credit agreement.
Excluding the favorable tax adjustments described in the non-GAAP financial disclosure below, the effective tax rate for the first nine months of fiscal year 2006 increased to 33.4% as compared to 32.1% in the first nine months of fiscal year 2005, mainly due to a reduction of U.S. and foreign income tax benefits. Including the tax adjustments, the effective tax rate was 21.8% Earnings per diluted share and net income for the first nine months of fiscal year 2006 were $1.59 and $95.8 million. Excluding the tax adjustments further described below, adjusted earnings per diluted share and adjusted net income for the first nine months of fiscal year 2006 rose 7% to $1.36 and 3% to $81.6 million, respectively. Earnings per diluted share growth outpaced growth in net income due to the accretive effect of treasury stock purchases. During the first nine months of fiscal year 2006, the Company repurchased approximately 2.1 million shares of common stock at an average price of $39.40. 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, 2006 and 2005, excluding the tax benefits are as follows: <TABLE> <CAPTION> Reconciliation of non-GAAP financial disclosure ----------------------------------------------- Net Income (in millions) ------------------------ 2006 2005 -------------- -------------- <S> <C> <C> As reported $95,810 $79,134 Tax benefit on repatriated foreign dividends (7,476) - Favorable resolution of tax matters (6,776) - -------------- -------------- Adjusted $81,558 $79,134 ============== ============== Earnings per Diluted Share -------------------------- As reported $1.59 $1.27 Tax benefit on repatriated foreign dividends (0.12) - Favorable resolution of tax matters (0.11) - Adjusted $1.36 $1.27 ============== ============= </TABLE> The Adjusted Net Income and Adjusted Earnings per Diluted Share above exclude 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 US Internal Revenue Service issued Notice 2005-38. The notice provided for a tax benefit, which was recorded by the Company in the first quarter of fiscal year 2006, that fully offset the tax accrued by the Company on foreign dividends in the fourth quarter of fiscal year 2005. The current tax benefit and the corresponding fourth quarter tax accrual in fiscal year 2005 had no cash impact on the Company.
The Adjusted Net Income and Adjusted Earnings per Diluted Share above also exclude a favorable tax adjustment associated with the resolution of certain matters with tax authorities. SEGMENT RESULTS Professional/Trade (P/T) - ------------------------ Wiley's U.S. P/T revenue for the first nine months of fiscal year 2006 advanced 7% over the prior year. P/T's technology and business book programs contributed to the growth. Revenue from the Company's recent acquisition of Sybex, a global publisher of computer and software information technology titles, contributed approximately $6.6 million to the revenue growth. Licensing of rights and higher online advertising also had a positive effect on the results. Direct contribution margin decreased by 24 basis points principally due to product mix. Scientific, Technical, and Medical (STM) - ---------------------------------------- Wiley's U.S. STM business recorded strong year-to-date results with revenue growth of 9% over the prior year to $148.0 million. Subscription and non-subscription journal revenue, such as journal backfiles, advertising, and reprints, contributed to the year-on-year growth. The reference book program continued to perform well against a strong performance last year. Direct contribution margin for the first nine months of fiscal year 2006 improved by 75 basis points to 46.5%. New and renewed Enhanced Access Licenses were signed by customers around the world who continue to take advantage of Wiley InterScience's wide range of access options, which is reflected in the continuing growth in usage. Full-text accesses to Wiley InterScience during the first nine months of the fiscal year increased 22.1% over the same period in the previous year. Higher Education - ---------------- Revenue of Wiley's U.S. Higher Education business increased 2% during the first nine months of fiscal year 2006. The growth was driven by solid sales of science and mathematics titles, partially offset by softness in social science and the deferral of WileyPlus revenue to the fourth quarter. Revenue from the sale of WileyPlus is deferred and recognized over the course of the semester. Direct contribution to profit for the first nine months fiscal year 2006 was $43.7 million, on par with the prior year. Higher revenue was offset by higher planned sales and marketing costs and the deferral of WileyPlus revenue. Direct contribution to profit increased 2%, excluding the impact of the deferral. Europe - ------ Wiley Europe's revenue for the first nine months of fiscal year 2006 was up 10% over prior year, or 12% excluding foreign currency effects. Direct contribution to profit increased 9% to $66.4 million, or 12% excluding foreign currency effects. Revenue growth in STM and P/T drove the solid gains. Asia, Australia, and Canada - --------------------------- Wiley's revenue in Asia, Australia, and Canada was up 8% during the first nine months of fiscal year 2006, or 5% excluding foreign currency effects. STM reference books and P/T growth in Asia and Higher Education in Australia drove the improvement. Excluding foreign currency effects, direct contribution to profit for the nine-month period declined approximately 6% to $21.5 million, mainly due to product mix and higher selling and shipping costs.
Shared Services and Administrative Costs - ---------------------------------------- Shared services and administrative costs for the first nine months of fiscal year 2006 increased 6% to $147.7 million. The increase is primarily attributable to planned increases in technology investments to deliver products to our customers, such as Wiley InterScience and WileyPlus, and increased facility costs, partially offset by reduced professional fees associated with Sarbanes-Oxley compliance. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities in fiscal year 2006 was $167.4 million compared with $188.8 million in the prior year. Higher cash from operations and deferred subscription cash receipts were more than offset by cash used for operating assets and liabilities. The increase in cash used for operating assets and liabilities was mainly the result of higher inventory purchases and higher income tax payments along with a prior year tax refund. Also contributing to the cash use were increased accounts receivable mainly due to higher book sales in the current period. The higher inventory purchases are from the reduced levels achieved in the prior year under inventory management programs as well as new current year editions. Cash used for investing activities for the first nine months of fiscal year 2006 was $85.3 million compared to $90.9 million in the prior year. The Company invested $29.1 million in acquisitions of publishing assets and rights compared to $13.7 million in the prior year. Increased cash used for investments in product development were partly offset by lower spending on property, equipment and technology. The Company sold $10 million of marketable securities during the current year consisting of shares of variable rate securities issued by closed-end funds and acquired $14 million of these securities in the prior year period. Projected product development and property, equipment and technology capital spending for fiscal year 2006 is forecast to be approximately $70 million and $25 million, respectively. Cash used for financing activities was $95.9 million in the first nine months of fiscal 2006, as compared to $55.2 million in the prior period. Cash was used to purchase treasury stock, repay debt and pay dividends to shareholders. On November 9, 2005, John Wiley and Sons, Inc. entered into a new $300 million revolving credit agreement with Bank of America as Administrative Agent and 14 other lenders. The interest rate on the initial borrowings was equal to LIBOR plus .37%. 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 .37% to .825% depending on the coverage ratio of debt to EBITDA; or (ii) at the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its prime rate; and (iii) LIBOR plus or minus an amount determined through a competitive bidding process among the lenders. The maximum amount outstanding at any time under option (iii) above cannot exceed $25 million. In addition, the Company will pay a facility fee ranging from .08% to .175% on the facility depending on the coverage ratio of debt to EBITDA. The Company has the option to request an increase of up to $100 million in the size of the facility in minimum amounts of $25 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 credit agreement will terminate on November 9, 2010. As of January 31, 2006, $190.0 million was outstanding under the new agreement. Simultaneous with the execution of this agreement, the Company terminated its previous credit agreement with UBS AG and paid in full the amounts outstanding under that agreement by utilizing funds from the new facility. In connection with the early termination of the credit agreement the Company wrote-off $0.5 million of unamortized organization fees in the third quarter. The final payment on the previous variable rate term loan was due September 2006.
Borrowings this period, including those under the new credit agreement were $279.8 million while payments, including the paydown of the prior revolving credit and term loan facility were $282.8 million. Included in this activity is $50.0 million of borrowings under its former revolving credit facility to repay $50.0 million of the former outstanding term loan facility in advance of the scheduled due date. During the third quarter of fiscal year 2006 the Company purchased the following Common Stock under its stock repurchase program. The current program approved by the Company's Board of Directors in June of 2005 authorizes management to purchase up to four million additional common shares. <TABLE> <CAPTION> Number of Shares Average Price Maximum Shares Yet to be Month Purchased Paid Per Share Purchased Under the Repurchase Plan - ----------------- -------------------------------- --------------- ---------------------------------------- <S> <C> <C> <C> November 319,200 $38.97 3,192,130 December 61,100 $39.56 3,131,030 January 328,100 $39.01 2,802,930 ------- Total 708,400 $39.04 </TABLE> During the first nine months of fiscal year 2006, the Company purchased 2,095,270 shares under its stock repurchase program at an average price of $39.40 per share. The Company increased its quarterly dividend to shareholders by 20% to $0.090 per share versus $0.075 per share in the prior year. The Company believes its cash balances together with existing credit facilities are sufficient to meet its obligations. At January 31, 2006 the Company had $190.0 million of variable rate loans outstanding and approximately $231.9 million of unused borrowing capacity available under its revolving credit facilities and other short-term lines of credit. "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. year 2006. Interest Rates The Company had $190.0 million of variable rate loans outstanding at January 31, 2006, 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, 2006 was approximately 4.83%. A hypothetical 1% change in interest rates for the variable rate debt would affect annual net income and cash flow by approximately $1.3 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 $66.1 million and $56.7 million at January 31, 2006 and April 30, 2005, respectively. On an annual basis, a one percent change in the estimated sales return rate could affect net income by approximately $3.0 million. A change in the pattern of trends in returns could affect the estimated allowance. 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. Customer Credit Risk The Company's business is not dependent upon a single customer; however, the industry has experienced a significant concentration in national, regional, and online bookstore chains in recent years. Although no one book customer accounts for more than 5% of total consolidated revenue, the top 10 book customers account for approximately 25% of total consolidated revenue and approximately 47% of total gross trade accounts receivable at April 30, 2005. 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 23% of total consolidated revenue and no one agent accounts for more than 6% of total consolidated revenue for the fiscal year ended April 30, 2005. 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 significant changes in the Company's internal controls or in other factors that could significantly affect such internal controls subsequent to this evaluation. PART II - OTHER INFORMATION 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 10.1 - $300,000,000 Credit Agreement dated November 9, 2005 (filed as an exhibit to the Company's report Second Quarter Form 10-Q). (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 9, 2005. i. Earnings release on the third quarter fiscal 2006 results issued on Form 8-K dated March 6, 2006 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 10-Q on December 9, 2005. i. Deferred Compensation Plans issued on Form 8-K dated December 21, 2005.
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, 2006
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, 2006
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, 2006
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, 2006 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 - -------------------- William J. Pesce President and Chief Executive Officer Dated: March 9, 2006
Exhibit 99.2 CERTIFICATION PURSUANT TO 18 .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, 2006 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 - -------------------- Ellis E. Cousens Executive Vice President and Chief Financial & Operations Officer Dated: March 9, 2006