WLY

Business Context and Reporting Period

Company: John Wiley & Sons, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Second quarter and first six months ended October 31, 2009 (Fiscal Year 2010).
Business Overview: A global publisher of print and electronic products serving scientific, technical, medical, scholarly, professional, trade, and higher education markets.

Key Financial Metrics

Margins (Q2 2009): Gross profit margin was 69.0% (up 0.6% from prior year). Operating margin was approximately 16.8%.

Material Changes vs. Prior Period

• Revenue Growth: Q2 revenue increased 4% year-over-year. Excluding foreign exchange, growth was 3%, driven by Professional/Trade and Higher Education segments, partially offset by a decline in Scientific, Technical, Medical, and Scholarly (STMS) due to publication timing and lower advertising revenue.
• Profitability: Operating income increased 7% in Q2 and 14% for the six-month period. Net income rose 15% in Q2 and 4% for the six months.
• Impairment Charge: The company recorded a one-time pre-tax impairment charge of $11.5 million related to intangible assets of GIT Verlag (a German-language magazine business) in Q2 2009.
• Cash Flow: Operating cash flow improved significantly to $40.1 million for the six months ended Oct 31, 2009, compared to a use of $39.8 million in the prior year, largely due to improved deferred revenue collections and higher earnings.
• Debt Reduction: Net debt decreased by $178.0 million compared to the prior year period. The company repaid $382.5 million in long-term debt while borrowing $413.3 million.

Guidance, Outlook, and Risks

• Segment Outlook:
  • STMS: Journal subscription revenue increased 6% on a currency-neutral basis for the ten-month calendar period ended Oct 31, 2009. Market conditions remain difficult in Greece and Ireland, but leading indicators in EMEA and Asia-Pacific are positive.
  • Professional/Trade: Sales growth was strongest in the US, UK, Germany, and Australia. Retail sell-through is improving.
  • Higher Education: Strong growth reported in all regions and subject categories, driven by a strong frontlist and digital products (WileyPLUS).
• Capital Spending: Projected product development and property/equipment spending for fiscal year 2010 is forecast at approximately $130.0 million and $50.0 million, respectively.
• Risks and Contingencies:
  • Foreign Exchange: Approximately 50% of net revenue is generated outside the U.S. Fluctuations in the British pound, euro, and other currencies significantly impact results. The company recorded $10.7 million in foreign exchange transaction losses for the six months ended Oct 31, 2009.
  • Market Volatility: Global capital and credit markets remain volatile, which could impair access to financing.
  • Customer Concentration: Top 10 book customers account for approximately 18% of total consolidated revenue. Subscription agents account for approximately 20% of revenue.
  • Restructuring: The company is considering restructuring alternatives for GIT Verlag, estimated to cost approximately $2 million.

Investor Verification Checklist

• Impairment Details: Verify the specific assumptions used in the $11.5 million GIT Verlag impairment test and the status of the proposed $2 million restructuring plan.
• Foreign Exchange Impact: Assess the sensitivity of future earnings to currency fluctuations, given the $10.7 million transaction loss and significant translation adjustments.
• Deferred Revenue: Confirm the sustainability of the improvement in deferred revenue collections, which drove the positive operating cash flow swing.
• Digital Transition: Monitor the growth rate of higher-margin digital products (WileyPLUS, eBooks) versus print revenue, particularly in the Higher Education segment.
• Debt Covenants: Review the terms of the $853.2 million variable rate debt and the effectiveness of the interest rate swap hedges in mitigating rate risk.