WLY

Business Context and Reporting Period

Company: John Wiley & Sons, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 31, 2008 (Second Quarter of Fiscal Year 2009)
Business Overview: A global publisher of print and electronic products serving scientific, technical, medical, scholarly, professional/trade, and higher education markets. The company recently transitioned to a global organizational structure with three core business segments: Scientific, Technical, Medical and Scholarly (STMS); Professional/Trade (P/T); and Higher Education.

Key Financial Metrics

Note: Operating cash flow for the six-month period was negative due to timing of journal renewals and working capital changes.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 2% ($431.9M) for the quarter and 3% ($833.6M) for the six months compared to the prior year. Excluding foreign exchange impacts, growth was 5% and 4%, respectively.
• Segment Performance:
  • STMS: Revenue increased 7% (quarter) and 7% (six months), driven by journal subscriptions and books.
  • Professional/Trade: Revenue declined 12% (quarter) and 8% (six months) due to a weak U.S. retail environment.
  • Higher Education: Revenue increased 11% (quarter) and 9% (six months), driven by strong performance across subject categories and digital learning suites.
• Profitability: Operating income increased 13% for the quarter and 5% for the six months. Gross profit margins improved slightly (68.4% for the quarter) due to product mix and price increases, offset by inventory obsolescence.
• Foreign Exchange: Significant negative impact from the strengthening U.S. dollar, resulting in $3.6M (quarter) and $4.0M (six months) in foreign exchange losses.
• Tax Rate: The effective tax rate for the six months was 22.1%, compared to a 5.0% benefit in the prior year. The prior year included a non-recurring $18.7M deferred tax benefit from U.K. and German tax legislation.

Guidance, Outlook, and Risks

• Capital Spending: Projected product development and property/equipment spending for fiscal year 2009 is forecast at approximately $125 million and $45 million, respectively.
• Liquidity: The company reported $31.4M in cash and $336.4M in unused borrowing capacity. Management believes operating cash flow and credit facilities are adequate for foreseeable needs, though global credit market volatility poses a risk.
• Seasonality: Cash flow is seasonal; STMS journal receipts occur primarily November-January, while Higher Education sales concentrate in June-August and November-January. Working capital needs typically increase from May through September.
• Accounting Changes: Effective November 1, 2008, the company changed the functional currency for its European STMS journal business from USD to local currency (Euro/Sterling), which may increase reported revenue volatility.
• Risks: Key risks include the financial stability of journal subscription agents (20% of revenue), consolidation of book retailers, and the ability to integrate acquired operations (e.g., Blackwell Publishing).

Investor Verification Checklist

• Deferred Revenue Timing: Verify the recovery of the $250M decrease in deferred revenue, attributed to delays in processing 2009 journal renewals due to system integration.
• Non-GAAP Adjustments: Review the reconciliation of net income excluding the $18.7M prior-year tax benefit to understand underlying operational trends.
• Foreign Exchange Exposure: Assess the impact of the new functional currency reporting for European operations on future earnings volatility.
• Debt Levels: Monitor the $1.0 billion debt load and interest expense in the context of global credit market disruptions.
• Acquisition Integration: Evaluate the realization of synergies from the Blackwell Publishing acquisition, particularly in the STMS segment.