Attached files

file filename
EX-10.3 - DIRECTOR STOCK PLAN - WILEY JOHN & SONS, INC.exhibit10_3.htm
EX-31.2 - CERTIFICATION - WILEY JOHN & SONS, INC.exhibit31_2.htm
EX-31.1 - CERTIFICATION - WILEY JOHN & SONS, INC.exhibit31_1.htm
EX-32.2 - CERTIFICATION - WILEY JOHN & SONS, INC.exhibit32_2.htm
EX-32.1 - CERTIFICATION - WILEY JOHN & SONS, INC.exhibit32_1.htm
EX-10.2 - EXECUTIVE ANNUAL INCENTIVE PLAN - WILEY JOHN & SONS, INC.exhibit10_2.htm
EX-10.1 - KEY EMPLOYEE STOCK PLAN - WILEY JOHN & SONS, INC.exhibit10_1.htm
EXCEL - IDEA: XBRL DOCUMENT - WILEY JOHN & SONS, INC.Financial_Report.xls
UNITED STATES
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 October 31, 2014
 
Commission File No. 1-11507
 
OR
                                                                                                                              [  ]                       TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES ACT OF 1934
For the transition period from_____  to _____

JOHN WILEY & SONS, INC.
(Exact name of Registrant as specified in its charter)

NEW YORK
 
13-5593032
(State of other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
111 RIVER STREET, HOBOKEN NJ
 
07030
(Address of principal executive offices)
 
Zip Code
Registrant’s telephone number, including area code
 
(201) 748-6000
NOT APPLICABLE

Former name, former address, and former fiscal year, if changed since last report

Indicate by check mark, whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the securities exchange act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [x]   No [  ]
 
Indicate by check mark, whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [x]   No [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [X]                                         Accelerated filer [  ]                                      Non-accelerated filer [  ]
 
Smaller reporting company [   ]
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [  ]     NO [X]
 
The number of shares outstanding of each of the Registrant’s classes of Common Stock as of November 30, 2014 were:
 
Class A, par value $1.00 – 49,386,167
Class B, par value $1.00 – 9,482,216
 
 
This is the first page of a 48 page document

 
 
1

 
 
 
JOHN WILEY & SONS, INC.

INDEX


PART I
-
FINANCIAL INFORMATION
 
PAGE NO.
         
Item 1.
 
Financial Statements
   
         
   
Condensed Consolidated Statements of Financial Position - Unaudited as of October 31, 2014 and 2013, and April 30, 2014
 
3
         
   
Condensed Consolidated Statements of Income - Unaudited for the three and six months ended October 31, 2014 and 2013
 
4
         
   
Condensed Consolidated Statements of Comprehensive Income - Unaudited for the three and six months ended October 31, 2014 and 2013
 
5
         
   
Condensed Consolidated Statements of Cash Flows – Unaudited for the six months ended October 31, 2014 and 2013
 
6
         
   
Notes to Unaudited Condensed Consolidated Financial Statements
 
7-17
         
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
18-38
         
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
39-41
         
Item 4.
 
Controls and Procedures
 
41
         
PART II
-
OTHER INFORMATION
   
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
42
         
Item 6.
 
Exhibits and Reports on Form 8-K
 
43
         
SIGNATURES AND CERTIFICATIONS
 
44-48
     
   
 

 
2

 

JOHN WILEY & SONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
         
   
October 31,
 
April 30,
   
         2014
 
          2013
 
          2014
   
     (Unaudited)
 
      (Unaudited)
   
Assets:
           
Current Assets
           
Cash and cash equivalents
$
198,912
$
149,662
$
486,377
Accounts receivable
 
204,424
 
180,175
 
149,733
Inventories
 
70,941
 
81,368
 
75,495
Prepaid and other
 
66,233
 
52,377
 
78,057
Total Current Assets
 
540,510
 
463,582
 
789,662
             
Product Development Assets
 
58,851
 
67,149
 
82,940
Technology, Property & Equipment
 
190,811
 
184,050
 
188,718
Intangible Assets
 
992,618
 
961,588
 
984,661
Goodwill
 
1,003,290
 
851,309
 
903,665
Income Tax Deposits
 
64,036
 
61,001
 
64,037
Other Assets
 
62,659
 
61,782
 
63,682
Total Assets
$
2,912,775
$
2,650,461
$
3,077,365
             
Liabilities & Shareholders' Equity:
           
Current Liabilities
           
Short-term debt
$
50,000
$
-
$
-
Accounts and royalties payable
 
180,033
 
161,649
 
142,534
Deferred revenue
 
163,902
 
138,354
 
385,654
Accrued employment costs
 
66,737
 
83,738
 
118,503
Accrued income taxes
 
10,127
 
7,804
 
13,324
Accrued pension liability
 
4,625
 
4,389
 
4,671
Other accrued liabilities
 
52,976
 
44,579
 
64,901
Total Current Liabilities
 
528,400
 
440,513
 
729,587
             
Long-Term Debt
 
749,513
 
647,900
 
700,100
Accrued Pension Liability
 
155,497
 
203,266
 
164,634
Deferred Income Tax Liabilities
 
234,685
 
194,639
 
222,482
Other Long-Term Liabilities
 
82,278
 
77,773
 
78,314
             
Shareholders’ Equity
           
Class A & Class B Common Stock
 
83,190
 
83,190
 
83,190
Additional paid-in-capital
 
345,082
 
306,356
 
327,588
Retained earnings
 
1,542,082
 
1,430,295
 
1,489,069
Accumulated other comprehensive loss
 
(250,490)
 
(235,463)
 
(190,291)
Treasury stock
 
(557,462)
 
(498,008)
 
(527,308)
Total Shareholders’ Equity
 
1,162,402
 
1,086,370
 
1,182,248
Total Liabilities & Shareholders' Equity
$
2,912,775
$
2,650,461
$
3,077,365
 
The accompanying notes are an integral part of the condensed consolidated financial statements.

 
3

 

JOHN WILEY & SONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME – UNAUDITED
(In thousands except per share information)
 
   
For The Three Months
 
For The Six Months
   
Ended October 31,
 
Ended October 31,
   
2014
 
2013
 
2014
 
 2013
                 
Revenue
$
476,972
$
449,153
$
914,889
$
860,173
                 
Costs and Expenses
               
Cost of sales
 
134,541
 
130,352
 
258,594
 
250,143
Operating and administrative expenses
 
253,328
 
237,526
 
505,062
 
474,521
Restructuring charges (credits)
 
-
 
15,316
 
(155)
 
23,071
Impairment charges
 
-
 
4,786
 
-
 
4,786
Amortization of intangibles
 
13,099
 
10,986
 
25,754
 
21,901
Total Costs and Expenses
 
400,968
 
398,966
 
789,225
 
774,422
                 
Operating Income
 
76,004
 
50,187
 
125,634
 
85,751
                 
Interest Expense
 
(4,506)
 
(3,392)
 
(8,650)
 
(6,863)
Foreign Exchange Transaction Gain  (Loss)
 
210
 
(581)
 
45
 
300
Interest Income and Other
 
1,108
 
491
 
1,418
 
1,629
 
               
                 
Income Before Taxes
 
72,816
 
46,705
 
118,447
 
80,817
Provision For Income Taxes
 
19,039
 
10,508
 
31,024
 
8,687
                 
Net Income
$
53,777
$
36,197
$
87,423
$
72,130
                 
Earnings Per Share
               
Diluted
$
0.90
$
0.61
$
1.46
$
1.22
Basic
$
0.91
$
0.62
$
1.48
$
1.23
                 
Cash Dividends Per Share
               
Class A Common
$
0.29
$
0.25
$
0.58
$
0.50
Class B Common
$
0.29
$
0.25
$
0.58
$
0.50
                 
Average Shares
               
Diluted
 
59,756
 
59,416
 
59,777
 
59,294
Basic
 
58,962
 
58,535
 
58,960
 
58,487
     
 
 
       
The accompanying notes are an integral part of the condensed consolidated financial statements.

 
4

 
 
JOHN WILEY & SONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – UNAUDITED
(In thousands)
 
   
For The Three Months
 
For The Six Months
   
Ended October 31,
 
Ended October 31,
   
2014
 
2013
 
2014
 
2013
                 
Net Income
53,777
  $
36,197
  $
87,423
  $
72,130
                 
Other Comprehensive Income (Loss):
               
Foreign currency translation adjustment
 
(63,930)
 
50,940
 
(66,788)
 
41,137
Unamortized retirement costs, net of tax provision (benefit) of $1,877, $(253), $2,266 and $881, respectively
 
5,428
 
(1,106)
 
6,550
 
1,699
Unrealized gain on interest rate swaps, net of tax (benefit) provision of $(144), $35, $24 and $198, respectively
 
(227)
 
57
 
39
 
333
Total Other Comprehensive Income (Loss)
 
(58,729)
 
49,891
 
(60,199)
 
43,169
                 
Comprehensive Income (Loss)
(4,952)
  $
86,088
  $
27,224
  $
115,299
 
 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.

 
5

 
 
JOHN WILEY & SONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW – UNAUDITED
(In thousands)
   
For The Six Months
 
 
Ended October 31,
   
2014
 
2013
Operating Activities
       
Net income
$
87,423
$
72,130
Adjustments to reconcile net income to cash used for operating activities:
       
Amortization of intangibles
 
25,754
 
21,901
Amortization of composition costs
 
20,810
 
22,827
Depreciation of technology, property and equipment
 
30,510
 
28,909
Restructuring and impairment charges (credits)
 
(155)
 
27,857
Restructuring payments
 
(16,267)
 
(12,453)
Deferred tax benefits on U.K. rate changes
 
-
 
(10,634)
Stock-based compensation expense
 
8,118
 
7,305
Excess tax (benefit) charge from stock-based compensation
 
(1,774)
 
1,672
Royalty advances
 
(47,997)
 
(44,005)
Earned royalty advances
 
64,939
 
59,926
Other non-cash charges
 
20,436
 
29,651
Change in deferred revenue
 
(223,731)
 
(229,572)
Income tax deposit
 
(3,783)
 
(10,433)
Net change in operating assets and liabilities, excluding acquisitions
 
(58,419)
 
(31,579)
Cash Used for Operating Activities
 
(94,136)
 
(66,498)
Investing Activities
       
Composition spending
 
(16,934)
 
(19,290)
Additions to technology, property and equipment
 
(29,584)
 
(26,199)
Acquisitions, net of cash acquired
 
(172,145)
 
(739)
Escrowed proceeds from sale of consumer publishing programs
 
1,100
 
-
Cash Used for Investing Activities
 
(217,563)
 
(46,228)
Financing Activities
       
Repayment of long-term debt
 
(228,051)
 
(293,500)
Borrowings of long-term debt
 
275,070
 
268,400
Borrowings of short-term debt
 
50,000
 
-
Change in book overdrafts
 
(8,123)
 
(23,836)
Cash dividends
 
(34,402)
 
(29,347)
Purchase of treasury stock
 
(41,534)
 
(18,533)
Proceeds from exercise of stock options and other
 
18,876
 
24,900
Excess tax benefit (charge) from stock-based compensation
 
1,774
 
(1,672)
Cash Provided by (Used for) Financing Activities
 
33,610
 
(73,588)
Effects of Exchange Rate Changes on Cash and Cash Equivalents
 
(9,376)
 
1,836
Cash and Cash Equivalents
       
Decrease for the Period
 
(287,465)
 
(184,478)
Balance at Beginning of Period
 
486,377
 
334,140
Balance at End of Period
$
198,912
$
149,662
Cash Paid During the Period for:
       
Interest
$
7,483
$
6,136
Income taxes, net
$
28,159
$
35,623
     
 
 
     
 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.

 
6

 
 
JOHN WILEY & SONS, INC., AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
1.
Basis of Presentation
 
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial condition, results of operations, comprehensive income and cash flows for the periods presented. Operating results for the interim period are not necessarily indicative of the results expected for the full year. For the Company’s recent international acquisition CrossKnowledge Group, Ltd. (“CrossKnowledge”), financial information is reported on a two-month lag. No events related to CrossKnowledge occurred during September or October which would materially affect the financial position of the Company. These financial statements should be read in conjunction with the most recent audited financial statements included in the Company’s Form 10-K for the fiscal year ended April 30, 2014.
 
The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year’s presentation.
 
 
 
2.
Recent Accounting Standards
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 "Revenue From Contracts With Customers" (Topic 606) (“ASU 2014-09”), and the International Accounting Standards Board (“IASB”) published its equivalent standard, International Financial Reporting Standard (“IFRS”) 15, “Revenue from Contracts with Customers”. The standard will require companies to review contract arrangements with customers and ensure all separate performance obligations are properly recognized in compliance with the new guidance. The standard is effective for the Company on May 1, 2017 with early adoption prohibited. The standard allows for either “full retrospective” adoption, meaning the standard is applied to all periods presented or “cumulative effect” adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company is currently assessing whether the adoption of the guidance will have an impact on its consolidated financial statements.
 
 
 
3.
Share-Based Compensation
 
The Company has share-based compensation plans under which employees may be granted options to purchase shares of Company common stock at the fair market value at the time of grant.  In addition to stock options, the Company grants performance-based stock awards and other restricted stock awards to certain management level employees. The Company recognizes the grant date fair value of share-based compensation in net income on a straight-line basis over the requisite service period. The measurement of performance for performance-based stock awards is based on actual financial results for targets established three years in advance. For the three months ended October 31, 2014 and 2013, the Company recognized share-based compensation expense, on a pre-tax basis, of $4.8 million and $4.0 million, respectively. For the six months ended October 31, 2014 and 2013, the Company recognized share-based compensation expense, on a pre-tax basis, of $8.1 million and $7.3 million, respectively.
 
 
7

 
 
The following table provides share-based compensation data for awards granted by the Company:
 
   
For the Six Months
Ended October 31,
   
2014
 
2013
 
Restricted Stock:
     
 
Awards granted (in thousands)
294
 
375
 
Weighted average fair value of grant
$59.70
 
$40.75
         
 
Stock Options:
     
 
Awards granted (in thousands)
188
 
322
 
Weighted average fair value of grant
$16.97
 
$10.12
 
The weighted average Black-Scholes fair value assumptions for stock option grants are as follows:
 
   
For the Six Months
Ended October 31,
   
2014
 
2013
 
Expected life of options (years)
7.2
 
7.4
 
Risk-free interest rate
2.2%
 
2.1%
 
Expected volatility
30.9%
 
30.5%
 
Expected dividend yield
1.9%
 
2.5%
 
Fair value of common stock on grant date
$59.70
 
$39.53
 
 
4.     Accumulated Other Comprehensive Loss
 
Changes in Accumulated Other Comprehensive Loss by component, net of tax, for the three and six months ended October 31, 2014 were as follows (in thousands):
 
   
Foreign
 
Unamortized
 
Interest
   
   
Currency
 
Retirement
 
Rate
   
   
Translation
 
Costs
 
Swaps
 
Total
                 
 
Balance at July 31, 2014
$(69,522)
 
$(121,903)
 
$(336)
 
$(191,761)
 
Other comprehensive income (loss) before reclassifications
(63,930)
 
3,917
 
(497)
 
(60,510)
 
Amounts reclassified from accumulated other comprehensive loss
-
 
1,511
 
270
 
1,781
 
Total other comprehensive income (loss)
(63,930)
 
5,428
 
(227)
 
(58,729)
 
Balance at October 31, 2014
$(133,452)
 
$(116,475)
 
$(563)
 
$(250,490)

   
Foreign
 
Unamortized
 
Interest
   
   
Currency
 
Retirement
 
Rate
   
   
Translation
 
Costs
 
Swaps
 
Total
                 
 
Balance at April 30, 2014
$(66,664)
 
$(123,025)
 
$(602)
 
$(190,291)
 
Other comprehensive income (loss) before reclassifications
(66,788)
 
3,441
 
(423)
 
(63,770)
 
Amounts reclassified from accumulated other comprehensive loss
-
 
3,109
 
462
 
3,571
 
Total other comprehensive income (loss)
(66,788)
 
6,550
 
39
 
(60,199)
 
Balance at October 31, 2014
$(133,452)
 
$(116,475)
 
$(563)
 
$(250,490)
 
 
8

 
 
   
Foreign
 
Unamortized
 
Interest
   
   
Currency
 
Retirement
 
Rate
   
   
Translation
 
Costs
 
Swaps
 
Total
                 
 
Balance at July 31, 2013
$(144,342)
 
$(140,319)
 
$(693)
 
$(285,354)
 
Other comprehensive income (loss) before reclassifications
50,940
 
(3,704)
 
(127)
 
47,109
 
Amounts reclassified from accumulated other comprehensive loss
-
 
2,598
 
184
 
2,782
 
Total other comprehensive income (loss)
50,940
 
(1,106)
 
57
 
49,891
 
Balance at October 31, 2013
$(93,402)
 
$(141,425)
 
$(636)
 
$(235,463)

 
   
Foreign
 
Unamortized
 
Interest
   
   
Currency
 
Retirement
 
Rate
   
   
Translation
 
Costs
 
Swaps
 
Total
                 
 
Balance at April 30, 2013
$(134,539)
 
$(143,124)
 
$(969)
 
$(278,632)
 
Other comprehensive income (loss) before reclassifications
41,137
 
(3,394)
 
(29)
 
37,714
 
Amounts reclassified from accumulated other comprehensive loss
-
 
5,093
 
362
 
5,455
 
Total other comprehensive income
41,137
 
1,699
 
333
 
43,169
 
Balance at October 31, 2013
$(93,402)
 
$(141,425)
 
$(636)
 
$(235,463)
 
During the three months ended October 31, 2014 and 2013, pre-tax actuarial losses included in Unamortized Retirement Costs of approximately $2.0 million and $3.7 million, respectively, were amortized from Accumulated Other Comprehensive Loss and recognized as pension expense in Operating and Administrative Expenses in the Condensed Consolidated Statements of Income. During the six months ended October 31, 2014 and 2013 pre-tax actuarial losses of approximately $3.9 million and $7.2 million, respectively, were amortized.
 
 
5.     Reconciliation of Weighted Average Shares Outstanding
 
A reconciliation of the shares used in the computation of earnings per share follows (in thousands):
 
   
For the Three Months
Ended October 31,
 
For the Six Months
Ended October 31,
   
2014
 
2013
 
2014
 
2013
                 
 
Weighted average shares outstanding
59,215
 
58,846
 
59,205
 
58,765
 
Less: Unearned restricted shares
(253)
 
(311)
 
(245)
 
(278)
 
Shares used for basic earnings per share
58,962
 
58,535
 
58,960
 
58,487
 
Dilutive effect of stock options and other stock awards
794
 
881
 
817
 
807
 
Shares used for diluted earnings per share
59,756
 
59,416
 
59,777
 
59,294
 
Since their inclusion in the calculation of diluted earnings per share would have been anti-dilutive, options to purchase 185,860 shares of Class A Common Stock have been excluded for both the three and six months ended October 31, 2014 and 715,952 and 1,125,120 shares of Class A Common Stock have been excluded for the three and six months ended October 31, 2013, respectively. In addition, for the six months ended October 31, 2013, 5,000 unearned restricted shares have been excluded as their inclusion would have been anti-dilutive.
 
 
9

 
 
6.     Acquisitions:
 
CrossKnowledge:
 
On May 1, 2014, the Company acquired CrossKnowledge Group Limited (“CrossKnowledge”) for approximately $166 million in cash, net of cash acquired. CrossKnowledge is a learning solutions provider focused on leadership and managerial skills development that offers subscription-based, digital learning solutions for global corporations, universities, and small and medium-sized enterprises. CrossKnowledge’s solutions include managerial and leadership skills assessments, courses, certifications, content and executive training programs that are delivered on a cloud-based platform providing over 17,000 learning objects in 17 languages. CrossKnowledge serves over five million end-users in 80 countries. CrossKnowledge reported approximately $37 million of revenue and approximately $5 million of operating income in its fiscal year ended June 30, 2013.
 
CrossKnowledge results reflect three and four months of operations for the three and six months ended October 31, 2014, respectively and are reported on a two-month lag to facilitate accurate reporting. For the three and six months ended October 31, 2014, CrossKnowledge’s revenue included in Wiley’s results was $11.3 million and $15.3 million, respectively, and CrossKnowledge’s operating loss included in Wiley’s results was $0.7 million and $0.9 million, respectively. The $166 million purchase price was allocated to identifiable long-lived intangible assets ($63.0 million), mainly customer relationships and content; technology ($6.3 million); long-term deferred tax liabilities ($21.5 million); negative working capital ($4.3 million); and goodwill ($122.5 million). The fair value of intangible assets and technology acquired was based on management’s assessment performed with the assistance of a third party valuation consultant. Goodwill represents the excess of the purchase price over the fair value of net assets acquired and comprises the estimated value of CrossKnowledge’s workforce, unidentifiable intangible assets and the fair value of expected synergies. None of the goodwill is deductible for tax purposes. The identifiable long-lived intangible assets are primarily amortized over a weighted average estimated useful life of approximately 15 years. The acquisition was funded through the use of the Company’s existing credit facility and available cash balances. The Company expects to finalize its purchase accounting for CrossKnowledge by April 30, 2015.
 
 
Profiles International:
 
On April 1, 2014, the Company acquired all of the stock of Profiles International (“Profiles”) for approximately $47.5 million in cash, net of cash acquired.  Profiles provides pre-employment assessment and selection tools that enable employers to optimize candidate selections and develop the full potential of their employees. Solutions include pre-hire assessments, including those designed to measure and match personality, knowledge, skills, managerial fit, loyalty, and values; and post-hire assessments, focused on measuring sales and managerial effectiveness, employee performance and career potential. Founded in 1991 and based in Waco, Texas, Profiles has served more than 40,000 enterprise clients and millions of end users in over 120 countries, with assessments available in 32 languages. Profiles reported approximately $27 million of revenue and approximately $5 million of operating income in its fiscal year ended December 31, 2013. The $47.5 million purchase price was allocated to identifiable long-lived intangible assets ($22.9 million), mainly customer relationships and assessment content; technology ($2.7 million); long-term deferred tax liabilities ($9.4 million); a credit to short-term deferred tax assets ($1.9 million); negative working capital ($6.7 million) and goodwill ($39.9 million). The fair value of intangible assets and technology acquired was based on management’s assessment performed with the assistance of a third party valuation consultant. Goodwill represents the excess of the purchase price over the fair value of net assets acquired and comprises the estimated value of Profile’s workforce, unidentifiable intangible assets and the fair value of expected synergies. None of the goodwill is deductible for tax purposes. The Company expects to finalize its purchase accounting for Profiles by January 31, 2015. Profiles contributed $5.9 million and $11.4 million to the Company’s revenue for the three and six months ended October 31, 2014, respectively.
 
Unaudited proforma financial information has not been presented since the effects of the acquisitions were not material.
 
 
10

 
 
7.     Restructuring Programs
 
Restructuring and Reinvestment Program:
 
In fiscal year 2013, the Company initiated a program (the “Restructuring and Reinvestment Program”) to restructure and realign its cost base with current and anticipated future market conditions.  The Company is targeting a majority of the cost savings achieved to improve margins and earnings, while the remainder will be reinvested in high growth digital business opportunities.
 
The following tables summarize the pre-tax restructuring charges related to this program, which are reflected in Restructuring Charges (Credits) in the Condensed Consolidated Statements of Income (in thousands):
 
   
For the Three
     
Cumulative
   
Months Ended
 
For the Six Months
 
Charges
   
October 31,
 
Ended October 31,
 
Incurred to Date
   
2013
 
2014
 
2013
   
 
Charges (Credits) by Segment:
             
 
Research
$3,401
 
$(185)
 
$5,372
 
$10,485
 
Professional Development
2,114
 
245
 
5,667
 
18,389
 
Education
210
 
51
 
258
 
2,059
 
Shared Services
9,591
 
(266)
 
11,774
 
36,086
 
Total Restructuring Charges
$15,316
 
$(155)
 
$23,071
 
$67,019
                 
 
Charges (Credits) by Activity:
             
 
 Severance
$9,900
 
$641
 
$14,931
 
$46,309
 
 Process reengineering consulting
3,100
 
(145)
 
5,611
 
11,029
 
 Other activities
2,316
 
(651)
 
2,529
 
9,681
 
Total Restructuring Charges
15,316
 
$(155)
 
$23,071
 
$67,019
 
There were no restructuring charges (credits) for the three months ended October 31, 2014. The amounts reflected above for the six months ended October 31, 2014 reflect true-ups to the previously estimated accrued restructuring charges.
 
The following table summarizes the activity for the Restructuring and Reinvestment Program liability for the six months ended October 31, 2014 (in thousands):
 
         
Foreign
 
   
April 30,
Charges
 
Translation &
October 31,
   
2014
(Credits)
Payments
Reclassifications
2014
             
 
Severance
$29,255
$641
$(14,027)
$(85)
$15,784
 
Process reengineering consulting
722
(145)
(577)
-
-
 
Other activities
4,995
(651)
(1,663)
(63)
2,618
 
Total
$34,972
$(155)
$(16,267)
$(148)
$18,402
 
The restructuring liability for accrued Severance costs is reflected in Accrued Employment Costs in the Condensed Consolidated Statements of Financial Position. Approximately $0.2 million and $2.4 million of the Other Activities are reflected in Other Accrued Liabilities and Other Long-Term Liabilities, respectively.
 
The Company expects to record a restructuring charge of approximately $18 million in the third quarter of fiscal year 2015. Roughly half of the expected charge is related to the completion of facility consolidations and dispositions in connection with prior restructuring actions. The restructuring charge will also include severance costs for reorganization and consolidation plans, primarily in Research and books.
 
 
11

 
 
8.     Impairment Charges
 
In the second quarter of fiscal year 2014, the Company terminated a multi-year software development program for an internal operations application due to a change in the Company’s longer-term enterprise systems plans. As a result, the Company recorded an asset impairment charge for previously capitalized software costs related to the program of $4.8 million.
 
 
9.     Segment Information
 
The Company is a global provider of knowledge and knowledge-enabled services that improve outcomes in areas of research, professional practice and education. Through the Research segment, the Company provides digital and print scientific, technical, medical and scholarly journals, reference works, books, database services and advertising. The Professional Development segment provides digital and print books, online assessment and training services, and test prep and certification. In Education, the Company provides print and digital content, and education solutions including online program management services for higher education institutions and course management tools for instructors and students. The Company takes full advantage of its content from all three core businesses in developing and cross-marketing products to its diverse customer base of researchers, professionals, students, and educators. The use of technology enables the Company to make its content efficiently more accessible to its customers around the world. The Company’s operations are primarily located in the North America, Europe, Asia, and Australia.
 
As part of Wiley’s restructuring and reorganization program, during the first quarter of fiscal year 2015, the Company consolidated certain decentralized business functions (Content Management, Vendor Procurement Services, Marketing Services, etc.) into Shared Service and Administrative functions. These newly centralized service groups are part of the Company’s plan to reduce costs through efficiencies gained from standardized technology and centralized management. The costs of these functions were previously reported as direct operating expenses in each business segment but will now be reported within the shared service functions. Prior year amounts have been restated to reflect the same reporting methodology.  The Company uses occupied square footage of space; number of employees; units shipped; specific identification/activity-based; gross profit; revenue and number of invoices to allocate shared service costs to each business segment.
 
 
12

 
 
Segment information is as follows (in thousands):
   
For the Three Months
 
For the Six Months
   
Ended October 31,
 
Ended October 31,
   
2014
 
2013
 
 2014
 
2013
 
RESEARCH
             
 
Revenue
$264,825
 
$252,947
 
$519,695
 
$498,735
                 
 
Direct Contribution to Profit
$121,577
 
$112,854
 
$235,428
 
$222,861
  Allocated Shared Services and Administrative Costs:              
 
Distribution and Operation Services
(11,449)
 
(11,828)
 
(23,419)
 
(23,395)
 
Technology and Content Management
(25,314)
 
(24,843)
 
(51,186)
 
(51,081)
 
Occupancy and Other
(6,061)
 
(6,519)
 
(12,219)
 
(12,972)
 
Contribution to Profit
$78,753
 
$69,664
 
$148,604
 
$135,413
                 
 
PROFESSIONAL DEVELOPMENT
             
 
Revenue
$105,667
 
$92,545
 
$197,994
 
$176,631
                 
 
Direct Contribution to Profit
$36,799
 
$34,972
 
$69,140
 
$61,189
  Allocated Shared Services and Administrative Costs:              
 
Distribution and Operation Services
(7,991)
 
(9,503)
 
(16,270)
 
(19,156)
 
Technology and Content Management
(11,953)
 
(12,969)
 
(22,797)
 
(26,038)
 
Occupancy and Other
(7,130)
 
(4,996)
 
(12,750)
 
(9,761)
 
Contribution to Profit (Loss)
$9,725
 
$7,504
 
$17,323
 
$6,234
                 
 
EDUCATION
             
 
Revenue
$106,480
 
$103,661
 
$197,200
 
$184,807
                 
 
Direct Contribution to Profit
$40,154
 
$40,484
 
$68,306
 
$64,630
  Allocated Shared Services and Administrative Costs:              
 
Distribution and Operation Services
(3,226)
 
(3,848)
 
(6,545)
 
(7,889)
 
Technology and Content Management
(13,828)
 
(11,407)
 
(26,815)
 
(23,044)
 
Occupancy and Other
(3,595)
 
(3,044)
 
(6,770)
 
(6,046)
 
Contribution to Profit
$19,505
 
$22,185
 
$28,176
 
$27,651
                 
 
Total Contribution to Profit
$107,983
 
$99,353
 
$194,103
 
$169,298
 
Unallocated Shared Services and Administrative Costs
(31,979)
 
(49,166)
 
(68,469)
 
(83,547)
 
Operating Income
$76,004
 
$50,187
 
$125,634
 
$85,751
 
 
The following table reflects total shared services and administrative costs by function, which are allocated to business segments based on the methodologies described above:
 
   
For the Three Months
 
For the Six Months
   
Ended October 31,
 
Ended October 31,
 
Total Shared Services and Administrative Costs:
2014
 
2013
 
  2014
 
2013
 
Distribution & Operation Services
$22,443
 
$25,281
 
$46,119
 
$50,516
 
Technology & Content Management
59,452
 
59,820
 
121,831
 
119,707
 
Finance
12,817
 
13,457
 
26,552
 
26,242
 
Other Administration
27,814
 
25,188
 
53,004
 
49,904
 
Restructuring Charges (Credits) (see Note 7)
-
 
14,377
 
(266)
 
16,560
 
Total
$122,526
 
$138,123
 
$247,240
 
$262,929
 
 
13

 
 
In the first quarter of fiscal year 2015, the Company modified its segment product/service revenue categories to reflect recent changes to the business, including acquisitions and restructuring. All prior periods have been revised to reflect the new categorization as follows:
 
   
For the Three Months
 
For the Six Months
   
Ended October 31,
 
Ended October 31,
 
Total Revenue by Product/Service:
2014
 
2013
 
2014
 
2013
 
Research Communications
$209,807
 
$191,510
 
$410,521
 
$380,624
 
Books and Custom Print Products
170,541
 
183,550
 
342,106
 
350,392
 
Education Services (Deltak)
19,699
 
16,551
 
35,935
 
31,251
 
Talent Solutions
26,440
 
8,554
 
43,616
 
15,141
 
Course Workflow Solutions (WileyPlus)
18,397
 
15,916
 
19,711
 
17,012
 
Other
32,088
 
33,072
 
63,000
 
65,753
 
Total
$476,972
 
$449,153
 
$914,889
 
$860,173
 
 
 
10.
Inventories
 
Inventories were as follows (in thousands):
   
As of October  31,
 
As of April 30,
   
2014
 
2013
 
2014
             
 
Finished goods
$54,766
 
$63,801
 
$62,071
 
Work-in-process
7,132
 
6,430
 
6,041
 
Paper, cloth and other
4,640
 
7,421
 
5,476
   
$66,538
 
$77,652
 
$73,588
 
Inventory value of estimated sales returns
9,420
 
9,418
 
6,774
 
LIFO reserve
(5,017)
 
(5,702)
 
(4,867)
 
Total inventories
$70,941
 
$81,368
 
$75,495
 
 
 
11.
Intangible Assets
 
Intangible assets consisted of the following (in thousands):
   
  As of October  31,
 
As of April 30,
   
2014
 
2013
 
  2014
 
Intangible assets with indefinite lives:
         
 
Brands and trademarks
$159,266
 
$159,557
 
$164,202
 
Content and publishing rights
98,261
 
106,644
 
106,898
 
 
$257,527
 
$266,201
 
$271,100
             
 
Net intangible assets with determinable lives:
         
 
Content and publishing rights
$521,416
 
$529,218
 
$535,827
 
Customer relationships
193,969
 
152,392
 
162,295
 
Brands and trademarks
18,845
 
12,888
 
14,716
 
Covenants not to compete
861
 
889
 
723
 
 
$735,091
 
$695,387
 
$713,561
 
Total
$992,618
 
$961,588
 
$984,661
 
 
14

 
 
12.   Income Taxes
 
The effective tax rate for the first six months of fiscal year 2015 was 26.2% compared to 10.7% in the prior year. During the first quarter of fiscal year 2014, the Company recorded non-cash deferred tax benefits of $10.6 million ($0.18 per share), principally associated with new tax legislation enacted in the United Kingdom (“U.K”) that reduced the U.K. statutory income tax rates by 3%. The benefits reflect the measurement of all applicable U.K. deferred tax balances to the new income tax rates of 21% effective April 1, 2014 and 20% effective April 1, 2015. Excluding the impact of the deferred tax benefit described above, the Company’s effective tax rate increased from 23.9% to 26.1% principally due to a $1.5 million net tax reserve release recorded in the second quarter of fiscal year 2014.
 
Payments Related to Tax Audit in Germany
 
In fiscal year 2003, the Company merged several of its German subsidiaries into a new operating entity which enabled the Company to increase (“step-up”) the tax deductible net asset basis of the merged subsidiaries to fair market value. The expected tax benefits to be derived from the step-up are approximately 50 million euros claimed as amortization over 15 years beginning in fiscal year 2003.
 
In May 2012, as part of its routine tax audit process, the German tax authorities filed a challenge to the Company’s tax position with respect to the amortization of certain stepped-up assets. The Company filed an appeal with the local finance court in September 2014.  Under German tax law, the Company must pay all contested taxes and the related interest to have the right to defend its position. As a result, the Company made deposits of 3 million and 8 million euros in the first six months of fiscal years 2015 and 2014, respectively, related to amortization claimed on certain “stepped-up” assets. The Company has made all required payments to date with total deposits paid of 45 million euros through October 31, 2014. The Company expects that it will be required to deposit additional amounts up to 12 million euros plus interest for tax returns to be filed in future periods until the issue is resolved.
 
In October 2014, the Company received an unfavorable decision from the local finance court and is in the process of appealing the court decision. The Company’s management and its advisors still believe that it is “more likely than not” to successfully defend that the tax treatment was proper and in accordance with German tax regulations, as such the Company has not recorded any charges related to the loss of the step-up benefit. The Company expects to file its appeal in January 2015 and resolution of the appeal could take up to several years. If the Company is ultimately successful, as expected, the tax deposits will be returned with 6% simple interest, based on current German legislation. As of October 31, 2014, the USD equivalent of the deposit and accrued interest was $64.0 million, which is recorded as Income Tax Deposits on the Condensed Consolidated Statements of Financial Position. The Company records the accrued interest at 6% within the Provision for Income Taxes in the Condensed Consolidated Statements of Income.
 
 
 
13.
Retirement Plans
 
The components of net pension expense for the company’s global defined benefit plans were as follows (in thousands):
 
   
For the Three Months
Ended October 31,
 
For the Six Months
Ended October 31,
   
2014
 
2013
 
2014
 
2013
                 
 
Service Cost
$1,588
 
$2,004
 
$3,141
 
$3,962
 
Interest Cost
7,638
 
7,326
 
15,189
 
14,664
 
Expected Return on Plan Assets
(9,112)
 
(8,977)
 
(17,977)
 
(17,888)
 
Net Amortization of Prior Service Cost
(30)
 
31
 
(3)
 
61
 
Recognized Net Actuarial Loss
1,946
 
3,602
 
3,838
 
7,059
 
Net Pension Expense
$2,030
 
$3,986
 
$4,188
 
$7,858
 
 
15

 
 
As disclosed in the Company’s fiscal year 2013 Form 10-K, in March 2013 the Company’s Board of Directors approved plan amendments that froze the U.S. Employees’ Retirement Plan, Supplemental Benefit Plan, and Supplemental Executive Retirement Plan, defined benefit plans effective June 30, 2013. As a result of freezing the U.S. defined benefit plans, the Company changed the amortization period from the average expected future service period of active plan participants to the average expected life of plan participants. Employer defined benefit pension plan contributions were $2.2 million and $2.5 million for the three months ended October 31, 2014 and 2013, respectively and $5.0 million and $5.5 million for the six months ended October 31, 2014 and 2013, respectively. Contributions for employer defined contribution plans were approximately $2.8 million and $2.4 million for the three months ended October 31, 2014 and 2013 respectively, and $8.9 million and $4.7 million for the six months ended October 31, 2014 and 2013, respectively.
 
 
 
14.   Debt and Available Credit Facilities
 
On October 31, 2014, the Company entered into a new U.S. dollar facility with TD Bank, N.A. which is equally ranked with the Company’s existing agreement with Bank of America - Merrill Lynch and The Royal Bank of Scotland plc. The new agreement consists of a $50 million 364-day revolving credit facility. The facility was fully drawn as of October 31, 2014. The borrowing rate is LIBOR plus an applicable margin ranging from 0.80% to 1.40%, and a facility fee will be due on any undrawn amounts ranging from 0.125% to 0.30%, both depending on the Company consolidated leverage ratio, as defined. The credit agreement contains certain restrictive covenants related to the Company’s consolidated leverage ratio and interest coverage ratio, which the Company was in compliance with as of October 31, 2014. The proceeds of the new revolving credit facility were used to pay a portion of the Company’s existing revolving credit facility and meet seasonal operating cash requirements.
 
 
 
15.
Derivative Instruments and Hedging Activities
 
The Company, from time-to-time, enters into forward exchange and interest rate swap contracts as a hedge against foreign currency asset and liability commitments, changes in interest rates and anticipated transaction exposures, including intercompany purchases. All derivatives are recognized as assets or liabilities and measured at fair value.  Derivatives that are not determined to be effective hedges are adjusted to fair value with a corresponding adjustment to earnings.  The Company does not use financial instruments for trading or speculative purposes.
 
Interest Rate Contracts:
 
The Company had $798.1 million of variable rate loans outstanding at October 31, 2014, which approximated fair value. As of October 31, 2014 and 2013, the interest rate swap agreements maintained by the Company were designated as fully effective cash flow hedges as defined under Accounting Standards Codification (“ASC”) 815 “Derivatives and Hedging”.  As a result, there was no impact on the Company’s Condensed Consolidated Statements of Income for changes in the fair value of the interest rate swaps. Under ASC 815, fully effective derivative instruments that are designated as cash flow hedges have changes in their fair value recorded initially within Accumulated Other Comprehensive Loss in the Condensed Consolidated Statements of Financial Position. As interest expense is recognized based on the variable rate loan agreements, the corresponding deferred gain or loss on the interest rate swaps is reclassified from Accumulated Other Comprehensive Loss to Interest Expense in the Condensed Consolidated Statements of Income. It is management’s intention that the notional amount of interest rate swaps be less than the variable rate loans outstanding during the life of the derivatives.
 
On August 15, 2014, the Company entered into an interest rate swap agreement which fixed a portion of the variable interest due on its variable rate loans outstanding. Under the terms of the agreement, the Company pays a fixed rate of 0.65% and receives a variable rate of interest based on one-month LIBOR (as defined) from the counterparty which is reset every month for a two-year period ending August 15, 2016. As of October 31, 2014, the notional amount of the interest rate swap was $150.0 million.
 
 
16

 
 
On January 15, 2014, the Company entered into an interest rate swap agreement which fixed a portion of the variable interest due on its variable rate loans outstanding. Under the terms of the agreement, the Company pays a fixed rate of 0.47% and receives a variable rate of interest based on one-month LIBOR (as defined) from the counterparty which is reset every month for a two-year period ending January 15, 2016. As of October 31, 2014, the notional amount of the interest rate swap was $150.0 million.
 
On March 30, 2012, the Company entered into an interest rate swap agreement which fixed a portion of the variable interest due on its variable rate loans outstanding. Under the terms of the agreement, the Company pays a fixed rate of 0.645% and receives a variable rate of interest based on one-month LIBOR (as defined) from the counterparty which is reset every month for a three-year period ending March 31, 2015. As of October 31, 2014, the notional amount of the interest rate swap was $150.0 million.
 
The Company records the fair value of its interest rate swaps on a recurring basis using Level 2 inputs of quoted prices for similar assets or liabilities in active markets. The fair value of the interest rate swaps as of October 31, 2014 and 2013 and April 30, 2014 was a deferred loss of $1.0 million, $1.0 million, and $1.0 million, respectively. Based on the maturity dates of the contracts, approximately $0.3 million and $0.7 million of the deferred losses as of October 31, 2014 and April 30, 2014 were recorded in Other Accrued Liabilities, with the remaining deferred losses in each period of $0.7 million and $0.3 million recorded in Other Long-Term Liabilities, respectively. The entire $1.0 million deferred loss as of October 31, 2013 was recorded in Other Long-Term liabilities. The pre-tax losses that were reclassified from Accumulated Other Comprehensive Loss into Interest Expense for the three months ended October 31, 2014 and 2013 were $0.4 million and $0.3 million, respectively. The pre-tax losses that were reclassified from Accumulated Other Comprehensive Loss into Interest Expense for the six months ended October 31, 2014 and 2013 were $0.8 million and $0.6 million, respectively.
 
Foreign Currency Contracts:
 
The Company may enter into forward exchange contracts to manage the Company’s exposure on certain foreign currency denominated assets and liabilities. The forward exchange contracts are marked to market through Foreign Exchange Transaction Gains (Losses) in the Condensed Consolidated Statements of Income, and carried at their fair value in the Condensed Consolidated Statements of Financial Position. Foreign currency denominated assets and liabilities are remeasured at spot rates in effect on the balance sheet date, with the effects of changes in spot rates reported in Foreign Exchange Transaction Gains (Losses). As of October 31, 2014 and 2013, the total notional amounts of the open forward contracts were 75 million euros and 43 million euros, respectively. The Company did not maintain any open forward contracts as of April 30, 2014. During the first six months of fiscal years 2015 and 2014, the Company did not designate any forward contracts as hedges under current accounting standards as the benefits of doing so were not material due to the short-term nature of the contracts. The fair value changes in the forward exchange contracts substantially mitigated the changes in the value of the applicable foreign currency denominated assets and liabilities.
 
As of October 31, 2014 and 2013, the fair values of the open forward exchange contracts were a loss of approximately $4.2 million and a gain of $0.1 million, respectively, and recorded within Other Accrued Liabilities and the Prepaid and Other line item, respectively, in the Condensed Consolidated Statements of Financial Position. The fair values were measured on a recurring basis using Level 2 inputs. For the three and six months ended October 31, 2014 and 2013, the gains (losses) recognized on the forward contracts were $(0.2) million, $0.1 million, $(4.2) million and $(0.1) million, respectively.
 
 
 
16.
Corporate Headquarters Lease Renewal
 
During the first quarter of fiscal year 2015, the Company renewed the lease for its corporate headquarters in Hoboken, New Jersey. The lease renewal is an operating lease which commences on July 1, 2017 and extends the current lease through March 31, 2033.  As a result of the renewal, the Company’s total future minimum payments under the new lease will be $223.0 million, with annual minimum payments of $14.4 million in fiscal years 2018 through 2022.
 
 
17

 
 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
RESULTS OF OPERATIONS – SECOND QUARTER ENDED OCTOBER 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 second quarters of fiscal years 2015 and 2014, the average exchange rates to convert British pounds sterling to U.S. dollars were 1.64 and 1.58, respectively; the average exchange rates to convert euros into U.S. dollars were 1.30 and 1.34, respectively; and the average exchange rates to convert Australian dollars to U.S. dollars were 0.91 and 0.93, respectively. Unless otherwise noted, all variance explanations below are on a currency neutral basis.
 
For the Company’s recent international acquisition CrossKnowledge Group, Ltd. (“CrossKnowledge”), financial results reflect three months of operations, but are reported on a two-month lag to facilitate accurate reporting. No events related to CrossKnowledge occurred during September or October which would materially affect the financial position of the Company.
 
Revenue:
 
Revenue for the second quarter of fiscal year 2015 increased 6% to $477.0 million.  The increase mainly reflects incremental revenue from the acquisitions of CrossKnowledge ($11 million) and Profiles International (“Profiles”) ($6 million), the sale of a backfile license ($10 million), journal subscriptions ($4 million), growth in Education custom products and WileyPLUS workflow solutions ($4 million) and Deltak Education Services ($3 million) and Professional Development online test preparation and certification ($3 million), partially offset by lower print book revenue in all three businesses ($14 million).
 
Cost of Sales and Gross Profit:
 
Cost of sales for the second quarter of fiscal year 2015 increased 3% to $134.5 million.  The increase mainly reflects higher royalty rates on society owned journals ($3 million) and  incremental costs from acquisitions ($2 million), partially offset by other mainly cost savings initiatives ($2 million).
 
Gross profit for the second quarter of fiscal year 2015 of 71.8% was 80 basis points higher than prior year due to growth in digital sales in Education and Research (80 basis points), incremental revenue from higher margin acquisitions (60 basis points) and cost savings initiatives, partially offset by higher royalty rates on society owned journals (90 basis points).
 
Operating and Administrative Expenses:
 
Operating and administrative expenses for the second quarter of fiscal year 2015 increased 7% to $253.3 million, or 6% excluding the unfavorable impact of foreign exchange.  The increase was mainly driven by incremental operating and administrative expenses from acquisitions ($15 million), Education Services’ (Deltak) program growth ($3 million), and other, mainly technology investments in internal systems and digital platforms ($3 million), partially offset by restructuring and other cost savings ($7 million).
 
 
18

 
 
Restructuring Charges:
 
In the second quarter of fiscal year 2014, the Company recorded pre-tax restructuring charges of $15.3 million, or $0.17 per share, which are described in more detail below. There were no restructuring charges or credits recorded for the three months ended October 31, 2014.
 
The following tables summarize the pre-tax restructuring charges related to this program, which are reflected in Restructuring Charges (Credits) in the Condensed Consolidated Statements of Income (in thousands):
 
   
For the Three Months
 
 Cumulative Charges
   
Ended October 31, 2013
 
Incurred to Date
 
Charges by Segment:
     
 
Research
$3,401
 
$10,485
 
Professional Development
2,114
 
18,389
 
Education
210
 
2,059
 
Shared Services
9,591
 
36,086
 
Total Restructuring Charges
$15,316
 
$67,019
         
 
Charges by Activity:
     
 
Severance
$9,900
 
$46,309
 
Process reengineering consulting
3,100
 
11,029
 
Other activities
2,316
 
9,681
 
Total Restructuring Charges
$15,316
 
$67,019
 
The cumulative charge recorded to-date related to the Restructuring and Reinvestment program of $67.0 million is expected to be fully recovered by the end of fiscal year 2015. The Company expects to record a restructuring charge of approximately $18 million in the third quarter of fiscal year 2015.  Roughly half of the expected charge is related to the completion of facility consolidations and dispositions in connection with prior restructuring actions. The restructuring charge will also include severance costs for reorganization and consolidation plans, primarily in Research and books.
 
Impairment Charges
 
In the second quarter of fiscal year 2014, the Company terminated a multi-year software development program for an internal operations application due to a change in the Company’s longer-term enterprise systems plans.  As a result, the Company recorded an asset impairment charge for previously capitalized software costs related to the program of $4.8 million, or $3.4 million after tax ($0.06 per share).
 
Amortization of Intangibles:
 
Amortization of intangibles increased $2.1 million to $13.1 million in the second quarter of fiscal year 2015 and was mainly driven by the acquisitions.
 
Interest Expense/Income, Foreign Exchange and Other:
 
Interest expense for the second quarter of fiscal year 2015 increased $1.1 million to $4.5 million.  The increase was driven by higher average debt mainly due to acquisition financing and higher interest rates.  The Company’s average cost of borrowing in the second quarters of fiscal years 2015 and 2014 was 1.9% and 1.8%, respectively.  In the second quarters of fiscal years 2015 and 2014, the Company recognized foreign exchange transaction gains (losses) of $0.2 million and ($0.6) million, respectively.  Interest income and other in the second quarters of fiscal years 2015 and 2014 was $1.1 million and $0.5 million, respectively.
 
 
19

 
 
Provision for Income Taxes:
 
The effective tax rate for the second quarter of fiscal year 2015 was 26.1% compared to 22.5% in the prior year. The increase was principally due to a higher proportion of income from high tax jurisdictions (United States) in the current year, partially offset by lower U.K. income tax rates. Prior year results included proportionately higher restructuring charges  related to U.S. operations.
 
Earnings Per Share:
 
Earnings per diluted share for the second quarter of fiscal year 2015 increased 48% to $0.90 per share.  Excluding the impact of the prior year restructuring ($0.17 per share) and impairment charges ($0.06 per share) and the unfavorable impact of foreign exchange ($0.01 per share), earnings per diluted share increased 8%. The increase was mainly driven by revenue growth in Research and company-wide cost savings resulting from restructuring, partially offset by investment in Education Services (Deltak) partnership and program development and the dilutive impact of the recent Talent Solutions acquisitions.

 
SECOND QUARTER SEGMENT RESULTS
 
As part of Wiley’s restructuring and reorganization program, in the first quarter of fiscal year 2015, the Company consolidated certain decentralized business functions (Content Management, Vendor Procurement Services, Marketing Services, etc.) into global shared service functions. These newly centralized service groups enable significant cost reduction opportunities, including efficiencies gained from standardized technology and centralized management. The costs of these functions were previously reported as direct operating expenses in each business segment but are now reported within the shared service functions. In addition, the Company has modified its segment product/service revenue categories to reflect recent changes to the business. Prior year amounts have been restated to reflect the same reporting methodology.
 
 
20

 

   
For the Three Months
   
   
Ended October 31,
 
% change
 
RESEARCH:
2014
2013
% change
w/o FX (a)
           
 
Revenue:
       
 
Research Communication:
 
 
 
 
 
Journal Subscriptions
 $168,315
 $164,119
3%
2%
 
Funded Access
 5,067
 3,857
31%
30%
 
Other Journal Revenue
36,425
 23,534
55%
55%
   
209,807
 191,510
10%
9%
 
Books and References:
       
 
Print Books
26,843
 31,069
-14%
-14%
 
Digital Books
 9,957
 9,383
6%
6%
   
36,800
 40,452
-9%
-9%
           
 
Other Research Revenue
18,218
20,985
-13%
-13%
           
 
Total Revenue
$264,825
$252,947
5%
5%
           
 
Cost of Sales
(72,542)
(68,935)
5%
4%
           
 
Gross Profit
$192,283
$184,012
4%
5%
 
Gross Profit Margin
72.6%
72.7%
   
           
 
Direct Expenses
(63,509)
 (60,793)
4%
4%
 
Amortization of Intangibles
(7,197)
 (6,964)
3%
1%
 
Restructuring Charges (see Note 7)
-
 (3,401)
   
           
 
Direct Contribution to Profit
$121,577
$112,854
8%
5%
 
Direct Contribution Margin
45.9%
44.6%
   
           
 
Shared Services and Administrative Costs:
       
 
Distribution and Operational Services
(11,449)
(11,828)
-3%
-4%
 
Technology and Content Management
(25,314)
(24,843)
2%
1%
 
Occupancy and Other
(6,061)
(6,519)
-7%
-7%
           
 
Contribution to Profit
$78,753
$69,664
13%
9%
 
Contribution Margin
29.7%
27.5%
   
 
(a) Adjusted to exclude the fiscal year 2014 Restructuring Charges
 
Revenue:
 
Research revenue for the second quarter of fiscal year 2015 increased 5% to $264.8 million.  Growth in Journal Subscriptions, Funded Access, Other Journal Revenue and Digital Books was partially offset by declines in Print Books and Other Research Revenue. Journal subscription revenue growth was driven by new titles ($1 million), new subscriptions ($1 million) and publication timing ($2 million). As of October 31, 2014, calendar year 2014 journal subscription renewals were up approximately 1.4% over calendar year 2013 on a constant currency basis with 99% of targeted business closed.
 
Funded Access revenue, which represents article publication fees that provide for free access to author articles on the Company’s website, grew $1.2 million in the second quarter.  Other Journal Revenue, which includes service charges for journal page counts and color charges and sales of journal licensing rights, backfiles and individual articles, increased 55% to $36.4 million principally due to the sale of a backfile license ($10 million) and journal content rights ($2 million).  Print Books declined 14% to $26.8 million, while Digital Books grew 6% to $10.0 million in the second quarter of fiscal year 2015. Other Research Revenue, which includes journal reprint revenue, advertising, book licensing rights, distribution services and the sale of protocols, declined 13% mainly due to lower journal reprint and advertising revenue.
 
 
21

 
 
Revenue by Region is as follows:
   
For the Three Months
   
   
Ended October 31,
% of
% change
   
 2014
 2013
Revenue
w/o FX
 
Revenue by Region
 
 
 
 
 
Americas
$99.5
$98.0
38%
1%
 
EMEA
 150.1
141.0
56%
6%
 
Asia-Pacific
15.2
13.9
6%
11%
 
Total Revenue
 $264.8
$252.9
100%
5%
 
Cost of Sales:
 
Cost of sales for the second quarter of fiscal year 2015 increased 5% to $72.5 million. The increase mainly reflects higher royalties due to growth in backfile revenue ($2 million) and royalty rates on society owned journals ($3 million), partially offset by cost savings initiatives ($2 million).
 
Gross Profit:
 
Gross Profit Margin for the second quarter of fiscal year 2015 of 72.6% was essentially flat with the prior year as higher royalty rates on society owned journals were offset by inventory cost savings initiatives and lower cost digital sales.
 
Direct Expenses and Amortization:
 
Direct Expenses for the second quarter of fiscal year 2015 increased 4% to $63.5 million mainly driven by higher employment costs ($2 million) and higher editorial costs to support business growth ($1 million). Amortization of intangibles increased $0.2 million to $7.2 million in the second quarter of fiscal year 2015.
 
Contribution to Profit:
 
Contribution to Profit for the second quarter of fiscal year 2015 increased 13% to $78.8 million, or 9% excluding the unfavorable impact of foreign exchange and the prior year Restructuring Charges. Revenue growth and restructuring savings were partially offset by higher royalty rates on society journals. Contribution Margin increased 220 basis points to 29.7%, mainly due to higher margin digital revenue, restructuring charges in the prior year and restructuring saving in the current year.
 
Society Partnerships
·  
3 new society journals were signed during the quarter with combined annual revenue of approximately $0.9 million
·  
3 renewals/extensions were signed with approximately $0.8 million in combined annual revenue
·  
2 journals were not renewed with combined annual revenue of approximately $0.4 million
 
Reorganization
 
In November 2014, the company announced plans to reorganize the Research segment. The reorganization will provide sharper focus in managing the portfolio of journal-related products and services.  The books-related portion of Research will be managed toward increasing operating synergies with the Professional Development books business.
 
 
22

 
 
Journal Agent Bankruptcy (Swets)
 
Swets Information Services, a global library subscription agent based in Amsterdam, declared bankruptcy in late September. While the bankruptcy had no material impact on the Company’s financial statements, future sourcing of journal subscriptions may be temporarily impacted. The impact to calendar year 2015 journal subscription revenue is expected to be on the order of $5 million.  Wiley continues to investigate the matter and will provide an update when it releases third quarter earnings.
 
   
For the Three Months
   
   
Ended October 31,
 
% change
 
PROFESSIONAL DEVELOPMENT (PD):
2014
2013
% change
w/o FX (a)
           
 
Revenue:
       
 
Knowledge Services:
 
 
 
 
 
Print Books
 $52,685
$59,794
-12%
-12%
 
Digital Books
 14,465
 13,980
3%
3%
 
Online Test Preparation and Certification
 5,538
 4,275
30%
30%
 
Other
 6,539
 5,942
10%
10%
 
 
 79,227
 83,991
-6%
-6%
 
Talent Solutions:
       
 
Assessment
15,187
8,554
78%
78%
 
Online Learning and Training
 11,253
-
-
-
 
 
26,440
8,554
209%
209%
           
 
Total Revenue
$105,667
$92,545
14%
14%
           
 
Cost of Sales
(30,172)
(29,410)
3%
2%
           
 
Gross Profit
 $75,495
$63,135
20%
20%
 
Gross Profit Margin
71.4%
68.2%
   
           
 
Direct Expenses
(35,175)
(24,409)
44%
44%
 
Amortization of Intangibles
(3,521)
(1,640)
115%
115%
 
Restructuring Charges (see Note 7)
-
(2,114)
   
           
 
Direct Contribution to Profit
 $36,799
$34,972
5%
-1%
 
Direct Contribution Margin
34.8%
37.8%
   
           
 
Shared Services and Administrative Costs:
       
 
Distribution and Operational Services
 (7,991)
(9,503)
-16%
-16%
 
Technology and Content Management
 (11,953)
(12,969)
-8%
-9%
 
Occupancy and Other
(7,130)
(4,996)
43%
43%
           
 
Contribution to Profit
 $9,725
$7,504
30%
2%
 
Contribution Margin
9.2%
8.1%
   
 
(a) Adjusted to exclude the fiscal year 2014 Restructuring Charges
 
Revenue:
 
PD revenue for the second quarter of fiscal year 2015 increased 14% to $105.7 million reflecting incremental revenue from the CrossKnowledge ($11 million) and Profiles ($6 million) acquisitions. Excluding revenue from both acquisitions, revenue decreased 4% as declines in print book sales exceeded growth in Online Test Preparation and Certification and other Assessment revenue. Other Knowledge Services Revenue, which includes the sales of licensing rights, subscription revenue and advertising and agency revenue increased 10% mainly due to the timing of licensing rights revenue.
 
 
23

 
 
Revenue by Region is as follows:
   
For the Three Months
   
   
Ended October 31,
% of
% change
   
 2014
 2013
Revenue
w/o FX
 
Revenue by Region:
 
 
 
 
 
Americas
 $73.2
$73.5
69%
3%
 
EMEA
26.6
13.3
25%
65%
 
Asia-Pacific
5.9
5.7
6%
0%
 
Total Revenue
 $105.7
$92.5
100%
12%
 
Cost of Sales:
 
Cost of sales for the second quarter of fiscal year 2015 increased 3% to $30.2 million due to costs from new acquisitions ($2 million), partially offset by lower Print Book sales volume ($1 million).
 
Gross Profit:
 
Gross Profit Margin increased from 68.2% to 71.4% in the second quarter of fiscal year 2015.  The improvement was mainly driven by higher margin incremental revenue from the Profiles (160 basis points) and CrossKnowledge (160 basis points) acquisitions.
 
Direct Expenses and Amortization:
 
Direct Expenses for the second quarter of fiscal year 2015 increased 44% to $35.2 million.  The increase was driven by incremental operating expenses from acquisitions ($10 million), higher advertising costs ($1 million) and higher costs to support online test preparation and certification growth ($1 million), partially offset by restructuring and other cost savings ($2 million).  Amortization of Intangibles increased $1.9 million to $3.5 million in the second quarter of fiscal year 2015 principally due to the Profiles and CrossKnowledge acquisitions.
 
Contribution to Profit:
 
Contribution to Profit increased 30% to $9.7 million in the second quarter of fiscal year 2015, or 2% on a currency neutral basis and excluding the prior year Restructuring Charges.  The improvement was mainly driven by restructuring and other cost savings, partially offset by the dilutive impact of the CrossKnowledge acquisition. Contribution Margin improved 110 basis points to 9.2% in the second quarter of fiscal year 2015 due to restructuring savings in the current year, restructuring charges in the prior year partially offset by the impact of the CrossKnowledge acquisition.
 
Partnership
 
In September 2014, Wiley announced a strategic collaboration with SilverCloud Health, a global provider of online behavioral and wellness solutions. The partnership, which will provide a comprehensive range of therapeutic programs across behavioral health and long-term chronic disease management, brings together Wiley’s evidence-based psychological and wellness content and SilverCloud Health’s award-winning cloud-based technology platform. The first set of programs, to be released in 2015, will address Generalized Anxiety Disorder and Diabetes, conditions that affect more than 40 million people in the United States on a daily basis alone.
 
 
24

 

   
For the Three Months
   
   
Ended October 31,
 
% change
 
EDUCATION:
2014
2013
% change
w/o FX (a)
           
 
Revenue:
       
 
Books:
 
 
 
 
 
Print Textbooks
 $41,778
$45,202
-8%
-6%
 
Digital Books
8,450
9,360
-10%
-10%
 
 
50,228
54,562
-8%
-7%
           
 
Custom Products
16,363
14,762
11%
11%
           
 
Course Workflow Solutions (WileyPLUS)
18,397
15,916
17%
16%
           
 
Education Services (Deltak)
 19,699
16,551
19%
19%
           
 
Other Education Revenue
1,793
1,870
-4%
-4%
           
 
Total Revenue
$106,480
$103,661
3%
3%
           
 
Cost of Sales
 (31,826)
(32,007)
-1%
0%
           
 
Gross Profit
74,654
71,654
4%
5%
 
Gross Profit Margin
70.1%
69.1%
   
           
 
Direct Expenses
 (32,119)
(28,579)
12%
12%
 
Amortization of Intangibles
 (2,381)
(2,381)
0%
0%
 
Restructuring Charges (see Note 7)
 -
(210)
 
 
           
 
Direct Contribution to Profit
$40,154
$40,484
-1%
0%
 
Direct Contribution Margin
37.7%
39.1%
   
           
 
Shared Service Costs:
       
 
Distribution and Operational Services
(3,226)
(3,848)
-16%
-16%
 
Technology and Content Management
 (13,828)
(11,407)
21%
21%
 
Occupancy and Other
 (3,595)
(3,044)
18%
18%
           
 
Contribution to Profit
 $19,505
$22,185
-12%
-11%
 
Contribution Margin
18.3%
21.4%
   
 
(a)  
Adjusted to exclude the fiscal year 2014 Restructuring Charges
 
Revenue:
 
Education revenue for the second quarter of fiscal year 2015 increased 3% to $106.5 million. The growth was driven by Deltak Education Services ($3 million), WileyPLUS Course Workflow Solutions ($3 million) and partially offset by a decrease in Books ($4 million). WileyPLUS revenue, which is earned ratably over the school semester, grew 17% during the second quarter of fiscal year 2015. Unearned deferred WileyPLUS revenue as of October 31, 2014 was $18.1 million as compared to $16.3 million as of October 31, 2013.
 
Education Services (Deltak) accounted for 19% of total Education revenue in the second quarter of fiscal year 2015 compared to 16% in the prior year. In the quarter, Education Services added the University of Birmingham as Wiley’s first European education services program partner. The university is the U.K.’s 11th largest, with over 19,000 undergraduate and 9,000 postgraduate students.  As of October 31, 2014, Deltak had 37 university partners, compared to 34 in the prior year period.  As of October 31, 2014, Deltak had 181 programs under contract (25 in development but not yet generating revenue) compared to 143 programs under contract in the prior year period (36 in development but not yet generating revenue).
 
 
25

 
 
Revenue by Region is as follows:
   
 For the Three Months
   
   
Ended October 31,
% of
% change
   
 2014
 2013
Revenue
w/o FX
 
Revenue by Region:
 
 
   
 
Americas
 $87.4
$85.4
82%
3%
 
EMEA
6.6
6.9
6%
-6%
 
Asia-Pacific
12.5
11.4
12%
13%
 
Total Revenue
 $106.5
$103.7
100%
3%
 
Cost of Sales:
 
Cost of Sales for the second quarter of fiscal year 2015 decreased 1% to $31.8 million, but was flat excluding the favorable impact of foreign exchange. Cost reduction initiatives in content development ($1 million) were offset by higher curriculum development cost in Education Services due to growth in new partners and programs ($1 million).
 
Gross Profit:
 
Gross Profit Margin for the second quarter of fiscal year 2015 improved 100 basis points to 70.1% principally due to cost saving initiatives and higher digital revenue.
 
Direct Expenses and Amortization:
 
Direct Expenses increased 12% to $32.1 million in the second quarter of fiscal year 2015. The increase was mainly driven by costs associated with growth in Education Services (Deltak) partner programs. Amortization of Intangibles was $2.4 million in the second quarters of fiscal years 2015 and 2014.
 
Contribution to Profit
 
Contribution to Profit for the second quarter of fiscal year 2015 decreased 12% to $19.5 million mainly due to continued investment in Education Services (Deltak) programs partially offset by revenue growth. Contribution Margin decreased 310 basis points to 18.3% in the second quarter of fiscal year 2015.
 
 
SHARED SERVICES AND ADMINISTRATIVE COSTS:
 
As part of Wiley’s restructuring and reorganization program, in the first quarter of fiscal year 2015 the Company consolidated certain decentralized business functions (Content Management, Vendor Procurement Services, Central Marketing, etc.) into global shared service functions. These newly centralized service groups enable significant cost reduction opportunities, including efficiencies gained from standardized technology and centralized management. The costs of these functions were previously reported as direct operating expenses in each business segment but are now reported within the shared service functions.  Prior year amounts have been restated to reflect the same reporting methodology.
 
 
26

 

   
For the Three Months
   
   
Ended October 31,
 
% change
   
2014
2013
% change
w/o FX (a)
           
 
Distribution and  Operation Services
$22,443
 $25,281
-11%
-12%
 
Technology and Content Management
59,452
 59,820
-1%
-1%
 
Finance
12,817
 13,457
-5%
-5%
 
Other Administration
27,814
 25,188
10%
10%
 
Restructuring Charges (see Note 7)
-
14,377
   
 
Total
$122,526
$138,123
-11%
-1%
 
(a) Adjusted to exclude the fiscal year 2014 Restructuring Charges
 
Shared Services and Administrative Costs for the second quarter of fiscal year 2015 decreased 11% to $122.5 million, or 1% on a currency neutral basis and excluding the prior year Restructuring Charges. Distribution and Operation Service costs decreased reflecting restructuring cost savings. Technology and Content Management costs decreased mainly due to restructuring and other cost savings ($4 million), partially offset by incremental costs from acquisitions ($2 million) and investments in internal systems and digital platforms ($1 million). Finance costs decreased mainly due to lower employment costs. Other Administration costs increased mainly due to incremental costs from the CrossKnowledge acquisition.
 
 
RESULTS OF OPERATIONS – SIX MONTHS ENDED OCTOBER 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 first six months of fiscal years 2015 and 2014, the average exchange rates to convert British pounds sterling to U.S. dollars were 1.67 and 1.56, respectively; the average exchange rates to convert euros into U.S. dollars were 1.33 and 1.32, respectively; and the average exchange rates to convert Australian dollars to U.S. dollars were 0.92 and 0.94, respectively. Unless otherwise noted, all variance explanations below are on a currency neutral basis.
 
For the Company’s recent international acquisition CrossKnowledge Group, Ltd. (“CrossKnowledge”), financial results reflect four months of operations and are reported on a two-month lag to facilitate accurate reporting. No events related to CrossKnowledge occurred during September or October which would materially affect the financial position of the Company.
 
Revenue:
 
Revenue for the first half of fiscal year 2015 increased 6% to $914.9 million, or 5% excluding the favorable impact of foreign exchange.  The increase mainly reflects incremental revenue from the acquisitions of CrossKnowledge ($15 million) and Profiles ($11 million), the sale of a backfile license ($10 million), growth in Education custom product and WileyPLUS workflow solutions ($7 million), journal subscriptions ($6 million), Deltak Education Services ($5 million) and funded access ($3 million), partially offset by lower print book revenue in all three businesses ($15 million).
 
 
27

 
 
Cost of Sales and Gross Profit:
 
Cost of sales for the first six months of fiscal year 2015 increased 3% to $258.6 million, or 2% excluding the unfavorable impact of foreign exchange. The increase mainly reflects higher royalty rates on society owned journals ($5 million), incremental costs from acquisitions ($3 million), revenue growth ($3 million), partially offset by cost savings initiatives ($7 million).
 
Gross profit for the first half of fiscal year 2015 of 71.7% was 80 basis points higher than prior year due to cost efficiencies and a higher proportion of digital sales (90 basis points) and higher margin revenue from acquisitions (50 basis points), partially offset by higher royalty rates on society owned journals (60 basis points).
 
Operating and Administrative Expenses:
 
Operating and administrative expenses for the first half of fiscal year 2015 increased 6% to $505.1 million.  The increase was mainly driven by incremental operating and administrative costs from acquisitions ($23 million); higher technology costs ($3 million) mainly due to investments in internal systems and digital platforms; Education Services’ (Deltak) program growth ($8 million) and higher employment and travel costs ($3 million); partially offset by restructuring and other cost savings ($13 million).
 
Restructuring (Credits) Charges:
 
In fiscal year 2013, the Company initiated a program (the “Restructuring and Reinvestment Program”) to restructure and realign its cost base with current and anticipated future market conditions.  The Company is targeting a majority of the cost savings achieved to improve margins and earnings, while the remainder will be reinvested in high growth digital business opportunities.
 
In the first half of fiscal years 2015 and 2014, the Company recorded pre-tax restructuring (credits) charges of ($0.2) million and $23.1 million, or $0.26 per share, respectively, which are described in more detail below:
 
The following tables summarize the pre-tax restructuring (credits) charges related to this program, which are reflected in Restructuring (Credits) Charges in the Condensed Consolidated Statements of Income (in thousands):
 
   
For the Six Months
 
Cumulative Charges
   
Ended October 31,
 
Incurred to Date
   
2014
 
2013
   
 
Charges (Credits) by Segment:
         
 
Research
$(185)
 
$5,372
 
$10,485
 
Professional Development
245
 
5,667
 
18,389
 
Education
51
 
258
 
2,059
 
Shared Services
(266)
 
11,774
 
36,086
 
Total Restructuring (Credits) Charges
$(155)
 
$23,071
 
$67,019
             
 
Charges (Credits) by Activity:
         
 
Severance
$641
 
$14,931
 
$46,309
 
Process reengineering consulting
(145)
 
5,611
 
11,029
 
Other activities
(651)
 
2,529
 
9,681
 
Total Restructuring (Credits) Charges
$(155)
 
$23,071
 
$67,019
 
Charges (Credits) for the six months ended October 31, 2014 reflect true-ups to the previously estimated accrued restructuring charges. The cumulative charge recorded to-date related to the Restructuring and Reinvestment program of $67.0 million is expected to be fully recovered by the end of fiscal year 2015. The Company expects to record a restructuring charge of approximately $18 million in the third quarter of fiscal year 2015.  Roughly half of the expected charge is related to the completion of facility consolidations and dispositions in connection with prior restructuring actions. The restructuring charge will also include severance costs for reorganization and consolidation plans, primarily in Research and books.
 
 
28

 
 
Impairment Charges
 
In the second quarter of fiscal year 2014, the Company terminated a multi-year software development program for an internal operations application due to a change in the Company’s longer-term enterprise systems plans.  As a result, the Company recorded an asset impairment charge for previously capitalized software costs related to the program of $4.8 million, or $3.4 million after tax ($0.06 per share).
 
Amortization of Intangibles:
 
Amortization of intangibles increased $3.9 million to $25.8 million in the first half of fiscal year 2015 and was mainly driven by the acquisitions.
 
Interest Expense/Income, Foreign Exchange and Other:
 
Interest expense for the first half of fiscal year 2015 increased $1.8 million to $8.7 million.  The increase was driven by higher average debt mainly due to acquisition financing and higher interest rates.  The Company’s average cost of borrowing in the first half of fiscal years 2015 and 2014 was 2.0% and 1.8%, respectively.  In the first six months of fiscal year 2014, the Company recognized a foreign exchange transaction gain of $0.3 million.  Interest income and other in the first half of fiscal years 2015 and 2014 was $1.4 million and $1.6 million, respectively.
 
Provision for Income Taxes:
 
The effective tax rate for the first six months of fiscal year 2015 was 26.2% compared to 10.7% in the prior year. During the first quarter of fiscal year 2014, the Company recorded non-cash deferred tax benefits of $10.6 million ($0.18 per share), principally associated with new tax legislation enacted in the United Kingdom (“U.K”) that reduced the U.K. statutory income tax rates by 3%. The benefits reflect the measurement of all applicable U.K. deferred tax balances to the new income tax rates of 21% effective April 1, 2014 and 20% effective April 1, 2015. Excluding the impact of the deferred tax benefit described above, the Company’s effective tax rate increased from 23.9% to 26.2% principally due to a  greater proportion of income from high tax jurisdiction (United States) in the current year and a $1.5 million net tax reserve release recorded in the second quarter of fiscal year 2014, partially offset by lower U.K. income tax rates. Prior year results included proportionately higher restructuring charges   related to U.S. operations.
 
Earnings Per Share:
 
Earnings per diluted share for the first half of fiscal year 2015 increased 20% to $1.46 per share.  Excluding the impact of the prior year restructuring and impairment ($0.32 per share) charges and the prior year deferred tax benefit related to the change in the U.K. corporate income tax rate ($0.18 per share), earnings per diluted share increased 8%.  The increase was mainly driven by revenue growth in Education and Research and company-wide savings resulting from restructuring, partially offset by the dilutive impact of the Talent Solutions acquisitions and investments in Education Services (Deltak) programs.
 
 
SEGMENT RESULTS FOR THE SIX MONTHS ENDED OCTOBER 31, 2014
 
As part of Wiley’s restructuring and reorganization program, in the first quarter of fiscal year 2015, the Company consolidated certain decentralized business functions (Content Management, Vendor Procurement Services, Marketing Services, etc.) into global shared service functions. These newly centralized service groups enable significant cost reduction opportunities, including efficiencies gained from standardized technology and centralized management. The costs of these functions were previously reported as direct operating expenses in each business segment but are now reported within the shared service functions. In addition, the Company has modified its segment product/service revenue categories to reflect recent changes to the business. Prior year amounts have been restated to reflect the same reporting methodology.
 
 
29

 
 
   
For the Six Months
   
   
Ended October 31,
 
% change
 
RESEARCH:
2014
2013
% change
w/o FX (a)
           
 
Revenue:
       
 
Research Communication:
 
 
 
 
 
Journal Subscriptions
 $337,138
$324,339
4%
2%
 
Funded Access
 10,496
7,191
46%
41%
 
Other Journal Revenue
62,887
49,094
28%
26%
   
 410,521
380,624
8%
6%
 
Books and References:
       
 
Print Books
52,915
58,493
-10%
-11
 
Digital Books
 19,213
18,952
1%
-1%
   
72,128
77,445
-7%
-9%
           
 
Other Research Revenue
37,046
40,666
-9%
-10%
           
 
Total Revenue
$519,695
$498,735
4%
2%
           
 
Cost of Sales
(141,538)
(135,543)
4%
2%
           
 
Gross Profit
$378,157
$363,192
4%
2%
 
Gross Profit Margin
72.8%
72.8%
   
           
 
Direct Expenses
(128,354)
(121,149)
6%
3%
 
Amortization of Intangibles
(14,560)
(13,810)
5%
1%
 
Restructuring Credits (Charges) (see Note 7)
185
(5,372)
   
           
 
Direct Contribution to Profit
$235,428
$222,861
6%
2%
 
Direct Contribution Margin
45.3%
44.7%
   
           
 
Shared Services and Administrative Costs:
       
 
Distribution and Operational Services
(23,419)
(23,395)
0%
-3%
 
Technology and Content Management
(51,186)
(51,081)
0%
-2%
 
Occupancy and Other
(12,219)
(12,972)
-6%
-8%
           
 
Contribution to Profit
$148,604
$135,413
10%
5%
 
Contribution Margin
28.6%
27.2%
   
 
(a) Adjusted to exclude the fiscal year 2015 and 2014 Restructuring Credits (Charges)
 
Revenue:
 
Research revenue for the first six months of fiscal year 2015 increased 4% to $519.7 million, or 2% excluding the favorable impact of foreign exchange.  Growth in Journal Subscriptions, Funded Access and Other Journal Revenue was partially offset by declines in Print Books and Other Research Revenue. Journal subscription revenue growth was driven by new titles ($2 million), new subscriptions ($2 million) and other mainly publication timing ($1 million). As of October 31, 2014, calendar year 2014 journal subscription renewals were up approximately 1.4% over calendar year 2013 on a constant currency basis.

Funded Access revenue, which represents article publication fees that provide for free access to author articles on the Company’s website, grew $3.3 million in the first half of fiscal year 2015.  Other Journal Revenue, which includes service charges for journal page counts and color charges and sales of journal licensing rights and backfiles and individual articles, increased 28% to $62.9 million principally due the sale of a backfile license ($10 million) and journal rights ($1 million). Print Books declined 10% to $52.9 million, while Digital Books revenue of $19.2 million was essentially flat with the prior year. Other Research Revenue, which includes journal reprint revenue, advertising, book licensing rights, distribution services and the sale of protocols, declined 9% mainly due to lower journal reprint ($2 million) and advertising ($1 million) revenue.
 
 
30

 
 
Revenue by Region is as follows:
   
For the Six Months
   
   
Ended October 31,
% of
% change
   
 2014
 2013
Revenue
w/o FX
 
Revenue by Region
 
 
 
 
 
Americas
$198.5
$197.7
38%
0%
 
EMEA
293.2
274.0
57%
3%
 
Asia-Pacific
28.0
27.0
5%
5%
 
Total Revenue
 $519.7
$498.7
100%
2%
 
Cost of Sales:
 
Cost of sales for the first six months of fiscal year 2015 increased 4% to $141.5 million, or 2% excluding the unfavorable impact of foreign exchange.  The increase was mainly driven by journal revenue growth ($2 million) and higher digital revenue and cost savings initiatives ($5 million), partially offset by higher royalty rates on society journals ($5 million).
 
Gross Profit:
 
Gross Profit Margin for the first half of fiscal year 2015 of 72.8% was flat with the prior year as higher royalty rates on society owned journals (110 basis points) were offset by inventory cost savings initiatives and lower cost digital sales.
 
Direct Expenses and Amortization:
 
Direct Expenses for the first six months of fiscal year 2015 increased 6% to $128.4 million, or 3% excluding the unfavorable impact of foreign exchange.  The increase was mainly driven by higher employment costs ($3 million) and higher editorial costs to support business growth ($1 million). Amortization of Intangibles increased $0.8 million to $14.6 million in the first six months of fiscal year 2015, but was flat excluding the unfavorable impact of foreign exchange.
 
Contribution to Profit:
 
Contribution to Profit for the first six months of fiscal year 2015 increased 10% to $148.6 million, or 5% excluding the favorable impact of foreign exchange and the current and prior year Restructuring Credits (Charges).  Revenue growth from the sale of a backfile licence and journal subscriptions and restructuring savings were partially offset by higher employment costs and royalty rates on society owned journals.  Contribution Margin increased 140 basis points to 28.6%, but was flat on a currency neutral basis and excluding the Restructuring Credits (Charges).
 
Society Partnerships
·  
5 new society journals were signed with combined annual revenue of approximately $1.2 million
·  
10 renewals/extensions were signed with approximately $12.2 million in combined annual revenue
·  
6 journals were not renewed with combined annual revenue of approximately $2.7 million
 
 
31

 
 

   
For the Six Months
   
   
Ended October 31,
 
% change
 
PROFESSIONAL DEVELOPMENT (PD):
2014
2013
% change
w/o FX (a)
           
 
Revenue:
       
 
Knowledge Services:
 
 
 
 
 
Print Books
 $108,612
$116,102
-6%
-7%
 
Digital Books
 24,964
25,637
-3%
-3%
 
Online Test Preparation and Certification
8,487
7,121
19%
19%
 
Other
12,315
12,630
-2%
-3%
 
 
154,378
161,490
-4%
-5%
 
Talent Solutions:
       
 
Assessment
28,309
15,141
87%
87%
 
Online Learning and Training
 15,307
-
-
-
 
 
43,616
15,141
188%
188%
           
 
Total Revenue
 $197,994
$176,631
12%
12%
           
 
Cost of Sales
(57,197)
(56,039)
2%
2%
           
 
Gross Profit
 $140,797
$120,592
17%
16%
 
Gross Profit Margin
71.1%
68.3%
   
           
 
Direct Expenses
(64,981)
(50,409)
29%
28%
 
Amortization of Intangibles
(6,431)
(3,327)
93%
93%
 
Restructuring Charges (see Note 7)
(245)
(5,667)
   
           
 
Direct Contribution to Profit
 $69,140
$61,189
13%
3%
 
Direct Contribution Margin
34.9%
34.6%
   
           
 
Shared Services and Administrative Costs:
       
 
Distribution and Operational Services
 (16,270)
(19,156)
-15%
-16%
 
Technology and Content Management
 (22,797)
(26,038)
-12%
-13%
 
Occupancy and Other
(12,750)
(9,761)
31%
31%
           
 
Contribution to Profit
 $17,323
$6,234
0%
48%
 
Contribution Margin
8.7%
3.5%
   
 
(a) Adjusted to exclude the fiscal year 2015 and 2014 Restructuring Charges
 
Revenue:
 
PD revenue for the first six months of fiscal year 2015 increased 12% to $198.0 million.  The increase reflected incremental revenue from the CrossKnowledge ($15 million) and Profiles ($11 million) acquisitions.  Excluding revenue from both acquisitions, revenue decreased 3% as declines in book sales exceeded growth in Online Test Preparation and Certification and other Assessment revenue.  Other Revenue, which includes the sales of licensing rights, subscription revenue and advertising and agency revenue, decreased 2% to $12.3 million in the first half of fiscal year 2015.
 
 
32

 

 
Revenue by Region is as follows:
   
For the Six Months
   
   
Ended October 31,
% of
% change
   
 2014
 2013
Revenue
w/o FX
 
Revenue by Region: