Value Line, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended July 31, 2016; comparisons are with the three months ended July 31, 2015 unless noted. Dollar amounts are in millions except per-share data. Value Line publishes investment research and licenses proprietary data; it also holds non-voting revenue and profit interests in Eulav Asset Management (EAM).
Financial performance and position
- Revenue: Total reported revenue was $16.644 million, up 88.5%, including an $8.123 million gain on sale of an operating facility. Publishing revenue excluding that gain was $8.521 million: investment periodicals and related publications were $7.650 million, down 6.5%, while copyright data fees were $0.871 million, up 34.4%.
- Profit: Operating income was $8.137 million versus $0.959 million; net income was $6.358 million versus $2.119 million; diluted EPS was $0.65 versus $0.22. The facility sale contributed approximately $5.28 million to after-tax profit. Excluding the $8.123 million pretax sale gain, operating income was approximately $0.014 million.
- Costs and margins: Operating expenses rose 8.1% to $8.507 million, primarily reflecting additional depreciation and amortization. The filing does not provide a clear adjusted operating margin excluding the facility gain. The effective tax rate was 36.96%, compared with 30.57%.
- EAM: Revenue and profit interests totaled $1.916 million, down 6.2%. Assets in Value Line funds managed or distributed by EAM were $2.315 billion, down 1.4% year over year.
- Cash flow: Operating cash flow was negative $2.057 million versus positive $0.692 million. Investing cash flow was positive $12.524 million, including $11.555 million of facility-sale proceeds. Financing cash outflow was $2.194 million, including $1.659 million in dividends and $0.535 million in share repurchases. Cash and cash equivalents ended at $21.395 million, up from $13.122 million at April 30, 2016.
- Liquidity and debt: Cash and short-term securities totaled $25.270 million. Working capital was $0.784 million, compared with negative $6.346 million at April 30, 2016; current liabilities included $19.316 million of unearned revenue. The filing reports no borrowings and management did not anticipate borrowing in the next 12 months. Total liabilities were $52.123 million, including deferred taxes and unearned revenue.
- Capital returns: The quarterly dividend was $0.17 per share, versus $0.15 a year earlier. The company repurchased 32,714 shares for $0.535 million; $0.815 million remained under its repurchase authorization.
Material changes and management commentary
- The sale of the 85,000-square-foot East Rutherford facility closed July 29, 2016 for $11.555 million in proceeds and generated the $8.123 million pretax gain. Fulfillment operations moved to a leased 24,110-square-foot facility.
- Periodicals revenue declined amid lower print sales and circulation. Print revenue fell 14.5%, while digital revenue rose 1.9%; the company attributed part of the print decline to 13 weeks of revenue in the current quarter versus 14 weeks in the prior-year quarter. Total product-line circulation was down 6.1% year over year.
- Copyright data fees increased as third-party sponsored assets represented by contracts rose to $2.4 billion across three contracts, from $1.3 billion across four contracts a year earlier.
- Operating cash flow weakened because of lower unearned subscription revenue and the timing of profit-sharing and tax payments. Management said cash, liquid assets, operating cash flows, and EAM distributions should be sufficient for forecasted needs over the next 12 months.
- Management described the U.S. economic outlook as gradually improving, while citing uncertainty around global growth, the U.K.’s EU exit, the U.S. election, and Federal Reserve policy. No quantified company revenue or earnings guidance is provided.
Risks, contingencies, and unusual items
- Key business risks include continued subscription declines, competition from free or low-cost online research, protection of intellectual property, reliance on EAM-related income, changes in EAM assets under management, regulation, and dependence on key personnel.
- EAM fund assets were lower year over year, including continued redemptions in certain variable-annuity funds. Value Line’s investment in EAM was $58.123 million; the company stated its maximum exposure to loss was that recorded investment and it had no obligation to fund EAM.
- The company leases its New York office through February 2017 and warehouse space through April 2024. It identifies locating suitable office space before the current lease expires as a risk.
- The company reported no legal proceedings, no material changes to previously disclosed risk factors, and no material uncertain tax positions. A state tax audit was ongoing, but management did not expect a material effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much of reported earnings and cash growth is attributable to the one-time facility sale, and what are ongoing operating results excluding it?
- Whether subscription revenue, circulation, and unearned revenue stabilize, particularly in print and retail products.
- Whether EAM distributions remain resilient given fund-asset levels, redemptions, and fee waivers.
- The cash-flow impact of subscription prepayments, taxes, dividends, repurchases, and the new warehouse and office arrangements.
- Progress on securing office space before the New York sublease ends in February 2017.