Value Line, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended January 31, 2014; fiscal year ends April 30. The company publishes investment research and licenses proprietary copyright data. It also receives non-voting revenue and profit interests from EULAV Asset Management (EAM), an unconsolidated investment-management trust.
Financial performance
| Metric | Three months 2014 | Three months 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $9.274 million | $8.946 million | $27.239 million | $26.693 million |
| Operating income | $1.008 million | $1.088 million | $2.123 million | $3.360 million |
| EAM revenue and profit interests | $1.974 million | $1.625 million | $5.597 million | $4.627 million |
| Income before taxes | $3.052 million | $2.750 million | $7.862 million | $8.080 million |
| Net income | $2.026 million | $1.747 million | $5.087 million | $5.095 million |
| Diluted earnings per share | $0.21 | $0.18 | $0.52 | $0.52 |
Third-quarter revenue grew 3.7% and net income rose 16.0%. Nine-month revenue increased 2.0%, while operating income fell 36.8% and net income was essentially unchanged. The filing attributes lower year-to-date operating income partly to $771,000 of one-time overlapping rent during the office move and $378,000 of additional depreciation and amortization. EAM income increased 21.0% for the nine-month period.
For the nine months, print and digital publication revenue were $13.972 million and $11.084 million, respectively: print declined 2.6%, while digital grew 17.3%. Copyright data fees fell 24.7% to $2.183 million. Operating expenses rose 7.6% to $25.116 million, including higher salary, production and distribution costs. The nine-month effective tax rate was 35.30%, compared with 36.94%.
Cash, liquidity and capital
- Operating cash flow was $2.268 million for the nine months, versus $0.662 million a year earlier. Investing activities provided $0.644 million; financing activities used $4.944 million, including $4.435 million of dividends paid and $0.509 million of share repurchases.
- Cash and cash equivalents were $4.808 million and available-for-sale securities were $9.160 million at January 31, 2014, for combined cash and short-term securities of $13.968 million. Total current assets were $17.146 million and current liabilities were $26.799 million; negative working capital of $9.653 million included $20.961 million of current unearned revenue.
- The company reported no fixed-maturity investments and said it did not anticipate borrowing during the next 12 months. Management said liquid resources and expected operating and EAM cash flows should cover forecast liquidity needs for that period. No debt balance is reported in the presented balance sheet.
- Total assets were $85.700 million, including a $57.900 million investment in EAM; shareholders’ equity was $33.087 million. The company declared dividends of $0.15 per share in each of the first three fiscal quarters and repurchased 55,073 shares during the nine months.
Material developments, outlook and risks
- Digital circulation and revenue continued to expand, while retail print circulation and revenue declined. Management expects long-term print revenue declines and said the prior-year-comparison-driven growth rate in retail digital revenue is not expected to persist.
- Third-party-sponsored assets supporting copyright data fees had declined to $2.9 billion from $3.6 billion a year earlier. After quarter-end, another portfolio was reassigned to a new subadvisor; the company estimates this will reduce copyright data fees by approximately $700,000 annually.
- The new office sublease runs through February 2017 at base rent of about $1.468 million annually and is expected to reduce annual rent expense. Fiscal 2014 includes the one-time overlapping rent noted above.
- Value Line’s EAM interest is non-voting, and the company says it does not control EAM or have an obligation to fund it beyond its recorded investment and undistributed interests. EAM-related income and distributions depend on its operations and assets under management.
- Principal risks include subscriber retention and competition from free or low-cost investment research, copyright-data contract and market exposure, changes in EAM assets and fund redemptions, intellectual-property protection, regulation, and dependence on key personnel. Management reported no material change to previously disclosed risk factors. Legal proceedings: none reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether digital subscriber and revenue growth can offset continuing print declines, and how renewal and new-order trends develop.
- The timing and full annual impact of the reported copyright-data portfolio reassignment, alongside the existing decline in sponsored assets and fees.
- EAM’s assets, profitability, fee waivers and distributions, which materially contribute to Value Line’s income and liquidity.
- Whether cash generation supports dividends, repurchases, software investment and liquidity needs, given negative working capital and the concentration of current liabilities in unearned subscription revenue.