Value Line, Inc. — Form 10-Q Summary
Business context and period: Value Line publishes investment periodicals and related research, and licenses proprietary copyright data. This filing covers the three and six months ended October 31, 2012 (fiscal 2013 second quarter); financial statements are unaudited. Dollar amounts below are in thousands unless stated otherwise.
Financial performance
| Metric | Three months 2012 | Three months 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $8,809 | $9,140 | $17,747 | $18,510 |
| Operating income | $920 | $1,518 | $2,272 | $3,156 |
| EAM revenues and profits interests | $1,529 | $1,343 | $3,002 | $2,915 |
| Income before taxes | $2,479 | $2,881 | $5,330 | $6,102 |
| Net income | $1,572 | $1,915 | $3,348 | $3,991 |
| Basic and diluted EPS | $0.16 | $0.19 | $0.34 | $0.40 |
- Quarterly revenue fell 3.6%; six-month revenue fell 4.1%. Investment publications revenue declined 6.0% and 5.2%, respectively, partly offset by copyright data fee growth of 20.8% and 6.0%.
- Operating income declined 39.4% for the quarter and 28.0% for six months. Approximate operating margins were 10.4% versus 16.6% for the quarter and 12.8% versus 17.1% for six months. Expenses rose 3.5% for the quarter and 0.8% for six months; higher software amortization and production/distribution costs contributed.
- Net income declined 17.9% for the quarter and 16.1% for six months. The six-month effective tax rate was 37.18%, compared with 34.60% a year earlier.
- At October 31, cash and cash equivalents were $8,223 and available-for-sale securities were $5,123, for total cash and short-term securities of $13,346. Total assets were $81,987; shareholders’ equity was $32,690.
- Working capital was negative $9,447, largely reflecting $19,697 of current unearned subscription revenue. Total unearned revenue, current and long-term, was $23,111.
- No borrowings or debt are shown on the balance sheet. Management said it did not expect to borrow over the next 12 months and considered available liquidity and expected operating and EAM cash flows sufficient for forecast needs.
- Six-month operating cash flow was negative $721, investing cash flow negative $99, and financing cash flow negative $2,999. Cash declined $3,819 from April 30. Financing outflows included $2,969 of dividends paid; dividends declared were $0.15 per share in each quarter.
Changes, outlook, and risks
- Publication revenue pressure continued: total product-line circulation was 4.6% below the prior-year level; print circulation was down 8.3%. Management said new subscribers are not offsetting non-renewals, with competition from free or low-cost online and brokerage research also weighing on demand. Institutional combined print and digital sales orders improved, but not enough to offset retail declines.
- Management expects the negative subscription-revenue trend to continue until new products are developed and marketed. New offerings were expected to begin launching in fiscal 2014, but the company could not predict timing or whether they would reverse the decline. Recent technology initiatives included a new fulfillment system, e-commerce platform, single sign-on, and institutional sales website.
- Value Line’s EAM interests generated $3,002 for the six months, including a $2,808 revenues interest and $194 profits interest. EAM manages or distributes funds with $2.048 billion in total net assets at October 31, 2012, up 0.8% year over year. Value Line does not control EAM; its recorded investment was $57,354, and the company reported maximum exposure to loss of that amount.
- The US Government Money Market Fund merged into a third-party fund effective October 19, 2012. EAM no longer subsidizes that fund’s expenses, and the merger is expected to eliminate its administration and fund-accounting costs.
- The company’s non-renewable office lease expires in May 2013; management identified securing replacement space as a risk. Other stated risks include subscriber retention, competition, intellectual property protection, market conditions, regulation, and dependence on EAM-related cash flows.
- Management did not expect Hurricane Sandy to have a material financial statement impact. No legal proceedings were reported; the filing stated there were no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether subscription and circulation declines stabilize, and whether institutional growth or planned digital products can offset retail weakness.
- The durability of EAM-derived income and distributions, including effects of fund assets, investor redemptions, fee waivers, and the money-market fund transition.
- Cash generation and the adequacy of liquidity, noting negative working capital and six-month operating cash outflow.
- Progress and costs of digital product development, and the May 2013 office lease expiration and replacement-space plans.
- The September 2012 authorization for up to $3,000 of share repurchases: $30 had been used by October 31; the parent company owned approximately 87.3% of outstanding shares.