Business context and reporting period
Value Line, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended January 31, 2019 (fiscal 2019 Q3). Its principal business is publishing investment research and licensing its copyrights, trademarks, and proprietary ranking information. It also holds non-voting revenue and profit interests in EULAV Asset Management Trust (EAM); EAM is not consolidated.
Financial results and liquidity
Amounts below are in millions, except per-share figures and percentages.
| Metric | Three months ended Jan. 31, 2019 | Three months ended Jan. 31, 2018 | Nine months ended Jan. 31, 2019 | Nine months ended Jan. 31, 2018 |
|---|---|---|---|---|
| Publishing revenue | $9.052 | $9.094 | $27.074 | $26.997 |
| Operating income | $1.413 | $0.787 | $4.443 | $2.760 |
| EAM revenue and profit interests | $2.210 | $2.284 | $6.865 | $6.657 |
| Income before taxes | $3.763 | $3.329 | $11.685 | $9.862 |
| Net income | $2.451 | $8.996 | $8.857 | $13.283 |
| Diluted EPS | $0.25 | $0.93 | $0.91 | $1.37 |
- Revenue mix: Nine-month periodicals revenue was $21.755 million, down 2.3%; copyright fees were $5.319 million, up 12.2%. Print and digital circulation were down 3.2% and 1.6%, respectively, at January 31 year over year. Copyright fees benefited from third-party sponsored assets rising to $4.9 billion from $4.4 billion.
- Margins and expenses: Operating margin was approximately 15.6% for the quarter and 16.4% for the nine months, compared with approximately 8.7% and 10.2% in the prior-year periods. Operating expenses fell 8.0% for the quarter and 6.6% for the nine months, with reductions in advertising, employee costs, and production and distribution.
- Cash flow: Nine-month operating cash flow was $5.447 million, versus $4.425 million. Investing activities used $1.170 million; financing activities used $5.854 million. Cash, cash equivalents, and restricted cash ended at $4.833 million.
- Liquidity and balance sheet: At January 31, cash and short-term securities totaled $23.633 million; working capital was $4.707 million, including $18.887 million of current unearned revenue. Total assets were $88.205 million, total liabilities $41.314 million, and shareholders’ equity $46.891 million. The filing reports no borrowings and management said it did not anticipate borrowing in the next 12 months.
- Debt and obligations: No debt balance is reported. Long-term liabilities include $12.186 million of deferred income taxes and $5.012 million of unearned revenue. Future minimum operating lease payments total $12.833 million.
- Capital returns: The company paid $5.523 million in dividends during the nine months; quarterly dividends were $0.19 per share. It repurchased 15,724 shares for $0.331 million and had $1.715 million remaining under its $2 million repurchase authorization.
Material changes versus the prior comparable period
- Operating income improved substantially as lower expenses more than offset nearly flat publishing revenue. Nine-month operating income rose 61.0%; the combined operating income and EAM interests increased 20.1%.
- Net income fell 33.3% for the nine months and 72.8% for the quarter, chiefly because the prior-year comparison included a one-time tax benefit from the federal corporate tax-rate reduction enacted in 2017. The prior-year nine-month effective tax rate was negative 34.69%, versus 24.20% in 2019.
- Unearned subscription revenue was $23.899 million, down 0.9% year over year and 6.4% from April 30, 2018. Management noted that April is typically the annual peak.
- Assets in EAM-managed or distributed Value Line Funds increased 2.5% to $2.678 billion year over year, reflecting market appreciation offset by net redemptions in seven of eleven funds.
Outlook, commentary, risks, and unusual items
- Management projected 2.4% U.S. economic growth for calendar 2019 and did not expect a recession for at least another year, while identifying risks including fiscal policy, Federal Reserve decisions, trade negotiations with China, and a deeper slowdown in Europe or Asia. This is macroeconomic commentary, not company-specific earnings guidance.
- Management believes liquid resources, operating cash flow, and EAM-related receipts will cover forecast liquidity needs for the next 12 months. The company expects continued cash use for dividends and share repurchases.
- Key disclosed risks include subscription retention, market and economic conditions, intellectual-property protection, reliance on EAM interests, changes in EAM assets under management, customer collections, competition, regulation, and cyberattacks or natural disasters. One customer represented 19.6% of nine-month publishing revenue.
- Value Line’s EAM investment was $58.358 million; the company stated its maximum exposure to loss from EAM was that recorded investment and it has no obligation to fund EAM in the future. EAM’s fund assets and profitability remain relevant to the company’s receipts.
- The company is evaluating the operational impact of the Supreme Court’s South Dakota v. Wayfair sales-tax decision and says it is complying with applicable state laws. A federal tax audit for fiscal 2015 was ongoing; management did not expect a material financial-statement effect. No material changes to previously disclosed risk factors were reported.
- Adoption of revenue-recognition, restricted-cash, and cash-flow classification standards had no material financial-statement impact; the cash-flow classification change moved EAM receipts from operating to investing activities. Management expected lease-accounting adoption to have no material impact.
Important facts for investors to verify
- Whether subscription declines and the nearly flat publishing revenue trend stabilize, particularly given the customer concentration and advance-renewal timing.
- How EAM assets, fund flows, and earnings affect Value Line’s revenue and profit interests, and whether the $58.358 million carrying value remains supportable.
- That year-over-year net-income comparisons reflect the prior-year one-time tax benefit; assess ongoing earnings using normalized tax assumptions.
- Cash generation, working capital, unearned revenue, and planned dividends and repurchases relative to the company’s liquidity needs.
- Potential effects of sales-tax requirements, the federal tax audit, market-sensitive investment holdings, and lease commitments.