Value Line, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2018 (fiscal 2019); comparisons are with the same periods of 2017. Amounts below are in millions unless stated otherwise.
Business context
Value Line publishes investment research and periodicals and licenses its copyrights and proprietary ranking information. It also holds non-voting revenue and profit interests in EULAV Asset Management Trust (EAM), which manages and distributes Value Line funds. Value Line does not control EAM and accounts for its interest under the equity method.
Financial performance
| Metric | Three months to Oct. 31, 2018 | Three months to Oct. 31, 2017 | Six months to Oct. 31, 2018 | Six months to Oct. 31, 2017 |
|---|---|---|---|---|
| Publishing revenue | $9.051 | $8.989 | $18.022 | $17.903 |
| Operating income | $1.760 | $0.808 | $3.030 | $1.973 |
| EAM revenue and profit interests | $2.384 | $2.237 | $4.655 | $4.373 |
| Income before taxes | $4.267 | $3.136 | $7.922 | $6.533 |
| Net income | $3.302 | $2.072 | $6.406 | $4.287 |
| Diluted EPS | $0.34 | $0.21 | $0.66 | $0.44 |
- Publishing revenue rose 0.7% in both the quarter and first half. Copyright fees increased 14.5% for the quarter and 14.2% for the half, while periodicals revenue declined 2.2% and 2.1%, respectively.
- Operating expenses fell 10.9% for the quarter and 5.9% for the half. Operating margin was approximately 19.4% for the quarter versus 9.0% a year earlier, and 16.8% for the half versus 11.0%.
- Net income increased 59.4% for the quarter and 49.4% for the half. Management attributed the half-year increase principally to lower federal tax rates; the six-month effective tax rate was 19.14%, compared with 34.40% in the financial-statement tax note.
- Operating cash flow was $3.604, versus $3.169 in the prior-year half. Investing activities used $1.232 and financing activities used $3.728; cash and restricted cash ended at $5.054.
Balance sheet and liquidity
- At October 31, 2018, total assets were $86.243 and shareholders’ equity was $46.400. The EAM investment was $58.451, about 68% of total assets.
- Cash and cash equivalents were $4.585 and current available-for-sale securities were $19.060. Management reported cash and short-term securities of $23.645, working capital of $3.297, and current liabilities of $22.644, including $18.325 of unearned revenue.
- The filing reports no borrowings and management did not anticipate borrowing during the next 12 months. It believed cash, liquid assets, operating cash flow, and EAM distributions would meet forecast needs over that period.
- Dividends declared were $0.19 per share for each of the two quarters. The board authorized a new share repurchase program of up to $2.0; no purchases under it had occurred by October 31. Operating lease commitments disclosed totaled $12.833.
Changes, outlook, risks, and unusual items
- Periodicals revenue was pressured by lower circulation: total product-line circulation was slightly below the prior year, with digital circulation down 3.7% and print circulation up 1.5%. Unearned subscription revenue was $23.201, down 2.2% year over year.
- Third-party sponsored assets supporting copyright fees were $4.5 billion, versus $4.2 billion a year earlier. EAM-managed Value Line fund assets were $2.574 billion, up 2.5%; management cited market appreciation partly offset by net redemptions in eight of eleven funds.
- Management expected U.S. economic growth to moderate from the strong midyear pace, estimating 2.5%–3.0% for the referenced quarter and somewhat less during calendar 2019. This is economic commentary, not company-specific financial guidance.
- Key risks include subscription retention and new sales, market conditions affecting EAM assets and distributions, reliance on significant customers, competition, intellectual-property protection, regulation, and cyber or other disruptive events. One customer accounted for 19.2% of first-half publishing revenue. The company was evaluating the potential effect of the South Dakota v. Wayfair sales-tax ruling.
- Value Line’s combined top-ranked stocks underperformed the Russell 2000 for both the six months and twelve months ended October 31, 2018. The company reported no legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Confirm the fiscal-period labeling: the report covers the quarter ended October 31, 2018, described in the filing as fiscal 2019’s second quarter.
- Reconcile the effective tax rate: the tax note gives 34.40% for the prior-year six-month period, while MD&A elsewhere states 34.80%.
- Reconcile cash-flow reclassification disclosures: the accounting note cites $4.7 million and $4.4 million of EAM interests reclassified between activities, while MD&A cites $2.3 million and $2.1 million.
- Monitor subscription trends, unearned revenue, customer concentration, EAM fund assets and distributions, and the company’s substantial exposure to its EAM investment.