Value Line, Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2019, the first quarter of fiscal 2020. Comparative period: three months ended July 31, 2018. Financial statement amounts below are in millions of dollars unless stated otherwise.
Business context
Value Line publishes investment research and periodicals and licenses its trademarks, rankings and other proprietary information. It also receives non-voting revenue and profit interests in EULAV Asset Management Trust (EAM), which manages and distributes Value Line mutual funds. Value Line does not control or consolidate EAM and accounts for its interest using the equity method.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Publishing revenue | $9.617 | $8.971 | +7.2% |
| Operating income | $2.025 | $1.270 | +59.4% |
| EAM revenue and profit interests | $2.871 | $2.271 | +26.4% |
| Income before taxes | $5.037 | $3.655 | +37.8% |
| Net income | $3.690 | $3.104 | +18.9% |
| Diluted EPS | $0.38 | $0.32 | +18.8% |
| Operating expenses | $7.592 | $7.701 | -1.4% |
- Operating margin was approximately 21.1%, versus 14.2% a year earlier. Net margin was approximately 38.4%, versus 34.6%; net income includes EAM interests and securities income.
- Periodicals revenue declined 3.6%: print fell 6.2% and digital fell 1.2%. Copyright fees rose 53.9% to $2.584 million.
- Income tax provision increased to $1.347 million from $0.551 million; the effective tax rate rose to 26.74% from 15.07%, primarily due to higher state and local taxes and prior-year tax allocation effects.
Cash flow, balance sheet and liquidity
- Operating cash flow was a use of $0.102 million, compared with $1.429 million provided in the prior-year quarter. Management attributed the decline mainly to timing of copyright-fee receipts, lower unearned publishing orders, and a $2.246 million increase in receivables.
- Investing cash outflow was $0.648 million; financing cash outflow was $2.025 million, including $1.933 million of dividends paid and $0.092 million of share repurchases. Cash, cash equivalents and restricted cash ended at $4.187 million.
- At July 31, cash and short-term securities were $26.303 million; working capital was $6.118 million. Current assets were $31.311 million and current liabilities $25.193 million.
- Total assets were $101.249 million and shareholders’ equity $49.276 million. The company reported no borrowings. Operating lease liabilities totaled $10.082 million, of which $0.925 million was current; the balance sheet also included a $9.289 million lease right-of-use asset.
- Unearned subscription revenue was $23.494 million, down 2.6% year over year. The quarterly dividend declared was $0.20 per share, versus $0.19 a year earlier.
Material changes and management commentary
- Management cited higher copyright fees and EAM interests, together with controlled expenses, as the main drivers of higher net income. Production and distribution expenses declined 11.4%; office and administration expenses increased 11.3%.
- Total product-line circulation was down 4.6% year over year; print circulation fell 5.1% and digital circulation 3.7%. New digital sales represented a larger share of digital sales, while new print sales represented a smaller share of print sales.
- EAM-managed fund assets were $3.421 billion, up 28.6% year over year. EAM revenue interest income rose to $2.588 million, while Value Line’s profit interest income was $0.283 million, down 6.6%.
- The company adopted lease accounting Topic 842 on May 1, 2019, recognizing lease assets and liabilities; comparative periods were not restated. Revenue-recognition adoption had no material reported impact.
- Management believes liquid resources, operating cash flows and EAM distributions will meet liquidity needs for the next 12 months and does not anticipate borrowing during that period. No specific earnings or revenue guidance was provided.
- Management’s economic commentary expected modest growth around 2% into 2020, while noting trade tensions, declining business and consumer sentiment and weaker manufacturing as potential sources of deterioration. It anticipated continued stock-market volatility.
Risks, contingencies and unusual items
- A single customer generated 26.9% of quarterly publishing revenue, creating customer concentration and collection risk.
- Results depend partly on subscription renewals, copyright-related assets under management and EAM distributions, which can fluctuate with markets, fund flows and redemptions. Eight of EAM’s eleven funds had net redemptions over the prior 12 months despite overall asset growth.
- The filing identifies risks including competition, changing availability of low-cost investment information, intellectual-property protection, regulation, cyberattacks, key-person dependence and market or economic conditions.
- The company was evaluating the effects of the South Dakota v. Wayfair sales-tax decision and stated it was complying with applicable state laws. It reported no legal proceedings and no material changes to previously disclosed risk factors. A federal tax audit for fiscal 2015 was not expected to have a material effect.
- Value Line’s parent owned 89.38% of its outstanding common shares. The company repurchased 3,857 shares during the quarter, with $1.346 million remaining under its $2 million program authorization.
Important facts for investors to verify
- Whether copyright-fee growth and EAM distributions are sustainable, and how sensitive both are to market levels, fund flows and redemptions.
- Subscription trends, circulation and unearned revenue, including the outlook for the concentrated customer contributing 26.9% of publishing revenue.
- Whether operating cash flow recovers as receivables and subscription-payment timing normalize.
- The ongoing effects of lease obligations, the effective tax rate and the company’s dividend and repurchase spending on liquidity.
- That the quarter ended July 31, 2019 is fiscal Q1 2020, notwithstanding the “2019 Q1” request label.