Value Line, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2016 (May 1, 2015–April 30, 2016), compared primarily with FY2015. This is an annual report, not a calendar-year 2015 Q4 filing; quarterly figures below identify the fiscal fourth quarter where relevant.
Business context
Value Line publishes investment research in print and digital formats and licenses proprietary rankings and data to third parties. Its publishing business is the sole reported operating segment. The company also receives 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. Controlling shareholder Arnold Bernhard & Co. owned 88.5% of Value Line’s common stock at year-end.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Publishing revenue | $34.546 million | $35.523 million | -2.8% |
| Operating income | $1.880 million | $2.399 million | -21.6% |
| EAM revenue and profit interests | $7.651 million | $7.970 million | -4.0% |
| Income before taxes | $10.008 million | $10.495 million | -4.6% |
| Net income | $7.291 million | $7.292 million | Approximately flat |
| Diluted EPS | $0.75 | $0.74 | +1.4% |
| Operating cash flow | $2.004 million | $1.407 million | +$0.597 million |
- Operating margin was approximately 5.4% of publishing revenue; net income was approximately 21.1% of publishing revenue. EAM income and securities income are reported below operating income.
- Print revenue fell 5.4% to $15.659 million; digital revenue increased 0.9% to $16.266 million. Copyright data fees declined 7.9% to $2.621 million.
- Advertising and promotion expense decreased 26.1% to $3.685 million, while production and distribution expense rose 23.2% to $8.725 million, mainly reflecting accelerated software amortization and digital hosting/transition costs.
- The effective income tax rate declined to 27.15% from 30.52%, supporting stable net income despite lower operating and EAM contribution.
- Investing cash flow was $12.207 million, including proceeds from securities sales; financing cash outflow was $6.963 million, including $6.167 million of dividends paid and $0.796 million of share repurchases.
Liquidity, debt and capital
- At April 30, 2016, total assets were $86.507 million and shareholders’ equity was $34.600 million. Cash and cash equivalents were $13.122 million; available-for-sale securities were $3.637 million, for combined cash and securities of $16.759 million.
- Working capital was negative $6.662 million, largely because $20.516 million of current unearned subscription revenue is recorded as a liability. Total current liabilities were $26.298 million.
- The filing reports no long-term debt or capital lease obligations. Long-term liabilities were $25.609 million, primarily deferred taxes and unearned revenue; operating lease obligations totaled $2.939 million.
- Management said available liquid resources and expected operating and EAM cash flows should meet forecast liquidity needs for the next 12 months and that it did not anticipate borrowing during that period.
- The quarterly dividend increased to $0.17 per share for the quarter ended April 30, 2016. The board later declared another $0.17 quarterly dividend and reaffirmed the repurchase authorization, with $1.35 million remaining under the $3 million program at year-end.
Changes, outlook and key risks
- Publishing revenue continued to decline, driven by weaker retail subscriptions and print. Total product-line circulation was 3.7% below the prior year. Institutional sales orders grew 6.9% to $14.240 million but did not fully offset retail weakness.
- Fund assets managed or distributed by EAM declined 5.4% to approximately $2.22 billion. Net redemptions and market depreciation weighed on assets. Value Line’s EAM-related income fell 4.0%; its profit-interest income decreased 29.5% to $0.440 million.
- Third-party sponsored assets under copyright-data agreements declined to $1.8 billion across three contracts from $2.3 billion across four; related fees fell. Management said it was pursuing additional licensing and distribution opportunities.
- FY2016 operating income included $1.102 million of additional depreciation and amortization. The fiscal fourth-quarter operating loss of $0.462 million was attributed to accelerated amortization after the company stopped developing certain data galleries. FY2015 also had a fourth-quarter operating loss, of $0.560 million, with different contributing items.
- Management expects the long-term decline in print revenue to continue and is emphasizing digital services, institutional customers, and lower-priced “starter” products. The filing provides no quantified company revenue or earnings guidance. Its economic commentary anticipated gradual U.S. improvement while noting unsettled global conditions; this was commentary, not company-specific financial guidance.
- Principal risks include subscription retention and competition from free or low-cost online research; EAM dependence and fund performance, market levels and redemptions; copyright-client concentration and asset fluctuations; key-personnel and intellectual-property risks; regulation; cyberattacks; office and warehouse transitions; and AB&Co.’s voting control.
- The company signed an eight-year New Jersey warehouse lease beginning around May 2016 and contracted to sell its existing warehouse; the sale was anticipated in summer 2016 but was not assured. No legal proceedings were reported. Auditors gave an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting, and no auditor internal-control attestation was required.
Important facts for investors to verify
- Whether digital and institutional growth can offset continuing retail and print subscription declines, including changes in circulation, renewal rates and unearned subscription revenue.
- Whether EAM’s assets, fund flows and earnings stabilize, given the company’s material reliance on EAM-related receipts and its lack of control over EAM.
- Whether copyright-data contracts and sponsored assets recover or continue to contract.
- The recurring versus nonrecurring portion of software amortization and the effect of ongoing technology, hosting and facility costs on operating profitability and cash conversion.
- Whether liquidity remains adequate after dividends and repurchases, and whether the warehouse sale closes on the anticipated terms.
- The details and consequences of the substantial deferred tax liability, largely associated with the prior deconsolidation of EAM, and the related tax-sharing arrangement with the controlling shareholder.