Value Line, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended April 30, 2013. This is an annual report, not a report for calendar 2012 Q4.
Business context
Value Line primarily publishes investment research and related products in print and digital formats and licenses proprietary ranking data to third parties. Since a December 2010 restructuring, the Company no longer consolidates its investment-management business; it receives non-voting revenue and profit interests from EULAV Asset Management Trust (EAM). Publishing is its sole reportable operating segment. Arnold Bernhard & Co. owned approximately 87.4% of Value Line’s common stock at year-end.
Key financial results
| Metric | FY2013 | FY2012 | Change / context |
|---|---|---|---|
| Total operating revenue | $35.840 million | $36.609 million | Down 2.1% |
| Print publication revenue | $19.027 million | $20.366 million | Down 6.6% |
| Digital publication revenue | $12.913 million | $12.652 million | Up 2.1% |
| Copyright data fees | $3.900 million | $3.591 million | Up 8.6% |
| Operating income | $4.120 million | $5.338 million | Down 22.8%; operating margin 11.5%, versus 14.6% |
| Revenue and profit interests from EAM | $6.260 million | $5.890 million | Up 6.3%; reported below operating income |
| Net income | $6.619 million | $6.925 million | Down 4.4% |
| Diluted earnings per share | $0.67 | $0.70 | Down from prior year |
| Operating cash flow | $1.168 million | $2.376 million | Lower than prior year |
Operating expenses were $31.720 million, up 1.4%, principally reflecting higher software amortization and support costs. The filing reports no long-term debt obligations. At April 30, 2013, cash and cash equivalents were $6.840 million and securities available-for-sale were $6.682 million, together $13.522 million in cash and short-term securities. Working capital was negative $10.721 million, including $22.073 million of current unearned subscription revenue. Total assets were $84.341 million and total liabilities were $51.356 million.
Investing activities used $0.253 million, including $2.457 million of capitalized software expenditures and $5.080 million of EAM distributions received. Financing activities used $6.117 million, including $5.935 million of dividends and $0.182 million of share repurchases. The Company paid $0.15 per share each quarter in FY2013.
Material changes versus the prior comparable period
- Publishing revenue continued to decline, though the 2.1% decrease was less severe than the 3.6% decline in FY2012. Print revenue fell while digital and copyright data revenue increased.
- Operating income and margin declined as publishing revenue weakened without a corresponding reduction in largely fixed production and administrative costs. Production and distribution expense rose 16.3%, in part due to amortization of internally developed software.
- Subscription trends were mixed: total product-line circulation was 0.6% higher year over year, with digital circulation up 21.7% and print circulation down 6.3%. Institutional sales orders rose 13.4% to $12.001 million, but management said this growth did not fully offset retail subscriber losses.
- Third-party assets using Value Line copyright data declined to $2.65 billion from $3.43 billion, despite higher copyright data fees; the filing attributes the asset decrease to a sponsor portfolio change.
- Value Line Funds’ total managed/distributed assets were approximately $2.19 billion, up 3.5%. Equity fund assets grew, but the Funds continued to experience net redemptions. A money market fund merged into a third-party fund, and several other fund mergers or name/strategy changes occurred.
Outlook, risks, and unusual items
- No specific company revenue or earnings guidance is provided. Management says it is developing competitive digital products, modernizing technology, and expanding institutional sales, but cannot predict whether or when these efforts will reverse retail subscription declines.
- Management believes available liquid resources, operating cash flows, and EAM-related receipts will be sufficient for forecast liquidity needs over the next 12 months and does not anticipate borrowing during that period.
- Management described a gradual economic recovery as its market outlook, while noting that volatility and risk-averse investor behavior were restraining publishing revenue and EAM-related cash flows.
- Key risks include subscriber attrition and free or low-cost online competition; dependence on EAM receipts and Value Line Fund contracts; changes in market values, redemptions, and fund performance; competition for copyright-data sponsors; regulation; key-personnel dependence; intellectual-property protection; cybersecurity; and concentrated voting control.
- The Company signed a sublease for approximately 44,493 square feet at 485 Lexington Avenue, beginning around July 2013 and ending February 2017, at base rent of $1.468 million annually, plus specified operating-cost and tax pass-throughs. Management expects lower annual rent than under the prior arrangement. Total disclosed operating lease obligations were $5.976 million.
- The FY2011 comparison is affected by unusual items, including a $50.510 million non-cash gain from deconsolidating the former investment-management subsidiaries and related restructuring and settlement items. FY2013 includes no comparable gain. A $0.243 million Fair Fund administration provision remained at April 30, 2013; the Company believes it is sufficient.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of April 30, 2013.
Most important facts for investors to verify
- Whether digital and institutional growth can offset continuing declines in retail and print subscriptions, and whether the reported circulation improvement persists.
- The sustainability and cash conversion of EAM-related receipts, given Value Line’s dependence on fund assets, fund contracts, market performance, and redemptions.
- Whether cash generation can support dividends, lease commitments, technology investment, and repurchases, particularly with negative working capital and lower operating cash flow.
- The reason for the decline in sponsor assets using Value Line copyright data and whether that concentration or sponsor change affects future fees.
- The terms and governance implications of the controlling shareholder’s 87.4% ownership, related-party arrangements, and the remaining Fair Fund obligation.