Value Line, Inc. — Form 10-Q Summary
Reporting period: Three months ended July 31, 2011 (first quarter of fiscal 2012). Amounts are in millions of dollars unless otherwise noted.
Business context
Value Line publishes investment research and licenses proprietary data and trademarks. Following the December 2010 restructuring, it no longer consolidates its investment-management and fund-distribution businesses; instead, it holds non-voting revenue and profit interests in EULAV Asset Management (EAM). The period is therefore not directly comparable with the prior-year quarter, which included those businesses in reported operating revenue and expenses.
Key financial results
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Total revenue | $9.370 | $13.609 | -31.1% |
| Publishing and copyright revenue | $9.370 | $9.394 | -0.3% |
| Operating income | $1.638 | $3.546 | -53.8% |
| Income before taxes | $3.221 | $3.583 | -10.1% |
| Net income | $2.076 | $2.317 | -10.4% |
| Diluted EPS | $0.21 | $0.23 | -8.7% |
| Net cash from operating activities | -$0.526 | $3.367 | — |
Publishing and copyright revenue comprised $8.398 million from periodicals and related publications (down 2.5%) and $0.972 million from copyright data fees (up 25.1%). The company recorded $1.572 million of EAM revenue and profits interests below operating income in the current quarter; the prior-year quarter included $4.215 million of investment-management fees and services as operating revenue. Operating expenses fell 23.2% to $7.732 million, partly because prior-year expenses included $1.3 million of restructuring costs. The publishing segment’s operating margin was 17.5%, versus 34.5% a year earlier.
Cash and cash equivalents were $7.186 million and available-for-sale securities were $9.596 million at July 31. Total assets were $84.962 million, shareholders’ equity $33.130 million, and total liabilities $51.832 million. The company reported no borrowings and management did not anticipate borrowing in fiscal 2012. Current liabilities exceeded current assets by $7.892 million, including $21.103 million of current unearned revenue. Management cited approximately $17 million of liquid assets and stated that available resources and expected cash flows should fund needs for the next 12 months.
Investing activities provided $3.063 million, including $1.626 million of EAM distributions; software-development spending was $1.557 million. Financing activities used $2.153 million, including $1.995 million of dividends paid and $0.158 million of share repurchases. Cash increased $0.384 million during the quarter. The effective tax rate was approximately 35.6%.
Material changes and operating trends
- Print subscription revenue declined 5.6%; electronic publication revenue rose 2.8%. Total company circulation was down 2% year over year, and print circulation was down 4%. The flagship survey renewal rate improved to 78% from 70%, but subscriber additions were insufficient to offset non-renewals.
- Copyright data fees rose 25.1%; related third-party sponsored assets were $3.4 billion across four contracts, versus $2.4 billion a year earlier.
- Assets in the Value Line Funds managed by EAM were $2.151 billion, up 2.4% year over year. Equity fund assets rose 6.0%, while fixed-income assets fell 4.7% and money-market assets fell 35.6%.
- The company repurchased 11,700 shares at an average $13.53 per share. The board’s $3.2 million authorization had $2.952 million remaining and ran through January 15, 2012, unless extended or terminated.
Outlook, risks, and contingencies
Management said subscription declines were likely to continue, though at a slower rate, until new products are developed and marketed. The company is modernizing legacy technology and investing in digital products, but could not predict when offerings would launch or whether they would reverse retail revenue declines. Management cited competition from free or low-cost online and brokerage research, market volatility, investor redemptions, dependence on EAM-related cash flows, key personnel, intellectual property, regulation, and litigation as important risks. No specific financial guidance was provided.
EAM is not consolidated; Value Line has no obligation to fund it beyond its agreed investment and undistributed interests. EAM had $58.091 million of assets and $1.471 million of liabilities at July 31. Value Line’s recorded investment and stated maximum exposure to loss were each $56.226 million.
The company previously paid $43.706 million to the SEC under a settlement related to former brokerage practices and remains responsible for Fair Fund administration costs. A separate derivative shareholder lawsuit had a $2.9 million settlement in principle, payable by parties other than the company and subject to a final agreement and court approval. The filing reports a $1.384 million balance-sheet reserve for settlement expenses, while the MD&A refers to estimated remaining administration costs of $1.767 million; the filing text does not clearly reconcile these amounts.
Global markets declined in the quarter, with the NASDAQ down 4% and the Dow Jones Industrial Average down 5%. Management said market volatility and risk-averse investor behavior continued to pressure publishing revenue and EAM-related cash flows. The company reported effective disclosure controls and no material change in internal control over financial reporting; it reported no material change to the risk factors in its latest Form 10-K.
Important facts for investors to verify
- Whether publishing subscription and circulation declines stabilize, and whether digital-product investment produces sustainable growth.
- How EAM’s revenues, profits, fund assets, fee waivers, and distributions develop, given Value Line’s reliance on those interests and lack of operational control.
- The reconciliation of the $1.384 million settlement reserve and the $1.767 million remaining-cost estimate, and the status of the derivative-litigation settlement approval.
- Liquidity and operating cash generation, particularly in light of negative working capital, advance subscription liabilities, dividends, and continued software spending.
- How the restructuring affects future-period comparisons of revenue, operating income, and cash flows.