Value Line, Inc. — FY2014 Form 10-K
Business context and reporting period. This is an annual report for the fiscal year ended April 30, 2014, compared primarily with the year ended April 30, 2013; it is not a report for calendar 2013 Q4. Value Line publishes investment research and sells related digital and print subscriptions, licenses proprietary investment data, and receives non-voting revenue and profit interests from EULAV Asset Management Trust (EAM). The asset-management business is not consolidated. Amounts below are in U.S. dollars; financial-statement figures are generally in thousands unless indicated otherwise.
Financial performance and position
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $36.331 million | $35.840 million | +1.4% |
| Operating income | $2.501 million | $4.120 million | -39.3% |
| Operating margin | 6.9% | 11.5% | Down 4.6 percentage points |
| EAM revenue and profit interests | $7.499 million | $6.260 million | +19.8% |
| Income before taxes | $10.178 million | $10.506 million | -3.1% |
| Net income | $6.768 million | $6.619 million | +2.3% |
| Diluted earnings per share | $0.69 | $0.67 | +3.0% |
| Operating cash flow | $3.487 million | $1.168 million | Increased |
- Revenue mix: Investment periodicals and related publications generated $33.598 million, up 5.2%; copyright data fees were $2.733 million, down 29.9%. Print revenue fell 3.6% to $18.346 million, while digital revenue rose 18.1% to $15.252 million.
- Costs and margins: Operating expenses increased 6.7% to $33.830 million, including higher salaries and benefits, software amortization, and production and distribution costs. The company also incurred $771,000 of one-time overlapping rent during its office move.
- Cash flow and investment: Investing activities provided $1.920 million, including $7.160 million of EAM distributions, while the company spent $2.481 million on capitalized software and $2.553 million on equity securities. Financing activities used $6.459 million, including $5.909 million of dividends and $550,000 of share repurchases. Cash and cash equivalents ended at $5.788 million.
- Liquidity and obligations: Cash and short-term securities were reported at $15.014 million. Working capital was negative $8.790 million, substantially reflecting $21.490 million of current unearned subscription revenue. Management said available liquid assets and expected cash flows would cover forecast needs for the next 12 months and that it did not anticipate borrowing. No debt obligations were reported; operating lease obligations totaled $4.160 million.
- Balance sheet: Total assets were $86.875 million, liabilities $53.577 million, and shareholders’ equity $33.298 million. Investment in EAM was carried at $57.850 million. Available-for-sale securities had a fair value of $9.226 million and were exposed to equity-market price changes.
- Margins and tax: Net income as a share of revenue was 18.6%, but includes EAM interests and securities income in addition to publishing operating income. The effective tax rate was 33.5%, compared with 37.0% in FY2013.
Material changes versus FY2013
- Digital publication revenue accelerated, with retail digital revenue up 26.4% and institutional digital revenue up 14.1%; total digital circulation increased 33.7%. Total publication circulation rose 6.7%, while print circulation declined 3.7%.
- Retail print revenue decreased 5.3%; institutional print revenue increased 14.3%, but did not offset the retail decline. Management expects long-term print revenue declines to continue.
- Copyright data revenue fell by $1.167 million. Assets in third-party sponsored products using Value Line data declined from $2.7 billion to $2.3 billion after portfolio asset reassignments.
- EAM-related income rose $1.239 million to $7.499 million. Total assets in Value Line Funds managed and/or distributed by EAM increased 7.5% to $2.35 billion, although the funds continued to experience net redemptions.
- Operating income declined despite higher revenue, reflecting higher operating costs and the unusual overlapping rent charge. Net income increased modestly, aided in part by lower tax expense.
- The company moved to a new New York headquarters under a sublease running through February 2017; management said the new terms reduce annual rent over the lease term.
Outlook, risks, contingencies, and unusual items
- Outlook: Management provided no company-specific financial guidance. It expects print revenue to keep declining and is investing in digital products, marketing, and technology, but said it cannot predict whether digital growth will offset print declines. On July 10, 2014, after year-end, Value Line launched new digital product packages.
- Copyright data risk: Two portfolio asset reallocations are expected to reduce annual pre-tax copyright data revenue by about $1.5 million beginning in FY2014 Q4. The company is seeking replacement arrangements but said replacing a material portion may take considerable time, if achievable.
- EAM dependence: Value Line’s cash flow depends materially on its non-voting interests in EAM. Fee income is sensitive to fund assets, market values, performance, redemptions, contract renewals, and regulatory or competitive developments. Value Line does not control EAM’s operations.
- Other principal risks: Subscriber retention and competition from free or low-cost online research; intellectual-property protection; dependence on key staff; market and economic conditions; regulation and litigation affecting EAM or the funds; cybersecurity; and concentrated voting control. Arnold Bernhard & Co. owned approximately 87.9% of Value Line’s shares at year-end.
- Contingencies and unusual matters: A $250,000 liability remained for administration of an SEC Fair Fund related to a prior settlement; the company believed it was sufficient for remaining obligations. Fiscal 2014 also included the $771,000 overlapping rent expense and $533,000 of additional depreciation and amortization. Management reported no material uncertain tax positions and expected no material impact from ongoing IRS examinations of fiscal 2012 and 2013 returns.
- Governance and audit: Management concluded disclosure controls and internal control over financial reporting were effective. The independent auditor gave an unqualified opinion on the financial statements; the auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Whether digital subscription growth continues and offsets persistent retail print declines, including the results of the July 2014 product launch.
- The timing and actual revenue impact of the expected approximately $1.5 million annual copyright-data fee reduction, and whether new licensing arrangements can replace lost fees.
- EAM’s fund assets, net redemptions, investment performance, fee waivers, and distributions to Value Line, given the company’s reliance on these interests.
- Whether operating expenses and software investment moderate enough to restore operating profitability and margins.
- The composition and accessibility of liquid assets, the implications of negative working capital driven by unearned revenue, and continuing dividend and lease commitments.
- Remaining Fair Fund obligations, tax-audit outcomes, and the implications of concentrated ownership and Value Line’s non-controlling position in EAM.