Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help a reader understand Value Line, its operations and business factors. The MD&A should be read in conjunction with Item 1, “Business”, and Item 1A, “Risk Factors” of form 10-K, and in conjunction with the consolidated financial statements and the accompanying notes contained in Item 8 of this report.
|
●
|
Liquidity and Capital Resources
|
|
●
|
Recent Accounting Pronouncements
|
|
●
|
Critical Accounting Estimates and Policies
|
Executive Summary of the Business
The Company's core business is producing investment periodicals and their underlying research and making available copyright data, including certain proprietary Ranking System and other proprietary information, to third parties under written agreements for use in third-party managed and marketed investment products and for other purposes. Value Line markets under well-known brands including
Value Line
®
, the Value Line
logo®,
The
Value Line Investment Survey
®
, Smart Research
,
Smarter Investing™
and
The Most Trusted Name in Investment Research
®
.
The name "Value Line" as used to describe the Company, its products, and its subsidiaries, is a registered trademark of the Company. Effective December 23, 2010, EULAV Asset Management Trust (“EAM”) was established to provide the investment management services to the Value Line Funds, institutional and individual accounts and provide distribution, marketing, and administrative services to the Value Line® Mutual Funds ("Value Line Funds"). The Company maintains a significant investment in EAM from which it receives payments in respect of its non-voting revenues and non-voting profits interests.
The Company’s target audiences within the investment research field are individual investors, colleges, libraries, and investment management professionals. Individuals come to Value Line for complete research in one package. Institutional licensees consist of corporations, financial professionals, colleges, and municipal libraries. Libraries and universities offer the Company’s detailed research to their patrons and students. Investment management professionals use the research and historical information in their day-to-day businesses. The Company has a dedicated department that solicits institutional subscriptions.
Payments received for new and renewal subscriptions and the value of receivables for amounts billed to retail and institutional customers are recorded as unearned revenue until the order is fulfilled. As the orders are fulfilled, the Company recognizes revenue in equal installments over the life of the particular subscription. Accordingly, the subscription fees to be earned by fulfilling subscriptions after the date of a particular balance sheet are shown on that balance sheet as unearned revenue within current and long-term liabilities.
The Company’s move to new headquarters in the third quarter of fiscal 2017 resulted in lower rent expense over the term of the sublease.
Prior to December 23, 2010, the Company’s businesses consolidated into two reportable business segments. The investment periodicals and related publications (retail and institutional) and fees from copyright data including the proprietary Ranking System information and other proprietary information consolidate into one segment called Publishing and the investment management services to the Value Line Funds were consolidated into a second business segment called Investment Management. Subsequent to December 23, 2010, the Publishing segment constitutes the Company’s only reportable business segment.
Asset Management and Mutual Fund Distribution Businesses
The Company completed the restructuring of its asset management and mutual fund distribution businesses (the “Restructuring Transaction”) on December 23, 2010 (the “Restructuring Date”) and executed the EAM Declaration of Trust (the “EAM Declaration of Trust”). Pursuant to the EAM Declaration of Trust, the Company received an interest in certain revenues of EAM and a portion of the residual profits of EAM but has no voting authority with respect to the election or removal of the trustees of EAM or control of its business.
The business of EAM is managed by its trustees each owning 20% of the voting profits interest in EAM and by its officers subject to the direction of the trustees. The Company’s non-voting revenues and non-voting profits interests in EAM entitle it to receive a range of 41% to 55% of EAM’s revenues (excluding distribution revenues) from EAM’s mutual fund and separate account business and 50% of the residual profits of EAM (subject to temporary increase in certain limited circumstances). The Voting Profits Interest Holders will receive the other 50% of residual profits of EAM. Distribution is not less than 90% of EAM’s profits payable each fiscal quarter under the provisions of the EAM Trust Agreement.
Business Environment
The nation's long business expansion, which is now closing in on a decade in duration, is finally pressing ahead strongly after years of clearly underperforming. On point, after three quarters of reasonable solid increases in the nation's gross domestic product to close out the twelve months of calendar 2017, and a further respectable showing in the seasonally weak opening quarter of the current year, recent trends in manufacturing, non-manufacturing, personal income, retail spending, and employment growth suggest that the recently ended second calendar quarter saw a materially stronger rate of economic improvement, with the nation's gross domestic product likely advancing by more than 4%.
Encouragingly, this recent buildup in economic momentum seems likely to largely continue during the second half and into 2019. Specifically, after the aforementioned likely acceleration in GDP growth in the second quarter, further improvement, likely driven by gains in industrial activity, consumer spending, and housing, should follow down the stretch of this year, with growth on the order of 3%, or better, being realized. Further improvement within that range would then seem reasonable to expect as 2019 gets under way.
Of course, few up cycles continue without interruption, and this one figures to be no exception. And although we do not see a recession on the horizon - with the long-lived expansion likely lasting through at least the current decade, given the absence of severe growth or inflation excesses to date--there are risks that should not be dismissed. Chief among these would be the failure of fiscal initiatives or monetary policy adjustments to keep the economic ball rolling without inviting major overheating. Other risks would be a marked increase in political headwinds at home or damaging flare-ups overseas, most notably on the trade front, where the imposition of debilitating tariffs on China or a number of our allies could bring on unwanted retaliation leading to damaging trade wars.
For now, although the business outlook continues to be bright, the stock market remains volatile. All told, P/E ratios are still at the upper end of their historical range, suggesting that the bull market's hold could be less secure than it was during the upturn's more formative stages, especially if trade wars intensify or we suffer a marked increase in inflation.
Results of Operations for Fiscal Years 2018, 2017 and 2016
The following table illustrates the Company’s key components of revenues and expenses.
|
|
Fiscal Years Ended April 30,
|
|
|
Change
|
|
($ in thousands, except earnings per share)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
'18 vs. '17
|
|
|
'17 vs. '16
|
|
Income from operations including gain on sale of operating facility in fiscal 2017
|
|
$
|
2,572
|
|
|
$
|
7,459
|
|
|
$
|
1,880
|
|
|
|
-65.5
|
%
|
|
|
296.8
|
%
|
Non-voting revenues and non-voting profits interests from EAM Trust
|
|
|
8,786
|
|
|
|
7,714
|
|
|
|
7,651
|
|
|
|
13.9
|
%
|
|
|
0.8
|
%
|
Income from operations plus non-voting revenues and non-voting profits interests from EAM Trust
|
|
|
11,358
|
|
|
|
15,173
|
|
|
|
9,531
|
|
|
|
-25.1
|
%
|
|
|
59.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
33,296
|
|
|
|
35,238
|
|
|
|
32,666
|
|
|
|
-5.5
|
%
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from securities transactions, net
|
|
|
540
|
|
|
|
312
|
|
|
|
477
|
|
|
|
73.1
|
%
|
|
|
-34.6
|
%
|
Income before income taxes
|
|
$
|
11,898
|
|
|
$
|
15,485
|
|
|
$
|
10,008
|
|
|
|
-23.2
|
%
|
|
|
54.7
|
%
|
Net income*
|
|
$
|
14,738
|
|
|
$
|
10,367
|
|
|
$
|
7,291
|
|
|
|
42.2
|
%
|
|
|
42.2
|
%
|
Earnings per share
|
|
$
|
1.52
|
|
|
$
|
1.07
|
|
|
$
|
0.75
|
|
|
|
42.1
|
%
|
|
|
42.7
|
%
|
*”Net income” activity exceeds pre-tax income because the one-time tax adjustment from the Federal Income tax rate changes effective January 1, 2018 in our favor is actually larger than our current year income tax.
During the twelve months ended April 30, 2018, the Company’s net income of $14,738,000, or $1.52 per share, was $4,371,000 or 42.2% above net income of $10,367,000, or $1.07 per share, for the twelve months ended April 30, 2017 due to the fiscal 2018 reduction in the U.S. statutory federal corporate income tax rate from 35% to 21% on the Company’s long-term deferred tax liabilities, resulting in a tax benefit of 54.51% of pre-tax income for the twelve months ended April 30, 2018. The Company re-calculated its net deferred tax assets and liabilities using the Federal Tax Rate under the Tax Act. The effect of the re-calculation was reflected entirely in the third quarter ended January 31, 2018 (the period that included the enactment date) and was allocated directly to both current and deferred income tax expenses from continuing operations. Income from operations of $2,572,000 during the twelve months ended April 30, 2018 was $4,887,000 below income from operations of $7,459,000, which included a pre-tax gain of $8,123,000 from the sale of the Company's operating facility during the twelve months ended April 30, 2017 for which it received net proceeds of $11,555,000 on July 29, 2016 and additional depreciation and amortization expense of $3,498,000 in fiscal 2017. During the twelve months ended April 30, 2018 there were 9,703,255 average common shares outstanding as compared to 9,721,958 average common shares outstanding during the twelve months ended April 30, 2017.
During the twelve months ended April 30, 2017, the Company’s net income of $10,367,000, or $1.07 per share, was $3,076,000 or 42.2% above net income of $7,291,000, or $0.75 per share, for the twelve months ended April 30, 2016. During the twelve months ended April 30, 2017 there were 9,721,958 average common shares outstanding as compared to 9,781,495 average common shares outstanding during the twelve months ended April 30, 2016. Income from operations of $7,459,000 for the twelve months ended April 30, 2017 which included additional depreciation and amortization expense of $806,000 was $5,579,000 above income from operations of $1,880,000 for the twelve months ended April 30, 2016. During the twelve months of fiscal 2017 both net income and income from operations included a pre-tax gain of $8,123,000 from the sale of the Company's operating facility for which it received net proceeds of $11,555,000 on July 29, 2016. The fulfillment and mailing operations housed within the facility were relocated to a nearby area of New Jersey. During the fourth quarter ended April 30, 2017, the Company’s reported loss from operations of $489,000 was the result of an increase in salaries and employee benefits primarily in the Information Technology department related to augmenting the Company’s digital infrastructure and production processes accompanied by increased expenses related to relocating the Company’s New York City office facility.
Total o
perating revenues
|
|
Fiscal Years Ended April 30,
|
|
|
Change
|
|
($ in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
'18 vs. '17
|
|
|
'17 vs. '16
|
|
Investment periodicals and related publications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print
|
|
$
|
13,850
|
|
|
$
|
14,094
|
|
|
$
|
15,659
|
|
|
|
-1.7
|
%
|
|
|
-10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Digital
|
|
|
15,653
|
|
|
|
16,074
|
|
|
|
16,266
|
|
|
|
-2.6
|
%
|
|
|
-1.2
|
%
|
Total investment periodicals and related publications
|
|
|
29,503
|
|
|
|
30,168
|
|
|
|
31,925
|
|
|
|
-2.2
|
%
|
|
|
-5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Copyright data fees
|
|
|
6,365
|
|
|
|
4,406
|
|
|
|
2,621
|
|
|
|
44.5
|
%
|
|
|
68.1
|
%
|
Gain on sale of operating facility
|
|
|
-
|
|
|
|
8,123
|
|
|
|
-
|
|
|
|
-100.0
|
%
|
|
|
n/a
|
|
Total operating revenues
|
|
$
|
35,868
|
|
|
$
|
42,697
|
|
|
$
|
34,546
|
|
|
|
-16.0
|
%
|
|
|
23.6
|
%
|
Within investment periodicals and related publications, subscription sales orders are derived from print and digital products. The following chart illustrates the changes in the sales orders associated with print and digital subscriptions.
Sources of
s
ubscription
s
ales
|
|
Fiscal Years Ended April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Print
|
|
|
Digital
|
|
|
Print
|
|
|
Digital
|
|
|
Print
|
|
|
Digital
|
|
New Sales
|
|
|
15.5
|
%
|
|
|
15.2
|
%
|
|
|
13.0
|
%
|
|
|
14.6
|
%
|
|
|
12.0
|
%
|
|
|
16.3
|
%
|
Conversion and Renewal Sales
|
|
|
84.5
|
%
|
|
|
84.8
|
%
|
|
|
87.0
|
%
|
|
|
85.4
|
%
|
|
|
88.0
|
%
|
|
|
83.7
|
%
|
Total Gross Sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
During twelve months ended April 30, 2018 new sales of print publications increased as a percent of the total gross print sales as a result of an increase in new print retail sales orders while conversion and renewal sales of print orders decreased from the prior fiscal year. New sales of digital publications slightly increased as a percent of the total gross digital sales as a result of an increase in new digital institutional sales orders. Conversion and renewal sales of digital services decreased as a percent of the total gross digital sales over the prior fiscal year.
During the twelve months ended April 30, 2017 new sales of print publications increased as a percent of the total gross print sales as a result of an increase in new print gross sales to Institutions. Conversion and renewal sales of print orders decreased from the prior fiscal year. New sales of digital publications decreased as a percent of the total gross digital sales as a result of a decrease in new digital retail sales orders, related to a two-year trend of lower advertising expenditures. Conversion and renewal sales of digital services increased over the prior fiscal year as a result of increased efforts by our in-house Retail and Institutional Sales departments.
|
|
As of April 30,
|
|
|
Change
|
|
($ in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
'18 vs. '17
|
|
|
'17 vs. '16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned subscription revenue (current and long term liabilities)
|
|
$
|
25,525
|
|
|
$
|
25,659
|
|
|
$
|
25,442
|
|
|
|
-0.5
|
%
|
|
|
0.9
|
%
|
Unearned subscription revenue as of April 30, 2018 is slightly below April 30, 2017 and is 1% above April 30, 2016. A certain amount of variation is to be expected due to the timing of advertising for order generation, the volume of new orders and timing of renewal orders, direct mail campaigns and large Institutional Sales orders.
Investment periodicals and related publications revenues
Investment periodicals and related publications revenues decreased $665,000, or 2.2%, for the twelve months ended April 30, 2018, as compared to fiscal 2017. The Company continued its efforts to attract new subscribers through various marketing channels, primarily direct mail, e-mail, and by the efforts of our sales personnel. Total product line circulation at April 30, 2018 was comparable to total product line circulation at April 30, 2017. Institutional Sales generated total sales orders of $14,487,000 for the twelve months ended April 30, 2018. The retail telemarketing sales team generated total sales orders of $8,872,000 for the twelve months ended April 30, 2018.
Print publication revenues of $13,850,000 decreased $244,000 or 1.7% for the twelve months ended April 30, 2018 as compared to the prior fiscal year. Revenues from institutional print publications increased $189,000 or 8.3% while print publications revenues from retail subscribers decreased $433,000 or 3.7% for the twelve months ended April 30, 2018, as compared to the prior fiscal year. Total print circulation at April 30, 2018 was 3.8% above total print circulation at April 30, 2017. Digital publications revenues of $15,653,000 during the twelve months ended April 30, 2018 were $421,000 or 2.6% below the prior fiscal year. Revenues from institutional digital publications were comparable to the prior fiscal year. Digital publications revenues from retail subscribers decreased $404,000 or 9.3% as compared to the prior fiscal year. Total digital circulation at April 30, 2018 was 6.0% below total digital circulation at April 30, 2017.
Investment periodicals and related publications revenues decreased $1,757,000, or 5.5%, for the twelve months ended April 30, 2017, as compared to fiscal 2016. Total product line circulation at April 30, 2017 was 7.1% below total product line circulation at April 30, 2016. Institutional Sales generated total sales orders of $14,757,000 for the twelve months ended April 30, 2017 compared to total sales orders of $14,240,000, for the twelve months ended April 30, 2016. The retail telemarketing sales team generated total sales orders of $9,255,000 for the twelve months ended April 30, 2017.
Print publication revenues decreased $1,565,000 or 10.0% for the twelve months ended April 30, 2017 as compared to fiscal 2016. Revenues from institutional print publications increased $152,000 or 7.1% while print publications revenues from retail subscribers decreased $1,717,000 or 12.7% for the twelve months ended April 30, 2017, as compared to fiscal 2016. This includes the effect of 52 weeks of print revenues recorded in the twelve months ended April 30, 2017 as compared to 53 weeks recorded in the twelve months ended April 30, 2016. Total print circulation at April 30, 2017 was 6.9% below total print circulation at April 30, 2016. Digital publications revenues during the twelve months ended April 30, 2017, were $192,000 or 1.2% below fiscal 2016. Revenues from institutional digital publications increased $123,000 or 1.1% as compared to fiscal 2016. Digital publications revenues from retail subscribers decreased $316,000 or 6.8% with circulation decreasing by 7.4% for the twelve months ended April 30, 2017, as compared to fiscal 2016.
Value Line serves primarily individual and professional investors in stocks, who pay, primarily on annual subscription plans, for basic services or as much as $100,000 or more annually for comprehensive premium quality research, not obtainable elsewhere. The ongoing goal of adding new subscribers has led us to experiment with varying terms for our reliable, proprietary research including a period of intensive promotion of “starter” services and publications.
The Value Line proprietary Ranking System information (the “Ranking System”), a component of the Company’s flagship product,
The Value Line Investment Survey
, is also utilized in the Company’s copyright data business. The Ranking System is made available to EAM for specific uses without charge. During the six month period ended April 30, 2018, the combined Ranking System “Rank 1 & 2” stocks’ increase of 0.4% underperformed the S&P 500 Index’s increase of 2.8% during the comparable period. During the twelve month period ended April 30, 2018, the combined Ranking System “Rank 1 & 2” stocks’ increase of 8.8% underperformed the S&P 500 Index’s increase of 11.1% during the comparable period. During the twelve month period ended May 31, 2018, the combined Ranking System “Rank 1 & 2” stocks’ increase of 14.5% outperformed the S&P 500 Index’s increase of 12.2% during the comparable period.
Copyright data fees
During the twelve months ended April 30, 2018, copyright data fees revenues of $6,365,000 were $1,959,000 or 44.5% above the prior fiscal year. At April 30, 2018, total third party sponsored assets were $4.2 billion, as compared to $3.6 billion in assets at April 30, 2017. During the twelve months ended April 30, 2016, copyright data fees were $2,621,000. The largest of the individual financial institutes active under Value Line’s copyright data program has again earned a five star Morningstar rating.
Investment management fees and services – (unconsolidated)
The Company has a substantial non-voting revenues and non-voting profits interests in EAM, the asset manager to the Value Line Mutual Funds. Accordingly, the Company does not report this operation as a separate business segment, although it maintains a significant interest in the cash flows generated by this business and will receive ongoing payments in respect of its non-voting revenues and non-voting profits interests.
Total assets in the Value Line Funds managed and/or distributed by EAM at April 30, 2018, were $2.48 billion, which is $70 million, or 2.8%, above total assets of $2.41 billion in the Value Line Funds managed and/or distributed by EAM at April 30, 2017. The increase reflects successful investment selection capturing market appreciation, offset by net redemptions in ten of the eleven Value Line Funds over the twelve month period ended April 30, 2018.
Total assets in the Value Line Funds managed and/or distributed by EAM at April 30, 2017, were $2.4 billion, which is $192 million, or 8.6%, above total assets of $2.2 billion in the Value Line Funds managed and/or distributed by EAM at April 30, 2016, reflecting market appreciation offset by net redemptions in all but two of the twelve Value Line Funds over the twelve month period ended April 30, 2017.
Shares of Value Line Strategic Asset Management Trust (“SAM”) and Value Line Centurion Fund (“Centurion”) are within certain variable annuity and variable life insurance contracts issued by The Guardian Insurance & Annuity Company, Inc. (“GIAC”); new contracts of this type are no longer sold.
Sales and inflows for the Value Line Equity and Fixed Income Funds during fiscal 2018 decreased 12.2% and 12.9%, respectively, as compared to fiscal 2017 and the Value Line Funds continue to experience net redemptions and the associated net asset outflows (redemptions less new sales) for the last three fiscal years.
The following table shows the change in assets for the past three fiscal years including sales (inflows), redemptions (outflows), dividends and capital gain distributions, and market value changes. Inflows for sales, and outflows for redemptions reflect decisions of individual investors. The table also illustrates the assets within the Value Line Funds broken down into equity funds, variable annuity funds and fixed income funds as of April 30, 2018, 2017 and 2016.
Value Line Mutual Funds
Total Net Assets
For the Years Ended April 30,
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vs.
|
|
|
vs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Value Line equity fund assets (excludes variable annuity)— beginning (1)
|
|
$
|
1,877,029,899
|
|
|
$
|
1,681,698,049
|
|
|
$
|
1,737,521,140
|
|
|
|
11.6
|
%
|
|
|
-3.2
|
%
|
Sales/inflows
|
|
|
357,940,388
|
|
|
|
410,927,024
|
|
|
|
441,634,248
|
|
|
|
-12.9
|
%
|
|
|
-7.0
|
%
|
Redemptions/outflows
|
|
|
(381,198,181
|
)
|
|
|
(384,689,816
|
)
|
|
|
(350,894,662
|
)
|
|
|
-0.9
|
%
|
|
|
9.6
|
%
|
Dividend and Capital Gain Distributions
|
|
|
(99,410,947
|
)
|
|
|
(97,996,109
|
)
|
|
|
(142,675,717
|
)
|
|
|
1.4
|
%
|
|
|
-31.3
|
%
|
Market value change
|
|
|
236,904,099
|
|
|
|
267,090,750
|
|
|
|
(3,886,961
|
)
|
|
|
-11.3
|
%
|
|
|
6771.5
|
%
|
Value Line equity fund assets (non-variable annuity)— ending
|
|
|
1,991,265,258
|
|
|
|
1,877,029,899
|
|
|
|
1,681,698,049
|
|
|
|
6.1
|
%
|
|
|
11.6
|
%
|
Variable annuity fund assets — beginning (2)
|
|
$
|
405,395,163
|
|
|
$
|
399,566,320
|
|
|
$
|
459,820,828
|
|
|
|
1.5
|
%
|
|
|
-13.1
|
%
|
Sales/inflows
|
|
|
28,395,736
|
|
|
|
35,751,469
|
|
|
|
26,337,080
|
|
|
|
-20.6
|
%
|
|
|
35.7
|
%
|
Redemptions/outflows
|
|
|
(59,902,699
|
)
|
|
|
(49,998,352
|
)
|
|
|
(70,599,332
|
)
|
|
|
19.8
|
%
|
|
|
-29.2
|
%
|
Dividend and Capital Gain Distributions
|
|
|
(21,078,180
|
)
|
|
|
(26,230,225
|
)
|
|
|
(18,508,679
|
)
|
|
|
-19.6
|
%
|
|
|
41.7
|
%
|
Market value change
|
|
|
26,160,450
|
|
|
|
46,305,950
|
|
|
|
2,516,423
|
|
|
|
-43.5
|
%
|
|
|
1740.1
|
%
|
Variable annuity fund assets — ending
|
|
|
378,970,470
|
|
|
|
405,395,163
|
|
|
|
399,566,320
|
|
|
|
-6.5
|
%
|
|
|
1.5
|
%
|
Fixed income fund assets — beginning (3)
|
|
$
|
131,309,317
|
|
|
$
|
141,430,806
|
|
|
$
|
153,016,581
|
|
|
|
-7.2
|
%
|
|
|
-7.6
|
%
|
Sales/inflows
|
|
|
4,920,663
|
|
|
|
26,354,593
|
|
|
|
6,109,851
|
|
|
|
-81.3
|
%
|
|
|
331.3
|
%
|
Redemptions/outflows
|
|
|
(22,403,260
|
)
|
|
|
(33,640,443
|
)
|
|
|
(19,121,358
|
)
|
|
|
-33.4
|
%
|
|
|
75.9
|
%
|
Dividend and Capital Gain Distributions
|
|
|
(21,515
|
)
|
|
|
(42,068
|
)
|
|
|
202,957
|
|
|
|
-48.9
|
%
|
|
|
-120.7
|
%
|
Market value change
|
|
|
(2,945,007
|
)
|
|
|
(2,793,571
|
)
|
|
|
1,222,774
|
|
|
|
5.4
|
%
|
|
|
-328.5
|
%
|
Fixed income fund assets — ending
|
|
|
110,860,197
|
|
|
|
131,309,317
|
|
|
|
141,430,806
|
|
|
|
-15.6
|
%
|
|
|
-7.2
|
%
|
Assets under management — ending
|
|
$
|
2,481,095,925
|
|
|
$
|
2,413,734,379
|
|
|
$
|
2,222,695,176
|
|
|
|
2.8
|
%
|
|
|
8.6
|
%
|
The Value Line Fund shareholders are provided a money market fund investment managed by Federated Government Obligations Fund.
In February 2018 the Value Line Income and Growth Fund changed its name to the Value Line Capital Appreciation Fund. The name was changed to better reflect the equity allocation and be more descriptive of its investment strategy.
As of April 30, 2018, four of six Value Line equity and hybrid mutual funds, excluding SAM and Centurion, held an overall four or five star rating by Morningstar, Inc. As of April 30, 2017, all six Value Line equity and hybrid mutual funds, excluding SAM and Centurion, held an overall four or five star rating by Morningstar, Inc.
Several of the Value Line Funds have received national recognition. The Value Line Mid-Cap Focused Fund, the Value Line Small Cap Opportunities Fund and the Value Line Capital Appreciation Fund have been named “Category Kings” in
The Wall Street Journal
in multiple months in calendar 2017 and 2018
.
EAM
Trust
- Results of operations before distribution to interest holders
The overall results of EAM’s investment management operations during the twelve months ended April 30, 2018, before interest holder distributions, included total investment management fees earned from the Value Line Funds of $15,988,000, 12b-1 fees and other fees of $6,455,000 and other income of $171,000 which included dividend, interest and licensing fees income. For the same period, total investment management fee waivers were approximately $487,000 and 12b-1 fee waivers for four Value Line Funds were approximately $754,000. During the twelve months ended April 30, 2018, EAM's net income was $1,492,000 after giving effect to Value Line’s non-voting revenues interest of $8,040,000, but before distributions to voting profits interest holders and to the Company in respect of its 50% non-voting profits interest.
The overall results of EAM’s investment management operations during the twelve months ended April 30, 2017, before interest holder distributions, include total investment management fees earned from the Value Line Funds of $14,701,000, 12b-1 fees and other fees of $5,822,000 and other income of $205,000 which includes dividend, interest and licensing fees income. For the same period, total investment management fee waivers were $474,000 and 12b-1 fee waivers for four Value Line Funds were $923,000. During the twelve months ended April 30, 2017, EAM's net income was $1,038,000 after giving effect to Value Line’s non-voting revenues interest of $7,195,000, but before distributions to voting profits interest holders and to the Company in respect of its 50% non-voting profits interest.
The overall results of EAM’s investment management operations during the twelve months ended April 30, 2016, before interest holder distributions, include total investment management fees earned from the Value Line Funds of $14,548,000, 12b-1 fees and other fees of $5,669,000 and a net loss of $14,000 on investments. For the same period, total investment management fee waivers were $260,000 and 12b-1 fee waivers for four Value Line Funds were $1,081,000. Removing management fee waivers on Asset Allocation Fund and the Core Bond Fund resulted in $30,000 in increased management fees per month. During the twelve months ended April 30, 2016, EAM's net income was $880,000 after giving effect to Value Line’s non-voting revenues interest of $7,211,000, but before distributions to voting profits interest holders and to the Company in respect of its 50% non-voting profits interest.
As of April 30, 2018, three of the Value Line Funds have all or a portion of the 12b-1 fees being waived, and one fund has partial investment management fee waivers in place. Although, under the terms of the EAM Declaration of Trust, the Company no longer receives or shares in the revenues from 12b-1 distribution fees, the Company could benefit from the fee waivers to the extent that the resulting reduction of expense ratios and enhancement of the performance of the Value Line Funds attracts new assets.
The Value Line equity and hybrid funds assets represent 80.0%, variable annuity funds issued by GIAC represent 15.5%, and fixed income fund assets represent 4.5%, respectively, of total fund assets under management (“AUM”) as of April 30, 2018. At April 30, 2018, equity, hybrid and GIAC variable annuities AUM increased by 3.4% and fixed income AUM decreased by 9.8% as compared to the prior fiscal year.
The Value Line equity and hybrid funds assets represent 78.1%, variable annuity funds issued by GIAC represent 16.8%, and fixed income fund assets represent 5.1%, respectively, of total fund assets under management (“AUM”) as of April 30, 2017. At April 30, 2017, equity, hybrid and GIAC variable annuities AUM increased by 10.2% and fixed income AUM decreased by 12.8% as compared to fiscal 2016.
EAM - The Company’s non-voting revenues and
non-voting
profits interests
The Company holds non-voting revenues and non-voting profits interests in EAM which entitle the Company to receive from EAM an amount ranging from 41% to 55% of EAM's investment management fee revenues from its mutual fund and separate accounts business, and 50% of EAM’s net profits, not less than 90% of which is distributed in cash every fiscal quarter.
The Company recorded income from its non-voting revenues interest and its non-voting profits interest in EAM as follows:
|
|
Fiscal Years Ended April 30,
|
|
|
Change
|
|
($ in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
'18 vs. '17
|
|
|
'17 vs. '16
|
|
Non-voting revenues interest
|
|
$
|
8,040
|
|
|
$
|
7,195
|
|
|
$
|
7,211
|
|
|
|
11.7
|
%
|
|
|
-0.2
|
%
|
Non-voting profits interest
|
|
|
746
|
|
|
|
519
|
|
|
|
440
|
|
|
|
43.7
|
%
|
|
|
18.0
|
%
|
|
|
$
|
8,786
|
|
|
$
|
7,714
|
|
|
$
|
7,651
|
|
|
|
13.9
|
%
|
|
|
0.8
|
%
|
Operating
e
xpenses
|
|
Fiscal Years Ended April 30,
|
|
|
Change
|
|
($ in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
'18 vs. '17
|
|
|
'17 vs. '16
|
|
Advertising and promotion
|
|
$
|
3,780
|
|
|
$
|
3,473
|
|
|
$
|
3,685
|
|
|
|
8.8
|
%
|
|
|
-5.8
|
%
|
Salaries and employee benefits
|
|
|
18,488
|
|
|
|
17,477
|
|
|
|
15,702
|
|
|
|
5.8
|
%
|
|
|
11.3
|
%
|
Production and distribution
|
|
|
5,857
|
|
|
|
9,063
|
|
|
|
8,725
|
|
|
|
-35.4
|
%
|
|
|
3.9
|
%
|
Office and administration
|
|
|
5,171
|
|
|
|
5,225
|
|
|
|
4,554
|
|
|
|
-1.0
|
%
|
|
|
14.7
|
%
|
Total expenses
|
|
$
|
33,296
|
|
|
$
|
35,238
|
|
|
$
|
32,666
|
|
|
|
-5.5
|
%
|
|
|
7.9
|
%
|
Expenses within the Company are categorized into advertising and promotion, salaries and employee benefits, production and distribution, office and administration.
Operating expenses of $33,296,000 for the twelve months ended April 30, 2018 decreased $1,942,000, or 5.5%, as compared to the twelve months ended April 30, 2017 primarily due to a $3,498,000 decrease in depreciation and amortization expense partially offset by a $307,000 increase in advertising expenses and a $1,011,000 increase in salaries and employee benefits in fiscal 2018.
Operating expenses of $35,238,000 for the twelve months ended April 30, 2017, increased $2,572,000, or primarily from the additional depreciation and amortization of $806,000 attributable to additional amortization of internally developed software costs related to the product production cycle for which the upgrade is expected to be completed during fiscal 2018, a $1,035,000 decrease in capitalization of deferred software costs for digital product and database development and an increase in space rental and moving costs (New York City and New Jersey office facilities).
Advertising and promotion
During the twelve months ended April 30, 2018, advertising and promotion expenses of $3,780,000 increased $307,000 above those of fiscal 2017 primarily due to a $249,000 increase in direct mail expenses and a $285,000 increase in media marketing expenses. Direct mail expenses of $1,256,000 during the twelve months ended April 30, 2018 increased above those of the prior fiscal year due to the increases in expenses for
The
Value Line Investment Survey,
The Value Line 60
0,
The
Value Line Small and Mid-Cap
and
The Value Line Special Situations
in fiscal 2018
.
During the twelve months ended April 30, 2018 sales commissions decreased $241,000 as compared to fiscal 2017 based on the structure of commission schedules and the mix of renewal and new sales.
Advertising and promotion expenses of $3,473,000 during the twelve months ended April 30, 2017 decreased $212,000 or 5.8%, as compared to fiscal 2016. The decrease in direct mail expenses of $275,000 during the twelve months ended April 30, 2017, is mainly attributable to a reduction in the number of campaigns for
The
Value Line Investment Survey
and
The Value Line 600
, as compared to fiscal 2016 partially offset by an increase in direct marketing for
Value
Line Select: Dividend Income & Growth, The Value Line Small and Mid-Cap
and
Special Situations
in fiscal 2017. During the twelve months ended April 30, 2017 sales commissions increased $96,000 as compared to fiscal 2016.
Advertising and promotion expenses of $3,685,000 during the twelve months ended April 30, 2016 decreased $1,299,000 or 26.1%, as compared to fiscal 2015. The decreases in direct mail expenses of $1,445,000 for the twelve months ended April 30, 2016, are mainly attributable to a reduction in the number of pieces mailed to prospects for
The
Value Line Investment Survey
and
The Value Line 600
, as compared to fiscal 2015 partially offset by an increase in direct marketing for
Value
Line Select
and
Value
Line Select: Dividend Income & Growth
in fiscal 2016. The Company also negotiated vendor savings resulting in a $157,000 reduction in expenses related to third party inbound telemarketing services and eliminated third party product support, bringing the operations in house. During the twelve months ended April 30, 2016 sales commissions increased $296,000 and were associated with a $1,949,000 increase in retail sales orders and a $915,000 increase in institutional sales orders as compared to fiscal 2015. Commissions vary based on the type of customer, size of sale, and whether a sale is new or renewal.
Salaries and employee benefits
During the twelve months ended April 30, 2018 salaries and employee benefits of $18,488,000 increased $1,011,000 above those of fiscal 2017 primarily due to the increases in salaries and employee benefits in the Information Technology department (“IT”) related to the Company’s digital infrastructure and production processes and Quantitative Research departments.
During the twelve months ended April 30, 2017 salaries and employee benefits of $17,477,000 increased $1,775,000 or 11.3% above fiscal 2016 which included the effect of a decrease in the capitalization of internal salaries and benefits expenses for digital project development of $1,035,000 during the twelve months ended April 30, 2017, as compared to fiscal 2016. The remaining increases in salaries and employee benefits, primarily in the Information Technology department (“IT”) related to augmenting the Company’s digital infrastructure and production processes and Institutional Sales and Research departments including recruiting fees, were partially offset by decreases in salaries and employee benefits in Human Resources, Advertising and fulfillment and distribution operations at VLDC during the twelve months ended April 30, 2017.
Salaries and employee benefits of $15,702,000 during the twelve months ended April 30, 2016 were $233,000 or 1.5% below fiscal 2015’s primarily as a result of a decrease in salary and employee benefits in Institutional Sales, Information Technology, Advertising and VLDC and a restructuring of the incentive compensation program which were partially offset by an increase in Executive, Quantitative Research and Research departments. The capitalization of internal salaries and employee benefits expenses of $1,250,000 for digital project development decreased $442,000 during the twelve months ended April 30, 2016, as compared to fiscal 2015.
During the twelve months ended April 30, 2018, 2017 and 2016, the Company recorded profit sharing expenses of $496,000, $345,000 and $473,000, respectively.
Production and distribution
During the twelve months ended April 30, 2018, production and distribution expenses of $5,857,000 decreased $3,206,000 below those of fiscal 2017. During the twelve months ended April 30, 2018, a decrease of $3,548,000 was attributable to a decline in amortization of internally developed software costs related to digital security and product production software. During the twelve months ended April 30, 2018, the decrease in production costs was partially offset by a $294,000 increase in production support of the Company’s website, maintenance of the Company’s publishing and application software and operating systems and web “framework”.
During the twelve months ended April 30, 2017, production and distribution expenses of $9,063,000 increased $338,000 or 3.9% above those of fiscal 2016. A major increase of $877,000 was attributable to additional amortization of internally developed software costs related to the product production cycle for which the upgrade is expected to be completed during fiscal 2018. Additional increases in production costs include a $333,000 increase in production support of the Company’s website, upgrade of the Company’s publishing and application operating system and Windows operating systems and framework. These increases in production costs were offset by a $477,000 annual savings resulting from the Company’s transition to an alternative provider of equity data effective January 1, 2016. Service mailers and distribution expenses decreased $251,000 in fiscal 2017 due to switching to United States Postal Service delivery of subscriber binders from a private carrier, consolidating freight carriers and a 6.9% decline in print circulation during the twelve months ended April 30, 2017 as compared to the prior fiscal year. Also a decline in print circulation resulted in an $81,000 decrease in paper and printing costs.
Production and distribution expenses of $8,725,000 during the twelve months ended April 30, 2016 increased $1,644,000 or 23.2% as compared to those of fiscal 2015. During the twelve months ended April 30, 2016, an increase of $1,239,000 of production expenses was attributable to additional accelerated amortization of internally developed software costs related to the cessation of software development for certain data galleries. In addition, the Company continues to amortize capitalized software costs attributable to the upgrade of our fulfillment system, single sign on, website development and new service oriented database production architecture. Third party production and hosting expenses for Company’s print and digital product files for internal use and delivery to the Company’s third party that hosts our digital and mobile version of our equity based product offerings, that began on July 9, 2014 (ten months in fiscal year 2015 and twelve months in fiscal 2016) increased $376,000 during fiscal 2016. Increase in expenses included a cost of $159,000 to host production hardware moved to a third party cloud, $163,000 of overlapping costs as the Company transitioned to equity data provided by an alternative vendor effective January 1, 2016 offset by $151,000 savings in data costs. Distribution expenses decreased $90,000 in fiscal 2016 due to switching to United States Postal Service delivery from a private carrier.
Office and administration
During the twelve months ended April 30, 2018, office and administration expenses of $5,171,000, decreased $54,000 below those of fiscal 2017. During the twelve months ended April 30, 2018, a decrease in office and administration expenses was primarily as a result of a $431,000 decrease in the cost of space rental due to lower rent payments resulting from the sub-lease agreement with ABM Industries, Incorporated (“ABM” or the “Sublandlord”). In accordance with GAAP, we allocated the benefit of the free rent period and other concessions over the term of our new NYC sublease, commenced on December 1, 2016. In fact, however, the Company did not pay cash rent for the new New York City office facility from December 2016 through October 2017. Additional decreases include $194,000 savings in real estate taxes due to the relocation of VLDC operations to a new downsized leased NJ facility upon the sale of the operating facility in July 2016 and relocation of the NYC office to a new smaller facility at 551 Fifth Ave., NY in February 2017. These savings in fiscal 2018 were partially offset by a $370,000 increase in professional fees above those of fiscal 2017.
During the twelve months ended April 30, 2017, office and administration expenses of $5,225,000 increased $671,000 or 14.7% above those of fiscal 2016. During the twelve months ended April 30, 2017, total increase in office and administration costs included a $409,000 increase in space rental is primarily due to overlapping rent expenses for financial statement purposes related to the Company’s New York City office facility and a $192,000 increase in moving costs (New Jersey and New York City office facilities). Increase in space rental includes $193,000 rent expense for the new New Jersey warehouse partially offset by $186,000 savings in VLDC utilities, depreciation and real estate taxes due to the VLDC building sale in July 2016 and additional three months overlapping rent expense of $86,000 per month for the current office facility and $105,000 for the previously occupied office facility during the period from December 1, 2016 to February 28, 2017 which is being offset by lower rent payments according to the sub-lease agreement with American Building Maintenance (“ABM” or the “Sublandlord”). In accordance with GAAP, we spread the benefit of a free rent period and other concessions over the term of our new NYC sublease, commencing on December 1, 2016. In fact, however, the Company is not paying cash rent for the new New York City office facility from December 2016 through September 2017.
Total office and administration expenses of $4,554,000, during the twelve months ended April 30, 2016 decreased $570,000 or 11.1% as compared to fiscal 2015. For the twelve months ended April 30, 2016, office and administration expenses included a decrease of $423,000 in disaster recovery site hosting fees that resulted from changing the third party vendor.
Concentration
During the twelve months ended April 30, 2018, 17.7% of total publishing revenues of $35,868,000 were derived from a single customer.
Lease Commitments
On November 30, 2016, Value Line, Inc. received consent from the landlord at 551 Fifth Avenue, New York, NY to the terms of a new sublease agreement between Value Line, Inc. and ABM Industries, Incorporated commencing on December 1, 2016. Pursuant to the agreement Value Line leased from ABM 24,726 square feet of office space located on the second and third floors at 551 Fifth Avenue, New York, NY (“Building” or “Premises”) beginning on December 1, 2016 and ending on November 29, 2027. Base rent under the sublease agreement is $1,126,000 per annum during the first year with an annual increase in base rent of 2.25% scheduled for each subsequent year, payable in equal monthly installments on the first day of each month, subject to customary concessions in the Company’s favor and pass-through of certain increases in utility costs and real estate taxes over the base year. The Company provided a security deposit represented by a letter of credit in the amount of $469,000 in October 2016, which is scheduled to be reduced to $305,000 on September 30, 2021 and fully refunded after the sublease ends. This Building became the Company’s new corporate office facility. The Company is required to pay for certain operating expenses associated with the Premises as well as utilities supplied to the Premises. The sublease terms provide for a significant decrease (23% initially) in the Company’s annual rental expenditure taking into account free rent for the first six months of the sublease. Sublandlord provided Value Line a work allowance of $417,000 which accompanied with the six months free rent worth $563,000 was applied against the Company’s obligation to pay rent at our NYC headquarters, delaying the actual rent payments until November 2017.
On February 29, 2016, the Company’s subsidiary VLDC and Seagis Property Group LP (the “Landlord”) entered into a lease agreement, pursuant to which VLDC has leased 24,110 square feet of warehouse and appurtenant office space located at 205 Chubb Ave., Lyndhurst, NJ (“Warehouse”) beginning on May 1, 2016 and ending on April 30, 2024 (“Lease”). Base rent under the Lease is $192,880 per annum payable in equal monthly installments on the first day of each month, in advance during fiscal 2017 and will gradually increase to $237,218 in fiscal 2024, subject to customary increases based on operating costs and real estate taxes. The Company provided a security deposit in cash in the amount of $32,146, which will be fully refunded after the lease term expires. The lease is a net lease requiring the Company to pay for certain operating expenses associated with the Warehouse as well as utilities supplied to the Warehouse.
Income from Securities Transactions, net
|
|
Fiscal Years Ended April 30,
|
|
|
Change
|
|
($ in thousands)
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
'18 vs. '17
|
|
|
'17 vs. '16
|
|
Dividend income
|
|
$
|
226
|
|
|
$
|
193
|
|
|
$
|
142
|
|
|
|
17.1
|
%
|
|
|
35.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
103
|
|
|
|
33
|
|
|
|
-
|
|
|
|
212.1
|
%
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital gain distributions from ETFs
|
|
|
152
|
|
|
|
39
|
|
|
|
105
|
|
|
|
289.7
|
%
|
|
|
-62.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital gain/(loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
224
|
|
|
|
n/a
|
|
|
|
-100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
59
|
|
|
|
47
|
|
|
|
6
|
|
|
|
25.5
|
%
|
|
|
683.3
|
%
|
Total income/(loss) from securities transactions and other, net
|
|
$
|
540
|
|
|
$
|
312
|
|
|
$
|
477
|
|
|
|
73.1
|
%
|
|
|
-34.6
|
%
|
During the twelve months ended April 30, 2018 and April 30, 2017 the Company’s income from securities transactions, net, primarily derived from dividend income, was $540,000 and $312,000, respectively. Proceeds from maturities and sales of government debt securities classified as available-for-sale were $3,384,000 and $750,000 during the twelve months ended April 30, 2018 and April 30, 2017, respectively. Proceeds from sales of equity securities classified as available-for-sale were $152,000 and $53,000 during the twelve months ended April 30, 2018 and April 30, 2017, respectively. In fiscal 2018 income from securities transactions, net, included capital gain distributions from ETFs of $152,000 which compares to capital gain distributions from ETFs of $39,000 in fiscal 2017.
During the twelve months ended April 30, 2017 and April 30, 2016 the Company’s income from securities transactions, net, primarily derived from dividend income, was $312,000 and $477,000, respectively. In fiscal 2017 income from securities transactions, net, included capital gain distribution from ETFs of $39,000 which compares to capital gain distribution from ETFs of $105,000 in fiscal 2016. There were no gains or losses from sales of equity securities, proceeds of which were $53,000 during the twelve months ended April 30, 2017. During the twelve months ended April 30, 2016 sales of equity securities generated proceeds of $10,206,000 and resulted in a $224,000 capital gain.
Effective income tax rate
The overall effective income tax rates, as a percentage of pre-tax ordinary income for the twelve months ended April 30, 2018, 2017 and 2016 were (23.87%), 33.05% and 27.15%, respectively. In fiscal 2018 the U.S. statutory federal corporate income tax rate was reduced from 35% to 21% on the Company’s long-term deferred tax liabilities, resulting in a tax benefit of 54.51% of pre-tax income for the twelve months ended April 30, 2018, primarily attributable to the effect on the long-term deferred tax liability. The Company re-calculated its net deferred tax assets and liabilities using the Federal Tax Rate under the Tax Act. The effect of the re-calculation was reflected entirely in the third quarter ended January 31, 2018 (the period that included the enactment date) and was allocated directly to both current and deferred income tax expenses from continuing operations. The Company's annualized overall effective tax rate fluctuates due to a number of factors, in addition to the new tax law, including but not limited to an increase or decrease in the ratio of items that do not have tax consequences to pre-tax income, the Company's geographic profit mix between tax jurisdictions, taxation method adopted by each locality, new interpretations of existing tax laws and rulings and settlements with tax authorities.
Liquidity and Capital Resources
The Company had working capital, defined as current assets less current liabilities, of $1,690,000 as of April 30, 2018 and $1,200,000 as of April 30, 2017. These amounts include short-term unearned revenue of $19,717,000 and $20,188,000 reflected in total current liabilities at April 30, 2018 and April 30, 2017, respectively. Cash and short-term securities were $23,785,000 and $23,133,000 as of April 30, 2018 and April 30, 2017, respectively.
The Company’s cash and cash equivalents include $4,982,000 and $6,066,000 at April 30, 2018 and April 30, 2017, respectively, invested primarily in commercial banks and in Money Market Funds at brokers, which operate under Rule 2a-7 of the 1940 Act and invest primarily in short-term U.S. government securities.
Cash from operating activities
The Company had cash inflows from operating activities of $1,071,000 during the twelve months ended April 30, 2018 compared to cash outflows from operations of $3,678,000 and cash inflows from operations of $2,004,000 during the twelve months ended April 30, 2017 and 2016, respectively. The increase in cash flows from fiscal 2017 to fiscal 2018 was primarily attributable to the timing of vendor payments, an increase in earnings before non-cash items that resulted from cost controls offset by a decrease in the Federal taxes due to the Federal tax rate change in fiscal 2018. The increase in cash outflows of $5,682,000 from fiscal 2016 to fiscal 2017 resulted from the payment of additional income taxes of $3,279,000, primarily attributable to the sale of the Company’s VLDC operating facility and the timing of payments of invoices and prepayments to vendors in fiscal 2017.
Cash from investing activities
The Company’s cash inflows from investing activities of $7,596,000 during the twelve months ended April 30, 2018 compared to cash inflows from investing activities of $4,470,000 and $12,207,000 for the twelve months ended April 30, 2017 and April 30, 2016, respectively. Cash inflows for the twelve months ended April 30, 2018 were higher than in fiscal 2017 as a result of reduced equipment and software purchases and increased distribution from EAM in fiscal 2018. Cash inflows for the twelve months ended April 30, 2017 were lower than in fiscal 2016 primarily due to investing $13,228,000 in fixed income and equity securities from the net proceeds of $11,555,000 from the sale of the Company’s operating facility as compared to $3,854,000 invested in equity securities from the $10,206,000 of proceeds from sales of securities classified as available for sale during fiscal 2016. Additionally, the Company invested $469,000 in a bank money market fund and pledged this investment to represent cash securing a Bank Letter of Credit issued to the sublandlord as a security deposit for the Company's new leased corporate office facility in fiscal 2017.
Cash from financing activities
During the twelve months ended April 30, 2018, the Company’s cash outflows from financing activities were $9,283,000 and compared to cash outflows from financing activities of $7,357,000 and $6,963,000 for the twelve months ended April 30, 2017 and 2016, respectively. Cash outflows for financing activities included $354,000, $741,000 and $796,000 for the repurchase of 20,045 shares, 44,924 shares and 52,907 shares of the Company’s common stock under the September 19, 2012 board approved common stock repurchase program, during fiscal years 2018, 2017 and 2016, respectively. Quarterly regular dividend payments of $0.18 per share during fiscal 2018 and a special dividend of $0.20 per share declared in January 2018 aggregated $8,929,000. Quarterly dividend payments of $0.17 per share during fiscal 2017 aggregated $6,616,000. Quarterly dividend payments of $0.15 per share during the first quarter and $0.16 per share during the latter three quarters in fiscal 2016 aggregated $6,167,000.
At April 30, 2018 there were 9,691,620 common shares outstanding as compared to 9,711,665 common shares outstanding at April 30, 2017. The Company expects financing activities to continue to include use of cash for dividend payments for the foreseeable future.
Management believes that the Company’s cash and other liquid asset resources used in its business together with the future cash flows from operations and from the Company’s non-voting revenues and non-voting profits interests in EAM will be sufficient to finance current and forecasted liquidity needs for the next twelve months. Management does not anticipate making any borrowings during the next twelve months. As of April 30, 2018, retained earnings and liquid assets were $44,902,000 and $23,785,000, respectively.
Seasonality
Our publishing revenues are comprised of subscriptions which are generally annual subscriptions. Our cash flows from operating activities are minimally seasonal in nature, primarily due to the timing of customer payments made for orders and subscription renewals.
Recent Accounting Pronouncements
In November 2015, the FASB issued ASU 2015-17, Income taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. Under existing standards, deferred taxes for each tax-paying jurisdiction are presented as a net current asset or liability and net long-term asset or liability. To simplify presentation, the new guidance requires that all deferred tax assets and liabilities, along with related valuation allowances, be classified as long-term on the balance sheet. As a result, each tax-paying jurisdiction will now only have one net long-term asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. ASU 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, which is our fiscal year 2018 beginning May 1, 2017. The Company implemented ASU 2015-17 in the first quarter of fiscal 2018 retroactively to include the results as of April 30, 2017 for comparative purposes. The adoption of ASU 2015-17 does not have a material impact on our consolidated condensed financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02"). The core principle of Topic 842 requires that a lessee should recognize the assets and liabilities on the balance sheet and disclose key information about leasing arrangements. The amendments in ASU 2016-2 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The guidance is required to be adopted at the earliest period presented using a modified retrospective approach. The Company is in the process of evaluating the impact of this standard on the consolidated financial statements.
In August, 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments ( a consensus of the Emerging Issues Task Force) ( “ASU 2016-15”). The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under ASC Topic 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. The Company is in the process of evaluating the impact of this standard on the consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. In addition, ASU No. 2014-09 requires disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU No. 2014-09 supersedes most existing U.S. GAAP revenue recognition principles, and it permits the use of either the retrospective or cumulative effect transition method. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. The Company is evaluating the effect that ASU No. 2014-09 will have on its consolidated condensed financial statements and related disclosures, as well as the expected method of adoption. The Company plans to adopt ASU No. 2014-09 in the first quarter of fiscal 2019, and does not believe it will have a material impact on its consolidated condensed financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)". This ASU requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. ASU No. 2016-18 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual periods. The Company is evaluating the effect that ASU No. 2016-18 will have on its consolidated financial statements and related disclosures. The Company plans to adopt ASU No. 2016-18 in the first quarter of fiscal 2019, and does not believe it will have a material impact on its consolidated condensed financial statements and related disclosures.
On June 21, 2018, the United States Supreme Court reversed the 1992 ruling in
Quill,
which protected firms mailing items by common carrier into a state where it had no physical presence from having to collect sales tax in such state. The Company is evaluating the impact, if any, of the 2018 ruling (
South Dakota vs. Wayfair
) on its operations.
Critical Accounting Estimates and Policies
The Company prepares its consolidated financial statements in accordance with Generally Accepted Accounting Principles as in effect in the United States (U.S. “GAAP”). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent, and the Company evaluates its estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or
conditions. The Company believes the following critical accounting policies reflect the significant judgments and estimates used in the preparation of its Consolidated Financial Statements:
Revenue Recognition
The majority of the Company’s revenues come from the sale of print and digital subscriptions and fees for copyright proprietary information. The Company recognizes subscription revenue, net of discounts, in equal amounts over the term of the subscription, which generally ranges from three months to one year or longer, varying based on the product or service. Copyright data fees are calculated monthly based on market fluctuation and billed quarterly. The Company believes that the estimates related to revenue recognition are critical accounting estimates, and to the extent that there are material differences between its determination of revenues and actual results, its financial condition or results of operations may be affected.
Income Taxes
The Company’s effective annual income tax expense rate is based on the U.S. federal and state and local jurisdiction tax rates on income and losses that are part of its Consolidated Financial Statements. Tax-planning opportunities, non-taxable income, expenses that are not deductible in the Company’s tax returns, and the blend of business income, including income derived from the Company’s non-voting revenue and non-voting profits interests in EAM and income from securities transactions, will impact the effective tax rate in the jurisdictions in which the Company operates. Significant judgment is required in evaluating the Company’s tax positions.
Tax law requires items to be included in the tax return at different times from when these items are reflected in the Company’s Consolidated Financial Statements. As a result, the effective tax rate reflected in the Company’s Consolidated Financial Statements is different from the tax rate reported on the Company’s tax returns (the Company’s cash tax rate). These differences reverse over time, such as depreciation and amortization expenses. These timing differences create deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and the tax basis of assets and liabilities.
On December 22, 2017 H.R. 1, originally known as the Tax Cuts and Jobs Act, (the "Tax Act") was enacted. The Tax Act lowers the U.S. federal income tax rate ("Federal Tax Rate") from 35% to 21% effective January 1, 2018. Accordingly, the Company computes its income tax expense for the fiscal year ending April 30, 2018 using a blended Federal Tax Rate of 30.33%. The 21% Federal Tax Rate will apply to fiscal year ending April 30, 2019 and each year thereafter. The Company re-calculated its net deferred tax assets and liabilities using the Federal Tax Rate under the Tax Act. The effect of the re-calculation was reflected entirely in the third quarter ended January 31, 2018 (the period that included the enactment date) and was allocated directly to both current and deferred income tax expenses from continuing operations.
In assessing the need for a valuation allowance, the Company considers both positive and negative evidence, including tax-planning strategies, projected future taxable income, and recent financial performance. If after future assessments of the realizability of the deferred tax assets the Company determines a lesser allowance is required, the Company would record a reduction to the income tax expense and to the valuation allowance in the period this determination was made. This would cause the Company’s income tax expense, effective tax rate, and net income to fluctuate.
In addition, the Company establishes reserves at the time that it determines that it is more likely than not that it will need to pay additional taxes related to certain matters. The Company adjusts these reserves, including any impact of the related interest and penalties, in light of changing facts and circumstances such as the progress of a tax audit. A number of years may elapse before a particular matter for which the Company has established a reserve is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. Such liabilities are recorded as income taxes payable in the Company’s Consolidated Balance Sheets. The settlement of any particular issue would usually require the use of cash. Favorable resolutions of tax matters for which the Company has previously established reserves are recognized as a reduction to the Company’s income tax expense when the amounts involved become known.
Assessing the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns requires judgment. Variations in the actual outcome of these future tax consequences could materially impact the Company’s financial position, results of operations, or cash flows.
Investment in EAM Trust
The Company accounts for its investment in EAM using the equity method of accounting. The value of its investment in EAM is the fair value of the contributed capital at inception, plus the Company’s share of non-voting revenues and non-voting profits from EAM, less distributions received from EAM. The Company evaluates its investment in EAM on a regular basis for other-than-temporary impairment, which requires significant judgment and includes quantitative and qualitative analysis of identified events or circumstances that impact the fair value of the investment.
Should the fair value of the investment fall below its carrying value, the Company will determine whether the investment is other-than-temporarily impaired, which includes assessing the severity and duration of the impairment and the likelihood of recovery. If the investment is considered to be other-than-temporarily impaired, the Company will write down the investment to its fair value. Since the inception of EAM, the Company has not recognized any other-than-temporary impairment in the investment.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, other than operating leases and a secured Letter of Credit (“LOC”) in the amount of $469,000 issued as a security deposit for the Company’s office facility entered into in the ordinary course of business. The LOC is secured by a restricted Money Market Investment of similar amount.
Contractual Obligations
Below is a summary of certain contractual obligations of the Company as of April 30, 2018 ($ in thousands):
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Payments due by period
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Contractual Obligations
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Total
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Less than 1
year
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1-3 years
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3-5 years
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More than 5
years
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Long Term Debt Obligations
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-
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-
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-
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-
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-
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Capital Lease Obligations
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-
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-
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-
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-
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-
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Operating Lease Obligations
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14,199
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1,366
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2,831
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3,339
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6,663
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Purchase Obligations
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-
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-
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-
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-
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-
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Total
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$
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14,199
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$
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1,366
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$
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2,831
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$
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3,339
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$
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6,663
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