Daily Journal Corporation — Form 10-Q summary
Business context and period: The filing covers the fiscal third quarter and nine months ended June 30, 2011; comparisons are with the same periods in 2010. Daily Journal publishes newspapers, websites and related services, and provides specialized information services. Its wholly owned Sustain subsidiary supplies case-management software to courts and other justice agencies. The filing is dated August 12, 2011.
Financial results
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Nine months ended June 30, 2011 | Nine months ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | $8.499 million | $9.469 million | $26.368 million | $28.437 million |
| Operating income | $2.604 million | $2.763 million | $8.373 million | $8.502 million |
| Income before taxes | $2.921 million | $2.964 million | $9.217 million | $9.130 million |
| Net income | $1.891 million | $1.844 million | $5.917 million | $5.660 million |
| Diluted earnings per share | $1.37 | $1.34 | $4.29 | $4.10 |
| Operating margin | 30.6% | 29.2% | 31.8% | 29.9% |
For the nine-month period, operating cash flow was $7.300 million, compared with $7.171 million a year earlier. Investing activities used $6.819 million, including $11.154 million of marketable-security purchases, partly offset by Treasury bill maturities and sales. Cash and cash equivalents were $4.096 million at June 30, 2011.
At June 30, 2011, current assets were $87.675 million, current liabilities $25.877 million and working capital $61.798 million. Marketable securities were $66.338 million and Treasury bills $9.100 million; together with cash, these totaled about $79.534 million. Total liabilities were $31.257 million. The balance sheet reports no borrowings; interest expense was $27,000 for the nine months. The filing does not provide a separate debt balance or a conventional debt-maturity schedule.
Changes and business drivers
- Nine-month revenue declined 7%, while costs and expenses fell 10%. Pretax income rose 1% and net income rose 5% year over year.
- Advertising revenue fell $1.184 million, circulation fell $263,000, advertising service fees and other fell $445,000, and information-systems revenue fell $177,000. Management cited lower public-notice and classified advertising, circulation, and Sustain consulting revenue; display advertising partially offset declines.
- Personnel costs decreased 15%, primarily from departmental reorganizations and a $1.230 million reduction in Management Incentive Plan expense. The traditional business reported nine-month pretax income of $10.319 million, up from $9.860 million.
- Sustain revenue was $2.318 million, down from $2.495 million; its pretax loss widened to $1.102 million from $730,000. Sustain spent $1.843 million on internal software development, expensed as incurred where applicable.
- Investment-related unrealized gains, net of tax, increased accumulated other comprehensive income to $20.910 million from $18.387 million. The portfolio’s pretax unrealized gain was $34.755 million, versus $29.655 million at September 30, 2010. Comprehensive income was $8.440 million for the nine months, including a $2.523 million after-tax unrealized gain.
Outlook, risks and contingencies
- Management expected fewer foreclosure notices to continue reducing public-notice advertising and forecast declining revenue for fiscal 2011. It did not expect commercial advertising to offset that decline.
- Sustain consulting revenue remained uncertain because of government budget reductions, customer needs, project timing and the ability to win new customers. Revenue on new installation projects is recognized only upon completion and customer acceptance. Management said the web-based case-management system had begun installation in several courts.
- Management said software-development costs would materially affect results at least through fiscal 2011. Unsuccessful development could impair Sustain’s ability to serve existing customers and compete for new business.
- The investment portfolio was concentrated in five companies. Management warned that declines in one or more holdings could materially reduce equity and, in some circumstances, produce income-statement losses. The company said it expected to fund foreseeable operations from operating cash flow and working capital, and might pursue acquisitions.
- The IRS proposed disallowing about $700,000 of previously claimed research and development credits for tax years 2002–2007. The company was contesting the issue in Tax Court and had a reserve of approximately $700,000; the outcome was uncertain. Accrued interest on unrecognized tax benefits was $277,000.
- Management did not expect ordinary-course litigation to materially affect financial position or results. It reported disclosure controls as effective and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether foreclosure-notice volumes and advertising revenue continue to decline, and whether other advertising can offset the pressure.
- Sustain’s consulting pipeline, customer acceptance and revenue timing for new installations, and the returns on its ongoing software-development spending.
- The performance and concentration of the five-company investment portfolio, including potential effects of market-value changes on equity and earnings.
- The Tax Court outcome on the approximately $700,000 research-credit dispute and any related tax, interest or penalty exposure.
- The reported effective tax rates and period references: the notes contain a “nine months ended March 31” wording, while the financial statements and MD&A identify the period as nine months ended June 30.