Daily Journal Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014; comparisons are to the periods ended June 30, 2013. The company operates a traditional newspaper, magazine and related-services business, plus technology businesses providing case-management software and services to justice agencies.
Financial performance
| Metric | Three months ended June 30, 2014 | Nine months ended June 30, 2014 |
|---|---|---|
| Revenue | $11.147 million, versus $9.204 million | $31.926 million, versus $26.650 million |
| Operating income (loss) | $(0.263) million, versus $0.446 million | $(2.050) million, versus $2.284 million |
| Income (loss) before taxes | $0.531 million, versus $1.161 million | $(0.046) million, versus $4.086 million |
| Net income | $2.841 million, versus $0.826 million | $2.254 million, versus $2.811 million |
| Diluted earnings per share | $2.06, versus $0.60 | $1.63, versus $2.04 |
- Nine-month revenue rose 20%, mainly reflecting New Dawn and ISD acquisition contributions. Technology represented about 52% of revenue, compared with 31% in the prior-year period.
- Nine-month operating expenses increased 39% to $33.976 million, including higher personnel costs and $3.642 million of acquired-intangible amortization. The company reported no consolidated operating profit for the period.
- Traditional Business revenue was $15.246 million for nine months, down from $18.315 million; pretax income fell 49% to $4.033 million. Technology Companies revenue was $16.680 million and pretax loss was $4.079 million.
- Net income benefited from a $2.300 million income-tax benefit despite a $0.046 million pretax loss. The filing attributes the tax result mainly to acquisition-related tax/GAAP differences and tax deductions; the very high reported effective rate reflects the small pretax-loss denominator.
- Nine-month comprehensive income was $20.431 million, including $18.177 million of after-tax unrealized investment appreciation. This is distinct from net income.
Cash, liquidity and debt
- At June 30, cash and cash equivalents were $14.750 million; marketable securities were $166.823 million. Combined, these totaled $181.573 million.
- Working capital was $121.296 million. Nine-month operating cash flow was $3.815 million, compared with $2.634 million in the prior-year period; capital expenditures were $0.403 million.
- Investment margin borrowings were $29.493 million, unchanged from September 30, 2013. The borrowings are secured by marketable securities, bear a floating rate based on the Federal Funds Rate plus 50 basis points, and have no stated maturity.
- Marketable securities included $118.845 million of pretax unrealized gains, with most gains in common stocks of three U.S. financial institutions. The company says its investments are concentrated in six companies.
Changes, outlook and risks
- Management expects foreclosure-notice advertising to continue declining during the remainder of fiscal 2014, with further declines in Traditional Business revenue and earnings. The number of foreclosure notices published fell 54% in the nine-month period.
- Management does not expect improving general economic conditions to offset pressure on commercial advertising. Public-notice revenue is exposed to legal changes eliminating publication requirements or challenges to newspapers’ adjudicated status.
- Technology revenue and costs increased with the acquisitions of New Dawn and ISD. Technology results remain exposed to project timing and customer acceptance, customer needs, winning new customers, and ongoing software development and upgrade costs. Goodwill and acquired intangibles are also subject to impairment and amortization considerations.
- The company stated it expects to fund foreseeable operations with operating cash flow and working capital; it may pursue acquisitions and may use excess cash to reduce margin borrowings or invest. No quantified earnings or revenue guidance was provided.
- Management reported that disclosure controls were effective, while noting late filings of the fiscal 2013 Form 10-K and the first two fiscal 2014 Forms 10-Q. The company dismissed its former auditor on June 24, 2014 and engaged BDO USA, LLP on July 3, 2014.
- Management said ordinary-course litigation was not expected to materially affect results. It reported no material change to previously disclosed risk factors and no subsequent event requiring disclosure.
Important facts for investors to verify
- Whether the expected decline in foreclosure-related public-notice advertising continues, and the resulting effect on Traditional Business earnings.
- Technology Companies’ underlying profitability, project acceptance and deferred installation contracts, including the effects of acquisition-related amortization and software investment.
- The composition, concentration and market value of the securities portfolio, and the potential effect of price declines on equity and borrowing capacity.
- The sustainability of reported net income given the tax benefit and the near break-even pretax result for the nine-month period.
- Details and implications of the delayed filings and auditor transition; the filing does not provide a clear explanation of any further consequences.