Daily Journal Corporation — Form 10-Q
Reporting period: Quarter and six months ended March 31, 2012 (fiscal second quarter). Comparisons are with the periods ended March 31, 2011. The company operates a traditional newspaper, magazine and related-services business, and Sustain, a provider of case-management software and services to courts and government agencies.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $8.066 million, down 5.9% | $15.986 million, down 10.5% |
| Operating income | $2.184 million, down 15.4% | $4.444 million, down 23.0% |
| Operating margin | 27.1%, versus 30.1% | 27.8%, versus 32.3% |
| Net income | $2.044 million, up 11.0% | $3.750 million, down 6.9% |
| Diluted EPS | $1.48, versus $1.33 | $2.72, versus $2.92 |
| Comprehensive income | $14.965 million, versus $2.893 million | $20.590 million, versus $10.718 million |
| Cash from operations | Not presented separately for the quarter | $4.101 million, versus $4.788 million |
Quarterly net income increased despite lower revenue and operating income; the six-month comparison shows lower net income. Comprehensive income was boosted by after-tax unrealized investment gains of $16.840 million for the six-month period, which are not operating earnings.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $5.878 million; Treasury bills were $0.500 million; and marketable securities were $97.686 million. Total current assets were $109.069 million and current liabilities were $30.445 million, producing reported working capital of $78.624 million.
- Total liabilities were $35.145 million, including deferred income taxes; the filing reports no borrowings or debt balance.
- Shareholders’ equity was $85.469 million, up from $64.879 million at September 30, 2011. The increase largely reflects investment appreciation recorded in accumulated other comprehensive income.
- Six-month investing cash outflow was $1.281 million, including $13.581 million of marketable-security purchases, partly offset by Treasury-bill maturities and sales. Capital expenditures were $0.300 million.
Changes, outlook and risks
- Six-month revenue fell $1.883 million, primarily because trustee-sale notice and related service-fee revenue declined $1.587 million (22%). Public notice advertising and service fees represented about 56% of total revenue.
- Traditional-business pretax income declined 8% to $6.333 million. Sustain’s pretax loss widened to $0.973 million from $0.612 million, as consulting and support revenue weakened amid government budget constraints.
- Management expects fewer foreclosure notices and declining related advertising revenue during fiscal 2012, and does not expect commercial advertising to offset the decline. The number of foreclosure notices published fell 21% year over year in the six-month period.
- Sustain continues to incur significant software development costs: $2.059 million of personnel costs were expensed for its Web-based case-management system during the six months. Management said these expenditures would materially affect overall results at least through fiscal 2012. Recent installations and projects in progress may generate license fees, but management does not expect these fees to materially affect near-term earnings.
- The company said operating cash flows and working capital should fund foreseeable operations, with potential investment in its businesses or acquisitions. Its investment portfolio is concentrated in six companies; a decline in one or more holdings could materially reduce equity and could lead to impairment losses.
- In March 2012, the company settled an IRS dispute involving research-and-development credits for 2002–2007. The settlement reduced the previously recorded tax provision by $282,000 and related interest accrual by $66,000. The six-month effective tax rate was 30.04%, versus 36.05%.
- Management reported that litigation arising in the ordinary course was not expected to have a material effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Key facts for investors to verify
- Whether foreclosure-notice volumes and related revenue continue to decline, and whether other advertising can offset that pressure.
- Sustain’s ability to complete and gain customer acceptance of software projects, win new customers, and convert development spending into recurring revenue.
- The value, concentration and potential impairment risk of the investment portfolio, including the distinction between unrealized gains and realized earnings.
- The sustainability of operating cash generation and the effect of deferred-tax liabilities associated with investment appreciation.