Daily Journal Corporation — Form 10-Q
Business and period: The filing covers the three and six months ended March 31, 2014, the company’s fiscal second quarter and first half. Daily Journal operates a Traditional Business—newspapers, publications and public-notice advertising—and Technology Companies that provide case-management software and related services to courts and justice agencies. New Dawn and ISD were acquired in December 2012 and September 2013, respectively. The report was signed August 15, 2014.
Key financial results
| Metric | Three months ended March 31, 2014 | Six months ended March 31, 2014 |
|---|---|---|
| Revenue | $10.828 million, versus $9.753 million | $20.779 million, versus $17.446 million |
| Operating income (loss) | $(0.518) million, versus $1.137 million | $(1.787) million, versus $1.838 million |
| Net income (loss) | $0.053 million, versus $1.151 million | $(0.587) million, versus $1.985 million |
| Basic and diluted earnings (loss) per share | $0.04, versus $0.83 | $(0.43), versus $1.44 |
| Cash from operating activities | The filing does not provide a standalone quarterly figure | $0.145 million, versus $1.042 million |
- First-half Technology Companies revenue was $10.782 million, about 52% of consolidated revenue, but the segment reported a $2.870 million pretax loss. Traditional Business revenue was $9.997 million and pretax income was $2.293 million.
- First-half operating expenses rose 45% to $22.566 million. Intangible amortization increased to $2.419 million from $0.635 million, largely reflecting the acquisitions.
- At March 31, cash and cash equivalents were $11.274 million; marketable securities were $168.028 million. Working capital was $118.779 million. Total assets were $231.174 million and shareholders’ equity was $131.626 million.
- Investment margin borrowings were $29.493 million, secured by marketable securities; the filing says these borrowings have no maturity and bear interest at the Federal Funds Rate plus 50 basis points. Interest expense for the six-month period was $0.117 million.
- Marketable securities had $120.051 million of pretax unrealized gains, with $46.777 million of related deferred tax liability. First-half comprehensive income was $18.279 million, primarily reflecting $18.866 million of after-tax unrealized investment appreciation.
Changes, outlook and risks
- Consolidated first-half revenue grew 19%, mainly due to New Dawn and ISD, which added $5.833 million of revenue; this was partly offset by a $1.902 million decline in trustee-sale notice and related service-fee revenue. Traditional Business revenue fell from $12.439 million to $9.997 million.
- Management said foreclosure notices published fell 56% year over year and expected fewer notices and declining Traditional Business revenue through fiscal 2014. It warned expense reductions would not fully offset the expected revenue loss.
- Technology Companies revenue rose with the acquisitions, but expenses rose faster. Project revenue is subject to uncertainty because recognition often depends on customer acceptance of completed installations, as well as existing-customer needs and winning new customers. Software development and upgrade costs are expensed as incurred and expected to affect earnings for the foreseeable future.
- The investment portfolio is concentrated in six companies; most unrealized gains were in three U.S. financial institutions. Management cautioned that declines in one or more holdings could materially reduce equity and could lead to impairment charges. The company concluded current unrealized equity losses were temporary.
- Management said existing cash flows, working capital and borrowing capacity were expected to fund operations for the foreseeable future. It may pursue acquisitions, reduce margin debt or make additional investments; no quantified earnings guidance was provided.
- Other risks include possible changes to public-notice publication laws or loss of newspaper adjudication status, continued declines in circulation or commercial advertising, software implementation and customer-reliance risks, and litigation in the ordinary course. Management did not expect pending litigation to materially affect the company.
- The company acknowledged that its fiscal 2013 Form 10-K and first- and second-quarter fiscal 2014 Forms 10-Q were not filed on time, attributing delays to additional audit work. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Track foreclosure-notice volumes and Traditional Business revenue against management’s stated expectation of further declines.
- Assess whether the Technology Companies can improve profitability and convert deferred installation contracts into accepted projects and recognized revenue.
- Review the investment portfolio’s concentration, market values, unrealized gains, tax effects and margin-account collateral exposure.
- Monitor cash generation, working capital, acquisition-related amortization and the company’s use of margin borrowings.
- Confirm the status and causes of the late filings and review any subsequent changes in controls, litigation or other contingencies.