Daily Journal Corporation — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended March 31, 2013; fiscal year ends September 30. The company operates traditional newspaper, magazine and public-notice businesses, and court case-management software businesses Sustain and New Dawn.
Financial performance
| Metric | Three months ended Mar. 31, 2013 | Three months ended Mar. 31, 2012 | Six months ended Mar. 31, 2013 | Six months ended Mar. 31, 2012 |
|---|---|---|---|---|
| Revenue | $9.753 million | $8.066 million | $17.446 million | $15.986 million |
| Operating income | $1.153 million | $2.184 million | $1.858 million | $4.444 million |
| Net income | $1.151 million | $2.044 million | $1.985 million | $3.750 million |
| Diluted EPS | $0.83 | $1.48 | $1.44 | $2.72 |
| Operating margin | 11.8% | 27.1% | 10.7% | 27.8% |
For the six-month period, revenue increased 9%, while operating income fell 58% and net income fell 47%. The revenue increase primarily reflected $3.690 million from New Dawn, partly offset by a $1.778 million decline in trustee-sale notice and related service-fee revenue. Costs and expenses rose 35% to $15.588 million, including higher personnel costs and $635,000 of New Dawn intangible amortization.
- Segments, six months: Traditional-business revenue was $12.439 million and pretax income was $5.168 million, down from $14.528 million and $6.333 million. Sustain and New Dawn revenue was $5.007 million; the segment reported a $2.243 million pretax loss, versus Sustain’s $973,000 loss a year earlier.
- Cash flow: Operating cash flow was $1.042 million, down from $4.101 million. Investing activities used $11.234 million, including $11.878 million net cash for the New Dawn acquisition; financing provided $14.000 million from margin borrowing. Cash increased $3.808 million to $4.793 million.
- Liquidity and debt: Working capital was $84.006 million. Marketable securities were $120.299 million; the company had a $14.000 million investment margin borrowing secured by marketable securities. The borrowing bears interest at the Federal Funds Rate plus 50 basis points, is payable interest-only monthly, and has no maturity date.
- Investments and equity: Net unrealized investment gains were $70.605 million at March 31, 2013, compared with $52.464 million at September 30, 2012. Six-month comprehensive income was $12.900 million, including $10.915 million of after-tax unrealized investment appreciation. Shareholders’ equity was $100.125 million.
Material developments, outlook and risks
The company acquired all of New Dawn on December 4, 2012, for $14 million in cash, funded by the margin borrowing. New Dawn contributed $3.690 million of revenue and a $356,000 pretax loss from December 5 through March 31. The preliminary purchase-price allocation included $9.5 million of identifiable software and customer-relationship intangibles, amortized over five years, and $14 million of goodwill.
Management reported a 46% decline in published foreclosure notices for the six-month period. It expects California’s Homeowner’s Bill of Rights and continued foreclosure-process delays to reduce foreclosure notices and fiscal 2013 revenue; management warned print-based earnings could decline substantially because cost reductions may not offset lost revenue. Public-notice advertising and related service fees represented about 41% of total revenue. The filing provides no quantified earnings or revenue forecast.
Software revenue depends on project completion and customer acceptance, and the company expects software-development expenses to remain significant. Other stated risks include changes to laws requiring public notices, loss of newspaper adjudicated status, declining commercial advertising or circulation, software-development and customer-concentration risks, and declines in investment values. Investments were concentrated in six companies; a significant decline could reduce equity and potentially lead to impairment losses. Management said available working capital and operating cash flows should fund foreseeable operations and that it may consider further acquisitions or investments. Litigation was described as arising in the ordinary course, with no expected material effect. No subsequent events requiring disclosure were reported.
Investor verification points
- Assess the effect of fewer foreclosure notices and potential legal changes on the traditional business, especially given public-notice revenue concentration.
- Track Sustain and New Dawn’s ability to complete and obtain acceptance of installations, convert deferred installation revenue to earned revenue, and improve segment profitability.
- Review the New Dawn purchase-price allocation, goodwill and intangible amortization, and the company’s future impairment assessments.
- Evaluate the margin borrowing’s variable rate, collateral exposure and absence of a stated maturity alongside the company’s investment concentration and unrealized gains.
- Monitor operating cash flow, which declined materially year over year, and the sustainability of liquidity as acquisition and operating needs evolve.