Daily Journal Corporation — Form 10-Q Summary
Business context and period. This fiscal third-quarter report covers the three and nine months ended June 30, 2013; the comparable periods are June 30, 2012. Daily Journal operates a traditional publishing and public-notice business and a justice-agency software business through Sustain and, following its December 2012 acquisition, New Dawn Technologies.
Financial performance
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Nine months ended June 30, 2013 | Nine months ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $9.204 million | $8.131 million | $26.650 million | $24.117 million |
| Operating income | $0.461 million | $2.234 million | $2.319 million | $6.678 million |
| Net income | $0.826 million | $0.208 million | $2.811 million | $3.958 million |
| Diluted EPS | $0.60 | $0.15 | $2.04 | $2.87 |
| Operating margin | 5.0% | 27.5% | 8.7% | 27.7% |
Quarterly revenue rose about 13%, while operating income fell sharply as operating costs increased. Quarterly net income exceeded the prior year, which included a $2.855 million investment impairment charge. For the nine months, revenue rose about 11%, but operating income and net income declined; prior-year net income also included the impairment charge. Comprehensive income was $18.613 million for the nine-month period versus $19.108 million, reflecting substantial unrealized investment gains in both periods.
- Revenue mix and segments: Nine-month traditional-business revenue was $18.315 million, down from $21.824 million; Sustain and New Dawn contributed $8.335 million, compared with Sustain’s $2.293 million a year earlier. The software segment reported a $3.783 million pretax loss, versus a $1.448 million loss for Sustain in the prior period.
- Cash flow: Nine-month operating cash flow was $2.634 million, down from $6.382 million. Investing cash use was $11.336 million, including $11.878 million net cash paid to acquire New Dawn; financing provided $14 million from margin-account borrowing. Cash ended at $6.283 million.
- Liquidity and debt: Current assets were $141.061 million and current liabilities $50.863 million, yielding working capital of $90.198 million. Marketable securities were $128.421 million at fair value, versus a $49.694 million cost basis. The company had $14 million of investment-margin borrowing, secured by marketable securities, with a floating rate of Federal Funds Rate plus 50 basis points, interest-only payments and no stated maturity.
- Acquisition: New Dawn was purchased for $14 million cash. Since acquisition, it contributed $6.430 million of revenue and a $0.718 million pretax loss, including $1.111 million of intangible amortization. The purchase allocation included $8.411 million of net intangibles and $14 million of goodwill.
Material changes, outlook and risks
Management attributed the traditional segment’s revenue decline largely to a $3.055 million reduction in trustee-sale notice and related service-fee revenue. Foreclosure notices published fell 49% year over year for the nine-month period. Management expects fewer foreclosure notices and declining print-based revenue in fiscal 2013, and cautioned that expense reductions are unlikely to offset all lost revenue. The California Homeowner’s Bill of Rights, effective January 1, 2013, was cited as contributing to slower foreclosures.
Higher costs reflected New Dawn’s operations, increased Sustain implementation and development staffing, acquisition-related amortization, and higher general and administrative expenses. Management expects software development costs to remain significant and to affect results. Software revenue also depends on project completion and customer acceptance, customer needs, and winning new business; installation advances may not be earned until acceptance.
Other material risks include reliance on legally required public-notice advertising and newspapers’ adjudicated status; changes in law or loss of eligibility could materially reduce revenue. The investment portfolio is concentrated in six companies, exposing equity and earnings to significant market declines and possible impairment. Management said existing liquidity and operating cash flows should fund operations for the foreseeable future and noted the ability to borrow against securities. No numerical earnings guidance was provided. Management did not expect ordinary-course litigation to materially affect financial position or results. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether foreclosure volumes, public-notice revenue and related earnings continue to decline as management expected.
- New Dawn and Sustain’s path to profitability, project acceptance timing, and ongoing staffing and development costs.
- Market value and concentration of the investment portfolio, and the margin borrowing terms and collateral exposure.
- The acquisition accounting, including the preliminary purchase-price allocation, goodwill and amortization effects.
- The filing’s precise characterization of unrealized investment gains: reported fair value and cost imply $78.727 million of unrealized gains, while the notes’ wording on tax treatment is not fully clear.