Daily Journal Corporation — Form 10-Q Summary
Business context and period. This filing covers the fiscal third quarter and nine months ended June 30, 2012, compared with the same periods in 2011. Daily Journal operates a traditional newspaper, magazine, and public-notice advertising business and Sustain, a court and justice-agency case-management software business.
Financial results
| Metric | Three months ended June 30, 2012 | Nine months ended June 30, 2012 | Comparable 2011 period |
|---|---|---|---|
| Revenue | $8.131 million | $24.117 million | $8.499 million; $26.368 million |
| Operating income | $2.234 million | $6.678 million | $2.604 million; $8.373 million |
| Net income | $208,000 | $3.958 million | $1.891 million; $5.917 million |
| Diluted EPS | $0.15 | $2.87 | $1.37; $4.29 |
| Operating margin | Approximately 27.5% | Approximately 27.7% | Approximately 30.6%; 31.8% |
Nine-month revenue declined 9%, operating income 20%, and net income 33% year over year. The $2.855 million pretax investment impairment was the principal reason pretax income fell 42%; the impairment was $1.720 million after tax. Excluding the impairment, reported nine-month net income would have been approximately $5.678 million, though this is not a company-reported non-GAAP measure. Nine-month comprehensive income was $19.108 million, reflecting $13.430 million of after-tax unrealized investment appreciation and the impairment-related reclassification.
Cash flow and liquidity. Nine-month operating cash flow was $6.382 million, down from $7.300 million. Investing activities used $6.441 million, including $16.390 million of marketable-security purchases, partly offset by Treasury maturities and sales. Cash was $2.999 million at June 30. Treasury bills and marketable securities were $2.800 million and $94.831 million, respectively. Working capital was $77.102 million. No borrowings or funded debt are reported; the balance sheet lists $4.500 million of long-term accrued liabilities.
Total assets were $117.656 million, up from $90.816 million at September 30, 2011; shareholders’ equity increased to $83.987 million from $64.879 million, largely reflecting investment appreciation. Marketable securities had $49.710 million of pretax unrealized gains at quarter-end. The filing identifies portfolio concentration in six companies.
Performance drivers and material changes
- Nine-month traditional-business revenue declined to $21.824 million from $24.050 million. Trustee-sale notice and related service-fee revenue fell $1.982 million, while circulation revenue also declined.
- Public-notice advertising and related fees represented about 56% of total nine-month revenue. The number of foreclosure notices published declined 20% year over year.
- Sustain revenue was $2.293 million versus $2.318 million for nine months. Its operating loss widened to $1.455 million from $1.102 million, with lower consulting and support revenue and increased personnel costs cited as factors.
- Consolidated operating expenses decreased 3% to $17.439 million. Dividends and interest income rose to $1.451 million from $870,000.
- The company recorded $2.855 million of other-than-temporary impairment losses on securities of one issuer. Management stated that the accounting impairment does not necessarily mean the decline in value is permanent.
- The IRS settlement of previously claimed research and development credits reduced a prior tax provision by $282,000 and related interest accrual by $62,000. The nine-month effective tax rate was about 26%, versus 36%.
Outlook, risks, and other disclosures
Management expected fewer foreclosure notices and declining public-notice advertising revenue in fiscal 2012, with no expected offset from commercial advertising. It said the company could fund foreseeable operations from operating cash flow and working capital and may consider acquisitions. No numerical earnings or revenue guidance was provided.
Key risks include further declines in foreclosure notices, subscriber or commercial advertising; potential changes to laws requiring public notices; and an appeal concerning a ruling that one California newspaper was not properly adjudicated. Loss of adjudicated status for additional newspapers could materially harm revenue. Sustain faces government budget constraints, uncertain consulting engagements, and risks related to software development and customer acceptance; $3.125 million of development and implementation personnel costs were expensed during the nine months. The concentrated investment portfolio may expose equity and earnings to significant market declines. Management said ordinary-course litigation was not expected to have a material effect. Disclosure controls were judged effective, with no reported material change in internal controls during the quarter.
Important facts for investors to verify
- How foreclosure-notice volumes and related revenue evolved after the quarter, and the outcome of the newspaper adjudication appeal.
- Whether Sustain’s web-based installations convert into accepted projects and recurring license or maintenance revenue, and how development spending affects results.
- The composition, concentration, market values, and subsequent performance of the investment portfolio, including any further impairment assessments.
- Cash generation and working-capital trends, including deferred tax liabilities associated with unrealized investment gains.
- The continuation and full-year impact of the IRS settlement and other tax items.