Business Context and Reporting Period
Company: Daily Journal Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Operations: The Company operates two primary segments: (1) Traditional Business, publishing newspapers (including the Los Angeles and San Francisco Daily Journals) and magazines covering California and Arizona; and (2) Sustain Technologies, a subsidiary providing case management software to courts and justice agencies.
Key Financial Metrics
Revenue (Six Months Ended March 31, 2009): $19,463,000 (up 3% from $18,924,000 in the prior year period).
Net Income (Six Months): $3,443,000 (up 18% from $2,928,000).
Net Income (Three Months): $1,695,000 (up 3% from $1,653,000).
Earnings Per Share (Six Months): $2.42 (Basic and Diluted).
Operating Cash Flow (Six Months): $4,483,000 provided by operations.
Liquidity: Cash and cash equivalents totaled $2,807,000 as of March 31, 2009. Total current assets were $43,502,000 against current liabilities of $15,130,000, resulting in working capital of $28,372,000.
Investments: Marketable securities (common stocks) totaled $24,713,000, with an unrealized gain of $5,720,000 recorded in accumulated other comprehensive income.
Material Changes vs. Prior Period
- Revenue Drivers: Consolidated revenue increased primarily due to a $1,612,000 rise in public notice advertising revenues, driven by a high volume of trustee foreclosure sales in California and Arizona. This offset significant declines in display advertising (-$380,000) and classified advertising (-$984,000, down 46%) due to a downturn in the employment market.
- Profitability: Pretax income increased by $800,000 (17%) to $5,598,000. The Traditional Business segment pretax profit rose 14% to $5,581,000. The Sustain segment improved from a loss of $92,000 to a profit of $17,000, driven by increased consulting revenues.
- Expenses: Total costs and expenses decreased by 2% to $14,196,000. Personnel costs dropped 5% due to departmental reorganizations, and postage/delivery expenses fell 11% due to fewer subscribers.
- Investment Activity: The Company purchased $15,501,000 in marketable securities (common stocks) and repurchased $1,590,000 of its own common stock during the six-month period.
Outlook, Risks, and Contingencies
Management Commentary: Management notes that the surge in traditional business profits is heavily dependent on the volume of foreclosure sales, which is expected to slow eventually. Sustain's profitability remains uncertain and dependent on consulting revenue timing and new customer acquisition. Significant internal development costs for Sustain software ($1,061,000 for the six months) are expensed as incurred until technological feasibility is established.
Risks and Contingencies:
- Tax Dispute: The IRS is auditing tax returns for 2002-2006 and has proposed disallowing approximately $700,000 in research and development credits. The Company is contesting this; the outcome is uncertain.
- Legal Litigation: Sustain faces a potential $20 million claim from Ontario, Canada Ministries regarding a terminated 1999 software contract. Management cannot currently determine if this will have a material adverse effect.
- Market Risks: Risks include a decline in foreclosure activity, further drops in commercial advertising, changes in laws regarding public notice requirements, and the success of Sustain's software development.
Investor Verification Checklist
- Verify the sustainability of public notice advertising revenue given the cyclical nature of the foreclosure market.
- Monitor the resolution of the IRS audit regarding the $700,000 R&D credit disallowance.
- Assess the status of the $20 million litigation claim from Ontario, Canada Ministries against Sustain.
- Review the progress and capitalization status of Sustain's new Web-based software development.
- Confirm the composition of the $24.7 million marketable securities portfolio and the volatility of the unrealized gains.