Daily Journal Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013; comparisons are with FY2012. This is an annual report, not a standalone fourth-quarter report. The company publishes specialized newspapers and related services and operates court case-management software businesses.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $37.676 million | $31.874 million | +18% |
| Operating income | $3.843 million | $8.682 million | -56% |
| Operating margin | 10.2% | 27.2% | Down 17.0 percentage points |
| Pretax income | $4.569 million | $7.901 million | -42% |
| Net income | $3.779 million | $5.541 million | -32% |
| Diluted EPS | $2.74 | $4.01 | -32% |
| Operating cash flow | $5.672 million | $6.959 million | -18% |
- FY2013 net margin was approximately 10.0%, versus 17.4% in FY2012. Costs and expenses rose 46% to $33.833 million, led by added technology-company personnel, acquisition-related costs and $1.865 million of acquired-intangible amortization.
- Cash and cash equivalents were $11.338 million and marketable securities were $136.994 million at year-end. Working capital was $98.854 million, including $17.277 million of deferred subscription, installation and maintenance liabilities.
- Investment margin borrowings were $29.493 million, secured by marketable securities. The borrowings bear a floating rate based on the Federal Funds Rate plus 50 basis points, require monthly interest payments and have no stated maturity.
- Marketable securities had $89.018 million of pretax unrealized gains, largely concentrated in three U.S. financial institutions; the company reported investments concentrated in six companies overall. FY2013 included $2.541 million of dividends and interest income and $1.719 million of other-than-temporary impairment losses.
- Comprehensive income was $26.122 million, compared with $22.346 million, principally reflecting after-tax unrealized investment appreciation of $21.292 million. This is distinct from net income.
Business changes and comparison with prior year
- Revenue growth reflected the acquisitions of New Dawn Technologies in December 2012 and ISD Technologies in September 2013. Technology-company revenue rose to $13.846 million, or 37% of consolidated revenue, from $2.918 million, or 9%, in FY2012, when only Sustain was included.
- The technology segment recorded a pretax loss of $4.138 million, versus a $2.188 million loss. New Dawn contributed $10.403 million of revenue and a $0.222 million pretax loss for its included period; ISD contributed $0.784 million of revenue and $0.090 million pretax income for September.
- Traditional-business revenue declined to $23.830 million from $28.956 million, and pretax income fell 14% to $8.707 million. Trustee-sale notice and related service-fee revenue decreased $4.454 million.
- Traditional advertising revenue fell 25% to $14.472 million; circulation revenue declined 3% to $6.346 million. Foreclosure notices published by the company fell 51% year over year.
- The acquisitions added $24.402 million of net cash outflows for investing activities, funded in part by $29.493 million of margin borrowings. Year-end intangible assets were $24.337 million and goodwill was $11.700 million.
Outlook, risks and unusual items
- Management anticipated fewer foreclosure notices and declining public-notice revenue in FY2014, with a significant decline in print-based earnings; it said expense reductions would not fully offset revenue losses. The filing cited economic conditions and California’s Homeowner’s Bill of Rights as factors in the foreclosure slowdown.
- Public-notice advertising and related fees were about 35% of FY2013 revenue; trustee-sale legal advertising alone was about 17%, down from 34% of FY2012 revenue. Legislative changes reducing required notices, or loss of a newspaper’s adjudicated status, could materially affect results.
- Management expected paper prices to rise in FY2014. Postage and paper costs, declining newspaper and court-rule subscriptions, online competition, and commercial-advertising weakness were additional risks.
- Software revenues depend on new customer wins, implementation completion and customer acceptance; project revenues may be delayed until acceptance. Continued software development costs are expensed and expected to weigh on earnings. Annual intangible amortization was estimated at about $5.235 million for FY2014–FY2017.
- Management stated it believed liquidity was adequate for the foreseeable future and identified potential borrowing against securities as an additional funding source. That capacity is subject to collateral values and investment-market risks.
- Ernst & Young gave the financial statements an unqualified audit opinion but issued an adverse opinion on internal control over financial reporting, identifying material weaknesses involving non-routine transactions and processes, segregation of duties, and reliability of system-generated reporting information. Management disagreed with the auditor’s material-weakness conclusions.
- The filing acknowledges that the 10-K and the first two FY2014 quarterly reports were not filed timely. Management attributed the delays to additional internal-control assessment and audit work.
- No dividends were paid in FY2013 or FY2012; the board did not expect distributions in the foreseeable future. Management also identified reliance on CEO/CFO Gerald Salzman as a key-person risk. Ordinary-course litigation was disclosed, with management not expecting a material adverse outcome.
Important facts for investors to verify
- Whether the anticipated FY2014 decline in foreclosure-related notices and print earnings occurred, and the pace of any offsetting cost reductions.
- Post-acquisition performance of New Dawn and ISD, including customer retention, installation-project completion and acceptance, and the recoverability of deferred project costs.
- Whether the preliminary ISD purchase-price allocation changed after third-party valuation, and whether acquired goodwill or intangibles required impairment.
- Investment portfolio concentration, unrealized gains, impairment exposure and the collateral coverage and interest cost of margin borrowings.
- Remediation of the auditor-identified internal-control material weaknesses and whether subsequent reports were filed on time.
- Potential changes in public-notice laws or adjudication status, and the effects of continued subscription and commercial-advertising declines.