Daily Journal Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012, compared with fiscal 2011. The filing does not provide a clear standalone fourth-quarter financial summary; figures below are full-year results.
Business context
Daily Journal publishes newspapers, magazines and specialized information services, represents newspapers for public-notice advertising, and operates Sustain Technologies, which supplies case-management software to courts and other justice agencies. Its traditional publishing and advertising business remains the larger operation. In December 2012, after year-end, the Company acquired New Dawn Technologies, a similar court-software provider.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $31.874 million | $34.513 million |
| Operating income | $8.682 million | $10.802 million |
| Income before taxes | $7.901 million | $12.000 million |
| Net income | $5.541 million | $7.840 million |
| Diluted earnings per share | $4.01 | $5.68 |
| Operating cash flow | $6.959 million | $10.317 million |
- Revenue fell 8%, primarily due to a $2.216 million (17%) decline in trustee-sale notice and related service-fee revenue, plus lower circulation revenue. Operating expenses declined 2% to $23.192 million.
- Operating margin was approximately 27.2%, down from 31.3%; net margin was approximately 17.4%, down from 22.7%.
- FY2012 included $2.855 million in other-than-temporary investment impairment charges. Dividends and interest income increased to $1.967 million from $1.233 million.
- Traditional-business revenue was $28.956 million and operating income was $10.877 million. Sustain revenue was $2.918 million, with an operating loss of $2.195 million, versus a $1.622 million loss in FY2011.
- Cash and cash equivalents were $985,000 at year-end; Treasury bills were $800,000 and marketable securities were $102.156 million. Working capital was $80.591 million. Year-end balance-sheet debt is not reported; the Company borrowed $14 million in December 2012 to fund the New Dawn acquisition, pledging marketable securities as collateral.
- Investments had a September 30, 2012 fair value of $102.956 million including Treasury bills, against an adjusted cost basis of $50.492 million, and were concentrated in six companies. Net unrealized gains were $52.464 million.
Changes, outlook and risks
- Foreclosure notices published by the Company declined 20% in FY2012. Management expected further declines and lower foreclosure-advertising revenue in FY2013, with no expected offset from commercial advertising.
- Public-notice advertising and related fees represented about 56% of FY2012 revenue; trustee-sale legal advertising alone represented about 34%. The Company warned that statutory changes reducing required notices, or loss of a newspaper’s adjudicated status, could materially harm revenue. One California publication was discontinued after an appellate ruling concerning its adjudication history.
- Management expected paper prices to rise in FY2013. Postal costs, competition from online classified services, declining newspaper and court-rules subscriptions, customer credit risk, and California economic conditions were also identified as concerns.
- Sustain’s consulting and support business faced government budget constraints. Software development and implementation personnel costs were $4.415 million in FY2012, expensed as incurred before technological feasibility. Management said sustained development spending would remain significant; unsuccessful development could impair Sustain’s competitive position and customer support.
- The New Dawn acquisition was completed after year-end for $14 million, financed with a margin loan at a variable rate tied to the Federal Funds Rate plus 50 basis points; interest is payable monthly. New Dawn served more than 350 justice agencies. The filing does not provide post-acquisition operating results.
- The Company said it believed existing cash flows and working capital could fund foreseeable needs. It paid no dividends in FY2012 or FY2011 and did not expect distributions in the foreseeable future.
- Other notable matters: an IRS settlement resolved the Company’s tax positions for research credits claimed for 2002–2007, eliminating the year-end uncertain-tax liability. Management reported no litigation expected to have a material adverse effect. The independent auditor gave an unqualified opinion on the financial statements; it did not audit internal control effectiveness.
Important facts for investors to verify
- New Dawn’s post-acquisition performance, integration costs, and the margin loan balance, rate exposure, and pledged-securities terms.
- Whether foreclosure-related revenue continues to decline, and whether public-notice laws or newspaper adjudications change.
- The concentration and market-value volatility of the investment portfolio, including potential impairment charges and effects on equity and liquidity.
- Sustain’s ability to complete and commercialize its software development, win court projects, and reduce operating losses.
- Whether circulation, commercial advertising, and customer collections stabilize enough to offset pressure on public notices.