Daily Journal Corporation — Form 10-Q Summary
Business context and period: The filing covers the fiscal first quarter ended December 31, 2011, compared with the three months ended December 31, 2010. Daily Journal publishes newspapers, websites and legal publications, provides public-notice advertising services, and operates Sustain, a provider of case-management software to courts and other government agencies. The interim statements are unaudited.
Financial results
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $7.920 million | $9.295 million | Down $1.375 million (15%) |
| Operating income | $2.260 million | $3.187 million | Down $927,000 |
| Operating margin | 28.5% | 34.3% | Down 5.8 percentage points |
| Pretax income | $2.586 million | $3.389 million | Down $803,000 (24%) |
| Net income | $1.706 million | $2.184 million | Down $478,000 (22%) |
| Diluted and basic EPS | $1.24 | $1.58 | Down $0.34 |
| Net margin | 21.5% | 23.5% | Down 2.0 percentage points |
| Cash from operations | $640,000 | $(110,000) | Improved $750,000 |
- Advertising revenue was $4.832 million, down from $5.770 million; circulation revenue was $1.671 million, down from $1.744 million. Advertising service fees and other revenue fell to $709,000 from $970,000; Sustain information-systems revenue fell to $708,000 from $811,000.
- Costs and expenses declined 7% to $5.660 million, including lower incentive-plan expense and professional-service fees. Dividends and interest income rose to $326,000 from $211,000. The effective tax rate was 34.03%, versus 35.56%.
- Comprehensive income was $5.625 million, including a $3.919 million after-tax unrealized investment gain.
- At December 31, cash and cash equivalents were $2.603 million, U.S. Treasury bills were $500,000, and marketable securities were $76.213 million. Current assets were $86.193 million and current liabilities $22.332 million; reported working capital was $63.861 million. Shareholders’ equity was $70.504 million.
- Operating cash flow was $640,000; investing activities used $1.095 million, including $13.581 million of securities purchases, offset in part by Treasury-bill maturities and sales. Capital expenditures were $114,000. No borrowings or debt balance are presented in the balance sheet.
Material changes and business drivers
- Traditional-business revenue was $7.212 million, down from $8.484 million, and pretax profit fell 18% to $3.030 million. Lower trustee-sale notice and related service-fee revenue was the main factor.
- Sustain revenue was $708,000, down from $811,000; its pretax loss widened to $444,000 from $287,000. Management cited lower consulting and support revenue, partly reflecting government budget constraints.
- Published foreclosure notices fell 26% year over year. The company said this slowdown was expected to continue, while commercial advertising was not expected to offset the decline.
- Management attributed the improvement in operating cash flow mainly to lower accounts receivable, partly offset by lower net income and reductions in accounts payable.
Outlook, risks and contingencies
- Management anticipated fewer foreclosure notices and declining related revenues in fiscal 2012. Public-notice advertising and related fees represented about 56% of total revenue; the smaller newspapers generated about 96% of public-notice advertising revenue.
- Sustain’s software-development spending is expected to materially affect results at least through fiscal 2012. It expensed $973,000 of personnel costs on development and implementation of its web-based case-management system during the quarter. Management reported installations in several courts and agencies, with additional installations in progress, but warned that unsuccessful development could impair Sustain’s ability to serve customers and compete.
- The company said operating cash flows and working capital should fund operations for the foreseeable future; it may also consider acquisitions. Management noted that investments are concentrated in six companies, so declines in one or more holdings could materially reduce equity or lead to impairment losses. Available-for-sale investments had $31.047 million of net-of-tax unrealized gains at quarter-end, and management judged unrealized equity losses to be temporary.
- The IRS dispute concerns approximately $700,000 of research and development credits for tax years 2002–2007. The company is contesting the proposed assessment in Tax Court and had a reserve of approximately $700,000; resolution is uncertain. Accrued interest related to unrecognized tax benefits was $286,000. Routine litigation was not considered likely to have a material effect by management.
- Management identified risks including government budget constraints, software-development and customer-acceptance uncertainty, changes to public-notice requirements, further declines in advertising or circulation, paper and postage costs, receivable collectibility, and dependence on key personnel. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether foreclosure-notice volumes and related advertising revenue continue to decline, and whether other revenue sources can offset the trend.
- Sustain’s progress in completing and obtaining customer acceptance of software installations, its future development costs, and its ability to secure government customers amid budget constraints.
- The composition, valuation, and concentration of the investment portfolio, including the effect of market-price changes on accumulated other comprehensive income and equity.
- The outcome of the IRS tax-credit dispute and any resulting tax, interest, or penalty exposure.
- Future operating cash flow, liquidity needs, and any investments or acquisitions pursued by management. The filing cautions that this quarter’s results are not necessarily indicative of full-year results.