The Dolan Company (NYSE: DM), a leading provider of professional services and business information to legal, financial and real estate sectors in the United States, today announced financial results for the three months ended June 30, 2012. “The second quarter was challenging for our two largest processing businesses,” said James P. Dolan, chairman, chief executive officer and president. "We continue to anticipate the backlog of pending and future mortgage foreclosures that we believe will work its way through the system. And our e-discovery business showed only single-digit growth because of lumpiness of revenues from larger clients due to timing of matters. However, as a result of new matters that are starting to be processed and our current pipeline, we believe our e-discovery business will be stronger in the second half of this year.” “Our Business Information segment tracked to our expectations and had a solid second quarter,” Dolan said. “The public notice advertising business showed modest growth while margins for the entire segment increased sharply compared to last year as a result of our employees’ hard work reorganizing and centralizing certain parts of the division.” Dolan said that during the quarter the pace of new mortgage default referrals had not yet changed materially. “Although we see signs of progress among the major mortgage servicers, we believe the required new procedures at the state and federal level, as well as political considerations, may be temporarily slowing the pace of new default referrals. However, we are encouraged that meaningful price increases instituted by Fannie Mae last week should benefit our law firm partners and the mortgage default processing industry going forward. We continue to view the default referral situation as deferred business, and believe that our National Default Exchange, or NDeX, is well positioned to gain market share and be the provider of choice for mortgage default services as the pace of default referrals improves,” Dolan said.
“Meanwhile, we experienced some challenges in our other processing segment, Litigation Support Services. Revenues for this segment increased by 3% during the second quarter, including 6% growth in our e-discovery business. However, given the current pipeline of new business, we believe we will see stronger second-half revenue from our e-discovery segment given new matters we have recently won. In fact, within the past 90 days, we have added three new clients that are S&P 100 companies. We are pleased that we continue to add very large and important companies as new clients, and we are optimistic about the revenue potential of those clients as they start to ramp over the next year,” Dolan said.
“Within our Business Information Division, we continue to see benefits from the good work by our management team. Although revenue for the segment was down 3% in the second quarter, we saw higher margins, lower operating costs, and overall operating income improvement of 31%. The division has centralized some of its operations and implemented work-sharing arrangements in which our local companies support each other more actively to achieve real savings,” Dolan said. He noted that public notice advertising revenue increased modestly during the quarter, which is the first year-over-year growth the company had seen in this revenue category in seven quarters. “Due primarily to purchase accounting adjustments related to previous acquisitions, in the second quarter, our total operating expense was reduced by $10.4 million on a non-recurring basis, to $52.4 million. Excluding the impact of these adjustments, total operating expenses would have been $62.8 million, down slightly from $63.0 million for the second quarter of last year,” Dolan added. “Overall, we believe our revenue challenges are short-term in nature and we are focused on finding growth opportunities throughout our businesses while being very mindful of costs. We have taken important steps to position ourselves for a better future in each of our businesses and remain optimistic about a resumption of growth in our default processing business and a re-acceleration of growth in our e-discovery business,” Dolan said.Full Year 2012 Guidance
Based on second quarter results and the outlook for the remainder of 2012, the company is revising its full-year financial guidance as follows:| 2012 Financial Guidance | ||
| (dollars in millions, except per share | ||
| numbers) | ||
| Total revenues | $265 – $278 | |
| Adjusted EBITDA | $43 – $51 | |
| Net income attributable to The Dolan Company per diluted share | $0.23 – $0.38 | |
| Cash earnings per diluted share | $0.49 - $0.63 | |
This guidance presumes no acquisitions for the remainder of 2012. It also assumes that there will be no additional material effect on results of operations from foreclosure-related government legislation, programs, investigations, litigation, or settlements, or from lender-based programs or halts. These include, but are not limited to, legislation, programs, and other matters detailed in “Regulatory Environment” and “Risk Factors” in the company’s 2011 Form 10-K, filed March 9, 2012, with the U.S. Securities and Exchange Commission.
Second Quarter 2012 Financial results for the three months ended June 30, 2012, and 2011 are as follows:| Dollars in thousands, except per share data | Three Months | Three Months | Year-over- | ||||||
| Ended | Ended | Year % | |||||||
| June 30, 2012 | June 30, 2011 | Change | |||||||
| (unaudited) | (unaudited) | ||||||||
| Total revenues | $ | 63,763 | $ | 68,387 | (6.8) | % | |||
| Professional Services Division revenues | 44,310 | 48,416 | (8.5) | % | |||||
| Business Information Division revenues | 19,453 | 19,971 | (2.6) | % | |||||
| Operating income (1) | 11,978 | 5,785 | 107.1 | % | |||||
| Net income attributable to The Dolan Company | 4,917 | 2,572 | 91.2 | % | |||||
| Adjusted EBITDA * | 10,085 | 12,972 | (22.3) | % | |||||
| Income from continuing operations attributable to The Dolan Company per diluted share | $ | 0.16 | $ | 0.09 | 77.8 | % | |||
| Cash earnings * | 2,640 | 5,983 | (55.9) | % | |||||
| Cash earnings per diluted share * | $ | 0.09 | $ | 0.20 | (55.0) | % | |||
(1) 2012 includes fair value and other adjustments on earnout liabilities in the amount of $10.4 million
Professional Services Division Results The Professional Services Division provides specialized processing services to the legal profession through its subsidiaries, NDeX, Counsel Press, and DiscoverReady. National Default Exchange or NDeX, is a leading provider of mortgage default processing services in the United States. Together, Counsel Press and DiscoverReady comprise the company’s litigation support services segment. Counsel Press is the largest provider of appellate services in the United States, and DiscoverReady provides outsourced discovery management, including document review and data hosting and processing services, to major corporations and law firms. Division revenues for the second quarter were $44.3 million, a decline of 8.5% from $48.4 million in the second quarter of 2011. The decline was primarily the result of lower NDeX file volume. NDeX received 63,100 mortgage default files for processing during the second quarter and generated $28.1 million in revenues. This compares to 80,800 files received for processing and $32.7 million in revenues in the second quarter of 2011. The total number of foreclosure files received in the second quarter decreased by 16% from last year. Litigation Support contributed $16.2 million in revenues during the second quarter of 2012, an increase of 3.1%, with the e-discovery business growing 6.4% during the quarter. Direct operating expenses within the Professional Services Division were down roughly 6% during the quarter as lower volumes and cost reduction efforts at NDeX were offset, in part, by the addition of ACT and investments in DiscoverReady. Selling, general and administrative expenses increased 10.8% on a year-over-year basis to $16.7 million. Once again, a modest decrease at NDeX was offset by the additional expense associated with the addition of ACT Litigation Services and investments in DiscoverReady. Excluding the impact of fair value and other adjustments on earn-out liabilities, total Professional Services Division operating expenses as a percentage of division revenues increased to 98.7% for the quarter, from 87.5% in the second quarter of 2011. The increase in operating expense was the result of negative operating leverage due to the revenue declines at NDeX, and lower than expected revenue at DiscoverReady.Business Information Division Results
The Business Information Division produces print and electronic legal publications, business journals, court and commercial media and other highly focused information products and services, operates Web sites and produces events for targeted professional audiences in about 20 geographic markets across the United States. Business Information Division revenues for the second quarter of 2012 were $19.5 million, a 2.6% decrease from $20.0 million in the second quarter of 2011. The decline in revenue reflected slightly slower display and advertising revenue, partially offset by modestly higher public notice revenue. This is the third consecutive quarter of sequential public notice revenue growth. The company attributes that to modest improvement in the public notice geographies served. Total operating expenses within the Business Information Division were $17.0 million during the second quarter of 2012, down 5.9% from last year. The reduction in expenses reflected the reorganization and centralization efforts implemented by senior management last year. For the second quarter of 2012, direct operating expenses decreased 6.5% to $7.3 million while selling, general and administrative expenses for the division declined by 3.6% to $8.6 million. Balance Sheet and Liquidity As of June 30, 2012, the company held $1.2 million of cash and cash equivalents, compared to $0.8 million at the end of 2011. During the second quarter of 2012, the company generated $15.8 million of cash from operating activities and $14.5 million of free cash flow, which is defined as net cash provided by operating activities minus capital expenditures. Deferred acquisition payments, primarily as a result of the ACT acquisition, were $14.4 million in the second quarter. Quarterly capital expenditures were $1.2 million. Days sales outstanding were 100.7 for the second quarter of 2012, which was up slightly from 99.1 days at the end of 2011, but down from 106.4 days at the end of the first quarter of 2012.Total debt outstanding at the end of the second quarter was $172.1 million, of which $42.5 million was under a term loan facility. Net debt was $170.9 million, down $4.7 million from the end of 2011. At June 30, 2012, the combined weighted-average interest rate on the company’s credit facilities was 3.7%. The leverage ratio at the end of the quarter was 3.3 times total debt to trailing twelve month pro forma adjusted EBITDA, up from 3.0 times as of March 31, 2012, but within the maximum of 3.5 times allowed for the quarter in the senior debt covenants.
Non-GAAP Financial Measures Generally Accepted Accounting Principles (GAAP) is the term used to refer to the standard framework of guidelines for financial accounting in the United States. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements. In addition to reporting financial results in accordance with GAAP, The Dolan Company reports the following non-GAAP measures:- Adjusted EBITDA, defined as GAAP income from continuing operations adjusted for the impact of the following: net interest expense resulting from the company’s net cash or borrowing position, which includes non-cash interest income or expense related to the changes in fair value of interest rate swaps; income tax expense; non-cash expenses, including depreciation and amortization, charges for stock options and restricted stock the company has granted, and fair value adjustments on earnouts recorded in connection with acquisitions; non-recurring items of income or expense, if applicable, including impairments of long-lived assets; and distributions paid to holders of noncontrolling interest;
- Cash earnings, defined as GAAP income from continuing operations adjusted for the impact of the following: noncontrolling interests; non-cash expenses, including non-cash interest income or expense related to the changes in the fair value of interest rate swaps, charges for stock options and restricted stock granted, fair value adjustments on earnouts recorded in connection with acquisitions, and amortization; certain non-recurring items of income or expense, including impairments of long-lived assets; and an adjustment to income tax expense related to the above reconciling items at the appropriate then-in-effect tax rate;
- Cash earnings per diluted share, defined as cash earnings divided by the number of weighted average diluted shares outstanding; and
- Free cash flow, defined as net cash provided by operating activities minus capital expenditures.
The following is a reconciliation of income from continuing operations to adjusted EBITDA (in thousands):
| Three Months Ended | ||||||||
| June 30, | ||||||||
| 2012 | 2011 | |||||||
| Income from continuing operations | $ | 5,571 | $ | 2,864 | ||||
| Interest expense, net | 1,991 | 1,365 | ||||||
| Income tax expense | 4,416 | 1,950 | ||||||
| Amortization of intangibles | 4,958 | 4,326 | ||||||
| Depreciation expense | 1,998 | 1,785 | ||||||
| Amortization of Detroit Legal News Publishing intangible | 377 | 377 | ||||||
| Non-cash compensation expense | 1,100 | 1,187 | ||||||
| Non-cash fair value adjustments on earnout liabilities recorded in connection with acquisitions | (9,883 | ) | 28 | |||||
| Non-recurring income | (520 | ) | (394 | ) | ||||
| Net distributions to holders of non-controlling interest | 77 | (516 | ) | |||||
| Adjusted EBITDA | $ | 10,085 | $ | 12,972 | ||||
| Three Months Ended | ||||||||
| June 30, | ||||||||
| 2012 | 2011 | |||||||
| Income from continuing operations | $ | 5,571 | $ | 2,864 | ||||
| Noncontrolling interests | (626 | ) | (168 | ) | ||||
| Non-cash compensation expense | 1,100 | 1,187 | ||||||
| Non-cash fair value adjustments on earnout liabilities recorded in connection with acquisitions | (9,883 | ) | 28 | |||||
| Amortization of intangibles | 4,958 | 4,326 | ||||||
| Amortization of Detroit Legal News Publishing intangible | 377 | 377 | ||||||
| Non-recurring income | (520 | ) | (394 | ) | ||||
| Adjustment to income tax expense related to reconciling items at effective tax rate | 1,663 | (2,237 | ) | |||||
| Cash earnings | $ | 2,640 | $ | 5,983 | ||||
| Income from continuing operations attributable to The Dolan Company per diluted share (GAAP) | $ | 0.16 | $ | 0.09 | ||||
| Cash earnings per diluted share | $ | 0.09 | $ | 0.20 | ||||
| Weighted average diluted shares outstanding | 30,356 | 30,211 | ||||||
| The Dolan Company | ||||||||
| Condensed Consolidated Balance Sheets | ||||||||
| (in thousands, except share data) | ||||||||
| June 30, | December 31, | |||||||
| 2012 | 2011 | |||||||
| ASSETS | (unaudited) | |||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 1,156 | $ | 752 | ||||
| Accounts receivable, including unbilled services (net of allowances for doubtful accounts of $1,447 and $1,416 as of June 30, 2012, and December 31, 2011, respectively) | 64,927 | 72,117 | ||||||
| Unbilled pass-through costs | 3,946 | 4,317 | ||||||
| Prepaid expenses and other current assets | 3,940 | 3,976 | ||||||
| Income tax receivable | 733 | 1,968 | ||||||
| Assets held for sale | 269 | 257 | ||||||
| Total current assets | 74,971 | 83,387 | ||||||
| Accounts receivable, long-term | 2,251 | 2,500 | ||||||
| Investments | 11,462 | 11,901 | ||||||
| Property and equipment, net | 18,278 | 19,263 | ||||||
| Finite-lived intangible assets, net | 203,022 | 212,950 | ||||||
| Indefinite-lived intangible assets | 283,039 | 283,039 | ||||||
| Other assets | 2,632 | 2,563 | ||||||
| Total assets | $ | 595,655 | $ | 615,603 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Current portion of long-term debt | $ | 7,831 | $ | 7,667 | ||||
| Accounts payable | 17,071 | 18,759 | ||||||
| Accrued pass-through liabilities | 8,407 | 8,820 | ||||||
| Accrued compensation | 6,298 | 5,189 | ||||||
| Accrued liabilities | 6,195 | 5,588 | ||||||
| Due to sellers of acquired businesses | 8,050 | 20,403 | ||||||
| Deferred revenue | 18,944 | 20,290 | ||||||
| Total current liabilities | 72,796 | 86,716 | ||||||
| Long-term debt, less current portion | 164,251 | 168,724 | ||||||
| Deferred income taxes | 25,941 | 20,739 | ||||||
| Due to sellers of acquired businesses | - | 12,687 | ||||||
| Other liabilities | 7,362 | 7,319 | ||||||
| Total liabilities | 270,350 | 296,185 | ||||||
| Redeemable noncontrolling interest | 9,174 | 12,726 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Common stock, $0.001 par value; authorized: 70,000,000 shares; outstanding: 30,983,477 and 30,576,597 shares as of June 30, 2012, and December 31, 2011, respectively | 30 | 30 | ||||||
| Preferred stock, $0.001 par value; authorized: 5,000,000 shares; designated: 5,000 shares of Series A Junior Participating Preferred Stock; no shares outstanding | — | — | ||||||
| Other comprehensive loss (net of tax) | (1,151 | ) | (1,285 | ) | ||||
| Additional paid-in capital | 298,695 | 294,476 | ||||||
| Retained earnings | 18,557 | 13,471 | ||||||
| Total stockholders’ equity | 316,131 | 306,692 | ||||||
| Total liabilities and stockholders’ equity | $ | 595,655 | $ | 615,603 | ||||
| The Dolan Company | ||||||||||||||||
| Unaudited Condensed Consolidated Statements of Operations | ||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Revenues | ||||||||||||||||
| Professional Services | $ | 44,310 | $ | 48,416 | $ | 92,215 | $ | 100,372 | ||||||||
| Business Information | 19,453 | 19,971 | 38,270 | 39,767 | ||||||||||||
| Total revenues | 63,763 | 68,387 | 130,485 | 140,139 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Direct operating: Professional Services | 21,643 | 22,936 | 45,060 | 46,438 | ||||||||||||
| Direct operating: Business Information | 7,284 | 7,789 | 14,452 | 15,598 | ||||||||||||
| Selling, general and administrative | 26,904 | 26,179 | 54,547 | 52,998 | ||||||||||||
| Amortization | 4,958 | 4,326 | 9,929 | 8,815 | ||||||||||||
| Depreciation | 1,998 | 1,785 | 4,099 | 3,701 | ||||||||||||
| Fair value and other adjustments on earnout liabilities | (10,403 | ) | 28 | (10,472 | ) | 358 | ||||||||||
| Total operating expenses | 52,384 | 63,043 | 117,615 | 127,908 | ||||||||||||
| Equity in earnings of affiliates | 599 | 441 | 1,024 | 1,189 | ||||||||||||
| Operating income | 11,978 | 5,785 | 13,894 | 13,420 | ||||||||||||
| Non-operating income (expense) | ||||||||||||||||
| Interest expense, net of interest income | (1,991 | ) | (1,365 | ) | (3,995 | ) | (2,973 | ) | ||||||||
| Non-cash interest income related to interest rate swaps | - | - | - | 286 | ||||||||||||
| Other income | - | 394 | - | 394 | ||||||||||||
| Total non-operating expense | (1,991 | ) | (971 | ) | (3,995 | ) | (2,293 | ) | ||||||||
| Income from continuing operations before income taxes | 9,987 | 4,814 | 9,899 | 11,127 | ||||||||||||
| Income tax expense | (4,416 | ) | (1,950 | ) | (4,345 | ) | (4,319 | ) | ||||||||
| Income from continuing operations | 5,571 | 2,864 | 5,554 | 6,808 | ||||||||||||
| Discontinued operations, net of tax | (28 | ) | (124 | ) | (188 | ) | (374 | ) | ||||||||
| Net income | 5,543 | 2,740 | 5,366 | 6,434 | ||||||||||||
| Less: Net income attributable to redeemable noncontrolling interests | (626 | ) | (168 | ) | (280 | ) | (387 | ) | ||||||||
| Net income attributable to The Dolan Company | $ | 4,917 | $ | 2,572 | $ | 5,086 | $ | 6,047 | ||||||||
| Earnings per share – basic and diluted: | ||||||||||||||||
| Income from continuing operations attributable to The Dolan Company | $ | 0.16 | $ | 0.09 | $ | 0.18 | $ | 0.21 | ||||||||
| Discontinued operations attributable to The Dolan Company | - | - | (0.01 | ) | (0.01 | ) | ||||||||||
| Net income attributable to The Dolan Company | 0.16 | 0.09 | 0.17 | 0.20 | ||||||||||||
| Decrease in redeemable noncontrolling interest in NDeX | - | 0.05 | - | 0.08 | ||||||||||||
| Net income attributable to The Dolan Company common stockholders | $ | 0.16 | $ | 0.14 | $ | 0.17 | $ | 0.28 | ||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 30,276 | 30,107 | 30,226 | 30,118 | ||||||||||||
| Diluted | 30,356 | 30,211 | 30,307 | 30,252 | ||||||||||||
| The Dolan Company | ||||||||||||||||
| Unaudited Condensed Consolidated Statements of Cash Flows | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||||||
| Cash flows from operating activities | ||||||||||||||||
| Net income | $ | 5,543 | $ | 2,740 | $ | 5,366 | $ | 6,434 | ||||||||
| Loss from discontinued operations | 28 | 124 | 188 | 374 | ||||||||||||
| Income from continuing operations | 5,571 | 2,864 | 5,554 | 6,808 | ||||||||||||
| Distributions received from The Detroit Legal News Publishing, LLC | 763 | 700 | 1,463 | 2,100 | ||||||||||||
| Distributions paid to holders of non-controlling interests | — | (438 | ) | — | (474 | ) | ||||||||||
| Gain on sale of investment | — | (394 | ) | — | (394 | ) | ||||||||||
| Non-cash operating activities: | ||||||||||||||||
| Amortization | 4,958 | 4,326 | 9,929 | 8,815 | ||||||||||||
| Depreciation | 1,998 | 1,785 | 4,099 | 3,701 | ||||||||||||
| Equity in earnings of affiliates | (599 | ) | (441 | ) | (1,024 | ) | (1,189 | ) | ||||||||
| Stock-based compensation expense | 1,100 | 1,187 | 1,901 | 2,024 | ||||||||||||
| Deferred income taxes | 3,713 | 28 | 3,713 | 28 | ||||||||||||
| Change in value of interest rate swap | — | — | — | (286 | ) | |||||||||||
| Amortization of debt issuance costs | 113 | 98 | 213 | 186 | ||||||||||||
| Non-cash fair value adjustment on earnout recorded in connection with acquisitions | (9,883 | ) | 28 | (9,952 | ) | 358 | ||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Accounts receivable and unbilled pass-through costs | 8,255 | (865 | ) | 8,225 | (4,984 | ) | ||||||||||
| Prepaid expenses and other current assets | 2,202 | 821 | 1,273 | 3,200 | ||||||||||||
| Other assets | 30 | (34 | ) | 31 | — | |||||||||||
| Accounts payable and accrued liabilities | 38 | (2,072 | ) | (75 | ) | (5,179 | ) | |||||||||
| Deferred revenue and other liabilities | (2,256 | ) | (1,192 | ) | (1,079 | ) | (686 | ) | ||||||||
| Cash from operating activities – continuing operations | 16,003 | 6,401 | 24,271 | 14,028 | ||||||||||||
| Cash from operating activities – discontinued operations | (207 | ) | (163 | ) | (231 | ) | (212 | ) | ||||||||
| Net cash provided by operating activities | 15,796 | 6,238 | 24,040 | 13,816 | ||||||||||||
| Cash flows from investing activities | ||||||||||||||||
| Acquisitions and investments | (145 | ) | (4,986 | ) | (145 | ) | (5,071 | ) | ||||||||
| Capital expenditures | (1,248 | ) | (1,664 | ) | (2,770 | ) | (3,904 | ) | ||||||||
| Escrow payment received on sale of investment | — | 394 | — | 394 | ||||||||||||
| Cash used in investing activities – continuing operations | (1,393 | ) | (6,256 | ) | (2,915 | ) | (8,581 | ) | ||||||||
| Cash used in investing activities – discontinued operations | 129 | — | 122 | (7 | ) | |||||||||||
| Net cash used in investing activities | (1,264 | ) | (6,256 | ) | (2,793 | ) | (8,588 | ) | ||||||||
| Cash flows from financing activities | ||||||||||||||||
| Net borrowings (payments) on senior revolving note | 1,500 | 2,500 | (2,200 | ) | (1,300 | ) | ||||||||||
| Payments on senior long-term debt | (1,250 | ) | (1,250 | ) | (2,500 | ) | (2,500 | ) | ||||||||
| Payment on unsecured notes payable | (627 | ) | (603 | ) | (1,247 | ) | (1,193 | ) | ||||||||
| Payment on capital leases | (84 | ) | (48 | ) | (183 | ) | (101 | ) | ||||||||
| Net payments of deferred acquisition costs and earnouts | (14,400 | ) | — | (14,400 | ) | — | ||||||||||
| Payments for repurchase of common stock | — | — | — | (1,691 | ) | |||||||||||
| Payments of deferred financing costs | — | — | (313 | ) | — | |||||||||||
| Net cash used in financing activities | (14,861 | ) | 599 | (20,843 | ) | (6,785 | ) | |||||||||
| Net change in cash and cash equivalents | (329 | ) | 581 | 404 | (1,557 | ) | ||||||||||
| Cash and cash equivalents at beginning of the period | 1,485 | 2,724 | 752 | 4,862 | ||||||||||||
| Cash and cash equivalents at end of the period | $ | 1,156 | $ | 3,305 | $ | 1,156 | $ | 3,305 | ||||||||