The Dolan's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Mar. 8.13 | About: Dolan Co (DOLNQ)

The Dolan Company (NYSE:DM)

Q4 2012 Earnings Call

March 8, 2013 8:30 am ET

Executives

Robert J. Evans – Director-Investor Relations

James P. Dolan – President, Chairman and Chief Executive Officer

Vicki J. Duncomb – Vice President and Chief Financial Officer

Scott J. Pollei – Executive Vice President and Chief Operating Officer

Analysts

George F. Sutton – Craig-Hallum Capital Group LLC

Jason M. Ursaner – CJS Securities, Inc.

Michael J. Grondahl – Piper Jaffray, Inc.

James C. Goss – Barrington Research Associates, Inc.

Rob B. Kirkpatrick – Cardinal Capital Management LLC

Operator

Welcome to the Dolan Company Fourth Quarter Earnings Conference Call. My name is Sandra, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Bob Evans. Mr. Evans, you may begin.

Robert J. Evans

Thank you, operator. Good morning ladies and gentlemen, and welcome to the Dolan Company’s fourth quarter 2012 earnings call. On the call today are Jim Dolan, Chairman, Chief Executive Officer and President; Scott Pollei, Executive Vice President and Chief Operating Officer; and Vicki Duncomb, Vice President and Chief Financial Officer.

By now, you should be able to access our fourth quarter earnings release, which we issued today at approximately 5 am Eastern. If you haven’t seen our release, you can find it on the Investor Relations Section of our website at www.thedolancompany.com. We also posted a slide presentation supplementing this conference call on our website. Today’s earnings release and the slide presentation contain a reconciliation of GAAP financial measures to the non-GAAP measures we will discuss.

Before we begin, I’d like to remind everyone of the Safe Harbor statement. During this call, we will make forward-looking statements including statements about beliefs, expectations, goals, projections, guidance for 2013 and circumstances we expect to affect our future operating results, including trends we see in mortgage foreclosures, efforts to mitigate foreclosures, public notice advertising and e-discovery.

These forward-looking statements are subject to risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed in, or implied by, these statements. Information about such risks and uncertainties is contained in the Company’s filings with the SEC, in particular the risk factor and forward-looking statement sections of the Company’s quarterly and annual reports.

And now, I will turn the call over to Jim Dolan.

James P. Dolan

Thanks, Bob, and thanks to all of you for joining us today. I think it’s fair to say that 2012 was the challenging year. It was affected by continued delays and foreclosure starts as the industry went through the process of identifying and deploying new regulations and procedures, a process that continues even today.

For most of the year, we saw stability and consistent free cash flow from our Business Information division. Importantly, we saw strong second half growth in our e-discovery business after overcoming some integration challenges in the first half of 2012.

For the fourth quarter, our results were mixed. We continue to see softness in our default processing business and our related public notice advertising saw a decline in the fourth quarter after having stabilized in the first three quarters.

Our e-discovery business continue to perform well. We saw a double digit organic growth in DiscoverReady as the strong business trends we experienced in the third quarter continues through the fourth quarter.

Let’s talk in a little more detail about our National Default Exchange or NDeX. Previously, we were cautious about default referral volumes in the fourth quarter due to implementation of new federal procedures. As cautious as we were, the pace of the referrals was even slower than we anticipated. There were several reasons for this; each mortgage servicer is following its own timeline in deploying the new procedures to start each foreclosure referral and nearly all of the timelines are slow.

New National Servicing Standards in California Homeowners Bill of Rights introduced in January 2013 continued to cause delays and to depress referral volumes. The political environment is harshly pinative for servicers making any mistakes. This makes them very conservative and very slow to refer to foreclosure. We continue to expect an increase in default referrals, especially in light of the industry’s backlog of delinquent mortgages, but we don’t know when the increase will begin.

Near term visibility of referrals for index is unclear. Given this uncertainty, we have taken and continued to take even more aggressive steps to improve our EBITDA margins. We are doing this by increasing fees, by reducing headcount, and by eliminating cost where possible. We are cautiously optimistic that these cost reductions along with price increases and expected future increases in referral volumes will improve our full year 2013 EBITDA margins at Index.

As I mentioned earlier, we are pleased with the fourth quarter performance of our e-discovery company. DiscoverReady reported 14% revenue growth this quarter, which compares especially well to a strong fourth quarter last year. We saw growth from both new and existing clients and DiscoverReady’s client and sector diversification is going very well. For the second straight quarter, DiscoverReady represents the greater share of our overall business mix, accounting for approximately 34% of total revenues for The Dolan Company’s fourth quarter.

The Litigation Support segment represented 40% of total revenues. We expect this trend to continue in 2013. Our next milestone goal is becoming a $100 million e-discovery business is in our sites, although we certainly don’t plan to stop there. We see many opportunities for growth in this industry and we plan to take full advantage.

In our Business Information Division, fourth quarter revenues declined by 9%. Basically, our public notice advertising revenues experienced the same circumstances as index. Fourth quarter slowdown of default referrals also slowed public notice advertising related to foreclosures. This reversed the trend. In the first three quarters of 2012, we were starting to see stabilization and even modest growth in public notices.

Although, revenue categories in the Business Information Division were flat or down slightly, we continued to work on improving this division’s cost structure to grow its EBITDA margins. Today, in our earnings release, we are departing from our past practice and providing 2013 revenues and adjusted EBITDA guidance on only a portion of our business, the guidance excludes our index operations. The regulatory and marketplace disruptions in default processing have made it impossible for us to forecast near-term default referral volumes. The visibility simply isn’t there.

Index aside, we are providing guidance as to what we believe the rest of our businesses, will it be achieving during the year. For 2013, we expect DiscoverReady to continue growing revenues at a double digit rate. This means in Litigation Support segment should be able grow at rate in the high single to lower double digit rates with positive EBITDA leverage. Given the near term headwinds of default related public notice advertising, in 2013, we expect our Business Information division revenues and EBITDA to be flat or modestly down in single digit percentages compared to last year.

Our guidance excludes any effect of future M&A activity and also is subject to assumptions which are detailed in our earnings release now available on our website. Now, I’ll turn the call over to Vicki.

Vicki J. Duncomb

Thank you, Jim, and good morning everyone. Our fourth quarter financial results reflect the new federal procedures affecting our default processing business and related public notice advertising as the slowdown in foreclosure referrals continue. However, we’re pleased with our fourth quarter performance in the litigation support services segment, particularly at our DiscoverReady e-discovery business.

Our fourth quarter revenue decreased by 6.7% to $62.9 million compared to prior year. Similar to the third quarter, we experienced two very different trends in the professional services division. Litigation revenue driven by the strength in the e-discovery business reported a strong quarter, up 12.3% to $25.4 million. DiscoverReady, our e-discovery business, grew by 14% this quarter and once again saw strength from both new and existing clients.

In fact revenue from new clients accounted for more than 25% of e-discover revenue this quarter. At Index, revenue was down 22.4% to $19.4 million due to the implementation of new federal guideline that we mentioned during our third quarter conference call.

Although, we were cautious about the impact on fourth quarter referral volumes due to a meaningful change and procedures, the slowdown in foreclosure referrals was greater than we anticipated. Revenue for the Business Information segment was down 8.8% as public notice advertising experienced the slowdown for the same reasons that affected index.

Net loss attributable to The Dolan Company was $2.5 million, or $0.08 per diluted share, while adjusted EBITDA declined 58% to $6 million. The adjusted EBITDA decline was primarily the result of the negative operating leverage that came from 31% decline in default files received for processing. It also includes $2 million of non-recurring items, including severance.

The company’s direct operating margin declined to 47.7% from 56.1%. This is primarily the result of negative operating leverage experienced to index from this quarter’s revenue decline, as well as some non-recurring items that impacted the fourth quarter.

Our SG&A expense for the company was essentially flat at $25.5 million. Modest SG&A increases in index were offset by similar expense declines in the Litigation Support segment. SG&A expense in the Business Information Division was flat.

Looking forward, we are moving aggressively to cut cost at index and we continue to focus on improving our cost structure in all our businesses where appropriate. We have already made significant investments in our e-discovery business and we expect continued growth as a result of these investments and the overall strength of the e-discovery industry.

Subsequent to the end of the fourth quarter, we strengthened our balance sheet by selling 8.5% series B cumulative preferred stock, with a face value of $17.5 million, with the proceeds used to reduce our senior debt. This preferred stock now trades on the New York Stock Exchange under the symbol DM.PrB.

During the fourth quarter, we regenerated cash from operations of $15.6 million and free cash flow of $13.1 million. For the full year, our cash flow generation of $29.2 million was strong. As we have stated previously, we will continue to use our free cash to pay down debt.

At the end of the quarter, our net debt was $162.5 million, down from $174.6 million in the third quarter of 2012 and $175.6 million from the end of last year. The decline in net debt from the end of 2011 includes $14.4 million in deferred acquisition payments. Our leverage ratio at the end of the quarter was 4.2 times debt to trailing 12 months pro forma adjusted EBITDA, which was within our senior debt covenants.

I would also like to mention that as a result of our previously announced third quarter restructuring of our Florida index operations, we believe we will receive a refund of approximately $10 million in the second quarter of 2013 for previously paid income taxes. We plan to use this payment to further reduce our debt.

Clearly, 2012 was a very challenging year and we are taking many steps seeking to right size our cost structure index and throughout the company. The expansion of new meaningful clients to DiscoverReady is encouraging and we feel very excited about the growth opportunities we see at DiscoverReady, we will continue to work hard to improve our earnings and cash flow, and will try to de-leverage our balance sheet as quickly as possible.

And now I’ll turn the call over to Jim Dolan.

James P. Dolan

Thanks Vicki. Although we do have our near-term challenges primarily in the foreclosure related businesses, we are resilient and we are encouraged about our future. We are very excited about our e-discovery business, and the number of Blue Chip clients that we have been able to add with client base in the past year. We believe DiscoverReady can be a much bigger and more profitable company than it is today, and we see multiple avenues of growth.

We also believe that the backlog of mortgage default referrals with related public notices will start to flow for Index and for public notice more consistently at some point in the future. Meanwhile we are cautiously optimistic that the significant cost reduction efforts we are carrying out now will improve EBITDA margins in 2013 and beyond. With great focus, energy and determination, we are evaluation every part of The Dolan Company to find new avenues of growth, to expand revenues and to reduce costs. We understand investor frustrations and we are working hard to improve the results of the Company.

With that I’ll turn the call over to the operator for questions.

Scott J. Pollei

I’m sorry operator, one final point, I want to make before we go to questions. Our guidance does not include Index operations, but it does include corporate overhead. So just want that to be clear, now operator please let’s go to questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions)

And the first question is from George Sutton from Craig-Hallum. Please go ahead.

George F. Sutton – Craig-Hallum Capital Group LLC

Craig-Hallum, okay. George Sutton from Craig-Hallum. Given that reality track numbers have come out for January and they were down quite a bit, California has been down quite a bit due to the homeowner store rights. Can you give us the sense of how your results are relative to the results we’ve been seeing from a macro perspective?

James P. Dolan

You mean the January results, or you mean the fourth quarter results?

George F. Sutton – Craig-Hallum Capital Group LLC

Correct. So as we look at, we’ve started the year, we’ve obviously gotten all the numbers from the public sources is, are you seeing anything tracking differently than that?

James P. Dolan

Not really. The January is, I think understandable and contacts of a couple of things. One is, what we saw from the end of December is continuing, so it hasn’t stopped the floor for mortgage default referrals, but it’s not a very fast pace. And we have some new elements that have been experienced in the first quarter specially.

The full referrals has become more and more subject to individual decisions by the servicers that used to have until actually last year more of a common experience they were subject to same regulatory moves, the same settlement discussions, now is more in the room of their individual decisions about foreclosure referrals.

And during the first quarter, for example, we had one of the large servicers without any events notices put a 45-day freeze on everything. Totally unexpected, didn’t see that coming, I don’t keen about in our industry did. It’s a wild card that actually was a factor in our decision about guidance. You’re seeing that kind of individual decision making now that makes it harder to forecast, but we’ve seen a lift in some referral areas, we’ve seen a drop-off in some, and we have seen the strange wildcard decisions.

George F. Sutton – Craig-Hallum Capital Group LLC

Got you. Okay. Now you had refinanced late last year or got a new set of terms relative to covenants, can you talk about where are we now relative to those covenant levels given the results you posted in some of the near-term outlook?

Vicki J. Duncomb

George, this is Vicki. I will speak to that. Certainly in Q4, we are within our senior debt covenants. Looking forward, we work very, very hard to stay within the requirements of our covenants and the credit agreement, but given the uncertainty in Index and public notice businesses, it’s a challenge, it’s just always a – but we are working very hard at it. If we fall short, we expect to seek a waiver from our lenders and we have been successful at that in the past.

George F. Sutton – Craig-Hallum Capital Group LLC

Got you.

Scott J. Pollei

George, I would add to that. As we are talking about covenants, those are the financial metrics or whatever that are embedded in the credit agreement. We do not anticipate, we never had a problem paying our bills. We have never had a problem paying any of our debt and we don’t anticipate that in the future.

George F. Sutton – Craig-Hallum Capital Group LLC

Sure.

James P. Dolan

We have been reducing our debt. We expect to continue reducing the debt and all payments will be made easily.

George F. Sutton – Craig-Hallum Capital Group LLC

So your numbers relative to our expectations in the quarter were actually pretty good except for gross margins and Vicki, you mentioned that there was the negative leverage from the lower foreclosure business, but you also mentioned some non-recurring items, I just wanted, if you could pull those out, so we understand where the real gross margin numbers might have been?

Vicki J. Duncomb

It’s couple of things, it’s primarily related to personnel, there was some severance items in there, there is a little bit of extra healthcare type cost that, because we are self insured go up and down from quarter-to-quarter.

George F. Sutton – Craig-Hallum Capital Group LLC

Understand, okay. Thanks guys.

Operator

Thank you. And the next question is from Jason Ursaner from CJS Securities. Please go ahead.

Jason M. Ursaner – CJS Securities, Inc.

Good morning. Just first to follow-up on the outlook for index, not in guidance. I’m just trying to better understand the various rules and delays that are impacting the foreclosure start. So the new federal guidelines that you’re talking about, are they all held now under the Consumer Financial Protection Bureau guidelines, and then the delays you’re talking about, is it the initial two-week notification period from the settlement, internal delays at your individual services, and then also the change to a fourth-month delinquency before you can initiate to start as part of those the CFPB guidelines, or are there other delays you’re also talking about?

James P. Dolan

Well, certainly the CFPB guidelines are the number one nationally; California has its own set as you know. And then Jim mentioned that, one of our large customers in February instituted its own 45-day stop, where they would say, we’re going to send your file, but we don’t want you to start it as we go through our files one last time to make sure that all the loss mitigation efforts have been made in document and those things. So it’s really a combination of those things George, you’re not George, but Jason.

Jason M. Ursaner – CJS Securities, Inc.

Okay. And the last one, the four-month delinquency that’s part of the CFPB. Do you see that is essentially creating another one-month delay or the cure rates on mortgages that had been three months delinquent, it’s still very well, or is that more of a permanent loss, or you do see some mortgages dropout?

Vicki J. Duncomb

I think it’s a one-month delay, and I don’t know that, I’m not sure that services were still pushing step out automatically at 90 days anyway. So in any event, it would be a deferral.

Jason M. Ursaner – CJS Securities, Inc.

Okay. And all the delays and changes in various programs, it has allowed time for the overall size of the delinquencies to shrink, especially with some of the negative equity improving. So when you look at the front end size of the foreclosure problem, how do you look at that today versus what it was one or two years ago, where you were more excited about the opportunity?

James P. Dolan

It’s clearly been coming down. At one point, the analysts were talking about 5 million loan final of pre-delinquencies, sorry pre-foreclosures. The current estimate that the number we’re hearing from a lot of sources that we considered to be reliable is about $3 million.

We also think that the secure rate, the term you used few minutes ago is getting lower because those loans most easily changed or redeemed somehow have been done and in fact taking the low hanging fruit, the ones that are left were more difficult, more challenged, their home may be vacant, homeowners may not want to become current again.

So the rate of cure, we think is becoming smaller and smaller. But as recently in the last week, analysts have followed the sector, there is one research we’re talking about 3 million loans out there, still you got to go to foreclosure system.

Jason M. Ursaner – CJS Securities, Inc.

Okay. And even in good economic environment, I mean the foreclosure market has always been a part of that market or things like refinances in the qualified mortgage, I mean does that changing the – what you would call a normal foreclosure environment of new loans that are part of these the pre-foreclosure of 3 million loans you just talked about?

Scott J. Pollei

That’s a very good question. If you look at the quality of loans that are being issued now, I think we had a couple of years of very high standards being opposed upon mortgages and that implies there will be fewer foreclosures downstream as these loans age. But lately, we have seen some pretty aggressive lending practices and some people are talking about a return to some of the past mistakes. And that’s true, within two or three years, you may see some sort of an up wave of these loans going bad. It’s too soon to tell you most of these, it takes a while for them to go bad, but we see signs that some of the old practices are beginning to come back.

Jason M. Ursaner – CJS Securities, Inc.

Okay. And looking at the guidance for the other businesses, I’m a little unclear how you are getting to the revenue of $160 million to $170 million. The face of the goal for DiscoverReady and ACT in 2013, is that $100 million target. Counsel Press has sort of been steady in the $15 million range. And the Business Information side, even on a depressed tough foreclosure levels still trending around $70 million and that’s without any traction of a subscription business. So I’m just wondering if you could breakdown a little more how you are getting to that revenue figure and guidance.

James P. Dolan

Well, I think what we said Jason was double digit growth for the litigation support segment, which would include DiscoverReady and Counsel Press. We said that we can, I also think what we said was, we can see at some point $100 million revenue for the e-discovery business, but we’re not forecasting that we’re going to get there this year.

Jason M. Ursaner – CJS Securities, Inc.

Okay, I appreciate all the commentary. Thanks.

Operator

Thank you. And the next question is from Mike Grondahl from Piper Jaffray. Please go ahead.

Michael J. Grondahl – Piper Jaffray, Inc.

Yeah. Could you talk a little bit about the cost you’ve taken out of the index business and kind of you currently have a platform there that’s sort of setup and anticipating a certain level of file, where are you positioned today for that.

Scott J. Pollei

We started the process Mike reducing headcount at Index in Q4, but to be honest we have intensified those efforts more in Q1, and we’re not providing guidance for Q1 today, but the impacts that we’ll see from those reductions, effects will really come in Q2, Q3, and Q4 of this year, we struggled we have been challenged in the last year or two balancing the maintaining capacity with what the file referrals were, and we have not been able to get in front of the referral clients with our cost structure we’re aggressively trying to get to that point now.

Michael J. Grondahl – Piper Jaffray, Inc.

Is sort of way we can think about if you’re doing 30,000, 40,000, 50,000 files where is profitability can get, what level of files do you need for what you sort of, let’s say restructure.

James P. Dolan

Well our goal is to get to a point of profitability with the referrals that we’re currently getting today, we’re working hard to get to that point. We have been successful over the last five months in reducing the inventory has been imbedded in each of the law firms and helping them push those out in the back door that’s allowing us to manage the headcount better, but our goal is to get right sized for the current volume in the near-term.

Michael J. Grondahl – Piper Jaffray, Inc.

Got you, and how should we just think about can Index generate positive EBITDA in ’13 or is that something that’s off the table.

Scott J. Pollei

No, that’s certainly our intention that’s what we’re working very hard to achieve, yes.

Michael J. Grondahl – Piper Jaffray, Inc.

Okay. But is it fair to think much more backend loaded?

James P. Dolan

Yes, it is. But backend loaded for sure. I don’t know much more backend loaded, but we are working hard to make things happen as quickly as we can.

Michael J. Grondahl – Piper Jaffray, Inc.

Okay.

James P. Dolan

The sequential approval, I should mention Mike that behind the scenes, there has been a change in our approach to this that may help you to understand. We have been talking for quite a while about service standards and needing to be ready when the foreclosure of volume resumes. Our thinking has migrated some on that point, because we now understand that its very hard to predict when the volume will increase and we also see around us much less of a competitive issue involving other firms that might take market share away from us.

So given that, we are saying we are much more intend on managing to a bottom line and we are moving that way pretty aggressively.

Michael J. Grondahl – Piper Jaffray, Inc.

Good, good. And what interest rate is sort of embedded in your guidance for 2013?

Vicki J. Duncomb

5.5%.

Michael J. Grondahl – Piper Jaffray, Inc.

Okay. And then just last question. Could you talk a little bit about free cash flow ranges for 2013? I mean you had a very strong free cash flow generation in 4Q. And if you could just give us some ranges there that maybe exclude that $10 million of tax refund. We can kind of get a sense for what you have to throw against that debt in 2013?

Vicki J. Duncomb

Mike, we have always historically done a little bit better than 50% free cash flow, the EBITDA and we are really – that’s our goal and I think in terms of our planning purposes, we would stay around that number.

Michael J. Grondahl – Piper Jaffray, Inc.

Okay.

Vicki J. Duncomb

And as we mentioned continually that would go down to pay off debt in just…

Michael J. Grondahl – Piper Jaffray, Inc.

Right. And that does exclude the $10 million refund, is that correct?

Vicki J. Duncomb

That is correct.

Michael J. Grondahl – Piper Jaffray, Inc.

Okay, great. Thanks a lot.

Operator

Thank you. And the next question is from Jim Goss from Barrington Research. Please go ahead

James C. Goss – Barrington Research Associates, Inc.

All right, thanks. One follow-up to a discussion you are having little bit ago about just the current state of the default referrals. I'm wondering if improvement in this overall market which as you mentioned does reduce the negative equity situation. Does this help by exposing the foreclosures not a function of macro events and therefore put more pressure to have those resolved and at least put into the pool you can work with.

James P. Dolan

Possibly, the banks we know are aware of the serious of the delinquent loans of $3 million we’ve talked about earlier in the call. I think they are interested in putting those through the system and getting rid of the houses, so we don't say the bank balance sheet is certainly going to be increase as the economy improves, as the housing market looks like its showing more life. Some analysts we talked and we follow in fact worry that the banks’ release of homes putting into the system I just described were actually slow the housing recovery, because it will change the balance in the supply and demand. But clearly that’s something a factor, Joe.

James C. Goss – Barrington Research Associates, Inc.

All right. So that sort of the lever that’s being pulled right now, the balance between what it might do to the overall improvement and that, okay, got to get aside of this?

James P. Dolan

Well, we think so, but obviously the banks as I said in the early part of the call are incredibly risk averse and they are afraid of being shot out and lot of people want to shoot at them, so that's a big factor in their decision making, I'm sure.

James C. Goss – Barrington Research Associates, Inc.

Okay. And then with regard to e-discovery, I believe Vicki said new clients were about a quarter of the volume that was created and I’m wondering what takes your discovery to the next level. Is it a continuation of this new client trend, or the value of the business per client sort of the penetration, or some balance between them and what such factor would have more of an influence?

James P. Dolan

It’s a combination, Jim, you really know that it’s – bringing those new customers in, and then getting more and more from each of those individual customers. And that’s what the team has really been successful at is bringing them in, getting the one or two matters that they start with doing a fantastic job with that and having the customers just continue to push more our way.

James C. Goss – Barrington Research Associates, Inc.

Early on was the your latest acquisition as you’re talking about cross-fertilization possibilities, because the customer races weren’t exactly the same. And are you seeing a lot of that playing out the way you expected? And are you building confidence with the new clients along the lines you’re just talking about, Scott?

Scott J. Pollei

We have totally integrated the operation both from a processing and sales standpoint, Jim. And what we’re seeing is that, the combined efforts are helping us win and serve the new engagements. So it’s really a combination of cross-fertilization, but I would say as much as just having greater scale and pulling it altogether.

James C. Goss – Barrington Research Associates, Inc.

Okay. And just a couple of housekeeping questions, there was a comment in the press release about the Florida restructuring, and The Dolan Company who have net operating loss for the year. So I presume that even though is future tense you meant 2012 and this wasn’t a forecast for 2013?

Vicki J. Duncomb

Correct.

James C. Goss – Barrington Research Associates, Inc.

Yeah, okay. The $2 million of non-recurring items that included to severance, I know you charter [pick] non-recurring items, but the severance this year is something that might be more predictable, is there more of that should be factored into numbers.

Vicki J. Duncomb

Absolutely, as Jim mentioned we are aggressively moving to scales of business index, but it just, it’s impossible to tell you what the dollar amount might be at this time.

James C. Goss – Barrington Research Associates, Inc.

And those $10 million tax refund in the second quarter flow through the income statement, will it just be an adjustment to tax and that will be the base numbers, we are looking at or just it get removed I guess maybe on the non-GAAP basis.

Vicki J. Duncomb

It’s in the 2012 numbers already.

James C. Goss – Barrington Research Associates, Inc.

Oh, it is, okay.

Vicki J. Duncomb

Yeah.

Scott J. Pollei

Those are receivables on the balance sheet for it.

James C. Goss – Barrington Research Associates, Inc.

Okay, that’s it for now. Thanks.

Operator

(Operator Instructions) And the next question is from Rob Kirkpatrick from Cardinal Capital. Please go ahead.

Rob B. Kirkpatrick – Cardinal Capital Management LLC

Good morning, could you talk about what acquisition or earn out payments you have in the coming year, and then if Jim could talk about the M&A environment and what the appetite is to do anything in that sector, thank you so much.

James P. Dolan

Rob there is no earn out payments left, from any of our acquisition, our DiscoverReady partners have input rate later this year, that they can exercise it if they chose that, we’ll have to see what they want to do with that, and our index partners had a input rates that last I think in February, they did not exercise. Other than that, there is no earn-out payments. The balance sheet does have – some money has already accrued, but nothing new.

Rob B. Kirkpatrick – Cardinal Capital Management LLC

And so, is DiscoverReady partners exercise that put right leader in 2013, can you give us a range of what kind of cash might be required?

Scott J. Pollei

Well, there is an amount on the face of the balance sheet, it’s about $7.2 million right now that’s on there. And but that’s subject to the bank covenants and things like that, if we have the cash availability and compare right away, if we can then it’s under the terms of the agreement, it coverts to a three-year note, and obviously that would always subject to discussion at that time anyway, so.

Rob B. Kirkpatrick – Cardinal Capital Management LLC

And that would be the balance of their ownership in the business or that’s half of the balance of the ownership?

Scott J. Pollei

They have the right from November to February to put up to all of their balance of their business. And it would be a – it’s a fair market value calculation at that point, Rob, so it depends on, obviously what happened between now and then, it could go up, it could go down. So the amount of the 12/31 balance sheet is a point in time estimate.

Rob B. Kirkpatrick – Cardinal Capital Management LLC

Right. Okay, and Jim, the M&A environment?

James P. Dolan

Yeah. Our primary focus now is in paying down debt and strengthening our balance sheet, and so I don’t see any acquisitions in the near-term. That said, we never stop looking at things, because it can take a while to get something going when you buy something interesting. So we are looking at a number of things and where I would consider a couple of normal course of business. Strategically, as I look at parts of the company, I don’t want to buy anything in the index space [counsel press] has really no competitors worth buying. DiscoverReady has what it needs strategically to grow. We are an integrated balanced business now there is charging ahead very strongly. So that things really need is there. In Business Information, we cripple a little bit in the last year couple of small divestitures there, but we've got what we need there too. So we don't have any crying needs to buy something here, we’re just in kind of monitoring all the way pay down debt.

Rob B. Kirkpatrick – Cardinal Capital Management LLC

And any thoughts on any further divestitures?

James P. Dolan

Well, we are always looking on what we own to see is that worth more to somebody else than is to us, so I wouldn't say that we're not going to do something like that, it’s kind of a standard part of the review we conduct of all of our business margin.

Rob B. Kirkpatrick – Cardinal Capital Management LLC

Okay. That's great, thank you so much.

Operator

(Operator Instructions) And at this time we have no further questions.

James P. Dolan

All right. I want to thank everybody for participating in the call and for your attention to our company. We're working very hard to make 2013 a better year. We have lot of things, we're working hard on and we expect it to bear fruit. But thank you for your patience Willis. And thank you for your attention. And have a nice day.

Operator

Thank you. Ladies and gentlemen this concludes today's conference. Thank you for participating. You may now disconnect.

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