Daily Journal Corporation — FY2022 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2022; this is an annual filing, not a standalone 2022 fourth-quarter report. Comparisons are with fiscal 2021.
Business context
The company operates two segments: the Traditional Business, comprising newspapers, public-notice advertising and related services; and Journal Technologies, which provides case-management software and services principally to courts and other government agencies. Journal Technologies generated about 71% of fiscal 2022 operating revenue. The company also holds a substantial, concentrated portfolio of publicly traded securities.
Key financial metrics
| Metric | FY2022 | FY2021 |
|---|---|---|
| Operating revenue | $54.009 million | $49.925 million |
| Operating expenses | $52.020 million | $47.773 million |
| Operating income | $1.989 million | $2.152 million |
| Net income (loss) | $(75.624) million | $112.900 million |
| Basic and diluted earnings (loss) per share | $(54.81) | $81.77 |
| Net cash from (used in) operating activities | $(5.261) million | $3.286 million |
Revenue rose 8%, while operating expenses grew 9%; operating margin was approximately 3.7%, versus 4.3% in FY2021. The net loss principally reflected a $123.401 million unrealized loss on marketable securities, compared with a $106.499 million unrealized gain in the prior year. These mark-to-market changes are included in reported earnings although the securities may not have been sold. The company also recorded $14.249 million of realized net gains on security sales, $5.451 million of dividends and interest income, and a $26.925 million income-tax benefit.
Segment performance: Traditional Business revenue was $15.922 million and operating income was $0.702 million, compared with $15.431 million and $0.443 million, respectively, in FY2021. Journal Technologies revenue was $38.087 million and operating income was $1.287 million, versus $34.494 million and $1.709 million. The filing reports segment pretax income of $1.287 million for Journal Technologies; segment operating income and pretax income are presented as the same amount in the segment table.
Cash, liquidity and debt: At year-end, cash and cash equivalents were $13.423 million, restricted cash $2.045 million, and working capital $275.835 million. Current assets were $309.454 million and current liabilities $33.619 million. Marketable securities were valued at $275.529 million, with $120.692 million of pretax unrealized gains. Investment margin borrowings were $75 million, up from $32 million a year earlier; the variable interest rate was 3% at year-end and interest expense rose to $1.026 million from $0.233 million. A separate real-estate loan totaled $1.431 million. Management said it believed resources and operating cash flows would fund foreseeable needs, while noting borrowing capacity depends on portfolio values and significant declines could cause margin calls.
Material changes versus FY2021
- Consolidated revenue increased $4.084 million, mainly from a $5.546 million increase in Journal Technologies consulting fees; this was partly offset by lower software licensing and maintenance revenue and lower newspaper circulation revenue.
- Journal Technologies consulting revenue increased 88% to $11.865 million, as several long-term projects went live late in the year. Licensing and maintenance revenue declined 9% to $19.192 million, partly because the company ended support for legacy products.
- Traditional Business advertising revenue increased 5% to $8.591 million, while circulation revenue declined 4% to $4.394 million. Public-notice and trustee-sale activity benefited from the lifting of foreclosure moratoriums; the company reported foreclosure notices published increased 53%.
- Operating expenses increased $4.247 million, including higher salaries and benefits, third-party hosting, agency commissions and general and administrative costs. Newsprint prices rose 23%; postage expense increased 1%.
- Cash and marketable securities combined declined by $71.215 million, reflecting portfolio market losses and investment activity. The company sold about $80.570 million of securities and purchased about $117.678 million, with additional margin borrowing.
Outlook, risks and unusual items
The filing provides no quantified revenue or earnings guidance. Management expects the newspaper industry’s decline and subscription pressure to continue, including as more readers work remotely. It also describes uncertainty in government procurement and software implementations; consulting revenue is generally recognized when services are completed and accepted, so delays in customer go-lives can defer revenue and cash receipts. Journal Technologies’ ongoing product development costs are expensed as incurred.
Principal risks include changes to laws requiring public notices or challenges to newspapers’ adjudicated status; intense competition and declining newspaper subscriptions and advertising; paper and postage cost volatility; government budget constraints and project delays; software execution, cybersecurity and customer-acceptance risks; COVID-19-related disruption; and losses in the concentrated securities portfolio. The $75 million margin balance is secured by marketable securities, bears a floating rate, and creates exposure to higher interest costs and potential margin calls.
Management reported material weaknesses in internal control over financial reporting, including insufficient segregation of duties and inadequate controls for management’s assessment of controls and prevention of fraud or management override. Disclosure controls were deemed ineffective as of September 30, 2022. The independent auditor gave an unqualified opinion on the financial statements but was not engaged to audit internal control effectiveness. Routine litigation was disclosed; management did not expect it to have a material adverse effect. The company paid no dividends in FY2022 or FY2021 and said it did not expect distributions in the foreseeable future.
Important facts for investors to verify
- How much of future earnings and equity value may be affected by the concentrated securities portfolio, its mark-to-market volatility and any subsequent portfolio changes.
- The current margin-loan balance, borrowing terms, collateral requirements, interest-rate exposure and headroom before a margin call could arise.
- Whether Journal Technologies’ project pipeline can convert into completed, customer-accepted go-lives, and whether consulting growth offsets declining legacy maintenance revenue.
- Progress toward remediating the disclosed material weaknesses and improving financial-reporting controls.
- Ongoing trends in newspaper subscriptions, public-notice requirements, advertising revenue, and paper and postage costs.