Daily Journal Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2016; filed May 10, 2016. Comparisons are with the corresponding 2015 periods. Amounts below are in millions unless noted.
Business context
The company operates two segments: the Traditional Business, which publishes newspapers and provides related advertising and services, and Journal Technologies, which supplies case-management software and related services to justice agencies. Journal Technologies contributed about 60% of six-month revenue, up from 58% a year earlier.
Financial performance
| Metric | Three months ended Mar. 31, 2016 | Three months ended Mar. 31, 2015 | Six months ended Mar. 31, 2016 | Six months ended Mar. 31, 2015 |
|---|---|---|---|---|
| Revenue | $11.442 | $11.392 | $22.257 | $22.715 |
| Operating income (loss) | ($0.576) | ($0.966) | ($1.538) | ($1.327) |
| Pretax income (loss) | $0.152 | ($0.171) | $0.017 | $0.237 |
| Net income | $0.207 | $0.504 | $0.257 | $0.937 |
| Diluted EPS | $0.15 | $0.37 | $0.19 | $0.68 |
Six-month revenue declined 2%, while operating expenses fell 1%; the operating loss widened. Net income declined mainly alongside lower pretax income and a smaller income-tax benefit. Six-month comprehensive loss was $3.874 million, including a $4.131 million after-tax decrease in unrealized appreciation on marketable securities.
Segment trends: For the six months, Traditional Business revenue was $8.925 million and operating income was $0.150 million, versus $9.572 million and $0.396 million. Journal Technologies revenue rose 1% to $13.332 million; its operating loss narrowed slightly to $1.688 million from $1.723 million, including $2.447 million of intangible amortization.
Cash flow, liquidity and debt
- Six-month operating cash flow was a use of $1.157 million, versus cash provided of $3.764 million in 2015. Investing activities used $7.466 million, including $3.628 million of capital expenditures, chiefly the Logan, Utah office building; financing provided $2.234 million.
- Cash and cash equivalents were $9.228 million at March 31, 2016, down from $15.617 million at September 30, 2015. Cash plus marketable securities totaled $171.759 million, down $9.899 million from fiscal year-end.
- Working capital was $117.204 million. Current assets were $178.936 million and current liabilities $61.732 million.
- Debt included $29.493 million of investment-margin borrowings, secured by marketable securities and bearing 1% interest at March 31, 2016, with no stated maturity, plus $2.234 million outstanding on the Logan real-estate loan. The latter carries a fixed 4.66% rate and is payable through 2030.
- Marketable securities had a fair value of $162.531 million and pretax unrealized gains of $104.149 million. Most gains were in three U.S. financial institutions; investments were concentrated in seven companies.
Changes, outlook and risks
- Six-month revenue was pressured by lower commercial advertising, trustee-sale notices and Journal Technologies public-service fees. Licensing and maintenance and consulting revenue at Journal Technologies increased. The discontinuation of California Lawyer magazine reduced advertising and printing-related activity.
- Management said fewer foreclosure notices were expected to continue, likely reducing fiscal 2016 public-notice revenue and significantly lowering print-based earnings, which may not be fully offset by expense reductions. Public-notice revenue is also exposed to potential legal changes or loss of a newspaper’s adjudicated status.
- Management believes operating needs can be funded for the foreseeable future from operating cash flows and working capital. Journal Technologies personnel and travel costs were expected to continue increasing in the foreseeable future; software update and upgrade costs are expensed as incurred.
- Key risks include software development and implementation, reliance on justice-agency service engagements, reduced public-notice, subscriber or commercial-advertising revenue, cybersecurity incidents, and declines in investment values. A decline in concentrated holdings could materially reduce equity and could result in impairment charges.
- The company reported material weaknesses in internal control over financial reporting and concluded disclosure controls and procedures were not effective as of March 31, 2016. It was preparing to adopt the 2013 COSO framework; no material quarterly changes in internal control were reported.
- Litigation arising in the ordinary course was not expected by management to materially affect financial position, results or cash flows. The company reported no subsequent events requiring recognition or disclosure. No formal numerical earnings guidance was provided.
Important facts for investors to verify
- Whether foreclosure-related and other public-notice revenues continue to decline, and the related effect on Traditional Business profitability.
- Journal Technologies’ revenue mix, project completion and customer acceptance timing, and whether operating costs outpace growth.
- The concentration, fair value and collateral exposure of the securities portfolio, including the effect of market declines on equity and margin borrowing capacity.
- Progress addressing the disclosed control weaknesses and the potential impact of the $2.866 million uncertain-tax-benefit liability.
- The size and repayment terms of debt, and the extent to which future operating cash flow supports investment and capital-spending plans.