Daily Journal Corporation — Form 10-Q
Reporting period: Quarter and six months ended March 31, 2015; fiscal second quarter. The company operates a Traditional publishing and public-notice business and Journal Technologies, which provides case-management software and related services.
Financial results and position
- Quarter: Revenue was $11.392 million, up 5% year over year. Operating loss widened to $966,000 from $518,000. Net income was $504,000, or $0.37 per share, compared with $53,000, or $0.04 per share. The quarter included a $675,000 income-tax benefit.
- Six months: Revenue increased 9% to $22.715 million. Operating loss narrowed to $1.327 million from $1.787 million; pretax income was $237,000 versus a $577,000 loss, and net income was $937,000, or $0.68 per share, versus a $587,000 loss, or $0.43 per share. Operating margin was approximately -5.8% versus -8.6%; net margin was approximately 4.1% versus -2.8%.
- Revenue mix and segments, six months: Journal Technologies revenue rose 22% to $13.143 million, led by licensing and maintenance fees (+21%) and consulting fees (+71%); its operating loss narrowed to $1.723 million from $2.921 million. Traditional Business revenue fell about 4% to $9.572 million, and operating income declined to $396,000 from $1.134 million. Journal Technologies provided approximately 58% of consolidated revenue, versus 52% a year earlier.
- Cash flow: Operating cash flow was $3.764 million, up from $145,000. Investing activities used $7.319 million, including $10.977 million of securities purchases and $386,000 of capital expenditures. Cash fell $3.555 million to $11.855 million.
- Liquidity and debt: Cash plus marketable securities totaled $184.720 million. Working capital was $125.211 million. Investment-margin borrowings were $29.493 million, secured by marketable securities, with a 0.75% interest rate and no stated maturity.
- Investments and equity: Marketable securities had a fair value of $172.865 million and pretax unrealized gains of $117.948 million, down from $125.700 million at September 30, 2014. The portfolio was concentrated in seven companies, with most unrealized gains in three U.S. financial institutions. Six-month comprehensive loss was $3.507 million, principally reflecting a $4.444 million after-tax decline in unrealized investment appreciation.
Changes, outlook and risks
- Management attributed consolidated revenue growth primarily to Journal Technologies, partly offset by lower trustee-sale notice and related service revenue. Consolidated operating expenses increased 7% to $24.042 million, chiefly from Journal Technologies costs.
- Traditional Business public-notice advertising faces continuing pressure: foreclosure notices published fell 26% year over year. Management expects fewer foreclosure notices and declining fiscal 2015 revenues, and warned print-based earnings will decline significantly because expense reductions may not offset the revenue loss. Commercial advertising was also described as challenging.
- Management expects to fund operations for the foreseeable future through operating cash flows and working capital. The filing provides no specific revenue or earnings guidance.
- The $700,000 six-month income-tax benefit on $237,000 pretax income included an approximately $400,000 discrete benefit from California Enterprise Zone credits, as well as tax deductions including the dividends-received deduction. An approximately $3.121 million liability for uncertain tax benefits relates to a fiscal 2013 acquisition; management did not expect a significant change over the next 12 months.
- Marketable securities are available for sale, but their concentration exposes equity to declines in individual holdings and possible impairment losses. The filing reports no material change in market-risk exposure since September 30, 2014.
- Management said litigation arising in the ordinary course was not expected to materially affect results. A minor security breach on a Traditional Business website was remediated; the filing warns that future breaches involving company or customer systems could cause reputational harm, costs, or lost revenue.
- Disclosure controls were not effective at March 31, 2015, and material weaknesses in internal control over financial reporting remained. The filing also references the company’s prior restatement of its fiscal 2014 third-quarter Form 10-Q.
Important facts for investors to verify
- Whether foreclosure-notice volumes and legal requirements for public notices continue to weaken Traditional Business revenue, and whether cost reductions can limit the earnings impact.
- Journal Technologies’ ability to convert installations and customer advances into accepted projects and recognized revenue; project acceptance timing can be unpredictable.
- The size, concentration, valuation and collateral implications of the securities portfolio, including the $29.493 million margin borrowing.
- The sustainability of reported net income given the tax benefit and the effect of investment income and unrealized market-value changes.
- Progress in remediating internal-control material weaknesses and maintaining security over company and customer information.