Business context and reporting period
Daily Journal Corporation’s Form 10-Q covers the quarter and nine months ended June 30, 2015, its fiscal third quarter. It operates a Traditional Business publishing newspapers, websites and related services, and Journal Technologies, which provides case-management software and related services to courts and justice agencies. Journal Technologies generated approximately 57% of nine-month revenue, up from 52% a year earlier.
Financial performance and position
| Metric | Three months ended June 30, 2015 | Nine months ended June 30, 2015 |
|---|---|---|
| Revenue | $10.503 million, versus $11.146 million | $33.212 million, versus $31.922 million |
| Operating income (loss) | $(1.133) million, versus $(0.264) million | $(2.466) million, versus $(2.054) million |
| Net income (loss) | $33,000, versus $38,000 | $970,000, versus $(549,000) |
| Operating cash flow | Not presented separately | $4.529 million, versus $3.815 million |
- Margins: The filing does not report gross margin. Operating results were losses in both the quarter and year-to-date periods.
- Liquidity: Cash and cash equivalents were $12.573 million at June 30, 2015. Working capital was $131.661 million. Cash plus marketable securities totaled $194.210 million.
- Investments: Marketable securities had a fair value of $181.637 million, including $126.719 million in pretax unrealized gains. Most gains related to common stocks of three U.S. financial institutions; the portfolio was concentrated in seven companies.
- Debt: Investment margin borrowings were $29.493 million, unchanged from September 30, 2014, secured by marketable securities. The rate was 0.75% at June 30, 2015; the borrowings have no stated maturity.
- Equity and comprehensive income: Shareholders’ equity was $138.174 million. Nine-month comprehensive income was $1.803 million, including $833,000 of after-tax unrealized investment appreciation.
Material changes versus prior comparable periods
- Nine-month revenue rose 4%, primarily from higher Journal Technologies licensing, maintenance and consulting revenue, partly offset by declines in traditional advertising and circulation.
- Journal Technologies revenue increased 13% to $18.789 million, while its operating loss narrowed to $3.292 million from $4.156 million. Higher revenue and the absence of a prior-year $479,000 tax-penalty accrual contributed to the improvement.
- Traditional Business operating income fell to $826,000 from $2.102 million. Public notice advertising weakened as foreclosure notices published declined 20%; traditional segment expenses also increased, mainly from legal and accounting fees.
- Consolidated operating expenses increased 5% to $35.678 million. The operating loss widened despite revenue growth.
- Nine-month net income improved from a loss to profit, helped by $760,000 of income-tax benefit and increased dividend and interest income. The tax benefit included an approximately $400,000 discrete California Enterprise Zone credit benefit.
- Cash and cash equivalents declined $2.837 million during the nine months, while operating cash flow increased by $714,000 year over year. The company purchased $10.977 million of securities and sold $4.044 million.
Outlook, commentary and risks
- Management said it expects to fund operations for the foreseeable future through operating cash flows and working capital; it may consider acquisitions, repay margin borrowings or invest excess cash. No quantified earnings or revenue guidance was provided.
- Management expects the slowdown in foreclosure notices to continue and said fiscal 2015 print-based earnings would decline significantly, since expense reductions may not offset lost revenue. Public-notice revenue is exposed to changes in legal publication requirements and challenges to newspapers’ adjudicated status.
- Journal Technologies’ project revenue may depend on customer completion and acceptance; software development and implementation, customer acceptance timing, and reliance on professional-services engagements are risks.
- Investment concentration exposes equity and earnings to declines in a small number of holdings; securities are pledged as collateral for margin borrowings.
- The company reported an approximately $3.059 million liability for uncertain tax benefits related to a fiscal 2013 acquisition and did not anticipate a significant change over the next 12 months. Management said ordinary-course litigation was not expected to materially affect results or financial condition.
- Management concluded disclosure controls were not effective at June 30, 2015 because material weaknesses in internal control over financial reporting remained. The filing also identifies a prior decision to restate the fiscal 2014 third-quarter Form 10-Q.
Important facts for investors to verify
- Whether foreclosure-related public-notice declines and commercial advertising and circulation pressures continue, and their effect on Traditional Business earnings.
- Journal Technologies’ revenue growth, installation backlog and customer acceptance timing, as well as whether operating losses continue to narrow.
- The market value and concentration of the securities portfolio, unrealized gains, and potential effects on equity, taxes and borrowing collateral.
- The status and remediation of the disclosed internal-control material weaknesses and any related reporting or restatement developments.
- The composition and resolution of the uncertain-tax-benefit liability and the sustainability of the reported tax benefit.