Daily Journal Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018; comparisons are to the periods ended June 30, 2017. The company operates a Traditional newspaper and public-notice business and Journal Technologies, which provides case-management software and services to justice agencies.
Financial performance
| Metric | Three months ended June 30, 2018 | Nine months ended June 30, 2018 |
|---|---|---|
| Revenue | $11.007 million, up 7.9% | $30.597 million, up 0.4% |
| Operating loss | $2.709 million | $10.527 million |
| Net income (loss) | $(0.972) million; $(0.70) per share | $13.535 million; $9.80 per share |
| Operating margin | (24.6)% | (34.4)% |
| Operating cash flow | Not reported separately for the quarter | $(6.250) million |
Nine-month net income primarily reflects a $17.660 million income-tax benefit, including the Tax Act’s deferred-tax remeasurement; pretax results remained a $4.125 million loss. The benefit is not an indication of positive operating earnings. Net income in the comparable 2017 period was $0.157 million, which included a tax-related reversal. Comprehensive income was $4.179 million versus $24.072 million, as unrealized investment gains declined year over year.
Segments and changes from prior periods
- Journal Technologies: Nine-month revenue rose 3% to $17.847 million, driven by 11% growth in licensing and maintenance fees. Consulting revenue fell 29% to $2.147 million, partly reflecting the timing of project go-lives. Segment operating loss widened to $10.556 million from $9.659 million as operating expenses increased 5% to $28.403 million, including higher personnel and computer-service costs.
- Traditional Business: Nine-month revenue declined 3% to $12.750 million, while operating income was $0.029 million versus a $0.093 million loss. Lower advertising, circulation and public-notice revenues were partly offset by lower expenses.
- Quarterly revenue growth was mainly from Journal Technologies licensing and maintenance fees. Quarterly net loss narrowed to $0.972 million from $1.351 million, while operating loss improved to $2.709 million from $3.633 million.
- Consolidated nine-month operating expenses increased 2% to $41.124 million. Depreciation and amortization declined as certain acquired intangibles became fully amortized.
Liquidity, investments and debt
- At June 30, 2018, cash was $4.974 million and marketable securities were $207.499 million; together, $212.473 million. Working capital was $197.521 million.
- Operating activities used $6.250 million in the nine months, compared with $3.430 million used in the prior-year period. Investing activities provided $7.926 million, including $8.125 million from bond sales; capital expenditures were $0.199 million.
- Debt included $29.493 million of investment-margin borrowings, secured by marketable securities, and approximately $1.985 million remaining on the real-estate loan. The margin borrowing has no maturity and bore 2.5% interest at June 30; the real-estate loan bears fixed interest of 4.66%.
- Marketable securities were concentrated in six companies. They had $149.050 million of pretax unrealized gains, with an associated $39.683 million deferred-tax liability. A decline in these holdings could materially reduce equity; management concluded an identified unrealized loss was temporary.
Outlook, risks and unusual items
- Management said it expects to fund operations for the foreseeable future from operating cash flows and working capital. It may consider acquisitions, debt repayment or investments; no quantitative earnings or revenue guidance was provided.
- Management expected fewer foreclosure notices to continue and warned that fiscal 2018 public-notice revenue and print-based earnings would likely decline significantly. It said expense reductions may not fully offset lost revenue.
- Risks include legal changes limiting public-notice publication, loss of newspaper adjudication status, declines in subscriptions and commercial advertising, software implementation and security risks, reliance on government-agency engagements, and market-price declines in concentrated investments.
- The Tax Act reduced the federal corporate rate to 21% effective January 1, 2018. A discrete deferred-tax benefit of approximately $16 million contributed to the period’s tax benefit. The company also reclassified $19.960 million of tax effects between accumulated other comprehensive income and retained earnings; this was an equity reclassification.
- Management reported that previously identified internal-control material weaknesses were rectified during the first two quarters of fiscal 2018 and concluded disclosure controls were effective as of June 30, 2018. Management said it would continue assessing remediation.
- Management did not expect the ultimate outcome of ordinary-course contingencies, including litigation, to materially affect financial position, results or cash flows. No material subsequent events were reported.
Important facts for investors to verify
- Whether Journal Technologies can convert licensing and maintenance growth into improved segment profitability, given its continuing operating losses and the timing dependence of consulting revenue.
- Progress and magnitude of the forecast decline in foreclosure notices, public-notice revenue and print-based earnings.
- The composition, concentration, collateral arrangements and fair-value sensitivity of the investment portfolio, and related margin borrowing.
- The sustainability and cash implications of reported net income, which was substantially driven by tax benefits despite operating and pretax losses.
- Whether internal-control remediation remains effective and whether software implementation, security, or government-customer risks have changed.