Business context and reporting period
Daily Journal Corporation’s unaudited Form 10-Q covers the three months ended December 31, 2020, its fiscal first quarter of 2021, compared with the three months ended December 31, 2019. The company operates a Traditional Business publishing newspapers and related services, and Journal Technologies, which provides case-management software and related services to justice and government agencies. Journal Technologies generated about 66% of revenue in the quarter.
Financial results and liquidity
| Metric | Quarter ended Dec. 31, 2020 | Prior-year quarter |
|---|---|---|
| Revenue | $10.420 million | $11.677 million |
| Operating loss | $315,000 | $1.518 million |
| Net income | $59.270 million | $14.210 million |
| Diluted earnings per share | $42.93 | $10.29 |
| Cash used in operating activities | $2.783 million | $3.126 million |
- Revenue declined 11%, while operating expenses fell 19% to $10.735 million. The operating loss narrowed as cost reductions more than offset lower revenue.
- Net income was driven primarily by $81.212 million of net unrealized gains on marketable securities, compared with $19.531 million a year earlier. These gains are included in net income and are subject to market-price volatility.
- Marketable securities were valued at $260.580 million, against an adjusted cost basis of $41.775 million; accumulated pretax unrealized gains were $218.805 million. The portfolio was concentrated in three U.S. financial institutions and one foreign manufacturer, with the filing also describing investments as concentrated in five companies.
- Cash and cash equivalents were $9.622 million and restricted cash was $2.042 million at quarter-end. Combined cash and restricted cash declined $17.299 million, mainly reflecting a $14.493 million margin-loan principal payment. Cash and restricted cash totaled $11.664 million at quarter-end.
- Working capital was $254.992 million. Margin-account borrowings were $15.0 million, secured by marketable securities; real-estate debt totaled approximately $1.686 million. The company paid down the margin balance from $29.493 million at September 30, 2020.
- The tax provision was $22.180 million, including $22.360 million of tax expense on unrealized securities gains; the reported effective tax rate was 27%.
Material changes versus prior period
- Traditional Business revenue fell 15% to $3.529 million. Advertising revenue declined 20% and circulation revenue declined 8%; the segment nevertheless reported operating income of $548,000, versus $274,000.
- Journal Technologies revenue fell 9% to $6.891 million. Consulting revenue dropped 65% to $244,000, primarily due to fewer system go-lives; licensing and maintenance revenue declined 3%. The segment’s operating loss narrowed to $863,000 from $1.792 million as expenses decreased 17%.
- Consolidated operating expenses fell by $2.460 million, reflecting lower personnel costs following pandemic-related workforce reductions, lower contractor costs, and reduced travel. Lower rent also reflected closure of the Colorado office.
- Dividends and interest income decreased to $638,000 from $1.680 million. Management said portfolio dividends had declined and were expected to remain below past levels as some banks reduced dividends.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said it could not estimate the magnitude of COVID-19’s continuing effects, citing uncertainty about court and government operations, implementation schedules, customer payments, advertisers and subscribers.
- COVID-related court closures and scaled-back activity delayed procurement, implementation, training, go-lives and e-filing revenue. The Traditional Business faces ongoing newspaper-industry declines; management expected advertising and subscription pressures to continue, potentially at an accelerated pace.
- Management reported that foreclosure notices published fell 61% year over year and expected fewer foreclosure and other public-notice advertisements in fiscal 2021 absent a significant increase in foreclosures. Changes to legal publication requirements or loss of a newspaper’s adjudicated status could materially affect public-notice revenue.
- The company plans to end maintenance of certain legacy software products acquired with New Dawn and ISD, effective July 1, 2021, while focusing on its eSeries products. Software development and implementation risks remain.
- The company stated that its material weaknesses in internal control over financial reporting, previously discussed in its Form 10-K, remained relevant; management concluded disclosure controls and procedures were not effective as of December 31, 2020.
- Management believed available working capital and operating cash flows could fund operations for the foreseeable future, but noted it might need to sell securities or borrow against them. A significant decline in concentrated portfolio holdings could reduce earnings and shareholders’ equity.
- Management did not believe routine contingencies, including litigation, would materially affect financial position, results or cash flows. No subsequent events requiring recognition or disclosure were identified.
Most important facts for investors to verify
- Portfolio holdings, concentration and market-value changes, including the potential effects on reported earnings, equity, taxes and liquidity.
- Whether Journal Technologies can restore project go-lives, consulting revenue and collections as customer agencies resume or change operations.
- The trajectory of print advertising, circulation and public-notice revenue, including foreclosure volumes and relevant legal requirements.
- Progress in addressing the disclosed internal-control material weaknesses and any related remediation or reporting updates.
- Cash generation and borrowing capacity, given operating cash use, margin debt secured by securities and the company’s reliance on its investment portfolio.