Daily Journal Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. The filing is an annual report, not a standalone Q4 filing; selected unaudited Q4 results are noted below. Dollar amounts are in millions unless otherwise stated.
Business context
The company operates two segments: a traditional publishing and public-notice advertising business, and Journal Technologies, which sells case-management software and related services primarily to courts and other government agencies. Journal Technologies generated 58% of FY2018 revenue. The company also holds a concentrated portfolio of publicly traded securities.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $40.703 | $41.384 |
| Operating expenses | $54.763 | $54.551 |
| Operating loss | $(14.060) | $(13.167) |
| Pretax loss | $(11.339) | $(8.068) |
| Net income (loss) | $8.201 | $(0.918) |
| Operating cash flow | $(1.881) | $(2.651) |
- Revenue declined 1.6%. Operating margin was approximately negative 34.5%, compared with negative 31.8% in FY2017.
- Net income of $8.201 million, or $5.94 per share, reflected a $19.540 million income-tax benefit, principally related to the Tax Act’s deferred-tax revaluation. The company still recorded a pretax loss.
- FY2018 included a $4.560 million other-than-temporary investment impairment and $3.182 million of gains on securities sales. Dividend and interest income was $4.808 million.
- Journal Technologies revenue was $23.531 million, down 1.2%; licensing and maintenance fees rose 7% to $17.225 million, while consulting fees fell 37% to $2.832 million. Its operating loss widened to $14.392 million.
- Traditional Business revenue was $17.172 million, down 2.3%; operating income was $0.332 million versus an operating loss of $0.282 million. Foreclosure notices published fell 13% year over year.
- Cash and cash equivalents were $9.301 million; marketable securities were $212.296 million. Working capital was $199.971 million. Cash flow from operations remained negative; capital expenditures were $0.212 million.
- Debt included $29.493 million of margin borrowings secured by marketable securities, with a 2.50% rate and no stated maturity, and a $1.956 million real-estate loan. Total assets were $263.998 million and shareholders’ equity was $162.916 million.
Material changes and Q4 results
- Compared with FY2017, revenue decreased $0.681 million, while operating expenses rose $0.212 million. Personnel costs increased $2.083 million, mainly from Journal Technologies staffing; amortization declined as acquired intangible assets became fully amortized in FY2018.
- Journal Technologies’ lower consulting revenue was attributed mainly to fewer project go-lives. Its license and maintenance revenue continued to grow.
- For the quarter ended September 30, 2018, revenue was $10.106 million, operating loss was $3.533 million, and net loss was $5.334 million, including the $4.560 million investment impairment. Q4 FY2017 revenue was $10.914 million and net loss was $1.075 million.
- Marketable securities declined from $229.265 million at FY2017 year-end to $212.296 million. The portfolio had $158.407 million of pretax unrealized gains and was concentrated in six companies.
Outlook, risks and unusual items
- Management expected further declines in FY2019 traditional-business revenue and print-based earnings, citing fewer foreclosures and the difficulty of offsetting lost revenue through cost reductions. The filing provides no specific financial guidance.
- Key publishing risks include declining newspaper and court-rule subscriptions, online competition, commercial-advertising pressure, rising paper prices and postage, changes to statutory public-notice requirements, and potential loss of a newspaper’s adjudicated status.
- Journal Technologies faces competitive bidding, uncertain government budgets and project timing, implementation and customer-acceptance risks, and continuing software development costs expensed as incurred.
- The company said it had sufficient cash and marketable securities for the foreseeable future, while noting that securities values can fall and that borrowing against them may not always be available on acceptable terms.
- The CEO/CFO suffered a transient ischemic attack in April 2018, reduced his schedule, and delegated some duties. The filing identifies the company’s reliance on him as a significant risk.
- Management and the auditor identified material weaknesses in internal control over financial reporting, including inadequate segregation of duties and an ineffective management assessment process. Disclosure controls were deemed ineffective. The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting.
- Management said ordinary-course litigation was not expected to materially affect the company. No quantitative financial guidance was provided.
Most important facts for investors to verify
- Whether Journal Technologies can convert its installed base and licensing growth into improved operating results and positive operating cash flow.
- Whether traditional-business revenue and earnings decline as forecast, particularly given foreclosure trends and possible legal changes to public notices.
- The composition, concentration, subsequent performance and collateral exposure of the $212.296 million securities portfolio, including the effect of future accounting treatment on reported earnings.
- The sustainability of reported net income given the large, largely tax-related benefit and the company’s continuing pretax and operating losses.
- Progress in remediating internal-control material weaknesses, and continuity planning for the CEO/CFO’s concentrated responsibilities.
- Current cash generation, margin-loan balance and rate, and the company’s ability to meet obligations without selling securities or relying on secured borrowing.