Daily Journal Corporation — Q2 FY2017 Form 10-Q
Business context and period. The quarter and six-month period ended March 31, 2017 (fiscal Q2 and first half). The company operates a Traditional newspaper and related-services business and Journal Technologies, which provides case-management software and services to justice agencies. Journal Technologies generated 57% of first-half revenue.
Financial performance
| Metric | Three months ended March 31, 2017 | Six months ended March 31, 2017 |
|---|---|---|
| Revenue | $10.279 million, down 10% | $20.269 million, down 9% |
| Operating loss | $3.266 million | $6.119 million |
| Pretax loss | $1.261 million | $3.042 million |
| Income tax benefit | $4.240 million | $4.550 million |
| Net income | $2.979 million ($2.16 per share) | $1.508 million ($1.09 per share) |
| Operating margin | Not stated; operating loss was about 31.8% of revenue | Not stated; operating loss was about 30.2% of revenue |
First-half net cash used in operating activities was $2.100 million, versus $1.157 million used a year earlier. Cash and equivalents were $4.050 million at March 31, down from $11.411 million at September 30, 2016. Cash plus marketable securities totaled $207.828 million, up $29.783 million from September 30, mainly reflecting higher security values. Working capital was $137.629 million.
Marketable securities were $203.778 million, including $140.386 million of pretax unrealized gains; most gains were in three U.S. financial institutions. Investments were concentrated in seven companies. Shareholders’ equity was $146.508 million, including $85.163 million of accumulated other comprehensive income.
Debt included $29.493 million of investment-margin borrowings secured by marketable securities, at a 1.5% rate, and approximately $2.13 million outstanding on a real-estate loan. The filing says the margin borrowings have no maturity. No material change in market-risk exposures was reported.
Material changes and drivers
- First-half revenue fell $1.988 million. Journal Technologies revenue declined $1.702 million, principally from lower consulting fees (down $882,000) and public-service fees (down $914,000), partly offset by $94,000 growth in licensing and maintenance fees. Online traffic-citation payment volume reduced public-service fees.
- Traditional Business revenue was $8.639 million, down from $8.925 million; segment results shifted from $135,000 pretax income to a $254,000 pretax loss. Foreclosure-notice volume fell 24% year over year.
- Operating expenses rose $2.593 million, or 11%, mainly from personnel costs, which increased $2.061 million. Journal Technologies’ operating loss widened to $5.895 million from $1.688 million; its expenses rose 17% as revenue decreased.
- Investment dividends and interest income increased to $2.539 million from $1.736 million, supporting non-operating income despite higher interest expense.
- Reported net income primarily reflects a tax item, not operating profitability: the IRS proposed no change to the tax position under examination, so the company reversed about $2.655 million of uncertain tax benefits liability, related interest and penalties of $743,000, and a related $352,000 deferred tax liability. First-half pretax loss remained $3.042 million.
- Comprehensive income was $21.165 million for the first half, including a $19.657 million after-tax increase in unrealized appreciation of marketable securities; this is not the same as net income.
Outlook, risks and other disclosures
- Management expects fewer foreclosure notices and declining public-notice advertising in fiscal 2017; it says print-based earnings will likely decline significantly because expense reductions may not offset revenue losses.
- Management believes available working capital and operating cash flows can fund operations for the foreseeable future. It may pursue acquisitions, invest excess cash, or reduce debt; no quantified earnings or revenue guidance was provided.
- Key risks include concentrated securities exposure and potential declines in their market value; fewer foreclosures; changes to legal requirements for public notices or loss of a newspaper’s adjudicated status; subscriber and commercial-advertising declines; software implementation and professional-services dependence; and cybersecurity risks.
- Journal Technologies’ installation and consulting revenue can depend on project completion and customer acceptance. Software update and upgrade costs are expensed as incurred. Goodwill impairment was not indicated during the six-month period.
- Management stated normal-course contingencies, including litigation, were not expected to materially affect financial position, results or cash flows. Disclosure controls were assessed as effective, with no material change in internal control reported.
Investor facts to verify
- How much of reported earnings is attributable to the one-time tax-liability reversal, and what are normalized earnings excluding it?
- Whether Journal Technologies can grow installation, consulting and online payment activity enough to cover rising personnel and service costs.
- Whether foreclosure-related advertising continues to decline and whether public-notice laws or newspaper adjudications change.
- Portfolio concentration, unrealized gains, associated deferred taxes, and the effect of a securities-market decline on equity and liquidity.
- Timing and cash conversion of deferred installation contracts, customer advances, and project acceptance.