Daily Journal Corporation — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2016; comparisons are to the corresponding 2015 periods. The company operates a Traditional publishing and public-notice business and Journal Technologies, which provides case-management software and related services. Journal Technologies generated 58% of nine-month revenue.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $10.338 million, down 1% from $10.494 million | $32.595 million, down 2% from $33.209 million |
| Operating loss | $1.782 million, versus $1.145 million | $3.320 million, versus $2.472 million |
| Net income (loss) | $(338,000), or $(0.25) per share; prior year income was $33,000, or $0.02 per share | $(81,000), or $(0.06) per share; prior year income was $970,000, or $0.70 per share |
| Operating cash flow | Not presented separately for the quarter | $45,000, versus $4.529 million |
| Comprehensive income (loss) | $(1.560) million, versus $5.310 million | $(5.434) million, versus $1.803 million |
No gross-margin measure is presented. Nine-month operating expenses increased $234,000 to $35.915 million, while salaries and benefits rose $797,000 to $20.537 million. Nine-month segment results: Traditional Business operating income was $916,000, up from $820,000; Journal Technologies’ operating loss widened to $4.236 million from $3.292 million.
Liquidity, investments and debt
- At June 30, cash and cash equivalents were $10.362 million; marketable securities were $161.250 million, for combined cash and securities of $171.612 million. Combined holdings declined $10.046 million during the nine months.
- Working capital was $117.159 million. Net cash provided by operations was only $45,000; investing activities used $7.508 million, including $3.670 million of property and equipment purchases, chiefly the Logan, Utah building. Financing provided $2.208 million.
- Debt included $29.493 million of investment-margin borrowings, secured by marketable securities, with a 1% rate at June 30 and no stated maturity. The Logan real-estate loan had a balance of approximately $2.21 million, fixed at 4.66% and repayable through 2030.
- Marketable securities had $102.868 million of pretax unrealized gains; most gains were in three U.S. financial institutions. The portfolio was concentrated in seven companies. The company reported a $5.353 million, after-tax decrease in unrealized appreciation during the nine-month period.
Changes, outlook and risks
- Nine-month revenue declines reflected fewer trustee-sale notices and lower commercial advertising, as well as a $1.089 million drop in Journal Technologies’ public-service fees, mainly from fewer online traffic-ticket transactions and an Amnesty Program. Higher Journal Technologies license and maintenance fees (+$681,000) and consulting fees (+$387,000) partly offset the declines.
- Management expected foreclosure notices and related revenue to continue declining in fiscal 2016, with print-based earnings likely to decline significantly because expense reductions may not offset lost revenue. Journal Technologies personnel and travel costs were expected to continue rising in the foreseeable future.
- Management said available working capital and operating cash flows should fund operations for the foreseeable future. It may pursue acquisitions and may use excess cash to reduce debt or make investments; borrowing against securities on favorable terms is not assured. No specific earnings or revenue guidance was provided.
- Key risks include dependence of public-notice revenue on legal publication requirements and newspapers’ adjudicated status; further declines in advertising, subscribers, or foreclosure notices; software development and implementation execution; security breaches; and market-value declines in the concentrated investment portfolio.
- The IRS had begun reviewing the company’s fiscal 2014 federal return. Accrued uncertain tax benefits were approximately $2.805 million; management did not expect a significant change over the next 12 months. Management reported no material litigation outcome expected and no subsequent events requiring disclosure.
- The company stated that internal controls over financial reporting were effective as of June 30, 2016, following changes intended to address previously identified material weaknesses. New accounting standards had not yet been evaluated for their potential impact.
Important facts for investors to verify
- Whether Journal Technologies can grow licensing, maintenance and consulting revenue while reducing its operating loss and preserving cash.
- How quickly public-notice revenue and print earnings respond to lower foreclosure activity or legal changes affecting publication requirements.
- Cash generation and working-capital trends, including the effect of deferred installation and maintenance contract balances.
- Exposure to concentrated securities, collateral requirements on margin borrowings, and potential effects of investment-price declines.
- Outcome of the IRS review and any developments in internal-control remediation or software implementation risks.