Daily Journal Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014. The filing also reports unaudited quarterly results, including the quarter ended September 30, 2014. Daily Journal operates a traditional publishing and public-notice business and Journal Technologies, a justice-agency software and services business. The technology subsidiaries were combined as Journal Technologies on October 1, 2014.
Financial results and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $43.423 million | $37.676 million |
| Operating income (loss) | $(2.190) million | $3.789 million |
| Income before taxes | $0.141 million | $4.569 million |
| Income tax benefit (provision) | $0.490 million | $(0.790) million |
| Net income | $0.631 million | $3.779 million |
| Basic and diluted EPS | $0.46 | $2.74 |
| Cash provided by operating activities | $4.507 million | $5.672 million |
FY2014 quarterly results included revenue of $11.497 million and net income of $1.180 million for the quarter ended September 30, 2014. The annual filing does not present a separate quarterly cash-flow figure.
- Revenue mix: Journal Technologies generated $23.150 million, about 53% of consolidated revenue, and recorded a $5.749 million pretax loss. Traditional Business revenue was $20.273 million and pretax income was $5.890 million.
- Balance sheet at September 30, 2014: Cash and cash equivalents were $15.410 million; marketable securities were $173.676 million; total assets were $243.877 million; and shareholders’ equity was $136.371 million. Working capital was $127.465 million.
- Debt and obligations: Investment-margin borrowings totaled $29.493 million, secured by marketable securities, with interest at 0.75% at year-end and no stated maturity. Operating-lease obligations totaled $2.622 million.
- Investments: The securities portfolio had $125.700 million of pretax unrealized gains, concentrated in six companies, with most gains in three U.S. financial institutions. The company reported a $48.896 million deferred tax liability related to unrealized investment gains.
- Margins: Consolidated operating loss was $2.190 million, compared with operating income of $3.789 million in FY2013. The filing does not report a consolidated gross margin.
Material changes versus FY2013
- Revenue increased 15%, principally because Journal Technologies revenue rose 67% to $23.150 million following the acquisitions of New Dawn and ISD; technology revenue included a fuller year of acquired operations than in FY2013.
- Operating expenses increased 35% to $45.613 million, driven mainly by technology-related personnel, acquisition-related amortization, rent, marketing and professional costs. Depreciation and amortization increased to $5.516 million, including $4.866 million of intangible amortization.
- Traditional advertising revenue fell 21% to $11.435 million. Trustee-sale notice volumes declined 51%, and trustee-sale notices and related service fees decreased $2.825 million. Circulation revenue declined 5% to $6.038 million.
- Net income fell to $0.631 million from $3.779 million. FY2014 had no investment impairment charge, unlike FY2013, but the operating decline and a $0.537 million tax-related interest and penalty charge weighed on results.
- Operating cash flow decreased to $4.507 million, with higher receivables partly offset by growth in deferred installation and maintenance revenues. Cash and marketable securities together increased by $40.754 million, according to management.
Outlook, risks and unusual items
- Management expected fewer foreclosure notices and further declines in traditional print-based earnings in FY2015, stating that expense reductions would not be sufficient to offset the expected revenue loss. It also anticipated paper prices could rise about $10 per standard ton in FY2015.
- Journal Technologies’ government customers may defer or cancel projects or maintenance payments because of budget constraints. Implementation revenue is often recognized only after customer acceptance, making timing and collection uncertain; software upgrades and development costs are expected to continue weighing on earnings.
- Other significant risks include possible legal changes reducing required newspaper public notices, loss of a newspaper’s adjudicated status, ongoing subscription and commercial-advertising declines, paper and postage costs, customer receivable collectability, and competition in both businesses.
- The company held a concentrated securities portfolio; a hypothetical 30% price decline would reduce shareholders’ equity by an estimated 36%, based on the filing’s sensitivity analysis. Management also cautioned that actual losses could be worse.
- The company recorded a $3.244 million liability for uncertain tax benefits related to a FY2013 acquisition and $0.537 million of related interest and penalties. It amended its FY2014 third-quarter Form 10-Q after correcting acquisition-related income-tax accounting; the quarter’s reported net income changed from $2.841 million to $0.038 million.
- Management and the auditor identified material weaknesses in internal control over financial reporting, including inadequate segregation and documentation of controls and insufficient technical accounting expertise. Management found disclosure controls ineffective at year-end, and the auditor issued an adverse opinion on internal control. The auditor issued an unqualified opinion on the FY2014 financial statements.
- Management said it believed cash flows and working capital were sufficient for the foreseeable future. The company paid no dividends in FY2014 and did not expect to pay distributions in the foreseeable future. No material litigation outcome was expected by management.
Most important facts for investors to verify
- Whether foreclosure-related public-notice revenue continued to decline after FY2014, and the resulting effect on traditional-business profitability.
- Journal Technologies’ project backlog, customer acceptance and implementation timelines, recurring maintenance revenue, and progress toward profitability.
- The composition, concentration, collateral status and market value of the securities portfolio, and the margin loan’s rate and borrowing terms.
- The resolution and cash impact of the $3.244 million uncertain-tax-benefit liability and the related interest and penalties.
- Remediation of the disclosed internal-control material weaknesses and whether subsequent filings avoid further tax-accounting corrections or restatements.