Daily Journal Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015. Although the request references 2015 Q4, this is an annual filing; quarterly results are noted below. Daily Journal operates a Traditional newspaper and advertising business and Journal Technologies, which provides case-management software and related services to justice agencies.
Financial results and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $43.978 million | $43.423 million |
| Operating income (loss) | ($3.512 million) | ($2.190 million) |
| Pretax income (loss) | ($310,000) | $141,000 |
| Net income | $810,000 | $631,000 |
| Diluted EPS | $0.59 | $0.46 |
| Cash from operating activities | $7.755 million | $4.507 million |
| Total assets | $228.196 million | $243.877 million |
| Shareholders’ equity | $128.600 million | $136.371 million |
- Revenue rose approximately 1%, while operating expenses increased 4% to $47.490 million. The consolidated operating margin was approximately negative 8.0%.
- Net income exceeded pretax income because of a $1.120 million income tax benefit. The unusually high reported effective tax rate reflects, among other items, tax deductions and a discrete California hiring-credit benefit.
- At September 30, cash and cash equivalents were $15.617 million and marketable securities were $166.041 million, totaling $181.658 million. The combined position declined $7.428 million during the year. Working capital was $122.947 million.
- Marketable securities had $111.498 million in pretax unrealized gains and generated $3.829 million in dividends and interest. Holdings were concentrated in seven companies; the filing says most unrealized gains were in three U.S. financial institutions.
- Investment margin-account borrowings were $29.493 million, secured by marketable securities, with interest at 0.75% at year-end and no stated maturity. Interest expense was $224,000. Contractual operating lease obligations totaled $1.727 million.
Segments and changes versus prior year
- Traditional Business: Revenue declined to $19.120 million from $20.273 million; pretax income fell 65% to $1.082 million. Trustee-sale notices and related fees, commercial advertising, and circulation all declined. Foreclosure notices published fell 21%; management expects further declines in fiscal 2016 and says lost print earnings will be impractical to offset fully through cost reductions.
- Journal Technologies: Revenue increased 7% to $24.858 million, including $13.984 million in licensing and maintenance fees and $4.704 million in consulting fees. Its operating loss narrowed to $4.594 million from $5.309 million, but it remained loss-making, with $4.895 million of intangible amortization.
- Journal Technologies contributed about 57% of consolidated revenue, up from 53%. Its fiscal-year revenue growth helped offset weakness in publishing and advertising.
- The $8.811 million after-tax decline in unrealized investment appreciation contributed to a comprehensive loss of $7.771 million, despite positive net income. The company recorded a $376,000 pretax other-than-temporary investment impairment.
- Fiscal Q4 2015: Revenue was $10.760 million, operating loss was $1.052 million, pretax loss was $520,000, and net loss was $160,000, or $0.11 per share. The quarter included the $376,000 investment impairment.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management expects foreclosure-related advertising revenue to decline further in fiscal 2016. Paper prices were expected to remain unchanged through at least June 2016; postal costs remain exposed to rate increases.
- Traditional Business risks include continued declines in foreclosures, subscriptions and commercial advertising; competition from online services; and potential changes to laws requiring public notices in adjudicated newspapers or challenges to a newspaper’s adjudicated status.
- Journal Technologies depends on software updates, successful implementation and customer acceptance, which can defer revenue recognition. Its government customers may delay projects or maintenance payments because of budget constraints; sales are often competitive bids.
- The investment portfolio creates substantial equity-price, concentration and foreign-currency exposure. A hypothetical 30% change in equity prices would change estimated shareholders’ equity by approximately 37%, according to the filing’s sensitivity analysis.
- Management identified material weaknesses in financial-reporting controls, including insufficient segregation and documentation of controls and insufficient technical accounting expertise. A material audit adjustment was made in Q4. Management concluded disclosure controls were ineffective; the auditor issued an adverse opinion on internal control over financial reporting, while giving an unqualified opinion on the financial statements.
- The company relies heavily on CEO/CFO Gerald Salzman and has no key-person insurance or employment agreement. A minor security breach at a Traditional Business website was discovered and remediated in early FY2015. Management did not expect ordinary-course litigation to have a material adverse effect.
- After year-end, the company purchased its Logan, Utah office building for $3.51 million, funded with $1.25 million cash and a $2.26 million real-estate loan at a fixed 4.66%, repayable through 2030.
- Traditional publications California Lawyer and California Directory of Attorneys were discontinued effective October 1, 2015; San Diego Commerce was replaced by the acquired Daily Transcript in September 2015. Management did not expect these changes to materially affect results.
Important facts for investors to verify
- Whether Journal Technologies can convert revenue growth and a narrowing segment loss into sustainable profitability, and how implementation timing and customer acceptance affect deferred revenue and cash collection.
- The pace of foreclosure-related advertising declines and whether public-notice laws or newspaper adjudication status change.
- The composition, concentration, valuation and tax consequences of the $166.041 million securities portfolio, including the effect of market-price and foreign-exchange movements.
- The terms and collateral arrangements for the $29.493 million margin borrowing, alongside the subsequent $2.26 million property loan.
- Remediation of the disclosed material weaknesses, given the adverse internal-control opinion and Q4 audit adjustment.
- The $2.991 million uncertain-tax-benefit liability and the assumptions supporting the FY2015 tax benefit.