Daily Journal Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended March 31, 2021; fiscal year ends September 30. Results are unaudited. Daily Journal operates a Traditional newspaper and public-notice business and Journal Technologies, which provides case-management software and services primarily to justice agencies.
Financial results
| Metric | Three months ended March 31, 2021 | Six months ended March 31, 2021 |
|---|---|---|
| Revenue | $13.97 million, up 13% year over year | $24.39 million, up 1% |
| Operating income (loss) | $1.31 million, versus a $1.10 million loss | $0.99 million, versus a $2.62 million loss |
| Net income (loss) | $12.48 million; $9.04 per share | $71.75 million; $51.96 per share |
| Operating cash flow | Not separately reported for the quarter | $(3.18) million, versus $(4.58) million |
Six-month operating margin was approximately 4.1% (operating income divided by revenue); second-quarter operating margin was approximately 9.3%. Net income was substantially affected by investment gains, rather than operating performance alone: six-month results included $76.07 million of unrealized gains and $18.48 million of realized gains on marketable securities. The six-month effective tax rate was 25.8% including taxes on investment gains.
Liquidity, investments and debt
- At March 31, cash and cash equivalents were $6.17 million, restricted cash was $2.04 million, and current assets totaled $312.06 million against current liabilities of $24.85 million. Reported working capital was $287.21 million.
- Marketable securities had a fair value of $293.91 million and adjusted cost basis of $80.25 million, representing $213.66 million in pretax unrealized gains. The portfolio was concentrated in six companies; most accumulated gains were in three U.S. financial institutions and one foreign manufacturer.
- Investment margin borrowings were $32.00 million, collateralized by marketable securities, with a 0.75% interest rate at March 31 and no maturity. The real-estate loan balance was approximately $1.65 million; its rate was amended to 3.33% in October 2020.
- Cash and restricted cash declined by $20.75 million over six months, primarily reflecting purchases of marketable securities. Cash plus marketable securities rose by $93.79 million, including investment gains and additional net margin borrowing.
Changes versus prior year
- Journal Technologies revenue rose 9% to $17.40 million for six months and represented about 71% of consolidated revenue, compared with 66% a year earlier. Its operating income was $1.34 million, versus a $3.06 million loss. Growth included more consulting revenue from project go-lives and a roughly $690,000 one-time legacy-project license fee.
- Traditional Business revenue fell 13% to $6.99 million for six months, and the segment recorded a $348,000 operating loss. Advertising and circulation declined; foreclosure notices published fell 62% amid COVID-related foreclosure restrictions.
- Consolidated operating expenses fell 12% to $23.40 million for six months, reflecting lower staffing, contractor, travel and other costs. The company cited pandemic-related workforce actions and the closure of its Colorado office.
- Dividend and interest income declined to $1.29 million from $2.98 million. The prior-year comparison included substantial unrealized investment losses, while the current period included large unrealized and realized gains.
Outlook, risks and unusual items
- Management said COVID-19 had significantly affected operations and that the duration and magnitude of further effects could not be estimated. Risks include continued or renewed government and court closures, delayed software implementations and procurement, delayed customer payments, and lower e-filing activity.
- Management expects continued declines in Traditional Business advertising and subscription revenue, potentially at an accelerated pace, and fewer foreclosure and public-notice advertisements for fiscal 2021. It also identified the risk that changes to public-notice laws or loss of a newspaper’s adjudicated status could materially reduce revenue.
- Journal Technologies implementation revenue may be delayed until systems go live. The company announced that maintenance of certain legacy products acquired in 2013 would end July 1, 2021.
- Management believes available working capital and operating cash flows should fund operations for the foreseeable future, but noted it might need to sell securities to raise cash and may not be able to borrow more against them.
- Management reported that disclosure controls and procedures were not effective as of March 31, 2021, in light of previously disclosed material weaknesses in internal control over financial reporting. No material control changes were reported during the quarter.
- Management did not believe ordinary-course contingencies, including litigation, would materially affect financial position, results or cash flows. No specific numerical earnings guidance was provided.
Key facts for investors to verify
- How much future earnings and equity changes depend on fair-value movements in a concentrated securities portfolio, and the related tax impact.
- Whether Journal Technologies can sustain revenue growth and convert delayed implementations and deferred professional fees into go-live revenue and cash.
- The pace of decline in Traditional Business advertising, circulation and public-notice revenue, including the effects of foreclosure restrictions and any legal changes.
- Progress in remediating the disclosed material weaknesses and improving disclosure controls.
- Cash generation and liquidity needs, including the use of margin borrowing secured by securities and the potential need to sell investments.