Daily Journal Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021; comparison is fiscal 2020. The company operates a Traditional Business in newspaper publishing and related services, and Journal Technologies, which provides case-management software and services to courts and other justice agencies.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $49.389 million | $49.942 million |
| Operating expenses | $47.237 million | $51.225 million |
| Operating income (loss) | $2.152 million | $(1.283) million |
| Net income | $112.900 million; $81.77 per share | $4.041 million; $2.93 per share |
| Cash provided by operations | $3.286 million | $2.336 million |
- Revenue declined 1%. Operating expenses fell 8%, and operating margin improved to approximately 4.4% from approximately negative 2.6%.
- Net income was largely driven by investment gains, not operating earnings: $106.499 million of unrealized gains and $41.749 million of realized gains on marketable securities. Net income included the unrealized gains even though they were not realized through sales.
- Income tax provision was $40.150 million, an effective rate of 26.2%, versus $185,000 and 4.4% in FY2020. The 2021 provision included taxes on realized and unrealized investment gains.
- At year-end, cash and cash equivalents were $12.596 million, restricted cash $2.043 million, and marketable securities $347.573 million. Working capital was $338.324 million.
- Total debt included $32.0 million of investment margin borrowings and approximately $1.578 million on a real-estate loan. Margin borrowings are collateralized by marketable securities and do not mature; the company warns that a significant portfolio decline could trigger margin calls.
Business trends and changes versus FY2020
- Journal Technologies generated $34.494 million of revenue, about 70% of company revenue, down 2%. Segment operating income improved to $1.709 million from a $771,000 loss. Licensing and maintenance revenue fell 3% and consulting revenue fell 18%; other public-service fees rose 21%, primarily from traffic-citation and e-filing fees.
- The Traditional Business generated $14.895 million, up 1%. Segment operating income was $443,000 versus a $512,000 loss. Advertising revenue rose 7%, but circulation revenue declined 10%, reflecting continued pressure on newspaper subscriptions.
- Consolidated operating expenses decreased $3.988 million, primarily due to lower headcount, contractor costs, rent, and business travel. The company attributed some reductions to office closures and pandemic-related changes.
- Cash, cash equivalents, and restricted cash declined $14.324 million, primarily as the company purchased additional marketable securities. The market value of the securities portfolio increased substantially; its pretax unrealized gain was $244.093 million at year-end.
Outlook, risks, and unusual items
- The filing gives no quantified earnings or revenue guidance. Management expects newspaper advertising and subscription revenues to continue declining and says the magnitude of the COVID-19 pandemic’s future effects cannot be estimated reliably.
- COVID-19 disruptions delayed or canceled government procurement and software implementations; because consulting revenue is generally recognized at project completion or “go-live,” delays can defer revenue and cash receipts. Management also cited possible renewed agency closures and lasting changes such as remote work.
- Key risks include government budget constraints and competitive bidding for Journal Technologies, implementation and customer-acceptance risk, software security breaches, and dependence on continued product upgrades. Traditional Business risks include declining circulation, online advertising competition, changes to public-notice laws or newspaper adjudication, and paper and postage cost increases.
- The investment portfolio is concentrated in seven companies, with most unrealized gains associated with three U.S. financial institutions and one foreign manufacturer. Changes in securities prices affect reported net income and equity; foreign-exchange movements may also affect a Hong Kong-dollar-denominated holding.
- Management reported material weaknesses in internal control over financial reporting, including insufficient segregation of duties and inadequate controls supporting management’s internal-control assessment. Management concluded disclosure controls were not effective at September 30, 2021. The auditor gave an unqualified opinion on the financial statements but was not engaged to audit internal control.
- Management said existing cash flows and working capital should fund operations for the foreseeable future. Ordinary-course litigation was disclosed; management did not expect it to have a material adverse effect. No dividends were paid, and the board did not expect distributions in the foreseeable future.
Important facts for investors to verify
- How much of earnings and equity performance depends on concentrated securities holdings, and how portfolio values, realized gains, taxes, and margin collateral may change.
- Whether Journal Technologies can convert its customer pipeline into completed implementations and sustain recurring license, maintenance, and public-service fee revenue.
- Whether circulation and public-notice advertising declines continue, and whether changes in law or newspaper adjudication could materially affect the Traditional Business.
- What remediation steps, if any, management takes to address the disclosed material weaknesses and improve financial-reporting controls.
- The filing’s reported operating cash flow was $3.286 million, far below reported net income; assess the contribution of investment gains, taxes, and working-capital changes to cash generation.