Daily Journal Corporation — FY2019 Form 10-K
Business context and period: This annual report covers the fiscal year ended September 30, 2019, not a calendar fourth-quarter report. Daily Journal operates a Traditional Business publishing newspapers and related services, and Journal Technologies, which provides case-management software and related services primarily to courts and government agencies.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $48.655 million | $40.703 million |
| Operating loss | $18.224 million | $14.060 million |
| Pretax loss | $31.476 million | $11.339 million |
| Net income (loss) | $(25.216) million | $8.201 million |
| Net income (loss) per share | $(18.26) | $5.94 |
| Cash provided by (used in) operations | $1.615 million | $(1.881) million |
| Cash and cash equivalents at year-end | $10.630 million | $9.301 million |
| Total assets / shareholders’ equity | $237.376 million / $137.700 million | $263.998 million / $162.916 million |
Revenue grew 20%. The operating margin was approximately negative 37.5%, versus negative 34.5% in FY2018; net margin was approximately negative 51.8%, versus positive 20.1%. The reported loss included a $13.4 million goodwill impairment and $17.715 million of unrealized investment losses. FY2019 tax benefit was $6.260 million (effective rate about 19.9%); the much larger FY2018 tax benefit reflected significant Tax Act-related deferred-tax adjustments.
Journal Technologies generated $31.562 million of revenue, up 34%, and represented about 65% of total revenue. It reported an $18.336 million operating loss, including the goodwill write-off. Traditional Business revenue was $17.093 million, slightly down from $17.172 million; operating income was $112,000.
Changes, liquidity and debt
- Journal Technologies’ licensing and maintenance revenue rose 17% to $20.179 million; consulting revenue rose 96% to $5.539 million, and public service fees rose 68% to $5.844 million, mainly reflecting more project go-lives and e-filings.
- Traditional Business circulation revenue fell 3% to $5.249 million. Foreclosure notices published declined 14%; trustee-sale advertising revenue continued to weaken.
- Marketable securities were valued at $194.581 million, with $140.692 million of pretax unrealized gains relative to adjusted cost. Under an accounting standard adopted in FY2019, changes in equity-security fair value are recognized in net income; the year’s $17.715 million unrealized loss was not a realized sale loss. The portfolio was concentrated in six companies.
- Working capital was $182.280 million, including $20.849 million of deferred subscription, installation and maintenance obligations. Cash increased by $1.329 million, while cash plus marketable securities declined by $16.386 million, primarily due to investment-value changes.
- Debt included $29.493 million of investment-margin borrowings collateralized by marketable securities, with no maturity and a 2.5% rate at year-end, and a $1.835 million real-estate loan. Total stated borrowing was approximately $31.3 million. The filing says the company expects to fund operations for the foreseeable future from operating cash flow and working capital.
Outlook, risks and unusual items
- No formal earnings guidance is provided. Management expects fewer foreclosure and other public-notice advertisements and declining related revenue in FY2020; it also expects newspaper subscriptions to continue declining.
- Journal Technologies is ending support for New Dawn and ISD legacy products and focusing on its internet-based product family. Software updates and upgrades remain a significant ongoing expense; installations carry acceptance and go-live timing risks.
- The full $13.4 million of goodwill associated with the 2013 acquisitions was impaired based on a third-party valuation. This was a non-cash charge.
- Investment-market and foreign-exchange fluctuations could materially affect reported earnings and equity. A hypothetical 30% securities-price decline would reduce estimated shareholders’ equity by 42%, according to the filing’s sensitivity analysis.
- Other material risks include changes to laws requiring public notices, loss of a newspaper’s adjudicated status, competition and postal/paper cost changes, government customer budget constraints, cybersecurity incidents, and dependence on CEO/CFO Gerald Salzman, who reduced his work schedule after a 2018 TIA.
- Management and the auditor reported material weaknesses in internal control, including inadequate segregation of duties and weaknesses in management’s assessment and documentation of controls. Disclosure controls were deemed ineffective at September 30, 2019. The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting.
- Management said ordinary-course litigation was not expected to have a material adverse effect. The company paid no dividends in FY2019 and did not expect distributions in the foreseeable future.
Most important facts to verify
- Whether Journal Technologies’ revenue growth converts into improved operating results, and the timing and performance of installation projects and go-lives.
- Progress addressing internal-control material weaknesses and any subsequent changes in audit or control findings.
- Current value, concentration, collateral terms and exposure of the securities portfolio and margin borrowings.
- FY2020 trends in foreclosure notices, public-notice legislation, circulation and other Traditional Business revenue.
- Execution and costs of the legacy-software wind-down and transition to Journal Technologies’ internet-based products.