Daily Journal Corporation — Form 10-Q Summary
Business context and reporting period. The filing covers the three months ended December 31, 2021, the first quarter of fiscal 2022; comparisons are with the three months ended December 31, 2020. Daily Journal operates a Traditional Business publishing newspapers and related services, and Journal Technologies, which provides case-management software and services to justice agencies. The financial statements are unaudited.
Financial results
- Revenue: $11.53 million, up 11% from $10.42 million. Journal Technologies contributed $7.95 million (about 69% of revenue), up 15%; Traditional Business revenue was $3.57 million, up 1%.
- Operating results: Operating expenses rose 7% to $11.47 million. Operating income was $56,000 versus an operating loss of $315,000, an operating margin of approximately 0.5%.
- Profit: Net income was $6.88 million, or $4.98 per diluted share, versus $59.27 million, or $42.93 per share. Pretax income fell to $11.44 million from $81.45 million. Results were substantially affected by investment gains and losses, rather than operating performance.
- Investment results: The company recorded $46.69 million in realized securities gains and $36.09 million in net unrealized securities losses, compared with $81.21 million in unrealized gains and no realized gains in the prior-year quarter. Dividends and interest income were $875,000 versus $638,000. The effective tax rate was 40%, compared with 27%.
- Cash flow: Operating cash flow was $325,000, versus cash used of $2.78 million. Investing activities used $37.11 million, including $87.13 million of securities purchases and $50.02 million of sale proceeds. Financing activities provided $36.98 million, primarily from $37.01 million of additional margin borrowing. Cash and restricted cash ended at $14.84 million.
- Liquidity and assets: Working capital was $373.85 million. Current assets were $417.87 million, including $395.28 million of marketable securities; total assets were $436.01 million. Securities had an adjusted cost basis of $187.28 million and pretax unrealized gains of $208.01 million.
- Debt: Investment margin borrowings were $69.01 million, up from $32.00 million at September 30, 2021; the stated interest rate was 0.75% and the borrowings do not mature. The real-estate loan balance was approximately $1.54 million, at a fixed 3.33% rate.
Material changes and segment trends
- Journal Technologies revenue increased $1.06 million. Consulting fees rose $1.52 million, primarily with more project go-lives; licensing and maintenance fees declined $553,000, partly reflecting the cessation of support for legacy products. Its operating loss narrowed to $450,000 from $863,000.
- Traditional Business revenue increased $45,000, while pretax income declined 8% to $506,000. Advertising rose 6%, including a recovery in foreclosure notices after moratoriums were lifted; circulation declined 8%.
- Consolidated operating expenses increased $737,000, including higher salaries, outside services and travel-related general and administrative costs.
- In December, the company sold securities and used the proceeds, together with additional margin borrowing, to purchase more securities. The filing reports $29.92 million of unrealized losses on these recent purchases at quarter-end.
Outlook, risks and controls
- No quantified earnings or revenue guidance is provided. Management expects to fund operations for the foreseeable future from operating cash flow and working capital, while noting it may need to sell securities or borrow against them to fund operations.
- Management says COVID-19 and its variants have affected, and may continue to affect, customer operations, project procurement and implementations, advertising, subscriptions and cash flows. It cannot estimate the pandemic’s full impact. Delayed software go-lives can defer implementation revenue; management also expects the newspaper industry’s longer-term decline to continue.
- Key risks include software development and implementation, reliance on government customers and professional-services projects, security breaches, declining newspaper subscriptions, changes to public-notice requirements, securities-price declines and margin calls. The investment portfolio’s unrealized gains are concentrated mainly in three U.S. financial institutions and one foreign manufacturer.
- Management states that disclosure controls and procedures were not effective as of December 31, 2021, in light of material weaknesses in internal control previously reported in the fiscal 2021 Form 10-K. No material control changes were reported during the quarter.
- Management does not believe pending ordinary-course contingencies will have a material adverse effect. The filing reports no subsequent events requiring recognition or disclosure.
Important facts for investors to verify
- How investment-portfolio concentration, valuation changes and potential margin calls affect the company’s risk and liquidity.
- Whether Journal Technologies can sustain revenue growth and convert implementations into timely go-lives and cash collections, while managing legacy maintenance declines.
- Whether operating performance improves independently of realized and unrealized securities results.
- Progress addressing the disclosed material weaknesses and the related effect on financial reporting controls.
- Whether COVID-related delays, newspaper-industry declines and changes in public-notice advertising requirements materially affect future results.