Daily Journal Corporation — Form 10-Q
Reporting period: Three and six months ended March 31, 2018; balance sheet compared with September 30, 2017. The company operates a Traditional newspaper and related-services business and Journal Technologies, which provides case-management software and services primarily to justice agencies.
Financial performance and position
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 |
|---|---|---|
| Revenue | $9.338 million, versus $10.279 million | $19.590 million, versus $20.269 million |
| Operating loss | $4.373 million, versus $3.266 million | $7.818 million, versus $6.119 million |
| Pre-tax loss | $332,000, versus $1.261 million | $2.443 million, versus $3.042 million |
| Net income (loss) | $(232,000), versus $2.979 million | $14.507 million, versus $1.508 million |
| Net income (loss) per share | $(0.17), versus $2.16 | $10.51, versus $1.09 |
- Revenue and operating trends: Six-month revenue fell 3%, while operating expenses rose 4% to $27.408 million. Personnel costs increased $1.014 million; lower amortization partly offset higher personnel and general and administrative costs. No gross margin figure is presented.
- Segments: Six-month Traditional Business revenue was $8.305 million and operating loss was $202,000. Journal Technologies revenue was $11.285 million and operating loss was $7.616 million; its consulting revenue declined 44% to $1.207 million, while licensing and maintenance revenue rose 6% to $8.331 million.
- Tax and unusual items: Six-month net income includes a $16.950 million income tax benefit, principally reflecting an approximately $16 million discrete benefit from remeasuring deferred taxes after the Tax Act lowered the federal corporate rate to 21%. Pre-tax results remained a loss. The prior-year period included tax-related reversals, including a $743,000 reversal of accrued interest and penalties. The quarter included a $3.180 million gain on bond sales.
- Cash flow: Operating activities used $4.153 million in the first six months, versus $2.100 million used in the prior-year period. Investing activities provided $8.050 million, mainly from selling bonds for $8.125 million; capital expenditures were $75,000. Cash increased $3.840 million to $7.224 million.
- Liquidity and debt: Working capital was $208.373 million, including $16.457 million of deferred subscription, installation, maintenance and other obligations. Cash and marketable securities totaled $225.027 million at March 31, 2018. Debt included $29.493 million of investment-margin borrowings, collateralized by marketable securities, and approximately $2.014 million on a real-estate loan. The margin borrowing rate was 2% and has no stated maturity.
- Investments and equity: Marketable securities were $217.803 million, with $159.354 million of pre-tax unrealized gains; the portfolio was concentrated in six companies. Shareholders’ equity was $169.952 million, up from $159.741 million at September 30, 2017. Comprehensive income was $12.764 million for the six-month period, including a $1.743 million after-tax decrease in unrealized appreciation.
Material changes, outlook and risks
- Management attributed the six-month revenue decline mainly to lower Journal Technologies consulting fees, recognized when projects reach go-live, and declines in traditional circulation and public-notice-related revenues. Journal Technologies’ operating loss widened as expenses increased 8%, principally from personnel and computer services.
- Management expects fewer foreclosure notices and further declines in public-notice advertising in fiscal 2018, with a significant likely decline in print-based earnings because expense reductions may not offset lost revenue. Public-notice advertising and related service fees represented about 21% of total six-month revenue. Changes to publication requirements or loss of a newspaper’s adjudicated status could materially affect this business.
- The company said it expects to fund foreseeable operations with cash flows and working capital, while noting it may or may not be able to borrow against its securities. Risks include concentrated investment exposure, software development and implementation, reliance on justice-agency engagements, cybersecurity, declining print revenues and possible changes in public-notice laws.
- Management reported no material expected effect from ordinary-course contingencies. No goodwill impairment indicator was identified for the six-month period. The company adopted ASC 606 in fiscal 2018 and reported no significant financial-statement impact.
- Management said disclosure controls were effective. It continued remediation related to a previously identified internal-control material weakness, including use of a ticketing system to track changes to its legal-advertising system; remediation effectiveness remains under evaluation.
- In April 2018, CEO, President and CFO Gerald Salzman suffered a transient ischemic attack (TIA), was working from home while undergoing physical therapy, and began delegating some duties.
Important facts for investors to verify
- Whether Journal Technologies can convert deferred installation work and project activity into go-lives and consulting revenue while controlling rising operating costs.
- The pace and financial effect of further declines in foreclosure notices, public-notice advertising and print circulation.
- The magnitude and sustainability of earnings excluding the discrete Tax Act benefit and bond-sale gain.
- The composition, concentration and market value of the investment portfolio, and the collateral and interest-rate exposure of margin borrowings.
- Progress in remediating the previously identified internal-control material weakness and the effect of the CEO’s reduced schedule and delegation of duties.