Daily Journal Corporation — Q1 FY2017 10-Q
Reporting period: Three months ended December 31, 2016; comparisons are with the three months ended December 31, 2015 unless otherwise noted. The company operates a Traditional Business (newspapers and related services) and Journal Technologies (justice-agency case-management software and services).
Financial results
| Metric | Q1 FY2017 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $9.990 million | $10.815 million | Down $0.825 million (8%) |
| Operating expenses | $12.843 million | $11.777 million | Up $1.066 million (9%) |
| Operating loss | $2.853 million | $0.962 million | Loss widened |
| Loss before tax | $1.781 million | $0.135 million | Loss widened |
| Net income (loss) | $(1.471) million | $0.050 million | Turned to a loss |
| Diluted EPS | $(1.07) | $0.04 | Turned to a loss |
| Operating margin | Approximately (28.6%) | Approximately (8.9%) | Contracted |
Revenue fell primarily because Journal Technologies consulting fees declined $528,000 and other public service fees fell $536,000; licensing and maintenance fees increased $319,000. Traditional Business revenue was $4.397 million, down 2%; Journal Technologies revenue was $5.593 million, down 12% and about 56% of consolidated revenue. Journal Technologies' operating loss widened to $2.850 million from $1.086 million. Traditional Business recorded a $3,000 operating loss versus $124,000 operating income.
Personnel costs rose $993,000 (15%) to $7.641 million, mainly reflecting Journal Technologies staffing and travel. Dividends and interest income increased to $1.171 million from $0.903 million. Net margin was approximately (14.7%), compared with approximately 0.5% in the prior-year quarter.
Cash flow, liquidity and debt
- Operating cash flow was negative $1.311 million, compared with negative $1.615 million. Investing cash use was $5.200 million, including $5.013 million of marketable-security purchases and $187,000 of capital expenditures. Financing cash use was $27,000.
- Cash declined to $4.873 million from $11.411 million. Cash plus marketable securities totaled $201.359 million at December 31, up $23.314 million from September 30, 2016.
- Working capital was $133.355 million. Current assets were $208.047 million and current liabilities $74.692 million; current liabilities include deferred taxes and deferred customer revenue.
- Marketable securities were $196.486 million, including $188.729 million of common stocks and $7.757 million of bonds. The portfolio had $133.095 million of pretax unrealized gains, with $52.070 million of related deferred tax liability. Most unrealized gains were in three U.S. financial institutions; investments were concentrated in seven companies.
- Debt included $29.493 million of margin-account borrowings secured by marketable securities, with a 1.25% variable rate and no maturity, and approximately $2.154 million remaining on the Logan real-estate loan, fixed at 4.66% and repayable through 2030.
Material changes, outlook and risks
- After-tax unrealized appreciation in marketable securities increased $15.019 million; comprehensive income was $13.548 million despite the net loss. The company concluded a below-cost equity security's unrealized loss was temporary.
- Management expects fewer foreclosure notices and declining Traditional Business public-notice revenue in FY2017; it said print-based earnings are likely to decline significantly because expense reductions may not offset revenue losses. Foreclosure notices published fell 21% year over year.
- Journal Technologies' traffic-ticket processing fees were affected by fewer online ticket payments and an Amnesty Program expected to reduce fines through March 2017. Management said personnel and travel costs were expected to continue increasing in the foreseeable future. Installation-project revenue generally depends on customer completion and acceptance.
- The company said existing cash flows and working capital should fund operations for the foreseeable future. It provided no specific consolidated revenue or earnings guidance and cautioned that quarterly results are not necessarily indicative of full-year results.
- Key risks include concentration in a small number of securities; changes in security prices; reduced public-notice requirements or loss of newspaper adjudication status; further declines in foreclosures, subscriptions or advertising; software implementation, customer acceptance and security risks; and reliance on justice-agency engagements.
- The IRS was examining the fiscal 2014 federal return; the outcome was unknown. The company reported approximately $2.655 million in liabilities for uncertain tax benefits related to a fiscal 2013 acquisition. Management said ordinary-course contingencies were not expected to materially affect results, but outcomes cannot be predicted.
Important facts for investors to verify
- Whether Journal Technologies can restore consulting and public-service-fee growth while controlling personnel and travel costs.
- Whether the expected decline in foreclosure notices and public-notice revenues continues, and whether legal or adjudication changes affect publication rights.
- The composition, concentration and market value of the investment portfolio, and the sensitivity of equity and earnings to declines in its holdings.
- Progress and resolution of the IRS examination and the adequacy of the uncertain-tax-benefit accrual.
- Timing of software installation completion and customer acceptance, which affects revenue recognition and deferred contract balances.
The company reported that disclosure controls were effective as of December 31, 2016 and that there were no material changes in internal control over financial reporting during the quarter.