Daily Journal Corporation — Fiscal Q1 2016
Reporting period: Three months ended December 31, 2015, compared with the three months ended December 31, 2014. Daily Journal operates a Traditional publishing and public-notice business and Journal Technologies, which provides case-management software and related services.
Financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $10.815 million | $11.323 million |
| Operating expenses | $11.777 million | $11.684 million |
| Operating loss | $962,000 | $361,000 |
| Income (loss) before taxes | $(135,000) | $408,000 |
| Income tax benefit | $185,000 | $25,000 |
| Net income | $50,000 | $433,000 |
| Basic and diluted EPS | $0.04 | $0.31 |
| Comprehensive income (loss) | $5.977 million | $(3.209) million |
Revenue declined 4%; operating costs rose 1%. The operating loss was approximately 8.9% of revenue, versus 3.2% in the prior-year quarter. Comprehensive income included a $5.927 million after-tax increase in unrealized investment appreciation, compared with a $3.642 million decrease in the prior period.
Segments and changes versus prior year
- Traditional Business: Revenue was $4.477 million, down from $4.913 million; operating income fell to $124,000 from $290,000. Advertising revenue decreased $383,000, including a 20% decline in foreclosure notices published. Management expects fewer foreclosure notices and declining print-based revenue in fiscal 2016, with print earnings likely to decline significantly because expense reductions may not offset lost revenue.
- Journal Technologies: Revenue was $6.338 million, down from $6.410 million; operating loss widened to $1.086 million from $651,000. Lower public-service fees and higher personnel and installation-related travel costs contributed. Consulting fees increased, while licensing and maintenance fees declined. The segment generated about 59% of consolidated revenue, up from 57%.
- Commercial advertising revenue declined $208,000, partly reflecting the discontinuation of California Lawyer magazine effective October 1, 2015. Consolidated revenue also fell due to lower trustee-sale and related service fees and lower Journal Technologies public-service fees.
Cash flow, liquidity and debt
- Operating cash flow was a use of $1.615 million, compared with $252,000 provided in the prior-year quarter. Investing activities used $7.379 million, including $3.541 million of property and equipment purchases; financing provided $2.260 million.
- Cash and cash equivalents were $8.883 million at December 31, down from $15.617 million at September 30, 2015. Cash plus marketable securities totaled $187.867 million. Working capital was $126.310 million.
- Marketable securities were valued at $178.984 million, with $120.602 million of pretax unrealized gains. Most gains were in common stocks of three U.S. financial institutions; investments were concentrated in seven companies.
- Investment margin borrowings were $29.493 million, collateralized by marketable securities and bearing a 1% rate at quarter-end, with no stated maturity. A new $2.260 million real-estate loan financed the Logan, Utah office purchase; it bears fixed interest of 4.66% and is repayable through 2030. Total disclosed borrowings were approximately $31.753 million.
- The company purchased its previously leased Logan office building for $3.5 million, funded with $1.24 million paid directly and the real-estate loan.
Outlook, risks and other notable items
- Management believes operating needs can be funded for the foreseeable future through operating cash flows and working capital. It may pursue acquisitions and may use excess cash to reduce debt or invest; no specific earnings or revenue guidance was provided.
- Public-notice advertising depends on legally required publication and newspapers retaining adjudicated status. Changes in law, loss of eligibility, or continuing declines in foreclosure notices could materially affect the Traditional Business.
- Journal Technologies faces software-development and implementation risks and relies substantially on professional-services engagements with justice agencies. Installation revenues may not be recognized until customers accept completed projects.
- Investment concentration exposes equity and earnings to declines in a small number of securities; the filing states that such declines could reduce shareholders’ equity or lead to impairment losses. Management assessed current unrealized equity losses as temporary.
- An approximately $2.925 million liability for uncertain tax benefits relates to a fiscal 2013 acquisition; management did not anticipate a significant change in the next 12 months. The filing also reports ordinary-course litigation, with management not expecting a material outcome.
- Management concluded disclosure controls and procedures were not effective at December 31, 2015, in light of material weaknesses previously reported. It intended to adopt the 2013 COSO framework during the fiscal year; no material control changes occurred in the quarter.
Important facts for investors to verify
- Whether the expected decline in foreclosure notices and print earnings continues, and how public-notice law or newspaper adjudication could affect revenue.
- Journal Technologies’ project pipeline, customer acceptance timing, deferred installation contracts, and ability to improve segment operating performance.
- Market value, concentration, and collateral implications of the securities portfolio, including the margin borrowing balance and related interest exposure.
- Progress addressing the disclosed material weaknesses in internal control and the uncertain-tax-benefit liability.