Daily Journal Corporation — Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2019; fiscal year ends September 30. The company operates a Traditional Business (newspapers, publications and public-notice advertising) and Journal Technologies (case-management software and services for justice agencies).
Financial results
| Metric | Three months ended June 30, 2019 | Nine months ended June 30, 2019 | Comparable 2018 period |
|---|---|---|---|
| Revenue | $14.518 million, up 32% | $35.658 million, up 17% | $11.007 million quarterly; $30.597 million nine-month |
| Operating income (loss) | $1.124 million | $(4.068) million | $(2.709) million quarterly; $(10.527) million nine-month |
| Net income (loss) | $3.823 million; $2.77 per share | $(12.692) million; $(9.19) per share | $(0.972) million quarterly; $13.535 million nine-month |
| Operating cash flow | Not separately presented | $(0.606) million | $(6.250) million nine-month |
Third-quarter revenue growth was led by Journal Technologies. Nine-month Journal Technologies revenue rose 29% to $22.947 million, while Traditional Business revenue was nearly flat at $12.711 million. Journal Technologies produced 64% of nine-month revenue, versus 58% a year earlier. Its nine-month operating loss narrowed to $4.294 million from $10.556 million, aided in part by the completion of intangible-asset amortization; the Traditional Business reported $226,000 of operating income.
The nine-month net loss includes $16.929 million of unrealized investment losses recognized in earnings under an accounting standard adopted in fiscal 2019. The prior-year nine-month net income included a substantial tax benefit related primarily to the Tax Cuts and Jobs Act; the company reported a $4.980 million tax benefit in 2019 versus $17.660 million in 2018. In the third quarter, $3.214 million of unrealized investment gains contributed to the return to net income.
Balance sheet, liquidity and debt
- At June 30, 2019, cash and cash equivalents were $8.508 million and marketable securities were $195.367 million, compared with $9.301 million and $212.296 million, respectively, at September 30, 2018.
- Working capital was $182.415 million. Current assets totaled $212.830 million and current liabilities $30.415 million.
- Marketable securities had a $53.889 million adjusted cost basis and $141.478 million of pretax unrealized gains. The portfolio was concentrated in six companies; most unrealized gains related to three U.S. financial institutions and one foreign manufacturer.
- Debt included $29.493 million of investment-margin borrowings, secured by marketable securities, at a 3% rate as of June 30, with no stated maturity, and approximately $1.866 million outstanding on a real-estate loan. Nine-month interest expense was $676,000 on margin loans and $67,000 on the real-estate loan.
- Nine-month capital expenditures were $97,000. Cash and securities together declined by $17.722 million, including the $16.929 million unrealized investment loss.
Outlook, risks and notable disclosures
- Management said available working capital and operating cash flows should fund operations for the foreseeable future; it may also consider acquisitions, debt reduction or further investments. No specific earnings or revenue guidance was provided.
- Management expected fewer foreclosure notices to continue, with declining foreclosure-notice and other public-notice advertising revenue for fiscal 2019. The filing cites possible legal changes affecting required public notices and challenges to newspaper adjudication status as material risks.
- Management highlighted the investment portfolio’s concentration and warned that declines in individual holdings could materially reduce earnings and shareholders’ equity. Unrealized investment value changes now flow through net income and may cause significant earnings volatility.
- Other identified risks include software development and implementation, reliance on professional-services engagements with justice agencies, cybersecurity breaches, declines in subscriptions or commercial advertising, and the CEO’s reduced work schedule due to a health issue.
- Management concluded disclosure controls and procedures were not effective as of June 30, 2019 because of previously reported material weaknesses in internal control over financial reporting. It reported no material changes in internal control during the quarter.
- Management reported no goodwill impairment indicator during the period and no subsequent event requiring disclosure. It did not believe normal-course contingencies, including litigation, would materially affect the company.
Important facts for investors to verify
- Whether Journal Technologies can sustain revenue growth and improve operating profitability as implementation and staffing costs evolve.
- Whether declines in foreclosure notices, public-notice advertising or circulation accelerate, and whether legal or adjudication changes affect eligibility to publish notices.
- The market value, concentration and collateral implications of the securities portfolio, including the margin-borrowing terms and exposure to further price declines.
- How recurring operating cash generation compares with reported earnings, which are affected by investment valuation changes and tax items.
- Progress in remediating the disclosed internal-control material weaknesses.