Daily Journal Corporation — FY2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended September 30, 2017; it is not a standalone fourth-quarter filing. Daily Journal operates two businesses: a traditional newspaper, public-notice advertising and information-services business, and Journal Technologies, which sells case-management software and related services to courts and other justice agencies. Journal Technologies accounted for approximately 58% of FY2017 revenue.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $41.384 million | $41.612 million |
| Operating loss | $13.167 million | $6.640 million |
| Pretax loss | $8.068 million | $2.978 million |
| Net loss / diluted loss per share | $0.918 million / $0.66 | $1.043 million / $0.76 |
| Net cash from operating activities | $(2.651) million | $1.224 million |
| Cash and cash equivalents | $3.384 million | $11.411 million |
| Marketable securities | $229.265 million | $166.634 million |
| Total assets / shareholders’ equity | $280.200 million / $159.741 million | $225.446 million / $125.343 million |
Revenue declined about 0.5%, while operating expenses rose 13% to $54.551 million, principally from Journal Technologies personnel, contractors and other costs. Operating margin was approximately negative 31.8%, versus negative 16.0% in FY2016. The income tax benefit of $7.150 million included reversal of a $2.723 million uncertain-tax liability and related interest and penalties; the net loss narrowed despite a larger pretax loss.
Comprehensive income was $34.398 million, driven by $35.316 million of after-tax unrealized investment gains, rather than operating earnings. The securities portfolio had $165.872 million in pretax unrealized gains and generated $4.844 million in dividends and interest. Portfolio value was concentrated in seven companies, with foreign-currency exposure.
Working capital was $151.638 million. The company reported total borrowings of approximately $31.564 million: $29.493 million of margin-account borrowings secured by marketable securities, plus a $2.071 million real-estate loan. The margin loans have no stated maturity and a variable rate, which was 1.75% at year-end. Management said it believed cash and marketable securities were sufficient for the foreseeable future. Cash and securities together increased by $54.604 million during the year.
Unaudited fourth-quarter FY2017 revenue was $10.914 million, operating loss $3.415 million, and net loss $1.075 million, or $0.77 per share.
Material changes versus the prior year
- Traditional Business revenue fell to $17.570 million from $18.417 million; its pretax result shifted from $1.141 million income to a $0.360 million loss. Foreclosure notices published declined 25%, reducing trustee-sale and related service-fee revenue by $724,000.
- Journal Technologies revenue increased 3% to $23.814 million, including growth in licensing and maintenance and consulting. Other public service fees fell $1.051 million, mainly because fewer traffic citations were processed online. Segment pretax loss widened to $12.142 million from $7.929 million as expenses increased 18%.
- Traditional advertising revenue decreased $750,000 and circulation revenue decreased $258,000. The filing cites declining foreclosures, newspaper subscriptions and advertising as continuing pressures.
- Operating cash flow moved from positive $1.224 million to negative $2.651 million. The company attributed the change in part to higher receivables and deferred taxes, and lower income taxes payable.
Outlook, risks and unusual items
- Management expected Traditional Business print-based earnings and revenue to decline significantly in FY2018 as foreclosure notices continue to fall; it said expense reductions may not offset the revenue decline. Arizona had approved a change eliminating a particular notice type, which the company estimated represented about $500,000 in annual revenue.
- Journal Technologies’ growth depends on winning public-sector contracts, completing implementations to customer acceptance, and continuing product updates. Government budget constraints, competitive bidding, larger competitors and project delays may affect revenue and profitability. Development and upgrade costs are expensed as incurred.
- Other principal risks include legislative changes to public-notice requirements, loss of a newspaper’s adjudicated status, paper and postage costs, cybersecurity incidents, concentration and market-price risk in the investment portfolio, and reliance on CEO/CFO Gerald Salzman. Management said paper prices were expected to remain unchanged through at least June 2018.
- The company identified material weaknesses in IT general controls and controls over software-contract revenue recognition, including insufficient segregation of duties, privileged-access monitoring and technical accounting expertise. Management concluded disclosure controls and internal control over financial reporting were ineffective as of September 30, 2017; the auditor issued an adverse opinion on internal control. The financial-statement audit opinion was unqualified.
- Management reported no material adverse expectation from ordinary-course litigation. No dividend was paid, and the board did not expect distributions in the foreseeable future.
Important facts for investors to verify
- Whether FY2018 Traditional Business revenue and earnings declined as forecast, and the continuing pace of foreclosure-notice reductions.
- Whether Journal Technologies converts licensing growth into improved segment profitability, and how implementation acceptance and deferred contract revenue develop.
- Portfolio concentration, unrealized gains, and exposure to market prices and foreign exchange; FY2017 comprehensive income depended substantially on unrealized gains.
- Progress in remediating material weaknesses, especially software revenue-recognition and IT controls, and any effect on reported results.
- Cash generation, margin-loan balances and interest costs, given negative FY2017 operating cash flow and securities pledged as collateral.