Daily Journal Corporation — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2021; unaudited. The company operates a Traditional newspaper and public-notice business and Journal Technologies, which provides case-management software and related services.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $13.562 million, up 5% year over year | $37.952 million, up 3% |
| Operating income (loss) | $1.324 million vs. $0.593 million | $2.314 million vs. loss of $2.023 million |
| Net income (loss) | $42.573 million ($30.83 per share) vs. $14.274 million ($10.34 per share) | $114.319 million ($82.80 per share) vs. loss of $27.842 million (loss of $20.16 per share) |
| Operating cash flow | Not separately presented for the quarter | $22,000 vs. cash used of $1.501 million |
- Nine-month results included $131.754 million in unrealized investment gains and $18.478 million in realized gains; the comparable prior-year period included $41.191 million in unrealized losses. These investment gains, rather than operating earnings, drove the large improvement in net income.
- Nine-month operating expenses fell 8% to $35.638 million, contributing to the return to operating profitability. Reduced personnel, travel, contractor and office costs were among the factors.
- At June 30, cash and cash equivalents were $9.333 million, restricted cash was $2.043 million, and marketable securities were $349.593 million. Working capital was $345.120 million.
- Total borrowings included $32.0 million under an investment margin account and about $1.615 million on the real-estate loan. Margin borrowings are collateralized by securities, have no stated maturity, and bore a 0.75% rate at June 30.
- Cash, restricted cash and cash equivalents declined $17.587 million over the nine months, primarily as the company bought additional securities. Securities purchases were $39.995 million; net cash from financing activities was $2.413 million.
Segments and changes versus prior year
- Journal Technologies: Nine-month revenue rose 5% to $26.881 million, about 71% of company revenue. Segment operating income was $2.244 million versus an operating loss of $1.899 million. Higher licensing, maintenance and public-service fees were partly offset by lower consulting fees and fewer project go-lives. In the June quarter, revenue declined 3% to $9.479 million and operating income fell to $906,000 from $1.161 million.
- Traditional Business: Nine-month revenue was $11.071 million, down slightly, and segment operating income was $70,000 versus a $124,000 loss. Circulation revenue declined 10%; public-notice and advertising trends were mixed. The June quarter’s segment revenue increased, principally from legal-notice advertising, and operating income was $418,000 versus a $568,000 loss.
- Investment portfolio fair value rose from $179.368 million at September 30, 2020 to $349.593 million at June 30, 2021. Pretax unrealized gains accumulated to $269.347 million; most were associated with three U.S. financial institutions and one foreign manufacturer.
- Nine-month dividend and interest income fell to $2.063 million from $4.573 million. The company reported an overall effective tax rate of 26%, including tax on realized and unrealized investment gains.
Outlook, risks and other notable matters
- No numerical earnings or revenue guidance was provided. Management expects to fund operations for the foreseeable future through operating cash flows and working capital, but notes it might need to sell securities or borrow against them. A significant decline in collateral values could result in margin calls.
- Management said COVID-19 and the Delta variant could continue to disrupt customers, advertisers and subscribers. Court and government procurement delays and restrictions on in-person implementation work can delay software go-lives and related consulting revenue. Management could not estimate the pandemic’s overall financial impact.
- The company expects continued decline in its newspaper business and anticipated fewer foreclosure and other public-notice advertisements and lower related revenue for fiscal 2021. Public-notice revenue is exposed to changes in publication laws and newspaper adjudication status.
- Journal Technologies ended maintenance of certain legacy software products effective July 1, 2021, which management expects to reduce legacy licensing and maintenance revenue. Software development and implementation execution remain important risks.
- Portfolio value and reported earnings are exposed to market-price movements; investments were concentrated in nine companies. The company also cited cybersecurity, key-person, and other business risks.
- Management did not expect routine-course contingencies, including litigation, to have a material effect. No subsequent events requiring recognition or disclosure were reported.
- Controls: Due to previously reported material weaknesses in internal control over financial reporting, management concluded disclosure controls and procedures were not effective as of June 30, 2021.
Important facts for investors to verify
- How much of reported earnings and equity reflects unrealized portfolio gains, and how concentrated the securities exposure remains.
- Whether operating cash generation improves, given only $22,000 of operating cash flow for the nine-month period and the substantial reported net income.
- Journal Technologies’ project go-live timing, consulting revenue, public-service fee growth, and the impact of ending legacy-product maintenance.
- Trends in circulation, advertising and legally required public notices, including the effect of foreclosure restrictions and any changes to publication requirements.
- Progress addressing internal-control material weaknesses and any updates on the pandemic’s effects on customers and implementations.