Daily Journal Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020; this is an annual report, not a quarterly filing. The company operates two businesses: Traditional Business (newspapers, advertising and related services) and Journal Technologies (justice-system software and services).
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $49.942 million | $48.655 million |
| Operating income (loss) | $(1.283) million | $(18.224) million |
| Income (loss) before taxes | $4.226 million | $(31.476) million |
| Net income (loss) | $4.041 million; $2.93 per share | $(25.216) million; $(18.26) per share |
| Cash from operating activities | $2.336 million | $1.615 million |
| Capital expenditures | $0.184 million | $0.165 million |
- Revenue rose 3% overall. Journal Technologies generated $35.247 million, up 12%, or approximately 71% of total revenue. Traditional Business revenue was $14.695 million, down 14%.
- Operating margin was approximately negative 2.6%; net margin was approximately 8.1%. Net income included investment-related items and should not be read as operating-business profitability alone.
- Cash and restricted cash totaled $28.963 million at year-end. Marketable securities were valued at $179.368 million, with $137.593 million in pretax unrealized gains. Working capital was $188.318 million.
- Debt included $29.493 million in margin-account borrowings secured by marketable securities and a $1.709 million real-estate loan. The margin borrowings do not mature; their rate was 0.75% at year-end.
- No shareholder dividends were paid in FY2020 or FY2019, and management did not expect distributions in the foreseeable future.
Material changes versus FY2019
- Journal Technologies revenue increased by $3.685 million, including higher licensing and maintenance fees and consulting fees. Its segment reported $0.447 million in operating income, compared with an $18.336 million operating loss in FY2019, which included a $13.4 million goodwill impairment.
- Traditional Business advertising revenue fell 22% to $7.104 million; circulation revenue fell 3% to $5.090 million. The company reported a $1.730 million segment operating loss, versus $0.112 million operating income in FY2019.
- Consolidated operating expenses were $51.225 million, down 4% excluding FY2019’s goodwill impairment. Lower travel, rent and other costs partly offset higher salaries and employee benefits.
- Non-operating results improved substantially: FY2020 included $4.193 million in net gains on securities sales and $3.099 million in unrealized investment losses, versus $17.715 million in unrealized losses and no reported security-sale gains in FY2019.
- Cash and restricted cash increased by $18.333 million, principally reflecting $16.307 million of proceeds from security sales. Operating cash flow was $2.336 million.
Outlook, risks and unusual items
- Management gave no quantified financial guidance and said it could not estimate the magnitude of COVID-19’s future impact. It expected newspaper-industry declines to continue, potentially at an accelerated pace, and anticipated further pressure on advertising and subscription revenue.
- COVID-19 disrupted court and agency operations, procurement, in-person software implementations, e-filing activity and customer payments. Delayed project go-lives delayed consulting revenue; reduced business travel lowered costs. The company reorganized its workforce in April 2020, including layoffs and temporary furloughs.
- Traditional Business risks include declining foreclosures and subscriber numbers, online competition, possible statutory reductions in required public notices, loss of a newspaper’s adjudicated status, and rising paper or postage costs. Foreclosure notices published fell 34% year over year.
- Journal Technologies depends on government customers, competitive procurements and successful software implementations; customer acceptance and project completion affect when installation revenue is recognized. Software update and upgrade costs are expensed as incurred.
- The concentrated securities portfolio creates material exposure to market-price and foreign-exchange movements. Unrealized investment gains and losses flow through reported net income under the applicable accounting rules, so earnings can vary independently of operating performance.
- Management concluded disclosure controls and internal control over financial reporting were not effective at September 30, 2020 because of material weaknesses involving segregation of duties and the assessment of controls, including the absence of an internal audit function. The independent auditor issued an unqualified opinion on the financial statements.
- Management said ordinary-course litigation was not expected to materially affect financial position, results or cash flows. The company anticipated a CARES Act-related tax refund for taxes and alternative minimum taxes paid in FY2014; the filing does not establish that the refund had been received.
Key facts for investors to verify
- Whether Journal Technologies can sustain revenue growth and convert delayed implementations into accepted, billable go-lives and cash collections.
- How ongoing COVID-19 effects and longer-term changes in court operations affect software projects, e-filing fees, customers’ payments and Traditional Business revenue.
- The market value, concentration and dividend income of the securities portfolio, and the resulting effect on earnings, equity and borrowing capacity.
- Progress in addressing the disclosed material weaknesses in internal controls.
- Whether public-notice laws, foreclosure activity, adjudication status, subscription trends and postage or paper costs materially change Traditional Business performance.
- Debt terms and collateral exposure, including the margin borrowings secured by marketable securities and the subsequent real-estate loan rate amendment disclosed in the filing.