Daily Journal Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2022, compared with the corresponding 2021 periods. Daily Journal operates a Traditional Business publishing newspapers and related services, and Journal Technologies, which supplies case-management software and services to justice agencies.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $10.717 million, down 23% from $13.970 million | $22.245 million, down 9% from $24.390 million |
| Operating income | $373,000, versus $1.305 million | $429,000, versus $990,000 |
| Net income (loss) | $(27.813) million, or $(20.14) per share; prior year $12.476 million, or $9.04 per share | $(20.935) million, or $(15.16) per share; prior year $71.746 million, or $51.96 per share |
| Cash from operating activities | Not provided for the quarter | $(13.126) million, versus $(3.178) million |
- Quarter operating margin was approximately 3.5%; six-month operating margin was approximately 1.9%. Operating results included reductions in the long-term supplemental compensation accrual of $1.920 million for the quarter and $2.050 million year to date.
- Investment results drove the reported net losses. The quarter included $32.445 million of realized losses on securities sales and $8.321 million of unrealized losses. For the six months, the company reported $14.249 million of realized gains but $44.409 million of unrealized losses.
- At March 31, total assets were $390.090 million, including $354.521 million of marketable securities, $5.285 million of cash and cash equivalents, and $2.044 million of restricted cash. Working capital was $348.924 million.
- Debt included $75.0 million of margin borrowings, up from $32.0 million at September 30, 2021, and approximately $1.505 million on a real-estate loan. The margin rate was 1% at March 31, variable with the Federal Funds Rate, and the borrowings do not mature.
- Marketable securities had $199.684 million of pretax unrealized gains at March 31; most were concentrated in three U.S. financial institutions and one foreign manufacturer. The portfolio generated $2.988 million of dividends and interest in the six-month period.
Material changes and operating trends
- Journal Technologies revenue fell 33% in the quarter and 14% year to date. Quarterly consulting fees declined 71%, with management attributing the drop to fewer system go-lives; licensing and maintenance revenue also declined, partly because the company ended maintenance of legacy products effective July 1, 2021.
- Journal Technologies reported operating losses of $1.713 million for the quarter and $2.163 million year to date, compared with operating income in the year-earlier periods. Operating expenses rose 5% in the quarter and 7% year to date.
- The Traditional Business’ revenue increased 7% year to date. Advertising benefited from increased foreclosure-related notices after moratoriums were lifted; circulation revenue declined 6%.
- Traditional Business operating results benefited from the compensation-accrual reduction. This non-routine item materially affects comparability with the prior year.
- The company sold securities for approximately $80.570 million and purchased approximately $117.678 million of securities during the six months, using proceeds and additional margin borrowing to fund purchases.
Outlook, risks and other matters
- Management expects to fund operations for the foreseeable future through operating cash flows and working capital, but provided no quantified earnings or revenue guidance. It cautioned that borrowing capacity depends on portfolio values, additional borrowing may not be available, and a significant investment decline could trigger margin calls or require securities sales.
- Management said COVID-19 effects remain uncertain, including possible court and government-agency closures or reduced activity. Implementation delays can defer Journal Technologies’ go-live-related consulting revenue. Management also expects the newspaper industry’s general decline to continue.
- Other disclosed risks include software development and implementation execution, dependence on government customers and professional-services projects, cybersecurity incidents, paper and postage costs, changes to public-notice laws or newspaper adjudicated status, and declines in investment values.
- Management stated that ordinary-course contingencies, including litigation, are not expected to have a material adverse effect. In April 2022, the company sold land near its Logan, Utah facility to the city for approximately $381,000 for a street-widening project.
- Management concluded disclosure controls and procedures were not effective as of March 31, 2022, in light of material weaknesses previously discussed in the fiscal 2021 Form 10-K. The filing reported no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether Journal Technologies’ implementation pipeline and go-live timing recover, and how that affects consulting revenue, deferred fees and segment profitability.
- The extent to which investment portfolio concentration, market-price movements and margin borrowing could affect earnings, liquidity or trigger margin calls.
- The nature, remediation status and potential consequences of the previously identified internal-control material weaknesses.
- Whether the temporary compensation-accrual reduction recurs; it materially supported reported operating results in this period.
- How persistent COVID-19 effects, court operations and the Traditional Business’ long-term circulation and advertising trends affect future results.