Daily Journal Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the fiscal third quarter ended June 30, 2020, and the nine months ended that date. Daily Journal operates a Traditional Business (newspapers, websites and public-notice advertising) and Journal Technologies, which supplies case-management software and services to courts and other government agencies. The results reflect the significant disruption from COVID-19.
Financial performance and position
| Metric | Three months ended June 30, 2020 | Nine months ended June 30, 2020 |
|---|---|---|
| Revenue | $12.874 million, down 11% year over year | $36.907 million, up 4% |
| Operating income (loss) | $593,000; operating margin approximately 4.6% | $(2.023) million; operating margin approximately (5.5)% |
| Net income (loss) | $14.274 million, or $10.34 per share | $(27.842) million, or $(20.16) per share |
| Investment valuation change in earnings | $16.489 million unrealized gain | $41.191 million unrealized loss |
| Cash from operating activities | Not separately reported for the quarter | $(1.501) million |
Quarterly net income was driven largely by the non-cash unrealized investment gain, not operating performance. Nine-month net loss likewise reflected the portfolio’s unrealized losses. Dividends and interest income were $4.573 million for the nine-month period.
- Segments: Nine-month Journal Technologies revenue rose 12% to $25.712 million, but the segment reported a $1.452 million pretax loss. Traditional Business revenue fell 12% to $11.195 million and produced a $634,000 pretax loss. In the quarter, Traditional Business revenue fell 31% to $3.131 million; Journal Technologies revenue fell 3% to $9.743 million, while its pretax income rose to $1.322 million.
- Liquidity: June 30 cash and cash equivalents were $9.867 million; marketable securities were $153.390 million, down from $194.581 million at September 30, 2019. Reported working capital was $144.935 million, including $19.918 million of deferred subscription, installation and maintenance obligations.
- Debt: Investment margin borrowings were $30.493 million at June 30, collateralized by marketable securities; the additional $1 million borrowed during the quarter was repaid in July. The real-estate loan balance was approximately $1.74 million. The margin borrowing rate was 0.75% at June 30 and has no stated maturity.
- Cash flow and investment exposure: Cash decreased $763,000 during the nine months. Capital expenditures were $168,000 and financing activities provided $906,000. The securities portfolio had a $153.390 million fair value and $99.501 million of accumulated pretax unrealized gains; it was concentrated in six companies, including three U.S. financial institutions.
Material changes versus prior periods
Nine-month revenue grew mainly from Journal Technologies’ licensing, maintenance and consulting fees, partly offset by lower Traditional Business advertising. Consolidated operating expenses decreased 2%, although salaries and benefits rose 8%, primarily as Journal Technologies contractors became employees. The nine-month net loss widened from $12.692 million to $27.842 million, mainly because investment losses increased from $16.929 million to $41.191 million. In contrast, third-quarter net income rose from $3.823 million to $14.274 million, primarily because quarterly unrealized investment gains increased to $16.489 million.
Outlook, risks and unusual items
- Management said COVID-19 had materially affected operations and expects effects on results and cash flows to continue for the foreseeable future, but could not estimate their magnitude. Court and agency closures delayed procurement, implementations, e-filing revenue and customer payments; restrictions also affected advertisers and subscribers.
- Management expects continued pressure on the Traditional Business from declining advertising and subscription revenue, potentially at an accelerated pace. It also noted fewer foreclosure notices and risks from changes to legal public-notice requirements or loss of newspaper adjudication status.
- The company reorganized its workforce on April 30, 2020, including layoffs and temporary furloughs. It stated it expects to fund operations for the foreseeable future from operating cash flows and working capital, but may need to sell securities if needed; its ability to borrow further against them is uncertain.
- The company recorded a $187,000 CARES Act tax benefit and anticipated a refund of taxes and alternative minimum taxes paid in fiscal 2014. The nine-month income tax benefit was $11.260 million.
- Management reported that disclosure controls and procedures were not effective as of June 30, 2020, in light of previously disclosed material weaknesses in internal control over financial reporting. No material changes to those controls were reported during the quarter.
- Management did not expect normal-course contingencies, including litigation, to have a material effect. No formal numerical guidance was provided.
Important facts for investors to verify
- How much subsequent-period earnings and equity reflect investment-price changes rather than operating results, and how the concentrated portfolio performs.
- Whether COVID-related closures, delayed projects and customer payments continue to weigh on Journal Technologies’ revenue, cash collections and implementation timing.
- Whether Traditional Business advertising, subscriptions and public-notice revenues decline further, including any changes to applicable notice laws or newspaper adjudication.
- Whether operating cash flow improves and whether securities sales or additional collateralized borrowing are needed to fund operations.
- Progress in remediating the disclosed internal-control material weaknesses and restoring effective disclosure controls.