Daily Journal Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. This is an annual report, not a standalone fourth-quarter filing. Dollar amounts are in U.S. dollars.
Business context
The company operates two segments: a Traditional Business publishing newspapers and related services, including public-notice advertising; and Journal Technologies, which sells case-management software and services to courts and other justice agencies. Journal Technologies generated 56% of FY2016 revenue. The company reported that its software served more than 500 organizations in 42 states and internationally.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $41.612 million | $43.978 million |
| Operating income (loss) | $(6.640) million | $(3.512) million |
| Operating margin | (16.0%) | (8.0%) |
| Pretax income (loss) | $(2.978) million | $(0.310) million |
| Net income (loss) | $(1.043) million | $0.810 million |
| Basic and diluted EPS | $(0.76) | $0.59 |
| Cash flow from operations | $1.224 million | $7.755 million |
| Cash and cash equivalents | $11.411 million | $15.617 million |
| Marketable securities | $166.634 million | $166.041 million |
| Working capital | $119.623 million | Not stated in the supplied filing text |
| Total assets / shareholders’ equity | $225.446 million / $125.343 million | $228.196 million / $128.600 million |
Revenue declined 5%; operating losses widened as total operating expenses rose 2% to $48.252 million. Net margin was approximately (2.5%), compared with 1.8% in FY2015. The filing does not provide a consolidated gross-margin figure.
At year-end, marketable securities had a fair value of $166.634 million and pretax unrealized gains of $108.256 million. The portfolio generated $4.085 million of dividends and interest income. Securities were concentrated in seven companies; most unrealized gains were in three U.S. financial institutions.
Debt included $29.493 million of investment-margin borrowings, secured by marketable securities, at a 1% rate at September 30, 2016, and a $2.181 million real-estate loan at a fixed 4.66% rate. Operating cash plus marketable securities totaled $178.045 million. The company reported $2.723 million of uncertain tax benefits and $1.402 million of operating-lease obligations. Its current ratio was approximately 2.8, based on reported current assets and liabilities.
Capital expenditures were $3.779 million, including $3.5 million for the Logan, Utah office building. Investing activities used $7.611 million; financing activities provided $2.181 million, primarily from the real-estate loan. Comprehensive loss was $3.257 million, including a $2.214 million after-tax decline in unrealized investment appreciation.
Material changes versus FY2015
- Revenue fell $2.366 million. Traditional Business revenue declined $0.703 million, while Journal Technologies revenue declined $1.663 million.
- Journal Technologies licensing and maintenance revenue increased $0.774 million, but consulting revenue fell $0.619 million and other public service fees fell $1.818 million, largely due to fewer traffic tickets processed and an amnesty program.
- Traditional advertising revenue fell $0.648 million, including a $0.532 million decline in commercial advertising. Trustee-sale notice and related service-fee revenue declined $0.463 million; foreclosure notices published fell 12% year over year.
- Journal Technologies’ pretax loss widened to $7.929 million from $4.690 million, as segment expenses increased while revenue declined. Traditional Business pretax income increased modestly to $1.141 million from $1.082 million.
- Operating cash flow fell $6.531 million to $1.224 million, reflecting lower earnings and working-capital changes, including lower accounts payable and a higher income-tax receivable.
- The company purchased its previously leased Logan office building and recorded a new real-estate loan. No other-than-temporary investment impairment was recorded in FY2016, versus $0.376 million in FY2015.
Fourth-quarter snapshot
For the quarter ended September 30, 2016, revenue was $9.017 million, operating loss was $3.320 million, pretax loss was $2.372 million, and net loss was $0.962 million, or $0.70 per share. The filing’s quarterly table is unaudited.
Outlook, risks and other notable matters
- Management expected fewer foreclosure notices and stated that Traditional Business print-based earnings would likely decline significantly in FY2017; it said expense cuts would be impractical to offset all related revenue losses.
- Management expected paper prices to remain unchanged at least through June 2017. Postage rates, paper costs and the ability to pass cost increases to customers remain risks.
- Journal Technologies’ costs for updating and upgrading software are expensed as incurred and were expected to continue weighing on earnings. Government procurement, competitive bidding, customer acceptance of completed installations, and public-sector budget constraints create revenue and execution risks.
- Other material risks include declining newspaper circulation and advertising, possible changes to statutory public-notice requirements or newspaper adjudication status, concentrated investment holdings and equity-price exposure, foreign-currency exposure, cybersecurity, and reliance on CEO/CFO Gerald Salzman.
- The company recorded a $1.935 million income-tax benefit on its pretax loss; its reported effective tax rate was 65%, influenced chiefly by the dividends-received deduction. The IRS was examining the FY2014 federal return; the outcome was unknown. Litigation in the ordinary course was not expected by management to materially affect results.
- Management and the auditor reported effective internal control over financial reporting at September 30, 2016. The company said it had addressed material weaknesses identified for FY2015 through revised procedures and controls. The FY2016 financial-statement and internal-control audit opinions were unqualified.
- No dividends were paid in FY2016, FY2015 or FY2014; the board did not expect distributions in the foreseeable future. The company adopted the revised discontinued-operations guidance with no effect and had not yet assessed the impact of forthcoming revenue-recognition, lease and other accounting standards.
Important facts for investors to verify
- Whether Journal Technologies can improve revenue growth and narrow its segment operating losses as recurring license and maintenance revenue grows.
- FY2017 trends in foreclosure notices, public-notice laws and Traditional Business earnings, including the extent to which declines can be offset by cost reductions.
- The composition, concentration, collateral status and market-value sensitivity of the securities portfolio, and the terms and balance of margin and real-estate borrowings.
- Cash conversion and working-capital movements, especially deferred installation revenue, customer acceptance and collections.
- The outcome of the IRS examination and developments in the $2.723 million uncertain-tax-benefit liability.
- Whether the FY2015 control weaknesses remain fully remediated and whether the company continues to maintain effective controls as reported.