Jack Henry & Associates, Inc. — Form 10-Q Summary
Business context and reporting period. The filing covers the quarter and six months ended December 31, 2011 (the second quarter and first half of fiscal 2012). Jack Henry provides software, hardware, implementation, support, payment-processing, and outsourced data-processing services to banks and credit unions. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Quarter ended Dec. 31, 2011 | Six months ended Dec. 31, 2011 |
|---|---|---|
| Revenue | $255.9; up 5% year over year | $504.2; up 6% |
| Operating income | $60.8; up 11% | $118.6; up 10% |
| Net income | $38.5; up 7% | $75.0; up 11% |
| Diluted EPS | $0.44, versus $0.42 | $0.86, versus $0.79 |
| Gross profit / margin | $107.4 / 42%, versus $102.8 / 42% | $211.8 / 42%, versus $199.9 / 42% |
| Operating cash flow | Not reported separately for the quarter | $96.3, versus $85.8 |
Quarterly revenue growth was led by support and service (+6%) and hardware (+13%); license revenue fell 12%. For the first half, support and service rose 5%, hardware 10%, and license 4%. Support and service generated 88% of revenue. Management attributed growth particularly to electronic payment services and outsourced delivery.
Bank-segment revenue increased 4% for the quarter and 3% year to date. Credit Union revenue increased 12% and 14%, respectively; its gross margin improved to 41% for the quarter and 41% year to date. Bank gross margin was 42% in both periods.
Financial position, liquidity, and debt
- Cash and cash equivalents were $95.2 at December 31, 2011, up from $63.1 at June 30, 2011. Working capital was approximately $31.4 ($308.8 current assets less $277.4 current liabilities).
- Total debt, including current maturities and capital leases, was approximately $147.0, down from $154.0 at June 30. The term loan balance was $138.8 at a variable rate of 2.58%; no balance was outstanding on the $150.0 revolving facility. The company reported compliance with its debt covenants.
- First-half investing cash outflow was $32.6, including $18.9 of capital expenditures and $15.7 for software development. Financing cash outflow was $31.5, including $18.0 of debt repayments and $18.2 of dividends. Cash increased $32.1 over the half year.
- Deferred revenue was $191.3, including current and non-current amounts, compared with $295.1 at June 30. Its $103.8 decrease was a significant operating cash-flow movement.
Changes, outlook, and risks
- Management cited recurring revenue, an 11% increase in backlog to $378.8 from a year earlier, and a healthy sales pipeline as positive indicators. Backlog increased 5% from September 30; $305.0 was outsourcing backlog.
- Management expressed cautious optimism, but noted that weak financial-institution profitability and U.S. financial-market conditions could reduce customer demand. Bank failures and forced consolidations may also affect the customer base.
- Fiscal 2012 capital expenditures were expected not to exceed $40.0, funded from operating cash. No specific revenue or earnings guidance was provided.
- Management expects the longer-term shift toward outsourced delivery to support outsourcing revenue, while potentially reducing license and hardware sales. The filing describes outsourcing contracts as multi-year and a source of recurring revenue.
- The effective tax rate increased to 35.2% for the quarter and 35.3% year to date, partly because the prior-year period benefited from the retroactive R&E tax credit extension. The company reported $8.7 of gross unrecognized tax benefits and $1.2 of accrued interest and penalties. Management did not expect the ongoing IRS examination to materially affect the financial statements.
- Debt has variable interest rates; management estimated that a 1 percentage-point rate increase would raise fiscal 2012 annual interest expense by less than $1.4. The company reported no use of derivative financial instruments.
- The Board declared a subsequent cash dividend of $0.115 per share, payable March 8, 2012. No shares were repurchased during the six-month period.
Key facts for investors to verify
- Whether recurring-service and electronic-payment growth continues to offset lower license revenue and the expected longer-term decline in hardware sales.
- Whether backlog converts to recognized revenue on the expected schedule, particularly the large outsourcing component.
- The impact of deferred-revenue movements and annual maintenance billings on future operating cash flow and liquidity.
- Debt repayment progress, variable-rate exposure, and continued compliance with credit-facility covenants.
- Future tax-rate changes, resolution of uncertain tax positions, and the outcome of tax examinations.
- Whether customer financial conditions, failures, or consolidations materially affect demand or collections.