Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2010 (first quarter of fiscal 2011; the request metadata labels the period 2010 Q1). Financial statement amounts are in thousands, except per-share data.
Business context and results
Jack Henry provides software, hardware, implementation, support, electronic funds transfer (EFT), and outsourced data-processing services to banks and credit unions. The quarter’s year-over-year comparisons reflect acquisitions completed in fiscal 2010, including GFSI, PTSI, and iPay; the prior-year reported results do not include those acquisitions.
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $234.8 million | $182.3 million | +29% |
| Gross profit / margin | $97.0 million / 41% | $74.4 million / 41% | +30% gross profit |
| Operating income | $52.8 million | $41.9 million | +26% |
| Net income | $31.8 million | $26.3 million | +21% |
| Diluted EPS | $0.37 | $0.31 | +19% |
| Operating cash flow | $75.4 million | $65.7 million | +15% |
Support and service revenue grew 35% to $210.6 million and represented 90% of revenue. License revenue declined 17% to $9.5 million, primarily amid smaller core-software deals, customer delays in technology investment, and a shift toward outsourced delivery. Hardware revenue declined 2% to $14.8 million. Management reported backlog of $327.3 million, up 12% from a year earlier and comparable to June 30, 2010.
Cash, liquidity, and debt
- Cash and cash equivalents were $46.8 million at September 30, versus $125.5 million at June 30, 2010. The reduction primarily reflected debt repayments.
- Operating cash flow was $75.4 million; investing activities used $16.2 million, including $10.0 million of capital expenditures and $6.2 million of software development. Financing activities used $137.9 million, including $132.3 million of credit-facility repayments and $8.1 million of dividends.
- Total debt was approximately $246.5 million, versus approximately $378.7 million at June 30. The company repaid its $100 million bullet loan on July 8, 2010; revolving credit borrowings were $90 million and the term loan was $150 million. Debt is primarily variable-rate.
- Current assets were $248.8 million and current liabilities $305.0 million at quarter-end. Deferred revenue was $221.0 million in current liabilities.
- The company was in compliance with its credit-facility financial covenants. A 1% increase in borrowing rates was estimated to increase fiscal 2011 annual interest expense by less than $2.4 million.
Material changes and management outlook
Acquisitions materially increased support and service revenue, especially EFT support; management attributed $30.2 million of current-quarter EFT support revenue to GFSI, PTSI, and iPay combined. Excluding acquisition effects, EFT support revenue still grew 11% year over year. Reported interest expense rose to $2.9 million from $0.1 million, principally because of acquisition-related borrowings.
Management described itself as cautiously optimistic, citing recurring-revenue growth, increased backlog, and an encouraging sales pipeline, while noting that the slow economic recovery and customer pressures remain concerns. It expects fiscal 2011 capital expenditures not to exceed $50 million. No specific revenue or earnings guidance was provided in the filing. Management suggested regulatory actions affecting financial institutions might peak in calendar 2010 and decline in 2011, absent a significant economic downturn.
Risks, contingencies, and notable items
- Customer financial distress, bank failures, regulatory intervention, and industry consolidation could affect demand, customer retention, and contract termination fees. Management said these factors had not materially affected results to date.
- Debt carries variable interest rates, creating exposure to rate increases; the company reported no use of derivative financial instruments.
- The IRS began examining federal tax returns for fiscal 2008–2009. Gross unrecognized tax benefits were $6.7 million, including $5.0 million that would affect the effective tax rate if recognized; accrued interest and penalties were $1.0 million. The company anticipated up to $1.1 million of potential reductions from statute expirations within 12 months.
- Change-in-control agreements provide specified compensation to certain executives and general managers if terminated without cause following a qualifying change in control. The company also has authority to repurchase up to 5.584 million additional shares, though none were repurchased during the quarter.
Important facts for investors to verify
- How much of revenue, earnings, and backlog growth is attributable to acquisitions versus organic growth, particularly in EFT and outsourced services.
- Whether recurring revenue, backlog, and the sales pipeline convert into sustained growth amid customer budget constraints and industry consolidation.
- Debt repayment progress, variable-rate exposure, covenant headroom, and the effect of lower cash balances on liquidity.
- Capital spending against the fiscal 2011 ceiling, and the integration and profitability of the GFSI, PTSI, and iPay acquisitions.
- Developments in the IRS examination and uncertain tax positions.