Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2014. The company provides integrated software, payment processing, and technology services to banks and credit unions. Unless noted otherwise, dollar amounts are in thousands. Prior-year comparisons are restated.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2014 |
|---|---|---|
| Revenue | $311,294; up 8% | $612,767; up 8% |
| Gross profit / margin | $131,035 / 42% (prior year 43%) | $257,624 / 42% (prior year 42%) |
| Operating income | $79,665 | $151,289 |
| Net income | $53,882; up 11% | $99,969; up 9% |
| Diluted EPS | $0.66 (prior year $0.56) | $1.22 (prior year $1.07) |
| Operating cash flow | Not presented for the quarter | $126,898 (prior year $131,316) |
Support and service generated 95% of quarterly and year-to-date revenue, rising 9% in both periods. Electronic payment and outsourcing services were key growth drivers. Hardware revenue declined 9% for the quarter and 10% year to date; license revenue was less than 1% of revenue.
For the six months, investing cash outflow was $63,399, including $36,820 for software development and $27,389 for capital expenditures, partly offset by $8,242 in asset-sale proceeds. Financing cash outflow was $84,544, including $112,803 in treasury-stock purchases and $35,961 in dividends, partly offset by $70,000 in revolving-credit borrowings. Cash declined from $70,377 at June 30 to $49,332 at December 31.
At December 31, total assets were $1,620,971 and total liabilities were $698,909. Debt and current maturities totaled $77,888, including a $70,000 revolving-credit balance; the company reported compliance with the existing facility’s covenants. Working capital was negative $98,478, largely because of $234,939 in current deferred revenue. Management said service-related cash costs for deferred revenue are substantially below the recorded balance, collections were sound, and remaining credit availability exceeded $80,000.
Changes, outlook, and notable matters
- Management cited strong first-half performance, a healthy sales pipeline, and the recurring nature of much of the business. It expects outsourcing demand to support revenue growth and expects hardware sales to trend down over time. No numerical revenue or earnings guidance was provided.
- Fiscal 2015 capital expenditures were expected not to exceed $60,000, funded from operating cash flow.
- On February 20, 2015, the company replaced its revolving facility with a $300,000 facility, expandable to $600,000, maturing February 20, 2020. The company also declared a $0.25-per-share dividend in February 2015.
- The company restated prior-period results after finding revenue-recognition errors in bundled software arrangements. Restated net income was lower by $5,621 for the December 2013 quarter and $12,187 for the six months then ended. At June 30, 2014, restated assets increased $56,411, liabilities increased $127,185, and equity decreased $70,774. The revised approach defers certain bundled revenue and related direct costs until specified delivery conditions are met.
- Management identified a material weakness in internal controls over accounting for bundled software arrangements; disclosure controls were ineffective as of June 30, 2014, and the weakness remained unremediated at December 31, 2014. Remediation steps were underway, with completion expected during fiscal 2016. The filing also checked “No” for having filed all required reports during the preceding 12 months.
- A patent-infringement case brought by DataTreasury remained pending. In April 2015, the PTAB held all claims of the patents at issue unpatentable; DataTreasury sought rehearing. The company said it could not reasonably estimate any possible loss.
- Gross unrecognized tax benefits were $9,099, including $6,405 that would affect the effective tax rate if recognized. The company anticipated potential reductions of $2,000–$3,000 within twelve months.
Key facts for investors to verify
- Progress and independent validation of the revenue-recognition control remediation, including whether the material weakness has been fully resolved.
- Effects of the restated accounting on future revenue timing, deferred revenue, and comparability of results.
- Use of the expanded credit facility, covenant compliance, and liquidity while share repurchases and dividends continue.
- Resolution and potential financial exposure from the DataTreasury litigation and uncertain tax positions.
- Whether growth in recurring payment and outsourcing services can offset lower hardware revenue and pressure on gross margin.