Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2014 (fiscal 2014 third quarter), compared with the corresponding 2013 periods. The request metadata says “2013 Q3,” but the filing itself reports fiscal 2014 Q3. Amounts are in thousands except per-share data.
Business context and results
Jack Henry provides software, technology solutions, and payment processing services to banks and credit unions. Most revenue comes from recurring outsourcing, transaction processing, and support and service fees; license and hardware sales are smaller components.
- Quarter: Revenue was $300.9 million, up 7%; net income was $46.8 million, up 2%; diluted EPS was $0.55 versus $0.53.
- Nine months: Revenue was $899.1 million, up 8%; net income was $150.5 million, up 17%; diluted EPS was $1.76 versus $1.49.
- Revenue mix: Quarterly support and service revenue rose 8% to $270.9 million and represented 90% of revenue. License revenue fell 8% to $15.3 million; hardware revenue rose 2% to $14.7 million. Nine-month support and service revenue increased 9% to $814.8 million.
- Margins: Gross profit increased 9% in both periods, to $124.5 million for the quarter and $386.1 million year to date. Gross margin was 41% for the quarter (41% prior year) and 43% year to date (42% prior year). Quarterly operating income rose 9% to $71.4 million; nine-month operating income rose 21% to $232.2 million.
- Cash flow: Nine-month operating cash flow was $161.4 million, up from $152.4 million. Investing used $106.1 million and financing used $131.0 million. Cash declined by $75.7 million to $52.2 million, primarily reflecting the Banno acquisition and share repurchases.
- Liquidity and debt: Current assets were $279.0 million and current liabilities $254.4 million at March 31, 2014. Total debt, principally capital leases, was approximately $15.4 million, including $11.8 million current. The company had no outstanding balance on its $150 million revolving credit facility or its $5 million bank line and was in compliance with covenants.
- Capital returns: The company paid $52.8 million in dividends and repurchased $63.0 million of stock during the nine months. Dividends paid per share were $0.62 versus $0.36 a year earlier.
Material changes and management commentary
- Management attributed growth to recurring support and service revenue, particularly electronic payments and outsourcing. Backlog increased 11% year over year to $510.7 million at March 31, 2014.
- Quarterly operating expenses rose 9%, mainly from increased headcount and salaries. Nine-month expenses fell 4%, largely because the prior-year period included $12.4 million of Hurricane Sandy-related costs at the Lyndhurst, New Jersey processing center.
- The effective tax rate rose to 34.3% for the quarter and 35.0% year to date, compared with 29.0% and 31.9%, respectively, in the prior-year periods. The prior year benefited from the research credit extension and recognition of tax benefits after an IRS audit.
- On March 1, 2014, the company acquired Banno, a provider of web and mobile services, for $27.9 million in cash. Preliminary purchase accounting included $18.8 million of goodwill. Banno contributed $161,000 of revenue and an after-tax loss of $271,000 from acquisition through quarter end; management considered the impact immaterial.
- Management was cautiously optimistic about economic improvement and customer investment, while noting that industry consolidation, regulation, and legislation could lead financial institutions to defer discretionary spending. Fiscal 2014 capital expenditures were not expected to exceed $40 million. No specific revenue or earnings guidance was provided.
Risks, contingencies, and unusual items
- A patent infringement lawsuit filed in May 2013 by DataTreasury seeks damages, interest, injunctive relief, attorneys’ fees, and potentially treble damages. The company says it intends to defend the case, but cannot estimate a possible loss or range of loss.
- The company reported $4.955 million of gross unrecognized tax benefits and $758,000 of accrued interest and penalties. It anticipated possible reductions in unrecognized tax benefits of $500,000 to $1.1 million within twelve months.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing stated there was no material change to previously disclosed risk factors, apart from matters already reported in the prior-quarter 10-Q.
Important facts for investors to verify
- Confirm the fiscal-period labeling: the filing covers the quarter ended March 31, 2014, not 2013 Q3.
- Track whether recurring support, electronic payments, outsourcing, and backlog continue to grow, and whether those gains sustain margins.
- Monitor the impact of lower cash balances, capital returns, and the Banno acquisition on liquidity and future results.
- Review developments in the DataTreasury litigation and uncertain tax positions; the filing does not quantify potential litigation exposure.
- Compare actual fiscal 2014 capital expenditures with management’s ceiling of $40 million; the filing provides no specific earnings or revenue forecast.