Jack Henry & Associates, Inc. — Q2 FY2014 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2013. Financial amounts below are in millions of dollars unless stated otherwise; the filing presents financial statements in thousands. Jack Henry provides software, data processing, payment and related services to banks and credit unions. Most revenue comes from recurring outsourcing, transaction-processing and support services.
Financial performance
- Quarter revenue: $302.5, up 9% from $278.7. Support and service revenue rose 10% to $274.3 and represented 91% of revenue; license revenue declined 2% to $12.9; hardware revenue increased 1% to $15.4.
- Six-month revenue: $598.2, up 9% from $549.7, led by 10% growth in support and service revenue to $543.8.
- Profit: Quarterly operating income was $83.5, up 40%, and net income was $54.0, up 33%; diluted EPS was $0.63 versus $0.47. Six-month operating income was $160.8, up 27%, and net income was $103.8, up 25%; diluted EPS was $1.21 versus $0.96.
- Margins: Gross margin was approximately 43.9% for the quarter, broadly unchanged year over year, and 43.7% for six months versus 43.3%. Operating margin was approximately 27.6% for the quarter versus 21.3%, and 26.9% for six months versus 23.1%.
- Cash flow: Six-month operating cash flow was $131.3 versus $119.2. Investing used $55.1, including $21.9 of capital expenditures and $29.0 of software development; financing used $48.7, including $34.1 of dividends and $13.6 of debt repayments. Cash increased $27.6 to $155.5.
- Liquidity and debt: Current assets were $382.7 and current liabilities $289.5 at December 31, 2013. Total debt, principally capital leases, was approximately $9.7, down from approximately $15.3 at June 30, 2013. No revolving credit balance was outstanding, and the company reported compliance with its covenants.
- Capital returns: Dividends paid per share were $0.20 for the quarter and $0.40 for six months, up from $0.115 and $0.23, respectively. No shares were repurchased in the first half of fiscal 2014.
Changes, outlook and management commentary
- Support and service growth was broad-based, led by electronic payment services and outsourcing. Management expects customer preference for outsourced delivery to continue supporting recurring revenue. Backlog was $503.8, up 11% from a year earlier and approximately flat from September 30, 2013.
- Bank segment revenue grew 10% for both the quarter and six months; Credit Union segment revenue grew 3% for the quarter and 6% for six months. Support-and-service scale helped six-month gross margin increase to 43.7% from 43.3%.
- Reported operating expenses declined 21% for the quarter and 9% for six months, chiefly because the prior-year periods included $13.7 of Hurricane Sandy-related expenses at the Lyndhurst processing center. The current quarter also included a $2.9 insurance recovery. Management’s supplemental, non-GAAP comparison adjusts for these items; investors should distinguish it from GAAP results.
- The effective tax rate was 35.2% for the quarter and 35.4% year to date, compared with 30.6% and 33.5%. The prior-year rates benefited from recognition of previously unrecognized tax benefits after an IRS examination.
- Management was cautiously optimistic about economic improvement and customer investment, while noting financial-sector consolidation, regulation and legislation could delay discretionary spending. Fiscal 2014 capital expenditures were expected not to exceed $50.0, funded from operating cash flow. No earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- In December 2013, the company entered into an agreement with federal banking regulators following the 2012 Super Storm Sandy disruption at its Lyndhurst, New Jersey processing center. The agreement requires assessment, improvement and monitoring of disaster recovery and business continuity plans, with regular reporting. The company said the agreement’s business impact was uncertain; failure to comply could materially adversely affect the business.
- A patent infringement suit filed in May 2013 by DataTreasury seeks damages, interest, injunctive relief and attorneys’ fees, including treble damages. The company intends to defend itself, but could not estimate a possible loss or range of loss.
- Key risks include interruption of outsourced processing, customer data security and privacy, extensive financial-services regulation, and possible costs or constraints from new rules. The company reported no variable-rate debt outstanding at quarter-end and does not use derivatives.
- Gross unrecognized tax benefits were $4.8, including $3.6 that would affect the effective tax rate if recognized. Management anticipated a possible $0.1–$0.7 reduction within twelve months.
Important facts for investors to verify
- Whether recurring payment-processing and outsourcing growth continues, and how much of backlog converts to revenue.
- The costs, required remediation and compliance status under the regulators’ disaster-recovery agreement.
- Potential exposure and timing in the DataTreasury litigation, for which the company reported no estimable loss range.
- How GAAP earnings compare with management’s Sandy- and insurance-adjusted non-GAAP presentation.
- Capital spending against the stated $50.0 fiscal-year ceiling, alongside dividends, debt repayments and liquidity needs.