Jack Henry & Associates, Inc. — Form 10-Q Summary
Business context and period: Jack Henry provides banking and credit-union software, payment processing, outsourcing, implementation, hardware, and related services. This unaudited report covers the fiscal second quarter and six months ended December 31, 2012; comparisons are with the corresponding 2011 periods. Unless stated otherwise, financial amounts below are in millions.
Financial performance
| Metric | Three months ended Dec. 31, 2012 | Year-over-year change | Six months ended Dec. 31, 2012 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $278.7 | +9% | $549.7 | +9% |
| Gross profit / margin | $122.2 / 43.9% | +14%; margin up from 42.0% | $238.2 / 43.3% | +12%; margin up from 42.0% |
| Operating income | $59.4 | -2% | $126.9 | +7% |
| Net income | $40.5 | +5% | $83.0 | +11% |
| Diluted EPS | $0.47 | vs. $0.44 | $0.96 | vs. $0.86 |
- Revenue mix: Support and service generated 90% of revenue, rising 11% in both periods, with electronic payment services the largest growth contributor. License revenue was nearly flat (+1% year to date); hardware revenue declined 9% for the quarter and 12% year to date.
- Margins and expenses: Support-and-service gross margin improved to 42% from 40% in both comparisons, primarily from scale in payment processing. G&A expense rose 103% for the quarter and 55% year to date, largely because of Hurricane Sandy costs. Excluding those costs, management reported G&A growth of 1% for the quarter and 3% year to date.
- Cash flow: Six-month operating cash flow was $119.2, up 24% from $96.3. Investing used $42.7, including $23.8 for software development and $19.0 for capital expenditures. Financing used $40.9, including $17.3 of debt repayments, $19.8 of dividends, and $9.3 of share repurchases. Cash increased $35.5 to $192.9.
- Liquidity and debt: At December 31, cash was $192.9 and current assets and liabilities were $408.9 and $299.8, respectively. Debt, including current maturities and capital leases, totaled approximately $129.3; the revolving facility had no borrowings outstanding. The $116.3 term loan carried a 2.37% rate. The company reported compliance with its debt covenants.
- Other indicators: Backlog was $452.2, up 19% from a year earlier, including $362.4 of outsourcing backlog. The company’s two reportable segments—Bank and Credit Union—grew revenue 6% and 17%, respectively, in the quarter.
Material changes, outlook, and risks
- Hurricane Sandy flooding at the Lyndhurst, New Jersey processing center resulted in $13.7 of recorded expenses, including $1.45 of contingent liabilities. Insurance claims are pending; no recovery was recorded, and the eventual recovery may differ from the expenses. Management expected no further significant costs other than the contingent amounts.
- The quarterly effective tax rate fell to 30.6% from 35.2%, principally reflecting the release of $2.84 of previously unrecognized tax benefits after completion of an IRS audit. The six-month rates were 33.5% and 35.3%. The renewed Research and Experimentation Credit was not reflected in these results; its effect, including the retroactive portion, was expected in the fiscal third quarter.
- Management expressed cautious optimism, citing recurring revenue, a strong sales pipeline and backlog, customer demand for efficiency and profitability solutions, and cost control. No specific revenue or earnings guidance was provided. Fiscal 2013 capital expenditures were expected not to exceed $50 million and to be funded from operating cash flow.
- Principal disclosed risks include economic weakness and reduced customer spending, competition and pricing pressure, cybersecurity and payment-processing failures, interruption of outsourcing operations, changing technology and regulation, financial-institution consolidation, acquisition integration, and unfavorable renewals of long-term outsourcing contracts. The company also identified variable-rate debt exposure; a 1% rate increase was estimated to add less than $1.2 of fiscal 2013 interest expense.
Important facts for investors to verify
- Progress and timing of insurance recoveries for the Sandy-related costs, and any remaining contingent expenses.
- Whether growth in electronic payments, outsourcing, and backlog converts to sustained revenue and margins, including contract renewal outcomes.
- The amount and timing of the R&D tax credit benefit and the sustainability of the lower effective tax rate.
- Cash generation relative to deferred-revenue movements, planned capital spending, dividends, repurchases, and scheduled debt repayments.
- Operational resilience and security of payment and outsourcing systems, alongside covenant compliance and exposure to variable interest rates.