Jack Henry & Associates, Inc. — Form 10-Q Summary
Period: Quarter and nine months ended March 31, 2013 (fiscal 2013 third quarter). The request metadata says “2012 Q3,” but the filing covers fiscal 2013 Q3. Financial amounts below are in millions unless otherwise noted.
Business context
Jack Henry provides banking and credit-union software, data processing, payment services, implementation, hardware, and related support. Its two reportable segments are Bank Systems and Services and Credit Union Systems and Services. Most revenue comes from recurring outsourcing, transaction-processing, and support contracts.
Financial performance
| Metric | Three months ended March 31, 2013 | Year-over-year | Nine months ended March 31, 2013 | Year-over-year |
|---|---|---|---|---|
| Revenue | $281.5 | +10% | $831.2 | +9% |
| Gross profit / margin | $114.6 / 40.7% | $103.4 / 40.3% | $352.8 / 42.4% | $315.2 / 41.5% |
| Operating income / margin | $65.7 / 23.3% | $56.5 / 22.0% | $192.7 / 23.2% | $175.1 / 23.0% |
| Net income | $46.0 | +25% | $129.0 | +16% |
| Diluted EPS | $0.53 | Compared with $0.42 | $1.49 | Compared with $1.28 |
Quarterly support and service revenue rose 11% to $250.4 million, led by electronic payment services; license revenue increased 11% and hardware revenue declined 2%. For the nine-month period, support and service revenue rose 11%, while hardware revenue fell 9%. Nine-month revenue increased in both segments: Bank +8% to $623.5 million and Credit Union +14% to $207.7 million. Credit Union gross margin improved to 44% for the nine months; Bank margin remained 42%.
The nine-month effective tax rate was 31.9%, down from 34.7%, reflecting the extended Research and Experimentation Credit and the release of previously unrecognized tax benefits after completion of an IRS audit. Quarterly rates were 29.0% versus 33.5%.
Cash flow, balance sheet, and debt
- Cash and cash equivalents were $182.1 million at March 31, 2013, up from $157.3 million at June 30, 2012. The company attributed the increase primarily to annual maintenance billings.
- Nine-month operating cash flow was $152.4 million, up 29% from $118.0 million. Investing activities used $66.0 million, including $37.9 million for software development and $28.4 million of capital expenditures. Financing activities used $61.7 million, including $31.0 million of dividends, $23.3 million of debt repayments, and $15.8 million of share repurchases.
- Total assets were $1.563 billion and total liabilities were $483.6 million. Current assets were $392.8 million versus current liabilities of $260.8 million.
- Total reported debt, including current maturities and capital leases, was approximately $132.6 million. The term loan balance was $110.6 million at a 2.29% rate; no balance was outstanding on the $150 million revolving facility. The company reported compliance with its credit covenants.
- The company expected fiscal 2013 capital expenditures not to exceed $50 million, funded from operating cash flow.
Material changes, outlook, and risks
- Management reported record quarterly and nine-month revenue, citing recurring revenue growth, electronic payment processing, outsourced services, and cost management. Backlog at March 31, 2013 was $460.0 million, up 16% year over year; $359.5 million was outsourcing backlog.
- Management was “cautiously optimistic,” citing recurring revenue and a strong contract backlog. The filing provides no specific revenue or earnings guidance. It expects outsourcing to support service revenue growth and hardware sales to trend lower as the sales mix shifts and computer prices deflate.
- Hurricane Sandy flooding at the Lyndhurst, New Jersey item-processing center contributed $12.4 million of year-to-date general and administrative expense, net of $2.2 million in insurance recoveries received. Additional claims remained unresolved and were not recorded; recoveries could differ from the expenses. Accrued expenses included $0.8 million of remaining contingent liabilities.
- Variable-rate debt exposes the company to interest-rate risk; management estimated that a 1 percentage-point increase would raise fiscal 2013 annual interest expense by less than $1.2 million. The filing also identifies customer credit risk and refers investors to risk factors in prior filings.
- After quarter-end, the board declared a $0.20-per-share cash dividend, payable May 30, 2013. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when remaining Hurricane Sandy insurance claims are resolved, and the amount ultimately recovered.
- Whether backlog converts to revenue on schedule and supports continued growth, particularly in electronic payments and outsourced services.
- Capital spending, software-development investment, and the effect of lower hardware sales on margins.
- Debt repayment and interest-rate exposure, including upcoming maturities and continued covenant compliance.
- The sustainability of earnings growth given the benefit from tax-credit changes and the release of prior-period tax benefits.