Jack Henry & Associates, Inc. — Form 10-Q
Reporting period: Quarter and six months ended December 31, 2010 (fiscal 2011 second quarter). Amounts below are in millions, except per-share data and percentages. The company provides banking and credit-union software, processing, implementation, and support services.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $242.6, up 15% | $477.5, up 21% |
| Gross profit / margin | $102.8 / 42% | $199.9 / 42% |
| Operating income | $55.0, up 16% | $107.8, up 21% |
| Net income | $36.0, up 20%; diluted EPS $0.42 | $67.8, up 21%; diluted EPS $0.79 |
| Operating cash flow | Not separately reported | $85.8, versus $75.9 |
- Quarterly revenue was 88% support and service, 6% license, and 6% hardware. Support and service revenue increased 15% for the quarter and 24% year to date; hardware revenue was nearly flat for the quarter and down 1% year to date.
- Cash and equivalents were $46.9 at December 31, down from $125.5 at June 30. Current assets were $239.1 and current liabilities $249.3, resulting in negative working capital of $10.2; deferred revenue of $174.9 was the largest current-liability component.
- Total debt and current maturities were approximately $244.9, compared with approximately $378.7 at June 30. The company repaid the $100.0 bullet loan in July and made net credit-facility repayments of $134.9 during the six months. Debt includes $240.0 of revolving and term borrowings at a variable rate of 3.04%.
- Cash used in investing activities was $27.6, including $15.5 of capital expenditures and $12.1 of software development. Financing activities used $136.9, primarily for debt repayment and $16.3 of dividends.
Changes and management commentary
- Growth included contributions from the prior-year acquisitions of GFSI, PTSI, and iPay. Management reported $46.7 of acquisition-related year-to-date growth in electronic payment services. Pro forma six-month revenue was $445.3 for the prior-year period, providing context for the acquisition-influenced reported comparison.
- Backlog increased 8% year over year to $342.7, including $264.0 in outsourcing and $78.7 in-house. Management cited rising recurring revenue, backlog, and an encouraging sales pipeline, while describing its outlook as cautiously optimistic.
- Management expects the shift toward outsourced delivery to support outsourcing revenue and expects hardware’s declining trend to continue. Fiscal 2011 capital expenditures are not expected to exceed $50.0. No specific earnings or revenue guidance was provided.
- Gross margin remained 42%. Research and development expense rose 28% for the quarter and 39% year to date, mainly due to personnel and contractor costs; management attributed the increased costs partly to acquired operations.
Risks, contingencies, and notable items
- Management cited the slow economic recovery, customer financial-institution profitability pressures, failures, and consolidation as risks to demand and customer decisions. It said these developments had not materially affected results to date.
- Interest expense increased to $2.5 for the quarter and $5.4 for the six months, principally reflecting acquisition-related borrowing. The company has variable-rate debt and estimated that a 1 percentage-point rate increase would raise fiscal 2011 annual interest expense by less than $2.4.
- The quarterly effective tax rate was 31.4%, versus 36.5% a year earlier, aided by a retroactively extended research credit that generated a $2.5 income-tax benefit. Unrecognized tax benefits were $7.8; the IRS was examining fiscal 2008–2009 federal returns.
- The company reported compliance with debt covenants. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- After quarter-end, the board declared a $0.105-per-share dividend, payable March 10, 2011. The fiscal 2011 bonus program depends partly on operating-income targets and relative return on average assets.
Key facts for investors to verify
- How much of reported revenue and profit growth reflects acquisitions versus organic growth; review the filing’s acquisition pro forma figures and segment disclosures.
- Whether backlog converts to revenue as expected and whether outsourced-service growth sustains margins.
- Cash generation, debt repayment capacity, and sensitivity to variable interest rates, given lower cash and negative working capital.
- The persistence of the research tax credit benefit and any developments in the IRS examination or uncertain tax positions.
- Whether capital expenditures remain within the stated fiscal 2011 ceiling and whether customer-sector conditions affect demand or collections.