Jack Henry & Associates, Inc. — Form 10-Q Summary
Period clarification: The filing covers the quarter ended March 31, 2015, the third quarter of fiscal 2015, and the nine months then ended. This differs from the request metadata’s “2014 Q1.” Comparative 2014 financial statements are presented as restated.
Business context and reporting period
Jack Henry provides software, technology solutions, and payment processing services to banks and credit unions. Its two reportable segments are Bank Systems and Services and Credit Union Systems and Services. Most revenue is support and service revenue, including recurring outsourcing and transaction-processing fees.
Financial performance
| Metric (USD millions, except per-share data) | Three months ended March 31, 2015 | Year to date | Change vs. restated 2014 |
|---|---|---|---|
| Revenue | $309.7 | $922.5 | +6% quarter; +8% year to date |
| Gross profit / margin | $131.8 / 42.6% | $389.4 / 42.2% | Gross profit +12% quarter; +9% year to date |
| Operating income | $77.2 | $228.5 | +20% quarter; +11% year to date |
| Net income | $50.7 | $150.7 | +19% quarter; +12% year to date |
| Diluted EPS | $0.63 | $1.84 | Prior year: $0.50 and $1.56 |
| Operating cash flow | Not presented quarterly | $182.5 | Prior year: $161.4 |
Support and service revenue rose 8% for the quarter and 9% year to date, driven by electronic payment services, outsourcing, and implementation services. Hardware revenue fell 17% for the quarter and 12% year to date; license revenue remained below 1% of total revenue. Management said it expects an overall declining trend in hardware sales as delivery mix shifts toward outsourcing and computer prices remain deflationary.
At March 31, cash was $52.8 million, down from $70.4 million at June 30, 2014. Current assets were $294.5 million and current liabilities were $287.6 million. Total debt, including capital leases, was approximately $77.4 million, comprising $70.0 million drawn on the revolving facility and $7.4 million in capital lease obligations. The revolving facility permits borrowings up to $300 million, with a potential increase to $600 million; it matures in February 2020.
For the first nine months, investing activities used $94.3 million, including $35.9 million of capital expenditures, $56.5 million of software development, and $10.3 million for internal-use software, offset in part by asset-sale proceeds. Financing activities used $105.7 million, including $112.8 million of treasury-stock purchases and $56.2 million of dividends, partly offset by $70.0 million of revolving-credit borrowings. The company paid $0.69 per share in dividends year to date.
Material changes and unusual items
- Restatement: The company corrected errors in accounting for bundled software arrangements. It had recognized revenue too early when multiple software products were delivered at different times and VSOE was not established for all elements. Under the corrected treatment, revenue and related direct costs are deferred until only post-contract support remains, then recognized over the remaining initial support period.
- The restatement reduced 2014 net income by $4.2 million for the quarter and $16.3 million for the nine-month period. At June 30, 2014, restated assets increased $56.4 million, liabilities increased $127.2 million, and equity decreased $70.8 million.
- Year-to-date share repurchases totaled $112.8 million for 1.898 million shares. Separately, 3,798 shares surrendered during the quarter were for employee tax withholding, not purchases under the public repurchase plan. Remaining repurchase authorization was approximately 8.3 million shares.
- A $70.0 million revolving-facility borrowing was made during the period; interest expense increased year over year. A TeleWeb asset sale generated proceeds included in the period’s asset-sale cash flows.
Outlook, risks, and contingencies
- Management cited strong nine-month performance, recurring revenue, a healthy sales pipeline, and continued customer demand for solutions addressing profitability, efficiency, and security. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Fiscal 2015 capital expenditures were not expected to exceed $60 million, funded from operating cash flow.
- Disclosure controls were deemed ineffective because of an unremediated material weakness in controls over revenue recognition for bundled software arrangements. The company said remediation was underway and expected to complete required actions during fiscal 2016; additional remediation measures could be identified.
- A patent-infringement lawsuit seeks damages, interest, injunctive relief, and attorneys’ fees. After quarter-end, on April 29, 2015, the PTAB held all claims of the patents at issue unpatentable and invalid; the plaintiff sought rehearing. The company could not reasonably estimate any possible loss or range of loss.
- The company reported $7.4 million of gross unrecognized tax benefits, including $5.7 million that would affect its effective tax rate if recognized. It anticipated potential reductions of $2 million to $3 million within 12 months.
- The revolving facility has financial covenants. The company received an extension, until June 30, 2015, for delivery of unaudited quarterly financial statements relating to the first and second fiscal quarters of 2015.
- A $0.25-per-share dividend declared May 11, 2015 was payable June 9, 2015 to holders of record May 26, 2015.
Important facts for investors to verify
- Confirm the applicable reporting period: this is fiscal Q3 2015, not 2014 Q1, and the comparative 2014 results are restated.
- Review the restatement’s revenue-recognition effects and the status and testing of remediation for the material weakness.
- Monitor recurring support and service growth against declining hardware sales, segment margins, and the company’s software-development spending.
- Track cash generation, share repurchases, dividend payments, and revolving-credit usage, including compliance with facility covenants.
- Follow the patent case and any developments in the plaintiff’s rehearing request, as well as changes in uncertain tax positions.