Jack Henry & Associates, Inc. — Form 10-Q Summary
Period clarification: Although the request metadata says 2010 Q3, this filing covers the fiscal third quarter and first nine months ended March 31, 2011. Financial amounts below are in millions of dollars, except per-share data.
Business context and reporting period
Jack Henry provides software, hardware, implementation, support, outsourced data processing and electronic payment services to banks and credit unions. It reports bank systems and services and credit union systems and services. The filing compares the three and nine months ended March 31, 2011 with the corresponding 2010 periods.
Financial performance
| Metric | Three months 2011 | Three months 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $240.2 | $215.5 | $717.6 | $608.7 |
| Gross profit | $95.3 | $86.5 | $295.1 | $250.0 |
| Operating income | $50.5 | $43.7 | $158.3 | $133.0 |
| Net income | $33.1 | $31.6 | $100.9 | $87.9 |
| Diluted EPS | $0.38 | $0.37 | $1.17 | $1.03 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $115.2 | $91.8 |
- Quarter revenue rose 11%; nine-month revenue rose 18%. Support and service revenue, the largest category, increased 15% for the quarter and 21% year to date. License revenue fell 21% and 5%, respectively; hardware revenue was essentially flat.
- Quarter net income increased 4.6%; nine-month net income increased 15%. Gross margin was approximately 39.7% for the quarter and 41.1% year to date, versus approximately 40.1% and 41.1% in the comparable periods. Operating margin was approximately 21.0% and 22.1%, respectively.
- Nine-month cash from operations increased 25%. Investing used $43.5, including $24.2 of capital expenditures and $19.3 of software development. Financing used $142.8, primarily for debt repayments and dividends.
- Cash and equivalents were $54.4 at March 31, 2011, down from $125.5 at June 30, 2010. Total debt, including current maturities and capital leases, was approximately $244.7, down from approximately $378.7. The $100.0 bullet loan was repaid in July 2010. The company had $90.0 outstanding on its revolving facility and $150.0 on its term loan at quarter end; it repaid a further $10.0 on the revolver on April 8, 2011.
- Current assets were $231.8 and current liabilities $207.2 at March 31, 2011. The company reported compliance with its credit-facility covenants.
Material changes and management commentary
- Growth reflects both acquisitions completed in fiscal 2010 and organic expansion. Acquisitions contributed $59.6 to year-to-date support and service revenue; management reported electronic payment revenue growth excluding acquisitions of 11% year to date.
- The filing’s actual revenue comparisons do not include acquired businesses’ pre-acquisition results. Pro forma nine-month 2010 revenue was $673.3, compared with actual 2011 revenue of $717.6; pro forma 2010 net income was $92.3, compared with actual 2011 net income of $100.9.
- Backlog was $335.5 at March 31, up 3% from a year earlier but down 3% from December 31, 2010. Outsourcing backlog was $258.6 and in-house backlog $76.9.
- Interest expense rose substantially, to $1.7 for the quarter and $7.1 year to date, reflecting acquisition-related borrowings. Management expected interest expense to decline slightly in the final fiscal quarter following debt repayment.
- The effective tax rate was 32.3% for the quarter, versus 27.2% a year earlier, mainly because the prior-year quarter included a one-time Domestic Production Activities Deduction benefit.
Outlook, risks and contingencies
- Management described its outlook as cautiously optimistic, citing recurring revenue, backlog and sales pipeline growth. It expects outsourcing trends to support future outsourcing revenue and expects hardware sales to continue their overall decline.
- Fiscal 2011 capital expenditures were not expected to exceed $35.0. The filing does not provide full-year revenue or earnings guidance.
- Management identified the slow economic recovery, reduced customer demand for technology investments, financial-institution failures and consolidations as risks. It said failures had not materially affected results to date and expected regulatory actions to decline through the rest of calendar 2011 absent a significant economic downturn.
- Variable-rate debt exposes the company to interest-rate risk; management estimated a 1% rate increase would raise annual fiscal 2011 interest expense by less than $2.4. The company reported no use of derivatives.
- At March 31, gross unrecognized tax benefits were $7.9, including $0.9 of accrued interest and penalties. An IRS examination of fiscal 2008–2009 returns was expected to conclude by the end of 2011; management did not expect a material financial-position impact and anticipated a possible $2.0–$3.0 reduction in unrecognized tax benefits within twelve months.
- The company declared a $0.105-per-share dividend on May 6, 2011, payable June 2, 2011. It reported no share repurchases during the nine-month period.
Important facts for investors to verify
- Reconcile reported growth with acquisition contributions and the pro forma comparisons, particularly for electronic payments and support services.
- Monitor the sustainability and mix of recurring support and service revenue, backlog conversion, and the recent quarter-over-quarter backlog decline.
- Review cash generation, the continued cash balance decline, debt repayment plans, variable interest-rate exposure and upcoming term-loan maturities.
- Assess the effect of the higher effective tax rate, the IRS examination and other uncertain tax positions.
- Confirm actual fiscal 2011 capital spending against the stated ceiling and track developments in customer financial health, consolidation and technology spending.