Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2011, the first quarter of fiscal 2012. Unless otherwise noted, financial amounts are in millions of dollars; the filing presents most figures in thousands. The company provides integrated banking and credit-union software, hardware, implementation, support, payment-processing and outsourced data-processing services.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $248.3 | $234.8 | +6% |
| Gross profit / margin | $104.4 / 42% | $97.0 / 41% | +8%; margin +1 percentage point |
| Operating income | $57.8 | $52.8 | +10% |
| Net income | $36.5 | $31.8 | +15% |
| Diluted EPS | $0.42 | $0.37 | +14% |
| Operating cash flow | $78.5 | $75.4 | +4% |
Support and service revenue, the largest category, increased 5% to $220.3 million; license revenue rose 30% to $12.3 million and hardware revenue rose 7% to $15.8 million. The effective tax rate was 35.4%, versus 36.3%, primarily reflecting the research and experimentation credit. Cash dividends paid per share were $0.105, compared with $0.095.
Segment revenue was $187.1 million for Bank (+3%) and $61.2 million for Credit Union (+16%). Credit Union gross margin increased to 42% from 38%; Bank gross margin remained 42%.
Cash, debt and liquidity
Cash and cash equivalents were $108.1 million at September 30, 2011, up from $63.1 million at June 30. Quarterly cash flow was $78.5 million from operations, $18.8 million used in investing and $14.7 million used in financing, producing a $44.9 million net increase in cash. Investing included $10.7 million of capital expenditures, $7.5 million of software development and $0.7 million for customer contracts. Financing included $6.3 million of debt repayments and $9.1 million of dividends.
Total debt, including capital leases and current maturities, was approximately $157.3 million. The term loan balance was $144.4 million, bearing interest at 2.37%; no balance was outstanding on the $150 million revolving facility. The company reported compliance with all credit-facility covenants. It had $4.8 million of negative working capital, primarily because of $219.4 million in current deferred revenue, which management said requires substantially less cash to fulfill than its recorded balance. Management reported no anticipated liquidity problem.
Changes, outlook and risks
- Revenue growth across all three categories, especially electronic payment services, and lower interest expense helped lift net income. Interest expense fell to $1.5 million from $2.9 million, mainly following repayment of revolving debt in the prior fiscal year.
- Backlog was $361.2 million at September 30, up 10% year over year and 1% from June 30; most was outsourcing backlog. Management cited recurring revenue, increased backlog and a healthy sales pipeline, while describing its outlook as cautiously optimistic.
- Management expects the shift toward outsourced delivery to continue. It noted this may support outsourcing revenue but can reduce license fees, implementation activity and hardware sales. Implementation revenue declined year over year.
- Fiscal 2012 capital expenditures are not expected to exceed $40 million, funded from operating cash flow. This is a stated spending expectation, not earnings guidance; the filing provides no specific revenue or EPS forecast.
- Management identified weak financial-institution profitability and challenging U.S. financial markets as factors weighing on customers’ demand for new products and services. The company also cited bank closures and forced consolidations, while expecting regulatory actions to decline through fiscal 2012 absent a significant economic downturn.
- Debt carries variable interest rates. The company estimated that a 1 percentage-point rate increase would raise fiscal 2012 annual interest expense by less than $1.5 million; it uses no derivatives.
- The company reported $8.5 million of gross unrecognized tax benefits and $1.1 million of accrued interest and penalties. An IRS examination of fiscal 2008–2009 returns was expected to complete by year-end 2011; management did not anticipate a material financial-statement impact. Expiring tax statutes could reduce unrecognized tax benefits by $2.5–$3.5 million within twelve months.
- Executive and general-manager change-in-control agreements provide specified compensation upon qualifying termination. The board retained authority to repurchase shares, with up to 5.584 million shares remaining authorized; no shares were repurchased during the quarter.
Investor verification points
- Confirm whether electronic payment and outsourced-service growth continues to offset weaker implementation activity and the expected decline in hardware sales.
- Track backlog conversion, recurring-revenue growth and customer demand given financial-institution market conditions.
- Monitor cash generation, capital spending against the $40 million fiscal-year expectation, debt repayments and the scheduled term-loan maturities.
- Review the outcome of the IRS examination and changes in unrecognized tax benefits.
- Note that management said interim results are not necessarily indicative of full-year results; the filing does not provide numerical earnings guidance.