Business Context and Reporting Period
Jack Henry & Associates, Inc. provides banking and credit-union software, hardware, implementation, outsourced data processing, electronic payment, and ongoing support services. The filing covers the quarter and nine months ended March 31, 2012 (fiscal 2012 Q3), compared with the same periods in 2011. This differs from the “2011 Q3” period in the request metadata.
Amounts below are in millions of dollars unless otherwise noted. The financial statements are unaudited.
Financial Results and Position
| Metric | Three months ended Mar. 31 | Nine months ended Mar. 31 |
|---|---|---|
| Revenue, 2012 | $256.3 | $760.5 |
| Revenue, 2011 | $240.2 | $717.6 |
| Revenue growth | 7% | 6% |
| Gross profit, 2012 | $103.4 | $315.2 |
| Gross margin, 2012 / 2011 | 40% / 40% | 41% / 41% |
| Operating income, 2012 | $56.5 | $175.1 |
| Net income, 2012 / 2011 | $36.7 / $33.1 | $111.7 / $100.9 |
| Diluted EPS, 2012 / 2011 | $0.42 / $0.38 | $1.28 / $1.17 |
| Operating cash flow, 2012 / 2011 | Not presented quarterly | $118.0 / $115.2 |
- Support and service generated 88% of revenue and increased 8% for the quarter and 6% year to date. Electronic payment services and outsourcing were key growth contributors. Quarterly hardware revenue fell 14%; year-to-date hardware revenue rose 1%.
- At March 31, cash was $89.8 million, versus $63.1 million at June 30, 2011. Current assets were $293.0 million and current liabilities $221.7 million.
- Reported current and long-term debt totaled approximately $141.1 million, down from $154.0 million at June 30, 2011. The $133.1 million term loan bore 2.47% variable interest; no revolving-credit balance was outstanding. The company reported compliance with its debt covenants.
- Cash from investing activities was $(49.4) million and financing activities $(42.0) million for the nine months. Capital expenditures were $26.6 million, software development spending $25.9 million, debt repayments $24.3 million, and dividends paid $28.2 million.
- The board declared a $0.115-per-share dividend on May 4, 2012, payable May 31 to shareholders of record May 21.
Material Changes Versus Prior Period
- Net income increased 11% in both the quarter and year-to-date period. Growth in revenue and lower interest expense contributed; higher effective tax rates partly offset the gains.
- Bank segment revenue grew 6% for the quarter and 4% year to date. Credit Union revenue grew 9% and 12%, respectively; its gross margin increased to 40% for the quarter and 41% year to date.
- Backlog rose 18% year over year to $397.0 million at March 31, including $314.6 million in outsourcing contracts.
- Cash from operations increased 2% year to date. Receivables contributed $89.1 million of operating cash, while deferred revenue decreased $156.8 million, a significant offset.
- The effective tax rate was 33.5% for the quarter and 34.7% year to date, versus 32.3% and 33.3% in the prior-year periods, primarily because the Research and Experimentation Credit expired.
Outlook, Risks, and Unusual Items
- Management described its outlook as cautiously optimistic, citing recurring revenue, rising backlog, and a healthy sales pipeline; it did not provide formal revenue or earnings guidance.
- Fiscal 2012 capital expenditures were expected not to exceed $40 million, funded from operating cash flow. Management expected continued long-term customer preference for outsourced delivery and an overall declining trend in hardware sales.
- Management cautioned that financial-institution profitability and spending remain constrained, potentially reducing demand for new products and services. Closures and forced consolidations could affect customers, though management expected regulatory closings to decline absent a significant economic downturn.
- Variable-rate debt creates interest-rate exposure. The company estimated a 1 percentage-point rate increase would raise fiscal 2012 annual interest expense by less than $1.4 million. It reported no use of derivatives.
- At March 31, gross unrecognized tax benefits were $9.5 million, including $7.5 million that would affect the effective tax rate if recognized; accrued interest and penalties were $1.3 million. IRS examinations were ongoing, and management did not expect the current-year examination to cause a material change. Statute expirations 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 if qualifying terminations occur. No treasury shares were repurchased during the nine months.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Confirm the reporting period: the filing is for fiscal Q3 2012, ended March 31, 2012, despite the request metadata’s 2011 Q3 label.
- Track whether recurring support, electronic-payment, and outsourcing growth continues, and whether the $397.0 million backlog converts to revenue as expected.
- Assess the sustainability of cash generation given the large deferred-revenue outflow and ongoing investment in facilities and software.
- Monitor debt repayment, variable-rate exposure, and covenant compliance, along with the outcome of tax examinations and uncertain tax positions.
- Compare actual fiscal-year capital expenditures with management’s ceiling of $40 million and watch for changes in customer spending, financial-institution consolidation, and hardware demand.