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JKHY > SEC Filings for JKHY > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for HENRY JACK & ASSOCIATES INC


7-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements included in this Form 10-Q.
RESULTS OF OPERATIONS
Background and Overview
Jack Henry & Associates, Inc. (JHA) is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Its solutions are marketed and supported through three primary brands. Jack Henry Banking® supports banks ranging from community to mid-tier, multi-billion dollar institutions with information and transaction processing solutions. Symitar® is a leading provider of information and transaction processing solutions for credit unions of all sizes. ProfitStars® provides specialized products and services that enable financial institutions of every asset size and charter, and diverse corporate entities outside the financial services industry, to mitigate and control risks, optimize revenue and growth opportunities, and contain costs. JHA's integrated solutions are available for in-house installation and outsourced and hosted delivery.
The majority of our revenue is derived from recurring outsourcing fees and transaction processing fees that predominantly have contract terms of five years or greater. Support and service fees also include in-house maintenance fees on primarily annual contract terms. Less predictable software license fees and hardware sales complement our primary revenue sources. We continually seek opportunities to increase revenue while at the same time containing costs to expand margins.
In the first quarter of fiscal 2013, revenues increased 9% or $22,663 compared to the same period in the prior year, with strong growth continuing in our support & service revenue component, particularly in our electronic payment services. The growth in revenue and the Company's continued focus on cost management, partially offset by a slightly higher tax rate, has resulted in a 16% increase in net income for the quarter.
The current condition of the U.S. financial markets continues to impact the overall demand and spending for new products and services by some of our customers. The profitability of many financial institutions continues to improve, but in many cases remains low and this appears to have resulted in some reduction of demand for new products and services. During the past four years, a number of financial institutions have closed or merged due to regulatory action. We believe that regulatory closings will continue to decline through fiscal 2013, absent a significant downturn in the economy. Furthermore, the increase in bank failures and forced consolidations has been, to some extent, offset by a general decline in the level of acquisition activity among financial institutions.
We continue into fiscal 2013 with cautious optimism following strong first quarter results. Significant portions of our business continue to come from recurring revenue and our healthy sales pipeline is also encouraging. Our customers continue to face regulatory and operational challenges which our products and services address, and in these times they have an even greater need for our solutions that directly address institutional profitability and efficiency. Our strong balance sheet, access to extensive lines of credit, the strength of our existing product line and an unwavering commitment to superior customer service position us well to address current and future opportunities to extend our customer base and produce returns for our stockholders. A detailed discussion follows of the major components of the results of operations for the three month period ended September 30, 2012. All amounts are in thousands and discussions compare the current three month period ended September 30, 2012, to the prior year three month period ended September 30, 2011.
REVENUE
License Revenue                Three Months Ended         %
                                 September 30,         Change
                               2012          2011
License                     $  12,864     $ 12,264       5 %
Percentage of total revenue         5 %          5 %

License revenue for core products remains consistent compared to the same period last year, with the current quarter increase being driven by a slight increase in revenue from our complementary products compared to the last fiscal year. While license fees will fluctuate, recent trends indicate that our customers are increasingly electing to contract for our products via outsourced delivery rather than a traditional license as our outsourced delivery does not require an up-front capital investment in license fees. We expect this trend to continue in the long term.


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Support and Service Revenue    Three Months Ended          %
                                  September 30,         Change
                               2012          2011
Support and service         $ 244,585     $ 220,270       11 %
Percentage of total revenue        90 %          89 %


                                          Qtr over Qtr Change
                                         $ Change            % Change
In-House Support & Other Services $        4,765                 6 %
Electronic Payment Services               12,267                15 %
Outsourcing Services                       4,152                 9 %
Implementation Services                    3,131                18 %
Total Increase                    $       24,315

There was growth in all support and service revenue components for the current quarter.
In-house support and other services revenue increased due to annual maintenance fee increases (as our customers' assets have grown) and increased revenues from our system conversion services. Revenue from our complementary products has also grown as the total number of supported in-house products has grown. Electronic payment services continue to experience the largest growth. The quarterly revenue increases are attributable to strong performance across our electronic payment products, particularly from debit/credit card processing services, online bill payment services and ACH processing.
Outsourcing services for banks and credit unions continue to drive revenue growth as customers continue to show a preference for outsourced delivery of our solutions. We expect the trend towards outsourced product delivery to benefit outsourcing services revenue for the foreseeable future. Revenues from outsourcing services are typically earned under multi-year service contracts and therefore provide a long-term stream of recurring revenues. Implementation services revenue increased for the quarter due mainly to increased implementations of our core banking platform products and related complementary products, coupled with higher merger conversion revenues from our core banking platform products.

Hardware Revenue               Three Months Ended         %
                                 September 30,         Change
                               2012          2011
Hardware                    $  13,552     $ 15,804      (14 )%
Percentage of total revenue         5 %          6 %

Hardware revenue continues to fluctuate from quarter to quarter. Revenue has decreased for the three month period due to a decrease in the number of third party hardware systems and components delivered. Although there will be continuing quarterly fluctuations, we expect there to be an overall decreasing trend in hardware sales due to the change in sales mix towards outsourcing contracts, which typically do not include hardware, and the deflationary trend of computer prices generally.
BACKLOG
Our backlog of $423,352 ($92,153 in-house and $331,199 outsourcing) at September 30, 2012 increased 17% from $361,222 ($73,221 in-house and $288,001 outsourcing) at September 30, 2011. The current quarter backlog decreased 3% from June 30, 2012, when backlog was $435,344 ($92,741 in-house and $342,603 outsourcing).


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COST OF SALES AND GROSS PROFIT
                                    Three Months Ended          %
                                       September 30,         Change
                                    2012          2011

Cost of License                  $   1,077     $   1,127       (4 )%
Percentage of  total revenue           <1%           <1%
License Gross Profit             $  11,787     $  11,137        6  %
Gross Profit Margin                     92 %          91 %
Cost of support and service      $ 143,418     $ 131,124        9  %
Percentage of  total revenue            53 %          53 %
Support and Service Gross Profit $ 101,167     $  89,146       13  %
Gross Profit Margin                     41 %          40 %
Cost of hardware                 $  10,578     $  11,661       (9 )%
Percentage of  total revenue             4 %           5 %
Hardware Gross Profit            $   2,974     $   4,143      (28 )%
Gross Profit Margin                     22 %          26 %
TOTAL COST OF SALES              $ 155,073     $ 143,912        8  %
Percentage of  total revenue            57 %          58 %
TOTAL GROSS PROFIT               $ 115,928     $ 104,426       11  %
Gross Profit Margin                     43 %          42 %

Cost of license depends greatly on third party reseller agreement software vendor costs. During the quarter, sales of these third party vendor licenses decreased as a percentage of total license revenue leading to lower related costs and slightly increased gross profit margins.
Cost of support and service increased for the three months commensurate with the increase in support and services revenue, as evidenced by the gross profit margins only increasing slightly.
In general, changes in cost of hardware trend consistently with hardware revenue. For the current quarter however, reduced sales of higher margin products related to hardware upgrades has driven lower hardware margins.

OPERATING EXPENSES
Selling and Marketing           Three Months Ended         %
                                  September 30,         Change
                                2012          2011
Selling and marketing        $  20,189     $ 18,754       8 %
Percentage of  total revenue         7 %          8 %

Selling and marketing expenses for the quarter has increased mainly due to higher commission expenses. This is in line with increased sales volume of long term service contracts on which commissions are paid as a percentage of total revenue.

Research and Development        Three Months Ended         %
                                  September 30,         Change
                                2012          2011
Research and development     $  14,645     $ 14,936      (2 )%
Percentage of  total revenue         5 %          6 %

Research and development expenses decreased for the three month period ended September 30, 2012 primarily due to increased capitalization of costs for ongoing software development projects, which has also driven the decreases in the percentage of total revenue for the quarter.


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General and Administrative      Three Months Ended         %
                                  September 30,         Change
                                2012          2011
General and administrative   $  13,578     $ 12,939       5 %
Percentage of  total revenue         5 %          5 %

General and administrative expenses for the quarter have increased slightly compared to last year due mainly to increased salary costs in line with a 6% increase in general and administrative headcount.
INTEREST INCOME AND EXPENSE
Three Months Ended % September 30, Change 2012 2011 Interest Income $ 187 $ 129 45 % Interest Expense $ (1,341 ) $ (1,456 ) (8 )%

Interest income for the three month period ended September 30, 2012 fluctuated due to changes in invested balances and yields on invested balances. Interest expense decreased for the quarter due to the lower outstanding balance on our term loan compared to last year.
PROVISION FOR INCOME TAXES
The provision for income taxes was $23,887 or 36.0% for the three month period ended September 30, 2012 compared with $19,995 or 35.4% for the same period last year. The prior year income tax rate was slightly lower primarily due to the effect of the Research and Experimentation Credit ("R&E Credit"), which expired effective December 31, 2011.
NET INCOME
Net income increased 16% for the three months ended September 30, 2012. For the first quarter of fiscal 2013, it was $42,475 or $0.49 per diluted share compared to $36,475, or $0.42 per diluted share in the same period last year.

BUSINESS SEGMENT DISCUSSION
The Company is a provider of integrated computer systems that perform data
processing (available for in-house installations or outsourced services) for
banks and credit unions. The Company's operations are classified into two
reportable segments: bank systems and services ("Bank") and credit union systems
and services ("Credit Union"). The Company evaluates the performance of its
segments and allocates resources to them based on various factors, including
prospects for growth, return on investment, and return on revenue.
Bank Systems and Services
                             Three Months Ended          %
                                September 30,         Change
                             2012          2011
Revenue                   $ 202,426     $ 187,108       8 %
Gross Profit              $  85,805     $  78,986       9 %
Gross Profit Margin              42 %          42 %

Revenue in the Bank segment increased 8% compared to the equivalent quarter last fiscal year. This was primarily due to growth in all areas of support and service revenue, particularly a 13% increase in electronic payment transaction processing services revenue.
Gross profit margins have remained consistent.


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Credit Union Systems and Services

                            Three Months Ended         %
                              September 30,         Change
                            2012          2011
Revenue                  $  68,575     $ 61,230       12 %
Gross Profit             $  30,123     $ 25,440       18 %
Gross Profit Margin             44 %         42 %

Revenue in the Credit Union segment increased 12% from the same quarter last year mainly due to support & service revenue which grew 14%, coupled with a small increase in complementary product license revenues. Support & service revenue increased due mainly to an 18% increase in electronic payment services from continuing growth of our online bill payment processing and debit/credit card processing services in the Credit Union segment. Also, continued growth of our outsourcing solutions in the Credit Union segment led to a 35% increase in outsourcing services revenues compared to the same quarter last year. Gross profit margins for the Credit Union segment for the three month period have increased mainly due to the increase in license revenue noted above. License revenues achieve higher margins relative to the other components of revenue.

FINANCIAL CONDITION
Liquidity
The Company's cash and cash equivalents totaled $223,688 at September 30, 2012,
increasing from $157,313 at June 30, 2012, and from $108,055 at September 30,
2011. The increase from June 30, 2012 is primarily due to continued receipts
from our annual maintenance billings.
The following table summarizes net cash from operating activities in the
statement of cash flows:
                                             Three Months Ended
                                               September 30,
                                             2012          2011
Net income                                $  42,475     $ 36,475
Non-cash expenses                            29,655       26,885
Change in receivables                        81,478       72,862
Change in deferred revenue                  (48,392 )    (56,586 )
Change in other assets and liabilities       (3,367 )     (1,173 )
Net cash provided by operating activities $ 101,849     $ 78,463

Cash provided by operating activities for the fiscal year to date increased 30% compared to last year. Cash from operations is primarily used to repay debt, pay dividends and fund acquisitions and other capital expenditures. The increase compared to last year reflects increased earnings driven by continued strong revenue growth, ongoing cost control and decreased interest costs. Cash used in investing activities for the current year totaled $18,495. The largest use of cash included $11,646 for the development of software and capital expenditures on facilities and equipment of $6,794, including spending on our online bill payment data center migration. Other uses of cash included $186 for the acquisition of customer contracts. These expenditures have been partially offset by proceeds of $131 from the sale of property. In the first three months of fiscal 2012, cash used in investing activities totaled $18,838 which included capital expenditures for facilities and equipment of $10,652, related to computer equipment and related purchased software, with other major uses of cash being $7,517 for the development of software and $670 for the acquisition of customer contracts.
Financing activities used cash of $16,979 during the current year. There were cash outflows to repay long and short term borrowings on our credit facilities of $5,726, dividends paid to stockholders of $9,911, and purchase of treasury shares of $4,776. Cash used was partially offset by $3,434 net proceeds from the issuance of stock and tax related to stock-based compensation. Net cash used by financing activities in the first three months of last year, was $14,695 and includes $6,340 repayments on our lines of credit and $9,074 in dividend payments to shareholders, partially offset by $719 of net proceeds from the issuance of stock and tax related to stock-based compensation.
While the current condition of the U.S. financial markets continues to impact our customers, we have not experienced any significant issues with our current collection efforts. Furthermore, we believe that any future impact to our liquidity


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would be minimized by our access to available lines of credit. Capital Requirements and Resources
The Company generally uses existing resources and funds generated from operations to meet its capital requirements. Capital expenditures totaling $6,794 and $10,652 for the three-month periods ended September 30, 2012 and 2011, respectively, were made primarily for additional equipment and the improvement of existing facilities. These additions were funded from cash generated by operations. Total consolidated capital expenditures for the Company for fiscal year 2013 are not expected to exceed $40,000 and will be funded from cash generated by operations.
The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves or short-term borrowings on its existing credit facilities. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At September 30, 2012, there were 15,580 shares in treasury stock and the Company had the remaining authority to repurchase up to 4,411 additional shares. The total cost of treasury shares at September 30, 2012 is $348,732. During fiscal 2013, the Company repurchased 128 treasury shares for $4,776. At June 30, 2012, there were 15,452 shares in treasury stock and the Company had the authority to repurchase up to 4,539 additional shares.
The Company has entered into a bank credit facility agreement that includes a revolving loan and a term loan.
Revolving credit facility
The long term revolving loan allows for borrowings of up to $150,000, which may be increased by the Company at any time until maturity to $250,000. The revolving loan terminates June 4, 2015. At September 30, 2012, there was no outstanding revolving loan balance.
Term loan
The term loan had an original principal balance of $150,000, with quarterly principal payments of $5,625 that began on September 30, 2011. The remaining outstanding balance on June 4, 2015 is due and payable on that date. At September 30, 2012, the outstanding balance of $121,875 was bearing interest at a rate of 2.37%, and $22,500 will be maturing within the next twelve months. Each of the above loans bear interest at a variable rate equal to (a) a rate based on LIBOR or (b) an alternate base rate (the greater of (a) the Federal Funds Rate plus 0.5%, (b) the Prime Rate or (c) LIBOR plus 1.0%), plus an applicable percentage in each case determined by the Company's leverage ratio. The loans are secured by pledges of capital stock of certain subsidiaries of the Company. The loans are also guaranteed by certain subsidiaries of the Company. The credit facility is subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the agreement. As of September 30, 2012, the Company was in compliance with all such covenants. Capital leases
The Company has entered into various capital lease obligations for the use of certain computer equipment. Long term capital lease obligations were entered into of which $8,538 remains outstanding at September 30, 2012 and $6,797 will be maturing within the next twelve months. The Company also has short term capital lease obligations totaling $1,989 at September 30, 2012. Other lines of credit
The Company renewed an unsecured bank credit line on April 29, 2012 which provides for funding of up to $5,000 and bears interest at the prime rate less 1% (2.25% at September 30, 2012). The credit line was renewed through April 29, 2014. At September 30, 2012, no amount was outstanding. Critical Accounting Policies
The Company regularly reviews its selection and application of significant accounting policies and related financial disclosures. The application of these accounting policies requires that management make estimates and judgments. The estimates that affect the application of our most critical accounting policies and require our most significant judgments are outlined in Management's Discussion and Analysis of Financial Condition and Results of Operations - "Critical Accounting Policies" - contained in our annual report on Form 10-K for the year ended June 30, 2012.
Forward Looking Statements
The Management's Discussion and Analysis of Results of Operations and Financial Condition and other portions of this report contain forward-looking statements within the meaning of federal securities laws. Actual results are subject to risks and uncertainties, including both those specific to the Company and those specific to the industry, which could cause results to differ materially from those contemplated. The risks and uncertainties include, but are not limited to,


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the matters detailed at Risk Factors in its Annual Report on Form 10-K for the fiscal year ended June 30, 2012. Undue reliance should not be placed on the forward-looking statements. The Company does not undertake any obligation to publicly update any forward-looking statements.
CONCLUSION
The Company's results of operations and its financial position continue to be solid, with increased gross profit and net income for the three month period ended September 30, 2012, compared to the same period a year ago. We continue to be cautiously optimistic, as we maintain significant levels of recurring revenue and continue to see a strong backlog of contracts for products and services yet to be delivered. Our overall results reflect the continuing attitude of cooperation and commitment by each employee, management's ongoing cost control efforts and our commitment to continue delivering top quality products and superior services to all of our customers in the markets we serve. We believe that we are well positioned to address current and future opportunities which will arise to extend our customer base and produce returns for our stockholders.

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