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JKHY > SEC Filings for JKHY > Form 10-K on 27-Aug-2013All Recent SEC Filings

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Form 10-K for HENRY JACK & ASSOCIATES INC


27-Aug-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section provides management's view of the financial condition and results of operations and should be read in conjunction with the Selected Financial Data, the audited Consolidated Financial Statements, and related notes included elsewhere in this report.
OVERVIEW
Jack Henry & Associates, Inc. (JHA) is headquartered in Monett, Missouri, employs approximately 5,200 associates nationwide, and is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Its solutions serve more than 11,300 customers and 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.
Each of our brands share the fundamental commitment to provide high quality business solutions, service levels that consistently exceed customer expectations, integration of solutions and practical new technologies. The quality of our solutions, our high service standards, and the fundamental way we do business typically foster long-term customer relationships, attract prospective customers, and have enabled us to capture substantial market share. Through internal product development, disciplined acquisitions, and alliances with companies offering niche solutions that complement our proprietary solutions, we regularly introduce new products and services and generate new cross-sales opportunities across our three business brands. We provide compatible computer hardware for our in-house installations and secure processing environments for our outsourced and hosted solutions. We perform data conversions, software implementations, initial and ongoing customer training, and ongoing customer support services.
Our primary competitive advantage is customer service. Our support infrastructure and strict standards provide service levels we believe to be the highest in the markets we serve and generate high levels of customer satisfaction and retention. We consistently measure customer satisfaction using comprehensive annual surveys and random surveys we receive in our everyday business. Dedicated surveys are also used to grade specific aspects of our customer experience, including product implementation, education, and consulting services.


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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.
During the last five fiscal years, our revenues have grown from $745,593 in fiscal 2009 to $1,129,386 in fiscal 2013. Income from continuing operations has grown from $103,102 in fiscal 2009 to $176,645 in fiscal 2013. This growth has resulted primarily from internal expansion supplemented by strategic acquisitions.
We have two reportable segments: bank systems and services and credit union systems and services. The respective segments include all related license, support and service, and hardware sales along with the related cost of sales. We continue to focus on areas of our company to accomplish our ongoing objective of providing the best integrated solutions, products and customer service available to our clients. We are currently cautiously optimistic regarding ongoing economic improvement and expect our clients to continue investing in our products and services that are needed to improve their operating efficiencies and performance. We anticipate consolidation within the financial services industry to continue, including some reduced amount of bank failures and an increasing amount of merger and acquisition activity. Regulatory conditions and legislation such as the Dodd-Frank Wall Street Reform and Consumer Protection Act will continue to impact the financial services industry and potentially motivate some financial institutions to postpone discretionary spending. A detailed discussion of the major components of the results of operations follows. All dollar amounts are in thousands and discussions compare fiscal 2013 to fiscal 2012 and compare fiscal 2012 to fiscal 2011.

RESULTS OF OPERATIONS
FISCAL 2013 COMPARED TO FISCAL 2012
In fiscal 2013, revenues increased 10% or $102,277 compared to the prior year due primarily to strong growth in all components of support and service revenues, particularly our electronic payment services and our outsourcing services. The growth in revenue and the Company's continued focus on cost management continued to drive up gross margins, which has resulted in a 13% increase in gross profit.
Operating expenses increased 13% for the year mainly due to expenses related to the impact of widespread flooding caused by Hurricane Sandy on our Lyndhurst, New Jersey item processing center. Expenses related to this event totaled $12,475 for fiscal 2013, net of $2,390 insurance recoveries received in the year. Insurance claims have been made by JHA to recover the portions of the remaining expenses incurred related to Hurricane Sandy. These open insurance recovery claims have not been finalized and no amounts have been recorded in the financial results for the year ended June 30, 2013. The amount recovered will likely be less than the amount of the expense.
Increased revenue and gross margins, partially offset by increased operating expenses, resulted in a combined 14% increase in net income for fiscal 2013. We move into fiscal 2014 following record revenue achieved in fiscal 2013. 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.


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REVENUE
License Revenue                   Year Ended            %
                                   June 30,           Change
                               2013         2012
License                     $ 54,818     $ 54,811        <1%
Percentage of total revenue        5 %          5 %

License revenue represents the sale and delivery of application software systems contracted with us by the customer. We license our proprietary software products under standard license agreements that typically provide the customer with a non-exclusive, non-transferable right to use the software on a single computer and for a single financial institution.
License revenue has remained consistent to last year due to strong results from our core and complementary Credit Union products being offset by reduced revenue from our Alogent® products (our suite of deposit and image capture products targeted at large financial institutions) which reduced from a particularly strong prior 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.

Support and Service Revenue         Year Ended               %
                                     June 30,             Change
                                2013           2012
Support and service         $ 1,015,211     $ 909,176       12 %
Percentage of total revenue          90 %          89 %


                                           Year over Year Change
                                           $ Change             % Change
In-House Support & Other Services $         12,677                  4 %
Electronic Payment Services                 58,052                 17 %
Outsourcing Services                        23,017                 12 %
Implementation Services                     12,289                 17 %
Total Increase                    $        106,035

Support and service revenues are generated from annual support to assist the customer in operating their systems and to enhance and update the software, electronic payment services, outsourced data processing services and implementation services (including conversion, installation, configuration and training). There was growth in all components of support and service revenue in fiscal 2013.
In-house support and other services revenue increased due to annual maintenance fee increases as our customers' assets grow. 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 revenue increases are attributable to strong performance across 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 due mainly to increased implementations of our core Banking and Credit Union platform products and related complementary products, coupled with higher merger conversion revenues from our core banking platform and outsourcing products.


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Hardware Revenue                  Year Ended             %
                                   June 30,           Change
                               2013         2012
Hardware                    $ 59,357     $ 63,122      (6 )%
Percentage of total revenue        5 %          6 %

The Company has entered into remarketing agreements with several hardware manufacturers under which we sell computer hardware, hardware maintenance and related services to our customers. Revenue related to hardware sales is recognized when the hardware is shipped to our customers.
Hardware revenue decreased due to a decrease in the number of third party hardware systems and components delivered. Although there will be continuing fluctuations, we expect 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.
COST OF SALES AND GROSS PROFIT
Cost of license represents the cost of software from third party vendors through remarketing agreements associated with license fee revenue. These costs are recognized when license revenue is recognized. Cost of support and service represents costs associated with conversion and implementation efforts, ongoing support for our in-house customers, operation of our data and item centers providing services for our outsourced customers, electronic payment services and direct operating costs. These costs are recognized as they are incurred. Cost of hardware consists of the direct and indirect costs of purchasing the equipment from the manufacturers and delivery to our customers. These costs are recognized at the same time as the related hardware revenue is recognized. Ongoing operating costs to provide support to our customers are recognized as they are incurred.

                                        Year Ended              %
                                         June 30,            Change
                                    2013          2012

Cost of License                  $   4,824     $   6,111      (21 )%
Percentage of total revenue            <1%             1 %
License Gross Profit             $  49,994     $  48,700        3  %
Gross Profit Margin                     91 %          89 %
Cost of support and service      $ 603,920     $ 551,285       10  %
Percentage of total revenue             53 %          54 %
Support and Service Gross Profit $ 411,291     $ 357,891       15  %
Gross Profit Margin                     41 %          39 %
Cost of hardware                 $  43,650     $  45,983       (5 )%
Percentage of total revenue              4 %           4 %
Hardware Gross Profit            $  15,707     $  17,139       (8 )%
Gross Profit Margin                     26 %          27 %
TOTAL COST OF SALES              $ 652,394     $ 603,379        8  %
Percentage of total revenue             58 %          59 %
TOTAL GROSS PROFIT               $ 476,992     $ 423,730       13  %
Gross Profit Margin                     42 %          41 %

Cost of license consists of the direct costs of third party software. Sales of third party software products decreased compared to last year, leading to lower related costs and slightly increased gross profit margins.
Gross profit margins in support and service increased due to economies of scale realized from increased revenues, particularly in electronic payment services. In general, changes in cost of hardware trend consistently with hardware revenue. For the fiscal year, margins have decreased slightly, being impacted by reduced sales of higher margin products related to hardware upgrades.


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OPERATING EXPENSES
Selling and Marketing             Year Ended             %
                                   June 30,           Change
                               2013         2012
Selling and marketing       $ 81,619     $ 76,500       7 %
Percentage of total revenue        7 %          7 %

Dedicated sales forces, inside sales teams, technical sales support teams and channel partners conduct our sales efforts for our two reportable segments, and are overseen by regional sales managers. Our sales executives are responsible for pursuing lead generation activities for new core customers. Our account executives nurture long-term relationships with our client base and cross sell our many complementary products and services.
Selling and marketing expenses for the year have 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          Year Ended             %
                                   June 30,           Change
                               2013         2012
Research and development    $ 63,202     $ 60,876       4 %
Percentage of total revenue        6 %          6 %

We devote significant effort and expense to develop new software, service products and continually upgrade and enhance our existing offerings. Typically, we upgrade our various core and complementary software applications once per year. We believe our research and development efforts are highly efficient because of the extensive experience of our research and development staff and because our product development is highly customer-driven.
Research and development expenses increased primarily due to increased salary costs.

General and Administrative        Year Ended             %
                                   June 30,           Change
                               2013         2012
General and administrative  $ 66,624     $ 50,119       33 %
Percentage of total revenue        6 %          5 %

General and administrative costs include all expenses related to finance, legal, human resources, plus all administrative costs. General and administrative expenses increased compared to last year due mainly to $12,475 of expenses, net of $2,390 insurance recoveries received, related to the impact of widespread flooding caused by Hurricane Sandy on our Lyndhurst, New Jersey item processing center.

INTEREST INCOME AND EXPENSE       Year Ended             %
                                   June 30,           Change
                               2013         2012
Interest Income             $    640     $  1,176      (46 )%
Interest Expense            $ (6,337 )   $ (5,743 )     10  %

Interest income was unusually high in the prior year, mainly from contractual interest income on previously uncollected deconversion revenues. Interest expense increased from the prior year due to costs related to the early payment of the term loan during fiscal 2013.
PROVISION FOR INCOME TAXES
The provision for income taxes was $83,205 or 32.0% of income before income taxes in fiscal 2013 compared with $76,684 or 33.1% of income before income taxes in fiscal 2012. The decrease in the effective tax rate was primarily due to the completion of the Internal Revenue Service audit of the tax returns for the fiscal years June 30, 2010 and 2011 which resulted in the recognition of previously-unrecognized tax benefits, and the retroactive extension of the Research and Experimentation Tax Credit through December 31, 2013.


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NET INCOME
Net income increased from $154,984, or $1.78 per diluted share in fiscal 2012 to $176,645, or $2.04 per diluted share in fiscal 2013.

FISCAL 2012 COMPARED TO FISCAL 2011
In fiscal 2012, revenues increased 6% or $60,212 compared to the prior year due primarily to strong growth in our electronic payment services and our outsourcing services, as well as continued revenue growth in all three of our components of revenue (license, support and service, and hardware). During fiscal 2012, the Company continued to focus on cost management and also reduced interest cost through our sustained repayment of long-term debt. These changes have resulted in a 13% increase in net income.
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.

REVENUE
License Revenue                   Year Ended             %
                                   June 30,           Change
                               2012         2011
License                     $ 54,811     $ 53,067       2 %
Percentage of total revenue        5 %          6 %

License revenue represents the sale and delivery of application software systems contracted with us by the customer. We license our proprietary software products under standard license agreements that typically provide the customer with a non-exclusive, non-transferable right to use the software on a single computer and for a single financial institution.
The increase in license revenue is due to strong results from our Silverlake® and Episys® core systems and related complementary products including 4|Sight™ Item Imaging and our ProfitStar® financial management and budgeting solutions. The increase was partially offset by reduced revenue from our Alogent® products (our suite of deposit and image capture products targeted at large financial institutions) and our Argo products (our suite of retail solutions, including branch sales automation) which have both reduced slightly from a particularly strong prior 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.

Support and Service Revenue        Year Ended              %
                                    June 30,            Change
                               2012          2011
Support and service         $ 909,176     $ 852,253       7 %
Percentage of total revenue        89 %          88 %


                                      Year Over Year Change
                                      $ Change       % Change
In-House Support & Other Services $     6,891               2 %
Electronic Payment Services            36,546              12 %
Outsourcing Services                    9,560               5 %
Implementation Services                 3,926               6 %
Total Increase                    $    56,923

Support and service revenues are generated from annual support to assist the customer in operating their systems and to enhance and update the software, electronic payment services, outsourced data processing services and implementation services (including conversion, installation, configuration and training). There was strong growth in support and service revenue in fiscal 2012.


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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 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 due mainly to increased Episys® credit union core product implementation revenues as well as higher online bill payment services implementation revenues.

Hardware Revenue                  Year Ended             %
                                   June 30,           Change
                               2012         2011
Hardware                    $ 63,122     $ 61,577       3 %
Percentage of total revenue        6 %          6 %

The Company has entered into remarketing agreements with several hardware manufacturers under which we sell computer hardware, hardware maintenance and related services to our customers. Revenue related to hardware sales is recognized when the hardware is shipped to our customers.
Hardware revenue increased slightly due to an increase in the number of third party hardware systems and components delivered as existing customers upgraded their hardware systems. Although there will be continuing 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.
COST OF SALES AND GROSS PROFIT
Cost of license represents the cost of software from third party vendors through remarketing agreements associated with license fee revenue. These costs are recognized when license revenue is recognized. Cost of support and service represents costs associated with conversion and implementation efforts, ongoing support for our in-house customers, operation of our data and item centers providing services for our outsourced customers, electronic payment services and direct operating costs. These costs are recognized as they are incurred. Cost of hardware consists of the direct and indirect costs of purchasing the equipment from the manufacturers and delivery to our customers. These costs are recognized at the same time as the related hardware revenue is recognized. Ongoing operating costs to provide support to our customers are recognized as they are incurred.


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Cost of Sales and Gross Profit          Year Ended              %
                                         June 30,            Change
                                    2012          2011
Cost of License                  $   6,111     $   6,285      (3 )%
Percentage of total revenue              1 %           1 %
License Gross Profit             $  48,700     $  46,782       4  %
Gross Profit Margin                     89 %          88 %
Cost of support and service      $ 551,285     $ 515,917       7  %
Percentage of total revenue             54 %          53 %
Support and Service Gross Profit $ 357,891     $ 336,336       6  %
Gross Profit Margin                     39 %          39 %
Cost of hardware                 $  45,983     $  45,361       1  %
Percentage of total revenue              4 %           5 %
Hardware Gross Profit            $  17,139     $  16,216       6  %
Gross Profit Margin                     27 %          26 %
TOTAL COST OF SALES              $ 603,379     $ 567,563       6  %
Percentage of total revenue             59 %          59 %
TOTAL GROSS PROFIT               $ 423,730     $ 399,334       6  %
Gross Profit Margin                     41 %          41 %

Cost of license depends greatly on third party reseller agreement software vendor costs. During the current year, sales of third party software products . . .

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