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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 0-14112
JACK HENRY & ASSOCIATES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 43-1128385
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(State or Other Jurisdiction I.R.S. Employer
of Incorporation) Identification No.)
663 Highway 60, P. O. Box 807, Monett, MO 65708
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(Address of Principal Executive Offices)
(Zip Code)
417-235-6652
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2 of the Exchange Act.)
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of January 30, 2004, Registrant had 89,632,393 shares of common
stock outstanding ($.01 par value).
JACK HENRY & ASSOCIATES, INC.
CONTENTS
Page
PART I FINANCIAL INFORMATION Reference
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets
December 31, 2003 and June 30, 2003 (Unaudited) 3
Condensed Consolidated Statements of Income for
the Three and Six Months Ended December 31, 2003
and 2002 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended December 31, 2003
and 2002 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
ITEM 3 Quantitative and Qualitative Disclosures
about Market Risk 14
ITEM 4 Controls and Procedures 14
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 15
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
December 31, June 30,
2003 2003
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 108,536 $ 32,014
Investments, at amortized cost 999 998
Trade receivables 67,832 150,951
Income taxes receivable 611 -
Prepaid cost of product 17,122 18,483
Prepaid expenses and other 14,642 13,816
Deferred income taxes 850 1,000
----------- -----------
Total 210,592 217,262
PROPERTY AND EQUIPMENT, net 206,421 196,046
OTHER ASSETS:
Goodwill 44,543 44,543
Trade names 3,699 3,699
Customer relationships, net of amortization 56,939 59,358
Computer software, net of amortization 12,891 12,500
Prepaid cost of product 8,907 10,021
Other non-current assets 4,383 5,146
----------- -----------
Total 131,362 135,267
----------- -----------
Total assets $ 548,375 $ 548,575
=========== ===========
LIABILITES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,703 $ 9,617
Accrued expenses 10,378 17,250
Accrued income taxes - 421
Deferred revenues 86,338 119,492
----------- -----------
Total 102,419 146,780
DEFERRED REVENUES 11,544 12,732
DEFERRED INCOME TAXES 27,610 23,840
----------- -----------
Total liabilities 141,573 183,352
STOCKHOLDERS' EQUITY
Preferred stock - $1 par value; 500,000
shares authorized, none issued - -
Common stock - $0.01 par value: 250,000,000
shares authorized; Shares issued at 12/31/03
and 06/30/03 were 90,519,856 905 905
Additional paid-in capital 173,713 169,299
Retained earnings 247,793 233,396
Less treasury stock at cost 961,163 shares
at 12/31/03, 2,363,121 shares at 06/30/03 (15,609) (38,377)
----------- -----------
Total stockholders' equity 406,802 365,223
----------- -----------
Total liabilities and stockholders' equity $ 548,375 $ 548,575
=========== ===========
See notes to condensed consolidated financial statements.
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
REVENUE
License $ 12,400 $ 13,807 $ 25,360 $ 25,876
Support and service 76,717 64,252 149,241 124,136
Hardware 23,613 24,504 47,069 46,529
------- ------- ------- -------
Total 112,730 102,563 221,670 196,541
COST OF SALES
Cost of license 252 975 1,165 1,766
Cost of support and service 51,696 46,518 100,745 87,973
Cost of hardware 16,073 18,204 32,394 34,823
------- ------- ------- -------
Total 68,021 65,697 134,304 124,562
------- ------- ------- -------
GROSS PROFIT 44,709 36,866 87,366 71,979
OPERATING EXPENSES
Selling and marketing 8,531 7,661 17,303 14,860
Research and development 5,912 3,962 11,231 7,513
General and administrative 7,673 7,012 14,678 13,748
------- ------- ------- -------
Total 22,116 18,635 43,212 36,121
------- ------- ------- -------
OPERATING INCOME 22,593 18,231 44,154 35,858
INTEREST INCOME (EXPENSE)
Interest income 281 191 568 378
Interest expense (3) (32) (29) (55)
------- ------- ------- -------
Total 278 159 539 323
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 22,871 18,390 44,693 36,181
PROVISION FOR INCOME TAXES 8,348 6,713 16,313 13,206
------- ------- ------- -------
NET INCOME $ 14,523 $ 11,677 $ 28,380 $ 22,975
======= ======= ======= =======
Diluted net income per share $ 0.16 $ 0.13 $ 0.31 $ 0.26
======= ======= ======= =======
Diluted weighted average
shares outstanding 92,000 88,812 91,534 89,196
======= ======= ======= =======
Basic net income per share $ 0.16 $ 0.13 $ 0.32 $ 0.26
======= ======= ======= =======
Basic weighted average
shares outstanding 89,231 87,680 88,873 87,882
======= ======= ======= =======
See notes to condensed consolidated financial statements.
JACK HENRY AND ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
December 31,
-----------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 28,380 $ 22,975
Adjustments to reconcile net income from
operations to cash from operating activities:
Depreciation 13,362 11,917
Amortization 3,164 3,126
Deferred income taxes 3,920 3,600
Other, net 163 (27)
Changes in:
Trade receivables 83,118 57,486
Prepaid expenses and other 1,752 (18)
Accounts payable (3,914) 867
Accrued expenses (6,872) (623)
Income taxes (including tax benefit of
$4,413 and $105 from the exercise of
stock options, respectively) 3,380 972
Deferred revenues (34,343) (30,941)
-------- --------
Net cash from operating activities 92,110 69,334
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (24,926) (26,303)
Purchase of investments (1,995) (1,993)
Proceeds from sale of investments 2,633 2,000
Proceeds from sale of equipment 960 -
Purchase of customer contracts - (304)
Payment for acquisition, net - (4,151)
Computer software developed (1,143) (2,726)
Other, net 96 25
-------- --------
Net cash from investing activities (24,375) (33,452)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon
exercise of stock options 14,665 470
Proceeds from sale of common stock, net 352 402
Dividends paid (6,230) (6,145)
Purchase of treasury stock - (18,165)
-------- --------
Net cash from financing activities 8,787 (23,438)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 76,522 $ 12,444
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 32,014 $ 17,765
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 108,536 $ 30,209
======== ========
See notes to condensed consolidated financial statements
Net cash paid for income taxes was $8,513 and $8,635 for the six months
ended December 31, 2003 and 2002, respectively.
The Company paid interest of $29 and $55 for the six months ended
December 31, 2003 and 2002, respectively.
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Jack Henry & Associates, Inc. ("JHA" or the "Company") is a leading provider
of integrated computer systems that has developed and acquired several
banking and credit union software systems. The Company's revenues are
predominately earned by marketing those systems to financial institutions
nationwide along with the computer equipment (hardware) and by providing the
conversion and software installation services for a financial institution to
install a JHA software system. JHA also provides continuing support and
services to customers using the systems either in-house or outsourced.
CONSOLIDATION
The condensed consolidated financial statements include the accounts of JHA
and all of its wholly owned subsidiaries and all significant intercompany
accounts and transactions have been eliminated.
STOCK OPTIONS
As permitted under Statement of Financial Accounting Standards ("SFAS") No.
123, Accounting for Stock-Based Compensation, the Company has elected to
follow Accounting Principles Board Opinion ("APB") No. 25, Accounting
for Stock Issued to Employees, in accounting for stock-based awards
to employees. Under APB No. 25, the Company generally recognizes no
compensation expense with respect to such awards, since the exercise price
of the stock options awarded are equal to the fair market value of the
underlying security on the grant date.
Pro forma information regarding net income and earnings per share is
required to be presented as if the Company had accounted for its stock based
awards to employees under the fair value method of SFAS No. 123. The value
of the Company's stock-based awards to employees was estimated as of the
date of the grant using a Black-Scholes option pricing model. The Company's
pro forma information is as follows:
(In thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income, as reported $ 14,523 $ 11,677 $ 28,380 $ 22,975
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects 308 555 6,808 1,157
------- ------- ------- -------
Pro forma net income $ 14,215 $ 11,122 $ 21,572 $ 21,818
======= ======= ======= =======
Diluted net income per share
As reported $ 0.16 $ 0.13 $ 0.31 $ 0.26
Pro forma $ 0.15 $ 0.13 $ 0.24 $ 0.24
Basic net income per share
As reported $ 0.16 $ 0.13 $ 0.32 $ 0.26
Pro forma $ 0.16 $ 0.13 $ 0.24 $ 0.25
COMPREHENSIVE INCOME
Comprehensive income for each of the three and six-month periods ended
December 31, 2003 and 2002, equals the Company's net income.
INTERIM FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q of the Securities
and Exchange Commission and in accordance with accounting principles
generally accepted in the United States of America applicable to interim
condensed consolidated financial statements, and do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete consolidated financial
statements. The condensed consolidated financial statements should be read
in conjunction with the Company's audited consolidated financial statements
and accompanying notes, which are included in its Form 10-K for the year
ended June 30, 2003. The accounting policies followed by the Company are
set forth in Note 1 to the Company's consolidated financial statements
included in its Annual Report on Form 10-K ("Form 10-K") for the fiscal year
ended June 30, 2003.
In the opinion of management of the Company, the accompanying condensed
consolidated financial statements reflect all adjustments necessary
(consisting solely of normal recurring adjustments) to present fairly the
financial position of the Company as of December 31, 2003, the results of
its operations and its cash flows for the three and six-month periods ended
December 31, 2003 and 2002.
The results of operations for the period ended December 31, 2003 are not
necessarily indicative of the results to be expected for the entire year.
RECLASSIFICATION
Where appropriate, prior period financial information has been reclassified
to conform with the current period's presentation.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Effective November 22, 2002, the EITF reached a consensus regarding EITF
Issue No. 02-16, Accounting by a Customer, Including a Reseller, for Cash
Consideration Received from a Vendor. This consensus requires that payments
from a vendor be classified as a reduction to the price of the vendor's
goods and taken as a reduction to cost of sales unless the payments are (1)
a reimbursement for costs incurred to sell the product or (2) a payment for
assets or services provided. The consensus also requires that payments from
a vendor be recognized as a reduction to cost of sales on a rational and
systematic basis. This consensus is effective for fiscal years beginning
after December 15, 2002 (July 1, 2003 for JHA). The adoption of this
consensus on July 1, 2003 did not have a material impact on its consolidated
financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, ("VIE") which addresses
consolidation by business enterprises of variable interest entities that
either: (1) do not have sufficient equity investment at risk to permit the
entity to finance its activities without additional subordinated financial
support, or (2) the equity investors lack an essential characteristic of a
controlling financial interest. The FIN 46 transition requirements for VIEs
existing before January 31, 2003, were delayed, effective October 9, 2003,
with the issuance of FASB Staff Position 46-6. The Company early adopted
the transition provisions of FIN 46 on July 1, 2003, without any impact on
its financial position or results of operations, because the Company does
not have any VIEs.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
SFAS No. 150 requires classification of a financial instrument that is
within its scope as a liability, or an asset in some circumstances. SFAS
No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and was therefore effective for the Company on July 1,
2003. The adoption of this standard did not have a material impact on the
Company's financial statements.
NOTE 3. SHARES USED IN COMPUTING NET INCOME PER SHARE
(In Thousands)
Three Months Ended Six Months Ended
December 31, December 31,
--------------- ---------------
2003 2002 2003 2002
------ ------ ------ ------
Weighted average number of common
shares outstanding - basic 89,231 87,680 88,873 87,882
Common stock equivalents 2,769 1,132 2,661 1,314
------ ------ ------ ------
Weighted average number of common
and common equivalent shares
outstanding - diluted 92,000 88,812 91,534 89,196
====== ====== ====== ======
Per share information is based on the weighted average number of common
shares outstanding for the periods ended December 31, 2003 and 2002. Stock
options have been included in the calculation of income per share to the
extent they are dilutive.
Non-dilutive stock options to purchase approximately 1,720,000 and 1,759,000
shares and 6,173,000 and 6,028,000 shares for the three and six-month
periods ended December 31, 2003, and 2002, respectively, were not included
in the computation of diluted income per common share.
NOTE 4. BUSINESS SEGMENT INFORMATION
The Company is a leading provider of integrated computer systems that
perform data processing (available for in-house or outsourced) for banks and
credit unions. The Company's operations are classified into two business
segments: bank systems and services and credit union systems and services.
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.
(In Thousands)
Three Months Ended Three Months Ended
December 31, 2003 December 31, 2002
---------------------------- ----------------------------
Bank Credit Union Total Bank Credit Union Total
------- ------------ ------- ------- ------------ -------
REVENUE
License $ 8,657 $ 3,743 $ 12,400 $ 9,442 $ 4,365 $ 13,807
Support and service 65,901 10,816 76,717 57,643 6,609 64,252
Hardware 19,668 3,945 23,613 20,684 3,820 24,504
------- ------- ------- ------- ------- -------
Total 94,226 18,504 112,730 87,769 14,794 102,563
COST OF SALES
Cost of license 165 87 252 363 612 975
Cost of support and service 42,661 9,035 51,696 38,630 7,888 46,518
Cost of hardware 13,377 2,696 16,073 15,447 2,757 18,204
------- ------- ------- ------- ------- -------
Total 56,203 11,818 68,021 54,440 11,257 65,697
------- ------- ------- ------- ------- -------
GROSS PROFIT $ 38,023 $ 6,686 $ 44,709 $ 33,329 $ 3,537 $ 36,866
======= ======= ======= ======= ======= =======
(In Thousands)
Six Months Ended Six Months Ended
December 31, 2003 December 31, 2002
Bank Credit Union Total Bank Credit Union Total
------- ------------ ------- ------- ------------ -------
REVENUE
License $ 17,488 $ 7,872 $ 25,360 $ 16,416 $ 9,460 $ 25,876
Support and service 129,048 20,193 149,241 112,362 11,774 124,136
Hardware 39,254 7,815 47,069 39,693 6,836 46,529
------- ------- ------- ------- ------- -------
Total 185,790 35,880 221,670 168,471 28,070 196,541
COST OF SALES
Cost of license 640 525 1,165 949 817 1,766
Cost of support and service 83,477 17,268 100,745 73,443 14,530 87,973
Cost of hardware 27,084 5,310 32,394 29,817 5,006 34,823
------- ------- ------- ------- ------- -------
Total 111,201 23,103 134,304 104,209 20,353 124,562
------- ------- ------- ------- ------- -------
GROSS PROFIT $ 74,589 $ 12,777 $ 87,366 $ 64,262 $ 7,717 $ 71,979
======= ======= ======= ======= ======= =======
(In Thousands)
December 31, June 30,
----------- -----------
2003 2003
----------- -----------
Property and equipment, net
Bank systems and services $ 189,879 $ 192,846
Credit union systems and services 16,542 3,200
----------- -----------
Total $ 206,421 $ 196,046
=========== ===========
Identified intangible assets, net
Bank systems and services $ 48,901 $ 50,205
Credit union systems and services 24,628 25,352
----------- -----------
Total $ 73,529 $ 75,557
=========== ===========
Goodwill, net
Bank systems and services $ 27,314 $ 27,314
Credit union systems and services 17,229 17,229
----------- -----------
Total $ 44,543 $ 44,543
=========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Background and Overview
We provide a suite of integrated computer solutions for in-house and
outsourced data processing to commercial banks, credit unions and other
financial institutions. We have developed and acquired suites of banking and
credit union application software systems that we market, together with
compatible computer hardware, to financial institutions throughout the
United States. We also perform data conversion and software installation for
the implementation of our systems and provide continuing support and
services after the systems are installed. For our customers who prefer not
to make an up-front capital investment in software and the related hardware,
we provide the same full range of products and services on an outsourced
basis through our seven data centers and fifteen item processing centers
located throughout the United States.
A detailed discussion of the major components of the results of operations
for the three and six-month periods ended December 31, 2003 compared to the
same periods in the previous year follows:
REVENUE - Revenue increased 10% to $112.7 million for the three months ended
December 31, 2003 from $102.6 million for the same period last year.
License revenue decreased 10% to $12.4 million, which represented 11% of
total revenue, compared to $13.8 million in the first quarter a year ago or
13% of total revenue. Support and service revenue increased 19% to $76.7
million, which represented 68% of total revenue for the three months ended
December 31, 2003 compared to $64.3 million, or 63% of total revenue, in the
same period in the previous year. Hardware revenue decreased 4% to $23.6
million, which represented 21% of total revenue from $24.5 million or 24% of
total revenue for the second quarter in the previous year.
For the first half of fiscal 2004, revenue grew 13% from $196.5 million last
year to $221.7 million. License revenue decreased 2% from $25.9 million for
the first six months in fiscal 2003 to $25.4 million in the first six months
in fiscal 2004. Support and service revenue grew 20% to $149.2 million in
the first half of fiscal 2004 from $124.1 million for the first half of
fiscal 2003. Hardware sales increased 1% to $47.1 million for the current
six months from $46.5 million for the six months ended December 31, 2002.
There was strong growth in all components that make up support and service
revenue for the three and six-months ended December 31, 2003. The support
and service revenue growth of $12.5 million for the three months ended
December 31, 2003 compared to the same period last year represents $0.7
million growth in installation services, $2.6 million growth in ATM and
debit card processing services, $3.5 million growth in outsourcing services
and $5.7 million increase for in-house support revenue.
For the first half of fiscal 2004, support and service revenue increased by
$25.1 million, consisting of a $3.6 million increase in installation
services, a $4.4 million increase in ATM and debit card processing services,
$5.3 million increase in outsourcing services and $11.8 million increase for
in-house support revenue.
The support and service revenue growth is primarily due to in-house support
relating to the software installations performed during the previous 12
months. Outsourcing services for banks and credit unions, along with ATM
and debit card transaction processing services, continue to drive revenue
growth at a strong pace. License revenue and hardware revenue continue to
come in with slight fluctuations compared to prior periods as expected, due
to the slow recovery of larger capital outlays for new core software sales.
Our backlog increased 16% at December 31, 2003 to $182.5 million ($60.0 in-
house and $122.5 outsourcing) from $158.0 million ($57.6 in-house and $100.4
outsourcing) at December 31, 2002. Backlog increased 3% from September 30,
2003, from $176.5 million ($60.2 in-house and $116.3 outsourcing).
COST OF SALES - Cost of sales increased 4% for the three months ended
December 31, 2003, from $65.7 million for the three months ended December
31, 2002 to $68.0 million for the three months ended December 31, 2003.
Cost of license decreased to $0.3 million for the three months ended
December 31, 2003, from $1.0 million at December 31, 2002. Cost of support
and service increased 11% to $51.7 million in the current three-month period
compared to $46.5 million for the three months ended December 31, 2002.
Cost of hardware decreased 12% from $18.2 million for the second quarter of
fiscal 2003 to $16.1 million for the second quarter of fiscal 2004.
For the first half of fiscal 2004, cost of sales increased 8%, from $124.6
million for fiscal 2003 to $134.3 million for fiscal 2004. Cost of license
decreased 34% from $1.8 million to $1.2 million for the six months ended
December 31, 2003. Cost of support and service increased 15% to $100.7
million in the current six-month period compared to $88.0 million for the
six months ended December 31, 2002. Cost of hardware decreased 7% from $34.8
million for the first half of fiscal 2003 to $32.4 million for the first
half of fiscal 2004.
The decrease in the cost of license is due to a lower percentage of third
party software delivered in the three and six months ended December 31,
2003, compared to the same periods in the prior year. Support and service
depreciation expense increased 24% for the three and six-month periods ended
December 31, 2003. The increase in depreciation is due to new buildings,
plus other capital expenditures for infrastructure and equipment related to
support and services. In the cost of support and service, employee related
expenses increased 4% and 9% for the current three and six-month periods,
compared to the fiscal 2003 periods, due to annual raises and a small
increase in headcount. Hardware cost decreased primarily due to increased
vendor incentives compared with the same periods last year.
GROSS PROFIT - Gross profit increased 21% to $44.7 million, reflecting a 40%
gross margin in the second quarter of fiscal 2004, compared to $36.9
million, reflecting a 36% gross margin in the second quarter of fiscal 2003.
Gross margin on license revenue increased to 98% for the current quarter
compared to last year's second quarter with a 93% margin. The gross profit
for support and service increased 41% from $17.7 million to $25.0 million
for the second quarter ended December 31, 2003 compared to the same period
last year. For the three months ended December 31, 2003, the gross margin
for support and service was 33% compared to 28% for the same quarter in
fiscal 2003. Hardware gross margin increased 20% from $6.3 million in the
quarter ended December 31, 2002, to $7.5 million in the quarter ended
December 31, 2003. Hardware gross margin increased from 26% in the second
quarter of fiscal 2003 to 32% for the second quarter fiscal 2004.
Gross profit increased 21% to $87.4 million, reflecting a 39% gross margin
for the first half of fiscal 2004, compared to $72.0 million, reflecting a
37% gross margin for the first half of fiscal 2003. Gross margin on license
revenue increased to 95% for the current six months compared to 93% for the
same period last year. The gross profit for support and service increased
34% from $36.2 million to $48.5 million for the six months ended December
31, 2003 compared to the same period last year. For the six months ended
December 31, 2003, the gross margin for support and service was 32% compared
to 29% for the same six months in fiscal 2003. Hardware gross profit
increased 25% from $11.7 million in the first half of fiscal 2003 to $14.7
million in the first half of fiscal 2004. Hardware gross margin increased
from 25% for the six months of fiscal 2003 to 31% for the six months of
fiscal 2004.
Gross margins in all three revenue categories grew in the quarter and year-
to-date. License revenue gross profit grew primarily because of reduced
third party vendor costs. The gross profit and gross margin increase in
support and service are due to revenue growth, with approximately 86% of
support and service revenue in fiscal 2004 being recurring revenue, and the
continuation of companywide cost control measures by management implemented
throughout the year. The increase in hardware margin is primarily due to
sales mix and an increase in incentives and rebates on specific hardware
sold compared to last year, which is reflected in the cost of hardware.
OPERATING EXPENSES - Total operating expenses increased 19% to $22.1 million
in the three months ended December 31, 2003 compared to $18.6 million for
the three months ended December 31, 2002. The change represents a 49%
increase in research and development expenses from $4.0 million in the
quarter ended December 31, 2002, to $5.9 million for the second quarter in
fiscal 2004. Selling and marketing expenses increased 11%, from $7.7
million, or 7% of total revenue, to $8.5 million, or 8% of total revenue,
for the three-month period ended December 31, 2003. General and
administrative expenses increased 9%, from $7.0 million to $7.7 million in
the second quarter of fiscal 2004 as compared with the same three-month
period last year.
For the first half of fiscal 2004, operating expenses increased 20% to $43.2
million from $36.1 million in the same period for the prior year. Selling
and marketing expenses increased 16%, from $14.9 million to $17.3 million.
Research and development expenses increased 49% from $7.5 million for the
six months ended December 31, 2002 to $11.2 million for the six months ended
December 31, 2003. General and administrative expenses increased 7%, from
$13.7 million to $14.7 million in the first half of fiscal 2004 as compared
with the same six-month period in fiscal 2003.
For the three and six-months ended December 31, 2003, selling and marketing
expenses increased primarily due to increased revenue and the associated
selling costs. Research and development expenses increased in the three and
six-month periods of fiscal 2004 due to ongoing development of new products
and enhancements to existing products. Also in fiscal 2003, a larger
percentage of employee-related expenses were capitalized due to major
development projects, the majority of which were completed during fiscal
2003. General and administrative expenses increased primarily due to
employee-related expenses.
INTEREST INCOME (EXPENSE) - Net interest income for the three and six-months
ended December 31, 2003 reflects an increase of $120,000 and $217,000 when
compared to the same period last year due to the higher cash and cash
equivalents balance.
PROVISION FOR INCOME TAXES - The provision for income taxes was $8.3
million, or 36.5% of income before income taxes for the three months ended
December 31, 2003 compared with $6.7 million or 36.5% of income before
income taxes for the same period last year. For the first half of fiscal
2004, the provision for income taxes was $16.3 million, or 36.5% of income
before income taxes, compared with $13.2 million or 36.5% of income before
income taxes for the same six-month period last year.
NET INCOME - Net income for the second quarter was $14.5 million or $0.16
per diluted share compared to $11.7 million, or $0.13 per diluted share in
the same period last year. For the six-months ended December 31, 2003, net
income was $28.4 million or $0.31 per diluted share compared to $23.0
million, or $0.26 per diluted share for the six months ended December 31,
2002.
Business Segment Discussion
Revenues in the bank systems and services business segment increased 7% to
$94.2 million in the three months ended December 31, 2003 from $87.8 million
in the same period a year ago. Gross profit increased 14% from $33.3
million in the second quarter of the previous year to $38.0 million in the
current second quarter. Gross margin increased from 38% to 40% for the
current second quarter compared to the same quarter in the previous year.
License revenue for the bank systems and services business segment decreased
8% from $9.4 million in the three months ended December 31, 2002 to $8.7
million for the three months ended December 31, 2003, primarily due to the
slow recovery of larger capital outlays for new core software sales and
timing of shipments. Bank support and service revenue increased 14% to
$65.9 million for the quarter ended December 31, 2003 from $57.6 million for
the same period in the previous year. The support and service revenue
increase of $8.3 million represents a decrease of $0.3 million for install
revenue, $1.7 million growth in ATM and debit card processing, $3.3 million
growth in outsourcing services and $3.6 million growth for in-house support
revenue. Hardware revenue in the bank segment decreased 5% from $20.7
million to $19.7 million, which is in line with the decrease in license
revenue.
For the first half of fiscal 2004, the bank systems and services business
segment increased revenue by 10%, from $168.5 million to $185.8 million.
Gross profit increased 16% from $64.3 million to $74.6 million for the six
months ended December 31, 2003. Gross margin increased from 38% in the
prior year to 40% for the current six months ended December 31, 2003.
In the six months ended December 31, 2003, bank license revenue increased 7%
to $17.5 million from $16.4 million for the six months ended December 31,
2002. Bank support and service increased 15% to $129.0 million in the six
months ended December 31, 2003, compared to $112.4 million in the six months
ended December 31, 2002. The increase of $16.6 million represents $0.9
million growth for installation services, $3.0 million growth in ATM and
debit card processing, $5.0 million growth in outsourcing services and $7.7
million growth for in-house support revenue. Bank hardware revenue for the
six months ended December 31, 2003 decreased slightly by 1%, from $39.7
million for the prior six-month period, to $39.3 million for the current
six-month period.
Bank systems and services business segment increased gross profit and gross
margin for the second quarter and year to date of fiscal 2004, due to our
revenue growth and continued leveraging of resources and infrastructure. In
addition, lower-margin hardware sales continue to become a smaller
percentage of total revenues.
Revenues in the credit union systems and services business segment increased
25% from $14.8 million in the second quarter in fiscal 2003 to $18.5 million
for the second quarter in fiscal 2004. Gross profit increased 89% from $3.5
million in the second quarter of the previous year to $6.7 million in the
current year second quarter. Gross margin increased from 24% in the second
quarter of fiscal 2003 to 36% for the second quarter of fiscal 2004
primarily due to increased leveraging of resources and infrastructure.
Also, gross margin has improved due to sales mix of higher margin services.
License revenue for the credit union systems and services business segment
decreased 14% from $4.4 million in the three months ended December 31, 2002
to $3.7 million for the three months ended December 31, 2003. Credit union
support and service revenue increased 64% to $10.8 million for the quarter
ended December 31, 2003, from $6.6 million for the same period in the
previous year. The support and service revenue increase of $4.2 million
represents an increase of $0.9 million for installation services, $0.9
million growth in ATM and debit card processing, $0.2 million growth in
outsourcing services and $2.2 million growth for in-house support revenue.
Hardware revenue in the credit union segment increased 3% from $3.8 million
to $3.9 million.
In the six months ended December 31, 2003, credit union license revenue
decreased 17% to $7.9 million from $9.5 million for the six months ended
December 31, 2002. Credit union support and service increased 72% to $20.2
million in the current year, compared to $11.8 million in the six months
ended December 31, 2002. The increase of $8.4 million represents $2.6
million growth for installation services, $1.4 million growth in ATM and
debit card processing, $0.3 million growth in outsourcing services and $4.1
million growth for in-house support revenue. Hardware revenue for the six
months ended December 31, 2003 increased 14%, from $6.8 million for the
prior six-month period to $7.8 million for the current six-month period.
For the first half of fiscal 2004, the credit union systems and services
business segment increased revenue by 28%, from $28.1 million to $35.9
million. Gross profit increased 66% from $7.7 million to $12.8 million for
the six months ended December 31, 2003. Gross margin increased from 27% for
the first six months in the prior year to 36% for the first six months ended
December 31, 2003.
Credit union systems and services business segment increased gross profit
89% for the second quarter of 2004 and 66% for the six months ended December
31, 2003, due to revenue growth outpacing the cost of sales, by leveraging
resources and infrastructure, and by controlling overall costs.
Significant increases in credit union support and service revenue is also
attributable to additional credit union installations over the year, which
have created the significant increases in recurring support revenue. Also,
increased revenue is being generated by additional services to the credit
union customer base such as ATM and debit card processing, outsourcing
services and Centurion disaster recovery, all of which carry higher profit
margins.
FINANCIAL CONDITION
Liquidity
The Company's cash and cash equivalents and investments increased to $109.5
million at December 31, 2003, from $33.0 million at June 30, 2003 primarily
due to collection of annual in-house support fees billed at June 30, 2003.
Cash provided by operations was $92.1 million for the six months ended
December 31, 2003 as compared to $69.3 million for the six months ended
December 31, 2002. The increase of $22.8 million is primarily due to
collections related to the shift in the annual billing cycle for in-house
support fees for acquired customers to our fiscal year end and increases in
prepaid annual support fees related to software installed in prior periods.
Cash of $24.4 million was used in investing activities for the six months
ended December 31, 2003. Capital expenditures of $24.9 million includes
$12.3 million for the initial cash outlay for expansion of our new San Diego
facility, expansion of existing facilities and additional equipment.
Financing activities provided cash of $8.8 million during the six months
ended December 31, 2003, mainly from the $14.7 million of proceeds from the
issuance of stock for stock options exercised, less dividends paid during
the six-month period ended December 31, 2003 which were $6.2 million.
The Company has available credit lines totaling $58.0 million at December
31, 2003.
Capital Requirements and Resources
The Company generally uses existing resources and funds generated from
operations to meet its capital requirements. Capital expenditures totaling
$24.9 million and $26.3 million for the six-month periods ended December 31,
2003 and 2002, respectively, were made for expansion of facilities and
additional equipment. These additions were funded from cash generated by
operations. Total consolidated capital expenditures of JHA are not expected
to exceed $61 million for fiscal year 2004.
On September 21, 2001, the Company's Board of Directors approved a stock
buyback of the Company's common stock of up to 3.0 million shares, and
approved an increase on October 4, 2002 to 6.0 million shares. At June 30,
2003, 3,012,933 shares have been purchased for $49,218,870. At June 30,
2003, there were 2,363,121 shares remaining in treasury stock. In the three
and six-months ended December 31, 2003, the Company issued 693,542 and
1,383,741 shares upon the exercise of stock options and 8,488 and 18,217
shares were purchased for the Employee Stock Purchase Plan, leaving a
balance of 961,163 shares.
The Company paid a $0.035 per share cash dividend on December 2, 2003 to
stockholders of record on November 18, 2003, which was funded from
operations. In addition, the Company's Board of Directors, subsequent to
December 31, 2003, declared a quarterly cash dividend of $0.04 per share on
its common stock payable February 26, 2004 to stockholders of record on
February 11, 2004. This dividend will be funded with cash generated from
operations.
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, 2003.
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, the matters detailed at Risk
Factors in its Annual Report on Form 10-K for the fiscal year ended June
30, 2003. 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
JHA's results of operations and its financial position continued to be good
with solid earnings, strong cash flow and no debt as of and for the six
months ended December 31, 2003. This reflects the continuing attitude of
cooperation and commitment by each employee, management's ongoing cost
control efforts and our commitment to deliver top quality products and
services to the markets we serve.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the risk that a change in the level of one or more
market prices, interest rates, indices, volatilities, correlations or other
market factors such as liquidity, will result in losses for a certain
financial instrument or group of financial instruments. We are currently
exposed to credit risk on credit extended to customers and interest risk on
investments in U.S. government securities. We actively monitor these risks
through a variety of controlled procedures involving senior management. We
do not currently use any derivative financial instruments. Based on the
controls in place, credit worthiness of the customer base and the relative
size of these financial instruments, we believe the risk associated with
these exposures will not have a material adverse effect on our consolidated
financial position or results of operations.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the
participation of our management, including our Company's Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the
design and operations of our disclosure controls and procedures pursuant to
Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation as of the
end of the period covered by this report, the CEO and CFO concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to us (including our consolidated
subsidiaries) required to be included in our periodic SEC filings. There
have not been any significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
date of evaluation.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of the Chief Executive Officer dated February 5, 2004.
31.2 Certification of the Chief Financial Officer dated February 5, 2004.
32.1 Written Statement of the Chief Executive Officer dated February 5,
2004.
32.2 Written Statement of the Chief Financial Officer dated February 5,
2004.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the period covered by
this report:
On October 15, 2003, the Company filed a report on Form 8-K which
reported the fiscal 2004 first quarter results under Item 12.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed
on behalf of the undersigned thereunto duly authorized.
JACK HENRY & ASSOCIATES, INC.
Date: February 5, 2004 /s/ Michael E. Henry
--------------------
Michael E. Henry
Chairman of the Board
Chief Executive Officer
Date: February 5, 2004 /s/ Kevin D. Williams
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Kevin D. Williams
Treasurer and Chief Financial Officer