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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 March 31, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transistion 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 Principle 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 April 26, 2004, Registrant has 89,802,036 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
March 31, 2004 and June 30, 2003 (Unaudited) 3
Condensed Consolidated Statements of Income for
the Three and Nine Months Ended March 31, 2004
and 2003 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended March 31, 2004
and 2003 (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 15
ITEM 4 Controls and Procedures 15
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 16
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)
March 31, June 30,
2004 2003
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 88,905 $ 32,014
Investments, at amortized cost 999 998
Trade receivables 66,980 150,951
Prepaid cost of product 15,444 18,483
Prepaid expenses and other 15,201 13,816
Deferred income taxes 950 1,000
----------- -----------
Total 188,479 217,262
PROPERTY AND EQUIPMENT, net 208,007 196,046
OTHER ASSETS:
Goodwill 63,530 44,543
Trade names 4,021 3,699
Customer relationships, net of amortization 56,829 59,358
Computer software, net of amortization 14,763 12,500
Prepaid cost of product 7,648 10,021
Other non-current assets 4,377 5,146
----------- -----------
Total 151,168 135,267
----------- -----------
Total assets $ 547,654 $ 548,575
=========== ===========
LIABILITES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,309 $ 9,617
Accrued expenses 12,080 17,250
Accrued income taxes 2,555 421
Deferred revenues 64,545 119,492
----------- -----------
Total 85,489 146,780
DEFERRED REVENUES 9,834 12,732
DEFERRED INCOME TAXES 29,640 23,840
----------- -----------
Total liabilities 124,963 183,352
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 03/31/04
and 06/30/03 were 90,519,856 905 905
Additional paid-in capital 174,217 169,299
Retained earnings 259,735 233,396
Less treasury stock at cost - 749,145 shares
at 03/31/04, 2,363,121 shares at 06/30/03 (12,166) (38,377)
----------- -----------
Total stockholders' equity 422,691 365,223
----------- -----------
Total liabilities and stockholders' equity $ 547,654 $ 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 Nine Months Ended
March 31, March 31,
-------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
REVENUE
License $ 15,343 $ 10,446 $ 40,703 $ 36,322
Support and service 78,353 66,552 227,594 190,688
Hardware 26,012 21,900 73,081 68,429
------- ------- ------- -------
Total 119,708 98,898 341,378 295,439
COST OF SALES
Cost of license 1,131 829 2,296 2,595
Cost of support and service 52,073 43,870 152,818 131,843
Cost of hardware 19,185 15,796 51,579 50,619
------- ------- ------- -------
Total 72,389 60,495 206,693 185,057
------- ------- ------- -------
GROSS PROFIT 47,319 38,403 134,685 110,382
OPERATING EXPENSES
Selling and marketing 8,634 7,603 25,937 22,463
Research and development 6,344 4,052 17,575 11,565
General and administrative 6,842 7,457 21,520 21,205
------- ------- ------- -------
Total 21,820 19,112 65,032 55,233
------- ------- ------- -------
OPERATING INCOME 25,499 19,291 69,653 55,149
INTEREST INCOME (EXPENSE)
Interest income 248 134 816 512
Interest expense (52) (29) (81) (84)
------- ------- ------- -------
Total 196 105 735 428
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 25,695 19,396 70,388 55,577
PROVISION FOR INCOME TAXES 9,379 7,080 25,692 20,286
------- ------- ------- -------
NET INCOME $ 16,316 $ 12,316 $ 44,696 $ 35,291
======= ======= ======= =======
Diluted net income per share $ 0.18 $ 0.14 $ 0.49 $ 0.40
======= ======= ======= =======
Diluted weighted average
shares outstanding 92,077 88,940 91,715 89,110
======= ======= ======= =======
Basic net income per share $ 0.18 $ 0.14 $ 0.50 $ 0.40
======= ======= ======= =======
Basic weighted average
shares outstanding 89,654 87,742 89,133 87,836
======= ======= ======= =======
See notes to condensed consolidated financial statements.
JACK HENRY AND ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
March 31,
-----------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 44,696 $ 35,291
Adjustments to reconcile net income from
operations to cash from operating activities:
Depreciation 19,908 17,751
Amortization 4,904 4,648
Deferred income taxes 5,850 5,050
Other, net 190 (51)
Changes in operating assets and liabilities,
net of acquisitions:
Trade receivables 84,473 68,815
Prepaid expenses and other 4,089 778
Accounts payable (3,308) (1,116)
Accrued expenses (5,975) (2,032)
Income taxes (including tax benefit of
$4,917 and $385 from the exercise of
stock options, respectively) 7,051 544
Deferred revenues (58,209) (42,917)
-------- --------
Net cash from operating activities 103,669 86,761
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (33,069) (34,461)
Purchase of investments (2,994) (2,990)
Proceeds from sale of investments 3,000 3,000
Proceeds from sale of equipment 1,604 -
Purchase of customer contracts - (304)
Payment for acquisitions, net of cash acquired (20,583) (6,537)
Computer software developed (2,734) (4,121)
Other, net 143 (576)
-------- --------
Net cash from investing activities (54,633) (45,989)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon
exercise of stock options 17,130 1,546
Proceeds from sale of common stock, net 540 598
Dividends paid (9,815) (9,214)
Purchase of treasury stock - (18,165)
-------- --------
Net cash from financing activities 7,855 (25,235)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 56,891 $ 15,537
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 32,014 $ 17,765
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 88,905 $ 33,302
======== ========
Net cash paid for income taxes was $11,970 and $14,692 for the nine months
ended March 31, 2004 and 2003, respectively.
The Company paid interest of $81 and $84 for the nine months ended March 31,
2004 and 2003, respectively.
See notes to condensed consolidated financial statements
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 Nine Months Ended
March 31, March 31,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Net income, as reported $ 16,316 $ 12,316 $ 44,696 $ 35,291
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects 249 458 7,058 1,616
------- ------- ------- -------
Pro forma net income $ 16,067 $ 11,858 $ 37,638 $ 33,675
======= ======= ======= =======
Diluted net income per share
As reported $ 0.18 $ 0.14 $ 0.49 $ 0.40
Pro forma $ 0.17 $ 0.13 $ 0.41 $ 0.38
Basic net income per share
As reported $ 0.18 $ 0.14 $ 0.50 $ 0.40
Pro forma $ 0.18 $ 0.14 $ 0.42 $ 0.38
Comprehensive income for each of the three and nine-month periods ended
March 31, 2004 and 2003 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 Annual Report on Form 10-K
("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 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 March 31, 2004, and the results of
its operations and its cash flows for the three and nine-month periods ended
March 31, 2004 and 2003.
The results of operations for the period ended March 31, 2004 are not
necessarily indicative of the results to be expected for the entire year.
ADDITIONAL INTERIM FOOTNOTE INFORMATION
The following additional information is provided to update the notes to the
Company's annual consolidated financial statements for the developments
during the nine months ended March 31, 2004.
Acquisitions:
On February 2, 2004, the Company acquired all of the common stock of Yellow
Hammer Software, Inc. ("YHS"). YHS is a company that offers a suite of
software products developed to protect financial institutions from
fraudulent activities. Fraud solutions are in demand in the bank and credit
union markets. YHS provides tools to assist in reducing fraud in all areas
of checking, deposits, kiting, and all methods of electronic payments. The
purchase price for YHS was allocated to the assets and liabilities acquired
based on then estimated fair values at the acquisition date, resulting in a
preliminary allocation of $0.7 million to capitalized software, $1.2 million
to customer relationships, and $17.7 million to goodwill and $0.3 million to
trade names. The acquired goodwill has been allocated to the banking
segment and is non-deductible for federal income tax.
Also, during the quarter, the Company made an additional acquisition which
was immaterial and increased goodwill by $1.3 million. This acquired
goodwill was allocated to the banking segment and is non-deductible for
federal income tax. Pro forma results of these acquisitions were not
material and are, therefore, not presented.
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 Emerging Issues Task Force ("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 the Company's 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 Nine Months Ended
March 31, March 31,
--------------- ---------------
2004 2003 2004 2003
------ ------ ------ ------
Weighted average number of common
share outstanding - basic 89,654 87,742 89,133 87,836
Common stock equivalents 2,423 1,198 2,582 1,274
------ ------ ------ ------
Weighted average number of common
and common equivalent shares
outstanding - diluted 92,077 88,940 91,715 89,110
====== ====== ====== ======
Per share information is based on the weighted average number of common
shares outstanding for the periods ended March 31, 2004 and 2003. 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 1,751,000 and 5,997,000
shares for the three-month period ended March 31, 2004 and 2003,
respectively and 1,758,000 and 6,027,000 shares for the nine-month period
ended March 31, 2004, and 2003, 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 (both 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
March 31, 2004 March 31, 2003
---------------------------- ----------------------------
Bank Credit Union Total Bank Credit Union Total
------- ------------ ------- ------- ------------ -------
REVENUE
License $ 10,620 $ 4,723 $ 15,343 $ 7,068 $ 3,378 $ 10,446
Support and service 66,848 11,505 78,353 59,133 7,419 66,552
Hardware 19,203 6,809 26,012 18,182 3,718 21,900
------- ------- ------- ------- ------- -------
Total 96,671 23,037 119,708 84,383 14,515 98,898
COST OF SALES
Cost of license 831 300 1,131 351 478 829
Cost of support and service 42,855 9,218 52,073 36,371 7,499 43,870
Cost of hardware 13,800 5,385 19,185 13,062 2,734 15,796
------- ------- ------- ------- ------- -------
Total 57,486 14,903 72,389 49,784 10,711 60,495
------- ------- ------- ------- ------- -------
GROSS PROFIT $ 39,185 $ 8,134 $ 47,319 $ 34,599 $ 3,804 $ 38,403
======= ======= ======= ======= ======= =======
(In Thousands)
Nine Months Ended Nine Months Ended
March 31, 2004 March 31, 2003
---------------------------- ----------------------------
Bank Credit Union Total Bank Credit Union Total
------- ------------ ------- ------- ------------ -------
REVENUE
License $ 28,108 $ 12,595 $ 40,703 $ 23,484 $ 12,838 $ 36,322
Support and service 195,896 31,698 227,594 171,495 19,193 190,688
Hardware 58,457 14,624 73,081 57,875 10,554 68,429
------- ------- ------- ------- ------- -------
Total 282,461 58,917 341,378 252,854 42,585 295,439
COST OF SALES
Cost of license 1,471 825 2,296 1,300 1,295 2,595
Cost of support and service 126,332 26,486 152,818 109,814 22,029 131,843
Cost of hardware 40,884 10,695 51,579 42,879 7,740 50,619
------- ------- ------- ------- ------- -------
Total 168,687 38,006 206,693 153,993 31,064 185,057
------- ------- ------- ------- ------- -------
GROSS PROFIT $113,774 $ 20,911 $134,685 $ 98,861 $ 11,521 $110,382
======= ======= ======= ======= ======= =======
(In Thousands)
March 31, June 30,
----------- -----------
2004 2003
----------- -----------
Property and equipment, net
Bank systems and services $ 189,798 $ 192,846
Credit union systems and services 18,209 3,200
----------- -----------
Total $ 208,007 $ 196,046
=========== ===========
Identified intangible assets, net
Bank systems and services $ 51,347 $ 50,205
Credit union systems and services 24,266 25,352
----------- -----------
Total $ 75,613 $ 75,557
=========== ===========
Goodwill, net
Bank systems and services $ 46,301 $ 27,314
Credit union systems and services 17,229 17,229
----------- -----------
Total $ 63,530 $ 44,543
=========== ===========
NOTE 5. SUBSEQUENT EVENTS
On April 9, 2004, the Company announced the signing of agreements to acquire
all of the outstanding stock of e-ClassicSystems, Inc. ("e-Classic"), for an
estimated purchase price of $15.0 million. e-Classic is a premier provider
of a first-of-its-kind suite of software products developed to enable
institutions to manage the operations and accounting of their ATM networks.
The acquisition was finalized with an effective date of May 1, 2004.
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 sixteen item processing centers
located throughout the United States.
A detailed discussion of the major components of the results of operations
for the three and nine-month periods ended March 31, 2004 compared to the
same periods in the previous year follows:
REVENUE - Revenue increased 21% to $119.7 million for the three months ended
March 31, 2004 from $98.9 million for the same period last year. License
revenue increased 47% to $15.3 million, which represented 13% of total
revenue, compared to $10.4 million in the third quarter a year ago or 11% of
total revenue. Support and service revenue increased 18% to $78.4 million,
which represented 65% of total revenue for the three months ended March 31,
2004 compared to $66.6 million, or 67% of total revenue, in the same period
in the previous year. Hardware revenue increased 19% to $26.0 million,
which represented 22% of total revenue from $21.9 million or 22% of total
revenue for the third quarter in the previous year.
For the nine months of fiscal 2004, revenue grew 16% from $295.4 million
last year to $341.4 million. License revenue increased 12% from $36.3
million for the nine months in fiscal 2003 to $40.7 million for the nine
months ended March 31, 2004. License revenue for both periods represented
12% of total revenue. Support and service revenue grew 19% to $227.6
million, or 67% of revenue, for the nine months of fiscal 2004 from $190.7
million, or 65% of revenue, for the nine months of fiscal 2003. Hardware
sales increased 7% to $73.1 million, or 21% of revenue for the current nine
months from $68.4 million, or 23% of revenue, for the nine months ended
March 31, 2003.
There was strong growth in all components that make up support and service
revenue for the three and nine-months ended March 31, 2004. The support and
service revenue growth of $11.8 million for the three months ended March 31,
2004 compared to the same period last year represents $0.2 million growth in
installation services, $2.4 million growth in ATM and debit card processing
services, $2.7 million growth in outsourcing services and a $6.5 million
increase of in-house support revenue.
For the nine months of fiscal 2004, support and service revenue increased by
$37.0 million, consisting of a $3.8 million increase in installation
services, a $6.9 million increase in ATM and debit card processing services,
an $8.0 million increase in outsourcing services and an $18.3 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 were strong
for the quarter and year to date as we saw overall growth in both
contracting and delivery of almost all software products for in-house banks
and credit union sales. The Check 21 legislation, which will allow
financial institutions to clear image documents electronically, has
stimulated solid interest and sales in our complementary image products,
especially our 4|sight solution.
Our backlog increased 9% at March 31, 2004 to $187.9 million ($66.4 in-house
and $121.5 outsourcing) from $172.7 million ($64.2 in-house and $108.5
outsourcing) at March 31, 2003. Backlog increased 3% from $182.5 million
($60.0 in-house and $122.5 outsourcing) at December 31, 2003.
COST OF SALES - Cost of sales increased 20% for the three months ended March
31, 2004, from $60.5 million for the three months ended March 31, 2003 to
$72.4 million for the three months ended March 31, 2004. Cost of license
increased to $1.1 million for the three months ended March 31, 2004, from
$0.8 million at March 31, 2003. Cost of support and service increased 19%
to $52.1 million in the current three-month period compared to $43.9 million
for the three months ended March 31, 2003. Cost of hardware increased 21%
from $15.8 million for the third quarter of fiscal 2003 to $19.2 million for
the third quarter of fiscal 2004.
For the nine months of fiscal 2004, cost of sales increased 12%, from $185.1
million for fiscal 2003 to $206.7 million for fiscal 2004. Cost of license
decreased 12% from $2.6 million to $2.3 million for the nine months ended
March 31, 2004. Cost of support and service increased 16% to $152.8 million
in the current nine-month period compared to $131.8 million for the nine
months ended March 31, 2003. Cost of hardware increased 2% from $50.6
million for the nine months of fiscal 2003 to $51.6 million for the nine
months of fiscal 2004.
The cost of license for the three-and nine-months ended March 31, 2004 and
2003 remained steady at 1% of total revenue. Cost of support and service
depreciation expense increased 24% for the three and nine-month periods
ended March 31, 2004. 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 13% and 10% for the current three and nine-month periods,
compared to the fiscal 2003 periods, due to annual raises and an increase in
headcount. The increase in cost of services is consistent with the increase
in revenue. Hardware costs increased primarily due to the increase in
revenue along with the sales mix and change in incentives in the current
period. Incentives and rebates received from vendors fluctuate quarterly
and annually due to changing thresholds established by the vendors.
GROSS PROFIT - Gross profit increased 23% to $47.3 million, reflecting a 40%
gross margin in the third quarter of fiscal 2004, compared to $38.4 million,
reflecting a 39% gross margin in the third quarter of fiscal 2003. Gross
margin on license revenue increased to 93% for the current quarter compared
to same quarter last year with a 92% gross margin. The gross profit for
support and service increased 16% from $22.7 million to $26.3 million for
the third quarter ended March 31, 2004 compared to the same period last
year. For the three months ended March 31, 2004 and 2003, the gross margin
for support and service remained at 34%. Hardware gross profit increased
12% from $6.1 million in the quarter ended March 31, 2003, to $6.8 million
in the quarter ended March 31, 2004. Hardware gross margin decreased
slightly from 28% in the third quarter of fiscal 2003 to 26% for the third
quarter fiscal 2004.
Gross profit increased 22% to $134.7 million, reflecting a 39% gross margin
for nine months of fiscal 2004, compared to $110.4 million, reflecting a 37%
gross margin for the nine months of fiscal 2003. Gross profit increased 14%
on license revenue with a gross margin of 94% for the current nine months
compared to 93% for the same period last year. The gross profit for support
and service increased 27% from $58.8 million to $74.8 million for the nine
months ended March 31, 2004 compared to the same period last year. For the
nine months ended March 31, 2004, the gross margin for support and service
was 33% compared to 31% for the same nine months in fiscal 2003. Hardware
gross profit increased 21% from $17.8 million for the nine months of fiscal
2003 to $21.5 million for the nine months of fiscal 2004. Hardware gross
margin increased from 26% for the nine months of fiscal 2003 to 29% for the
nine months of fiscal 2004.
Gross profit in license revenue grew in the quarter and year-to-date
primarily due to lower third party software vendor costs. The gross profit
increase in support and service is due to continued strong revenue growth,
with approximately 87% support and service revenue for the quarter and 86%
for the year being recurring. The gross margin remained steady at 34% for
the quarter and grew from 31% to 33% year to date due to the continuation of
company-wide cost control measures by management implemented throughout the
year. Hardware gross margin was slightly lower for the third quarter at 26%
from 28% compared to the third quarter last year, primarily due to decreases
in incentives and rebates earned from vendors, which fluctuate quarterly and
annually due to changing thresholds established by the vendors.
OPERATING EXPENSES - Total operating expenses increased 14% to $21.8 million
in the three months ended March 31, 2004 compared to $19.1 million for the
three months ended March 31, 2003. Selling and marketing expenses increased
14%, from $7.6 million, or 8% of total revenue, to $8.6 million, or 7% of
total revenue, for the three-month period ended March 31, 2004. Research
and development expenses increased 57% from $4.1 million in the quarter
ended March 31, 2003, to $6.3 million for the third quarter in fiscal 2004.
General and administrative expenses decreased 8%, from $7.5 million, or 8%
of revenue, to $6.8 million, or 6% of revenue, in the third quarter of
fiscal 2004 as compared with the same three-month period last year.
For the nine months of fiscal 2004, operating expenses increased 18% to
$65.0 million from $55.2 million in the same period for the prior year.
Selling and marketing expenses increased 15%, from $22.5 million to $25.9
million. Selling expenses represented 8% of total revenue for the current
nine-month period. Research and development expenses increased 52% from
$11.6 million, or 4% of revenue for the nine months ended March 31, 2003 to
$17.6 million, or 5% of total revenue for the nine months ended March 31,
2004. General and administrative expenses increased 1%, from $21.2 million,
or 7% of revenue to $21.5 million, or 6% of total revenue in the nine months
of fiscal 2004 as compared with the same nine-month period in fiscal 2003.
For the three and nine-months ended March 31, 2004, selling and marketing
expenses increased primarily due to increased revenue and the associated
selling costs. Research and development expenses increased in the three and
nine-month periods of fiscal 2004 due to ongoing development of new products
and enhancements to existing products. 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 decreased for the quarter and had a small
increase of 1% year to date, due to ongoing cost control measures by
management implemented throughout the year.
INTEREST INCOME (EXPENSE) - Net interest income for the three and nine-
months ended March 31, 2004 reflects increases of $91,000 and $307,000 when
compared to the same period last year due to the higher cash and cash
equivalents balances.
PROVISION FOR INCOME TAXES - The provision for income taxes was $9.4 million
for the three months ended March 31, 2004 compared with $7.1 million for the
same period last year. For the nine months of fiscal 2004, the provision
for income taxes was $25.7 million compared with $20.3 million for the same
nine-month period last year. For current and prior periods, the rate of
income taxes is 36.5% of income before income taxes.
NET INCOME - Net income increased 32% and 27% for the three and nine months
ended March 31, 2004. Net income for the third quarter was $16.3 million or
$0.18 per diluted share compared to $12.3 million, or $0.14 per diluted
share in the same period last year. For the nine months, ended March 31,
2004, net income was $44.7 million or $0.49 per diluted share compared to
$35.3 million, or $0.40 per diluted share for the nine months ended March
31, 2003.
Business Segment Discussion
Revenues in the bank systems and services business segment increased 15% to
$96.7 million in the three months ended March 31, 2004 from $84.4 million in
the same period a year ago. Gross profit increased 13% from $34.6 million
in the third quarter of the previous year to $39.2 million in the current
third quarter. Gross margin remained steady at 41% for both periods.
License revenue for the bank systems and services business segment increased
50% from $7.1 million in the three months ended March 31, 2003 to $10.6
million for the three months ended March 31, 2004. Bank support and service
revenue increased 13% to $66.8 million for the quarter ended March 31, 2004
from $59.1 million for the same period in the previous year. The support
and service revenue increase of $7.7 million represents a decrease of $0.7
million for install revenue, $1.3 million growth in ATM and debit card
processing, $2.3 million growth in outsourcing services and $4.8 million
growth for in-house support revenue. Hardware revenue in the bank segment
increased 6% from $18.2 million to $19.2 million for the three months ended
March 31, 2004.
For the nine months of fiscal 2004, the bank systems and services business
segment increased revenue by 12%, from $252.9 million to $282.5 million.
Gross profit increased 15% from $98.9 million to $113.8 million for the nine
months ended March 31, 2004. Gross margin increased from 39% in the prior
year to 40% for the current nine months ended March 31, 2004.
For the nine months of March 31, 2004, bank license revenue increased 20% to
$28.1 million from $23.5 million for the nine months ended March 31, 2003.
Bank support and service revenue increased 14% to $195.9 million in the nine
months ended March 31, 2004, compared to $171.5 million in the nine months
ended March 31, 2003. The increase of $24.4 million represents $0.2 million
growth for installation services, $4.4 million growth in ATM and debit card
processing, $7.3 million growth in outsourcing services, and $12.5 million
growth for in-house support revenue. Bank hardware revenue for the nine
months ended March 31, 2004 increased 1%, from $57.9 million for the prior
nine-month period, to $58.5 million for the current nine-month period.
Revenue growth is attributable to the surge in license revenues along with
the continuous steady increase in support and services relating to
maintenance for in-house customers and data centers, along with ATM and
debit card activity. License revenue and hardware revenue were strong for
the quarter and year to date as we saw growth in larger in-house banks. The
Check 21 legislation has stimulated solid interest and sales in our
complementary image products, especially our 4|sight solution.
Bank systems and services business segment increased gross profit for the
third quarter and the nine months of fiscal 2004. Gross margin remained
fairly even for the third quarter, but increased for the nine months, due to
our revenue growth and continued leveraging of resources and infrastructure.
Revenues in the credit union systems and services business segment increased
59% from $14.5 million in the third quarter in fiscal 2003 to $23.0 million
for the third quarter in fiscal 2004. Gross profit increased 114% from $3.8
million in the third quarter of the previous year to $8.1 million in the
current year third quarter. Gross margin increased from 26% in the third
quarter of fiscal 2003 to 35% for the third quarter of fiscal 2004.
License revenue for the credit union systems and services business segment
increased 40% from $3.4 million in the three months ended March 31, 2003 to
$4.7 million for the three months ended March 31, 2004. Credit union
support and service revenue increased 55% to $11.5 million for the quarter
ended March 31, 2004, from $7.4 million for the same period in the previous
year. The support and service revenue increase of $4.1 million represents
an increase of $1.0 million for installation services, $1.1 million growth
in ATM and debit card processing, $0.3 million growth in outsourcing
services and $1.7 million growth for in-house support revenue. Hardware
revenue in the credit union segment increased 83% from $3.7 million to $6.8
million for the quarter.
In the nine months ended March 31, 2004, credit union license revenue
decreased slightly by 2% to $12.6 million from $12.8 million for the nine
months ended March 31, 2003. Credit union support and service revenue
increased 65% to $31.7 million in the current year, compared to $19.2
million in the nine months ended March 31, 2003. The increase of $12.5
million for support and service revenue represents $3.6 million growth for
installation services, $2.5 million growth in ATM and debit card processing,
$0.6 million growth in outsourcing services, and $5.8 million growth for in-
house support revenue. Hardware revenue for the nine months ended March 31,
2004 increased 39%, from $10.6 million for the prior nine-month period to
$14.6 million for the current nine-month period.
For the nine months of fiscal 2004, the credit union systems and services
business segment increased revenue by 38%, from $42.6 million to $58.9
million. Gross profit increased 82% from $11.5 million to $20.9 million for
the nine months ended March 31, 2004. Gross margin increased from 27% for
the nine months in the prior year to 35% for the nine months ended March 31,
2004.
Credit union systems and services business segment increased gross profit
114% for the third quarter of 2004 and 82% for the nine months ended March
31, 2004, 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 attributable to
additional credit union installations over the year, which has 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 $89.9
million at March 31, 2004, from $33.0 million at June 30, 2003. Cash
provided by operations increased $ 16.9 million to $103.7 million for the
nine months ended March 31, 2004 as compared to $86.8 million for the nine
months ended March 31, 2003. The increase is primarily due to the
collection of annual in-house support fees filled at June 30, 2003,
resulting in a reduction of trade receivables of $84.0 million offset by a
reduction in deferred revenues of $57.8 million. The increase is also due
to a $9.4 million increase in net income and the impact of the related
increase in accrued income taxes and timing of tax payments of $6.5 million,
which includes a $4.9 million tax benefit from the exercise of stock
options.
Cash used in investing activities for the nine months ended March 31, 2004,
totaled $54.6 million. The largest use of cash was for capital expenditures
in the amount of $33.1 million. The cash outlay for expansion of our new
San Diego facility was $15.7 million. Remaining investing cash used was for
expansion of existing facilities and additional equipment. Cash used for
acquisitions for the nine months totaled $20.6 million.
Financing activities provided net cash of $7.9 million during the nine
months ended March 31, 2004, mainly from the $17.1 million of proceeds from
the issuance of stock for stock options exercised, less dividends paid
during the nine-month period ended March 31, 2004 of $9.8 million.
The Company has available credit lines totaling $58.0 million at March 31,
2004.
Capital Requirements and Resources
The Company generally uses existing resources and funds generated from
operations to meet its capital requirements. Capital expenditures totaling
$33.1 million and $34.5 million for the nine-month periods ended March 31,
2004 and 2003, 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 $50 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 nine-months ended March 31, 2004, the Company issued 201,827 and
1,585,568 shares upon the exercise of stock options and 10,191 and 28,408
shares were issued for the Employee Stock Purchase Plan, leaving a balance
of 749,145 shares.
The Company paid a $0.04 per share cash dividend on February 26, 2004 to
stockholders of record on February 11, 2004, which was funded from
operations. In addition, on April 29, 2004, the Company's Board of
Directors declared a quarterly cash dividend of $0.04 per share on its
common stock payable May 21, 2004 to stockholders of record on May 6, 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 increased earnings, gross margin growth, strong cash flow and no debt
as of and for the nine months ended March 31, 2004. 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 May 6, 2004.
31.2 Certification of the Chief Financial Officer dated May 6, 2004.
32.1 Written Statement of the Chief Executive Officer dated May 6, 2004.
32.2 Written Statement of the Chief Financial Officer dated May 6, 2004.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the period covered by
this report:
On January 19, 2004, the Company filed a report on Form 8-K which
reported the fiscal 2004 second quarter results under Item 12.
On January 26, 2004, the Company filed a report on Form 8-K which
announced an increase in the quarterly dividend to $0.04 per common share.
On February 9, 2004, the Company filed a report on Form 8-K which
announced the acquisition of Yellow Hammer Software, Inc.
On March 1, 2004, the Company filed a report on Form 8-K which
announced the appointment of Craig R. Curry to the Board of Directors.
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: May 6, 2004 /s/ Michael E. Henry
--------------------
Michael E. Henry
Chairman of the Board
Chief Executive Officer
Date: May 6, 2004 /s/ Kevin D. Williams
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Kevin D. Williams
Treasurer and Chief Financial Officer