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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, 2004
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
---------------------------- ---------------
(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
----------------------------------------------------
(Registrant's Telephone number, including area code)
N/A
---------------------------------------------------------------------
(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 27, 2004, Registrant has 91,163,321 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, 2004 and June 30, 2004 (Unaudited) 3
Condensed Consolidated Statements of Income
for the Three and Six Months Ended
December 31, 2004 and 2003 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended December 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 17
ITEM 4 Controls and Procedures 17
PART II OTHER INFORMATION
ITEM 6 Exhibits 18
PART 1. 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,
2004 2004
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 22,515 $ 53,758
Investments, at amortized cost 997 998
Trade receivables 87,921 169,873
Prepaid expenses and other 13,933 14,023
Prepaid cost of product 17,516 19,086
Deferred income taxes 1,870 1,320
----------- -----------
Total 144,752 259,058
PROPERTY AND EQUIPMENT, net 224,071 215,100
OTHER ASSETS:
Prepaid cost of product 8,063 6,758
Computer software, net of amortization 25,890 18,382
Other non-current assets 6,638 5,791
Customer relationships, net of amortization 71,567 61,368
Trade names 4,033 4,029
Goodwill 176,574 83,128
----------- -----------
Total 292,765 179,456
----------- -----------
Total assets $ 661,588 $ 653,614
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,531 $ 9,171
Accrued expenses 20,052 21,509
Accrued income taxes 946 6,258
Note payable 10,000 -
Deferred revenues 99,339 136,302
----------- -----------
Total 138,868 173,240
DEFERRED REVENUES 10,403 8,694
DEFERRED INCOME TAXES 29,955 28,762
----------- -----------
Total liabilities 179,226 210,696
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 12/31/04 were 90,865,984
Shares issued at 06/30/04 were 90,519,856 909 905
Additional paid-in capital 184,063 175,706
Retained earnings 297,390 271,433
Less treasury stock at cost
315,651 shares at 06/30/04 - (5,126)
----------- -----------
Total stockholders' equity 482,362 442,918
----------- -----------
Total liabilities and stockholders' equity $ 661,588 $ 653,614
=========== ===========
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,
-------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
REVENUE
License $ 22,148 $ 12,400 $ 41,699 $ 25,360
Support and service 87,726 76,717 171,374 149,241
Hardware 26,086 23,613 46,983 47,069
------- ------- ------- -------
Total 135,960 112,730 260,056 221,670
COST OF SALES
Cost of license 1,734 252 3,343 1,165
Cost of support and service 60,946 51,696 116,976 100,745
Cost of hardware 18,531 16,073 34,426 32,394
------- ------- ------- -------
Total 81,211 68,021 154,745 134,304
------- ------- ------- -------
GROSS PROFIT 54,749 44,709 105,311 87,366
OPERATING EXPENSES
Selling and marketing 11,920 8,531 22,652 17,303
Research and development 6,741 5,912 12,883 11,231
General and administrative 8,127 7,673 15,592 14,678
------- ------- ------- -------
Total 26,788 22,116 51,127 43,212
------- ------- ------- -------
OPERATING INCOME 27,961 22,593 54,184 44,154
INTEREST INCOME (EXPENSE)
Interest income 359 281 818 568
Interest expense (14) (3) (17) (29)
------- ------- ------- -------
Total 345 278 801 539
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 28,306 22,871 54,985 44,693
PROVISION FOR INCOME TAXES 10,614 8,348 20,619 16,313
------- ------- ------- -------
NET INCOME $ 17,692 $ 14,523 $ 34,366 $ 28,380
======= ======= ======= =======
Diluted net income per share $ 0.19 $ 0.16 $ 0.37 $ 0.31
======= ======= ======= =======
Diluted weighted average
shares outstanding 92,957 92,000 92,721 91,534
======= ======= ======= =======
Basic net income per share $ 0.20 $ 0.16 $ 0.38 $ 0.32
======= ======= ======= =======
Basic weighted average
shares outstanding 90,650 89,231 90,468 88,873
======= ======= ======= =======
See notes to condensed consolidated financial statements
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
December 31,
-----------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 34,366 $ 28,380
Adjustments to reconcile net income from
operations to cash from operating activities:
Depreciation 14,563 13,362
Amortization 4,254 3,164
Deferred income taxes 2,930 3,920
Loss on disposal of property and equipment 1,061 229
Other, net - (66)
Changes in operating assets and liabilities,
net of acquisitions:
Trade receivables 88,210 83,118
Prepaid expenses, prepaid cost of product,
and other 113 1,752
Accounts payable (2,098) (3,914)
Accrued expenses (1,457) (6,872)
Income taxes (including tax benefit
of $1,730 and $4,413 from exercise
of stock options, respectively) (3,582) 3,380
Deferred revenues (44,150) (34,343)
-------- --------
Net cash from operating activities 94,210 92,110
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (23,570) (24,926)
Purchase of investments (1,992) (1,995)
Proceeds from sale of property and equipment 3 960
Proceeds from investments 2,000 2,633
Computer software developed (3,162) (1,143)
Payment for acquisitions, net of cash acquired (109,910) -
Other, net 70 96
-------- --------
Net cash from investing activities (136,561) (24,375)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon
exercise of stock options 7,987 14,665
Proceeds from sale of common stock, net 360 352
Notes payable 10,000 -
Dividends paid (7,239) (6,230)
-------- --------
Net cash from financing activities 11,108 8,787
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (31,243) $ 76,522
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 53,758 $ 32,014
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,515 $ 108,536
======== ========
Net cash paid for income taxes was $21,284 and $8,513 for the six months
ended December 31, 2004 and 2003, respectively. The Company paid interest
of $4 and $29 for the six months ended December 31, 2004 and 2003,
respectively.
See notes to condensed consolidated financial statements
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts In Thousands, Except Per Share Amounts)
(Unaudited)
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Jack Henry & Associates, Inc. and Subsidiaries ("JHA" or the "Company") is a
leading provider of integrated computer systems that has developed and
acquired a number of banking and credit union software systems. The
Company's revenues are predominately earned by marketing those systems
to financial institutions nationwide together with computer equipment
(hardware) and by providing the conversion and software installation
services for a financial institution to utilize a JHA software system. JHA
also provides continuing support and services to customers using the systems
either in-house or outsourced.
CONSOLIDATION
The consolidated financial statements include the accounts of JHA and all of
its subsidiaries, which are wholly- owned, 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.
The following table illustrates the effect on net income and net income per
share as if the Company had accounted for its stock-based awards to
employees under the fair value method of SFAS No. 123. The fair 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:
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Net income, as reported $ 17,692 $ 14,523 $ 34,366 $ 28,380
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects 338 308 605 6,808
------- ------- ------- -------
Pro forma net income $ 17,354 $ 14,215 $ 33,761 $ 21,572
======= ======= ======= =======
Diluted net income per share
As reported $ 0.19 $ 0.16 $ 0.37 $ 0.31
Pro forma $ 0.19 $ 0.15 $ 0.36 $ 0.24
Basic net income per share
As reported $ 0.20 $ 0.16 $ 0.38 $ 0.32
Pro forma $ 0.19 $ 0.16 $ 0.37 $ 0.24
COMPREHENSIVE INCOME
Comprehensive income for the three and six-month periods ended December 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, 2004. 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, 2004.
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, 2004, and the results
of its operations and its cash flows for the three and six-month periods
ended December 31, 2004 and 2003.
The results of operations for the three and six-month periods ended December
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 three and six months ended December 31, 2004.
Acquisitions:
On December 17, 2004, the Company acquired certain assets of SERSynergy[TM]
("Synergy"), a division of SER Solutions, Inc. Synergy is a market leader
for intelligent document management for financial institutions. The
preliminary purchase price for Synergy, $35,001 paid in cash, was allocated
to the assets and liabilities acquired based on then estimated fair values
at the acquisition date, resulting in an allocation of $2,541 to capitalized
software, $6,145 to customer relationships, and $28,204 to goodwill. The
acquired goodwill has been allocated to the bank segment and is deductible
for federal income tax.
Effective December 1, 2004, the Company acquired the capital stock of TWS
Systems, Inc. and three affiliated corporations (collectively "TWS"). TWS
is a leading provider of image-based item processing solutions for credit
unions. The purchase price for TWS, $10,885 paid in cash, was allocated to
the assets and liabilities acquired, based on then estimated fair values at
the acquisition date, resulting in an allocation of $2,110 to capitalized
software, $2,645 to customer relationships, and $5,917 to goodwill. The
acquired goodwill has been allocated to the credit union segment and is non-
deductible for federal income tax.
On November 23, 2004, the Company acquired the capital stock of Optinfo,
Inc. ("Optinfo"). Optinfo is a leading provider of enterprise exception
management software and services. The purchase price for Optinfo, $12,927
paid in cash and $2,240 of vested options to acquire common stock, was
allocated to the assets and liabilities acquired based on then estimated
fair values at the acquisition date, resulting in an allocation of $421 to
capitalized software, and $12,650 to goodwill. The acquired goodwill has
been allocated to the bank segment and is non-deductible for federal income
tax.
Effective October 1, 2004, the Company acquired the capital stock of Verinex
Technologies, Inc. ("Verinex"). Verinex is a leading developer and
integrator of biometric security solutions. The purchase price for Verinex,
$35,000 paid in cash, was allocated to the assets and liabilities acquired
based on then estimated fair values at the acquisition date, resulting
in an allocation of $464 to capitalized software, $4,208 to customer
relationships, and $29,729 to goodwill. The acquired goodwill has been
allocated to the bank segment and is non-deductible for federal income tax.
On October 5, 2004, the Company announced it had completed the acquisition
by merger of Select Payment Processing, Inc. ("SPP") effective October 1,
2004. SPP is a provider of an innovative electronic payment processing
solution for financial institutions. The purchase price for SPP, $12,000
paid in cash, was allocated to the assets and liabilities acquired based on
then estimated fair values at the acquisition date, resulting in an
allocation of $467 to capitalized software and $10,397 to goodwill. The
acquired goodwill has been allocated to the bank segment and is non-
deductible for federal income tax.
On September 1, 2004, the Company acquired Banc Insurance Services, Inc.
("BIS") in Massachusetts. BIS is a leading provider of turnkey outsourced
insurance agency solutions for financial institutions. The purchase price
for BIS, $6,665 paid in cash, was allocated to the assets and liabilities
acquired based on then estimated fair values at the acquisition date,
resulting in a net allocation of $6,549 to goodwill. Contingent purchase
consideration may be paid over the next five years based upon BIS gross
revenues which could result in additional allocations to goodwill of up to
$13,400. The acquired goodwill has been allocated to the bank segment and is
non-deductible for federal income tax.
The accompanying condensed statements of income for the three and six-month
periods ended December 31, 2004 and 2003 do not include any revenues and
expenses related to these acquisitions prior to the respective closing dates
of each acquisition. The following unaudited pro forma consolidated
financial information is presented as if these acquisitions had occurred
at the beginning of the periods presented. In addition, this unaudited pro
forma financial information is provided for illustrative purposes only and
should not be relied upon as necessarily being indicative of the historical
results that would have been obtained if these acquisitions had actually
occurred during those periods, or the results that may be obtained in the
future as a result of these acquisitions.
Pro Forma Three Months Ended Six Months Ended
December 31, December 31,
-------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
Revenue $142,133 $122,672 $276,403 $240,165
Gross profit 57,255 48,282 112,503 94,440
------- ------- ------- -------
Net Income $ 18,436 $ 15,677 $ 37,003 $ 30,929
======= ======= ======= =======
Earnings per share - diluted $ 0.20 $ 0.17 $ 0.40 $ 0.34
======= ======= ======= =======
Diluted Shares 92,957 92,000 92,271 91,534
======= ======= ======= =======
Earnings per share - basic $ 0.20 $ 0.18 $ 0.41 $ 0.35
======= ======= ======= =======
Basic Shares 90,650 89,231 90,468 88,873
======= ======= ======= =======
RECLASSIFICATION
Where appropriate, prior period financial information has been reclassified
to conform to the current period's presentation.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standard Board ("FASB") issued
Statement No. 123 ("FAS 123R"), Share-Based Payment. The statement requires
all entities to recognize compensation expense in an amount equal to the
fair value of stock options and restricted stock granted to employees. The
Company will apply this standard beginning July 1, 2005; however the Company
has not completed the process of evaluating the methodology to be used to
implement the requirements of this standard.
NOTE 3. SHARES USED IN COMPUTING NET INCOME PER SHARE
Three Months Ended Six Months Ended
December 31, December 31,
--------------- ---------------
2004 2003 2004 2003
------ ------ ------ ------
Weighted average number of common
shares outstanding - basic 90,650 89,231 90,468 88,873
Common stock equivalents 2,307 2,769 2,253 2,661
------ ------ ------ ------
Weighted average number of common
and common equivalent shares
outstanding - diluted 92,957 92,000 92,721 91,534
====== ====== ====== ======
Per share information is based on the weighted average number of common
shares outstanding for the periods ended December 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 1,723 and 1,720 shares and 1,780 and 6,173 shares for the
three and six-month periods ended December 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 and 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.
Three Months Ended Three Months Ended
December 31, 2004 December 31, 2003
---------------------------- ----------------------------
Bank Credit Union Total Bank Credit Union Total
------- ------------ ------- ------- ------------ -------
REVENUE
License $ 16,864 $ 5,284 $ 22,148 $ 8,657 $ 3,743 $ 12,400
Support and service 73,926 13,800 87,726 65,901 10,816 76,717
Hardware 20,514 5,572 26,086 19,668 3,945 23,613
------- ------- ------- ------- ------- -------
Total 111,304 24,656 135,960 94,226 18,504 112,730
------- ------- ------- ------- ------- -------
COST OF SALES
Cost of license 1,117 617 1,734 165 87 252
Cost of support and service 48,451 12,495 60,946 42,661 9,035 51,696
Cost of hardware 14,166 4,365 18,531 13,377 2,696 16,073
------- ------- ------- ------- ------- -------
Total 63,734 17,477 81,211 56,203 11,818 68,021
------- ------- ------- ------- ------- -------
GROSS PROFIT $ 47,570 $ 7,179 $ 54,749 $ 38,023 $ 6,686 $ 44,709
======= ======= ======= ======= ======= =======
Six Months Ended
December 31, 2004 December 31, 2003
---------------------------- ----------------------------
Bank Credit Union Total Bank Credit Union Total
------- ------------ ------- ------- ------------ -------
REVENUE
License $ 29,382 $ 12,317 $ 41,699 $ 17,488 $ 7,872 $ 25,360
Support and service 145,166 26,208 171,374 129,048 20,193 149,241
Hardware 36,572 10,411 46,983 39,254 7,815 47,069
------- ------- ------- ------- ------- -------
Total 211,120 48,936 260,056 185,790 35,880 221,670
------- ------- ------- ------- ------- -------
COST OF SALES
Cost of license 1,535 1,808 3,343 640 525 1,165
Cost of support and service 94,152 22,824 116,976 83,477 17,268 100,745
Cost of hardware 26,282 8,144 34,426 27,084 5,310 32,394
------- ------- ------- ------- ------- -------
Total 121,969 32,776 154,745 111,201 23,103 134,304
------- ------- ------- ------- ------- -------
GROSS PROFIT $ 89,151 $ 16,160 $105,311 $ 74,589 $ 12,777 $ 87,366
======= ======= ======= ======= ======= =======
December 31, June 30,
----------- -----------
2004 2004
----------- -----------
Property and equipment, net
Bank systems and services $ 190,001 $ 187,242
Credit Union systems and services 34,070 27,858
----------- -----------
Total $ 224,071 $ 215,100
=========== ===========
Identified intangible assets, net
Bank systems and services $ 237,537 $ 125,650
Credit Union systems and services 40,527 41,257
----------- -----------
Total $ 278,064 $ 166,907
=========== ===========
NOTE 5. SUBSEQUENT EVENTS
Effective January 1, 2005, the Company acquired all of the membership
interests in RPM Intelligence, LLC, doing business as Stratika ("Stratika").
Stratika provides customer and product profitability solutions for financial
institutions. The initial purchase price for Stratika, $6,000 paid in
cash, was preliminarily allocated to the assets and liabilities acquired
based on then estimated fair values at the acquisition date. Contingent
purchase consideration of up to $10,000 may be paid over the next three
years based upon the net operating income of Stratika.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Background and Overview
We provide integrated computer systems for in-house and outsourced
data processing to commercial banks, credit unions and other financial
institutions. We have developed and acquired banking and credit union
application software systems that we market, together with compatible
computer hardware, to these financial institutions. We also perform data
conversion and software installation for the implementation of our systems
and provide continuing customer support services after the systems are
installed. For our customers who prefer not to make an up-front capital
investment in software and hardware, we provide our full range of products
and services on an outsourced basis through our six data centers and 20
item-processing centers located throughout the United States.
Fiscal year 2005 second quarter results reflect a 21% increase in revenue,
resulting in a 22% increase in gross profit and net income over the second
quarter of fiscal year 2004. For the first six months of fiscal 2005,
revenue increased 17%, with an increase of 21% in gross profit and net
income over the same six months in fiscal 2004.
A detailed discussion of the major components of the results of operations
for the three and six-month periods ended December 31, 2004 follows. All
amounts are in thousands and discussions compare the current three and six-
month periods ended December 31 2004, to the prior three and six-month
periods ended December 31, 2003.
REVENUE
License Revenue Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
License $ 22,148 $ 12,400 $ 41,699 $ 25,360
Percentage of total revenue 16% 11% 16% 11%
Change from prior year +79% +64%
License revenue represents the delivery and acceptance of application
software systems contracted with us by the customer. We license our
proprietary software products under standard license agreements that
typically provide the customer with a non-exclusive, non-transferable right
to use the software on a single computer and for a single financial
institution location.
License revenue increased mainly due to growth in delivery and acceptance
within both segments with the bank segment experiencing the largest increase
for the quarter and the first six months in fiscal 2005. The Check 21
legislation, which facilitates the clearing of image checks electronically
by financial institutions, has continued to generate strong interest in
sales of our complementary image products, especially our 4|sight and
Check Image Exchange solutions. ARGO (a customer relationship management
solution), Episys (our credit union software solution for larger credit
unions), and Detective (our anti-fraud and anti-money laundering software
solution) were all leading elements in the license increase for the second
quarter and the first six months of fiscal 2005.
Support and Service Revenue Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Support and service $ 87,726 $ 76,717 $171,374 $149,241
Percentage of total revenue 65% 68% 66% 67%
Change from prior year +14% +15%
Support and service revenues are generated from implementation services,
annual support services to assist the customer in operating their systems
and to enhance and update the software, outsourced data processing services
and ATM and debit card processing services.
There was strong growth in most of the support and service revenue
components for the second quarter and first half of fiscal 2005, with the
exception of implementation services. Implementation services decreased 1%,
mainly due to timing and number of installations performed during the first
six months of fiscal 2005 compared to the same period last year.
Q2 Fiscal 2005 Compared to Q2 Fiscal 2004
-----------------------------------------
Support and Service Revenue $ Change % Change
-------- --------
In-House Support & Other Services $ 4,023 11%
EFT Support 4,161 46%
Outsourcing Services 2,250 11%
Implementation Services 575 6%
--------
Total Increase $ 11,009 14%
========
YTD Fiscal 2005 Compared to YTD Fiscal 2004
-------------------------------------------
Support and Service Revenue $ Change % Change
-------- --------
In-House Support & Other Serv $ 9,426 13%
EFT Support 7,911 46%
Outsourcing Services 5,063 13%
Implementation Services (267) -1%
--------
Total Increase $ 22,133 15%
========
In-house support increased primarily from software installations performed
during the previous twelve months. We expect this trend to continue as we
add services from recent acquisitions to our existing and new customers.
EFT support, representing ATM and debit card transaction processing
services, together with outsourcing services for banks and credit unions
continue to drive revenue growth at a strong pace as we leverage our
resources effectively and expand our customer base.
Hardware Revenue Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Hardware $ 26,086 $ 23,613 $ 46,983 $ 47,069
Percentage of total revenue 19% 21% 18% 21%
Change from prior year +10% 0%
The Company has entered into remarketing agreements with several hardware
manufacturers under which we sell computer hardware, hardware maintenance
and related services to our customers. Revenue related to hardware sales is
recognized when the hardware is shipped to our customers.
Hardware revenue increased for the second quarter due to an increase in the
number of hardware systems delivered, mainly due to timing of shipments.
Hardware revenue was 21% of total revenue in the second quarter of the prior
year and the first six months of fiscal 2004, while in the current second
quarter it is 19% of total revenue and 18% of total revenue for the first
six months of fiscal 2005. We expect this decrease as a percentage of total
revenue to continue as the entire industry is experiencing the impact of
rising equipment processing power and decreasing equipment prices.
BACKLOG
Backlog increased 7% from year-ago levels and increased 5% from the
September 2004 quarter to $194.5 million ($68.4 million in-house and $126.1
million outsourcing) at December 31, 2004. Backlog at September 30, 2004,
was $185.1 million ($63.0 million in-house and $122.1 million outsourcing).
At December 31, 2003, backlog was $182.5 million ($60.0 million in-house and
$122.5 million outsourcing).
COST OF SALES AND GROSS PROFIT
Cost of license represents the cost of software from third party vendors
through remarketing agreements. These costs are recognized when license
revenue is recognized. Cost of support and service represents costs
associated with conversion and implementation efforts, ongoing support for
our in-house customers, operation of our data and item centers providing
services for our outsourced customers, ATM and debit card processing
services and direct operation costs. These costs are recognized as they are
incurred. Cost of hardware consists of the direct and related costs of
purchasing the equipment from the manufacturers and delivery to our
customers plus the ongoing operation costs to provide support to our
customers. These costs are recognized at the same time as the related
hardware revenue is recognized.
Cost of Sales and Gross Profit Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Cost of License $ 1,734 $ 252 $ 3,343 $ 1,165
Percentage of total revenue 1% 0% 1% 1%
Change from prior year >100% >100%
License Gross Profit $ 20,414 $ 12,148 $ 38,356 $ 24,195
Gross Profit Margin 92% 98% 92% 95%
Change from prior year +68% +59%
------------------ ------------------
Cost of support and service $ 60,946 $ 51,696 $116,976 $100,745
Percentage of total revenue 45% 46% 45% 45%
Change from prior year +18% +16%
Support and Service Gross $ 26,780 $ 25,021 $ 54,398 $ 48,496
Gross Profit Margin 31% 33% 32% 32%
Change from prior year +7% +12%
------------------ ------------------
Cost of hardware $ 18,531 $ 16,073 $ 34,426 $ 32,394
Percentage of total revenue 14% 14% 13% 15%
Change from prior year +15% +6%
Hardware Gross Profit $ 7,555 $ 7,540 $ 12,557 $ 14,675
Gross Profit Margin 29% 32% 27% 31%
Change from prior year 0% -14%
------------------ ------------------
TOTAL COST OF SALES $ 81,211 $ 68,021 $154,745 $134,304
Percentage of total revenue 60% 60% 60% 61%
Change from prior year +19% +15%
TOTAL GROSS PROFIT $ 54,749 $ 44,709 $105,311 $ 87,366
Gross Profit Margin 40% 40% 40% 39%
Change from prior year +22% +21%
Cost of license increased for the second quarter and the first six months of
fiscal 2005 due to increased third party reseller agreement software vendor
costs. Cost of support and service increased for the second quarter and the
first six months of fiscal 2005 due to increased headcount, travel and
depreciation expense as compared to the same periods last year. Cost of
hardware also increased for the current second quarter and the first half of
fiscal 2005, due to product and sales mix with lower vendor incentives in
the current year. Incentives and rebates received from vendors fluctuate
quarterly and annually due to changing thresholds established by the
vendors.
GROSS PROFIT - Gross profit margin on license revenue decreased in the
current second quarter and the first half of fiscal 2005 due to increased
license revenue through reseller agreements. The gross profit margin
decreased slightly in support and service for the current second quarter
primarily due to increased headcount relating to support and service,
facility costs related to new acquisitions, travel related expenses and
depreciation expense of new equipment. For the first six months of fiscal
2005, the support and service gross margin remained even when compared to
the first six months of fiscal 2004. Hardware gross margin in the second
quarter and the first half of fiscal 2005 decreased primarily due to
decreases in incentives and rebates earned from vendors which fluctuate
quarterly and annually, plus the timing of hardware shipments and sales mix.
OPERATING EXPENSES
Selling and Marketing Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Selling and marketing $ 11,920 $ 8,531 $ 22,652 $ 17,303
Percentage of total revenue 9% 8% 9% 8%
Change from prior year +40% +31%
Dedicated sales forces, inside sales teams, and technical sales support
teams conduct our sales efforts for our two market segments, and are
overseen by regional sales managers. Our sales executives are responsible
for pursuing lead generation activities for new core customers. Our account
executives nurture long-term relationships with our client base and cross
sell our many complementary products and services. Our inside sales force
markets specific complementary products and services to our existing
customers.
For the three months and six months ended December 31, 2004, selling and
marketing expenses increased due to larger commission and related expenses
due to increased revenue.
Research and Development Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
Research and development $ 6,741 $ 5,912 $ 12,883 $ 11,231
Percentage of total revenue 5% 5% 5% 5%
Change from prior year +14% +15%
We devote significant effort and expense to develop new software, service
products and continually upgrade and enhance our existing offerings.
Typically, we upgrade all of our core and complementary software
applications annually. We believe our research and development efforts are
highly efficient because of the extensive experience of our research and
development staff and because our product development is highly customer-
driven.
Research and development expenses increased primarily due to employee
related costs in relation to increased headcount for ongoing development of
new products and enhancements to existing products, plus depreciation
and maintenance expense for upgrading technology equipment. Research and
development expenses increased for the second quarter and year to date but
still remained at 5% of total revenue for both years.
General and Administrative Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
2004 2003 2004 2003
------- ------- ------- -------
General and administrative $ 8,127 $ 7,673 $ 15,592 $ 14,678
Percentage of total revenue 6% 7% 6% 7%
Change from prior year +6% +6%
General and administrative expense increased for the second quarter and
year-to-date in fiscal 2005, primarily due to increased employee cost
related to both acquisitions and internal headcount growth as compared to
the same period last year. Although general and administrative expenses
increased for both the second quarter and year to date, they remained even
at 6% of total revenue for the current year, and 7% of total revenue for the
same periods in the prior year.
INTEREST INCOME (EXPENSE) - Net interest income for the three and six-months
ended December 31, 2004 reflects an increase of $67 and $262, respectively,
when compared to the same period last year due to higher interest and
dividends on investments.
PROVISION FOR INCOME TAXES - The provision for income taxes was $10,614 and
$20,619 for the three and six months ended December 31, 2004 compared with
$8,348 and $16,313 for the same three and six-month periods in fiscal 2004.
For the current fiscal year, the rate of income taxes is estimated at 37.5%
of income before income taxes compared to 36.5% for the periods in fiscal
2004. The change reflects an overall increase in the effective state income
tax rate.
NET INCOME - Net income increased 22% to $17,692 or $0.19 per diluted share
for the three months ended December 31, 2004 compared to $14,523 or $0.16
per diluted share for the three months ended December 31, 2003. Net income
increased 21% to $34,366 or $0.37 per diluted share for the first six months
of fiscal 2005 compared to $28,380 or $0.31 per diluted share for the six
month period ended December 31, 2003.
BUSINESS SEGMENT DISCUSSION
The Company is a leading provider of integrated computer systems that
perform data processing (available for in-house or outsourced installations)
for banks and credit unions. The Company's operations are classified into
two business segments: bank systems and services ("Bank") and credit union
systems and services ("Credit Union"). The Company evaluates the performance
of its segments and allocates resources to them based on various factors,
including prospects for growth, return on investment, and return on revenue.
Bank Three Months Ended % Six Months Ended %
December 31, Change December 31, Change
------------------------- ------------------------
2004 2003 2004 2003
------- ------- ------- -------
Revenue $111,304 $ 94,226 18% $211,120 $185,790 14%
Gross Profit $ 47,570 $ 38,023 25% $ 89,151 $ 74,589 20%
Gross Profit Margin 43% 40% 42% 40%
Revenue growth in the bank segment for the second quarter and the first half
of fiscal 2005 is attributable to the significant increase in license
revenue related to new core customers, migrations from legacy systems, and
complimentary products, together with the steady increase in support and
services relating to maintenance for in-house and outsourced customers. ATM
and debit card processing activity continues to experience strong increases
while expanding the customer base.
This bank segment increased gross profit for the second quarter and the
first half of 2005 due to our revenue growth and continued leveraging of
resources and infrastructure combined with cost controls.
Credit Union Three Months Ended % Six Months Ended %
December 31, Change December 31, Change
------------------------- ------------------------
2004 2003 2004 2003
------- ------- ------- -------
Revenue $ 24,656 $ 18,504 33% $ 48,936 $ 35,880 36%
Gross Profit $ 7,179 6,686 7% $ 16,160 $ 12,777 26%
Gross Profit Margin 29% 36% 33% 36%
Revenue growth in the credit union segment for the second quarter and the
first half of fiscal 2005 is attributable to the growth in license revenue
together with the steady increase in support and services relating to
maintenance for in-house and outsourced customers, and ATM and debit card
processing activity, which is growing rapidly in our credit union segment.
Headcount increased in the segment due to the significant increase in
implementation backlog from the same period last year.
The credit union gross profit decreased for the second quarter and the first
half of 2005 due to the increased amount of third party software delivered,
causing a decrease in gross profit margin on license revenue. There was
also a decrease in support and service margin primarily due to increased
headcount and increased depreciation expense related to the new office
facility in San Diego, which did not exist last year for the same period.
The decrease in the hardware margin is mainly due to sales mix and reduced
rebates compared to the prior year.
FINANCIAL CONDITION
Liquidity
The Company's cash and cash equivalents decreased to $22,515 at December 31,
2004, from $53,758 million at June 30, 2004 and $108,536 at December 31,
2003. The decrease is primarily due to payment for acquisitions of
$109,910. Cash provided by operations increased $2,100 to $94,210 for the
six months ended December 31, 2004 as compared to $92,110 for the same
period last year. The increase in net cash from operating activities
consists of an increase in net income of $5,986, and an increase in
depreciation and amortization of $2,291, plus changes in trade receivables
of $5,092, prepaid expenses of ($1,639), accounts payable and accrued
expenses of $7,231, income taxes of ($6,962) and deferred revenues of
($9,807).
Cash used in investing activities for the current period totaled $136,561.
The largest use of cash was for payment of acquisitions in the amount of
$109,910. Capital expenditures totaled $23,570, and purchase of internal
software used $3,162.
Financing activities netted cash of $11,108 during the six months ended
December 31, 2004 and included proceeds from the issuance of stock for stock
options exercised and the sale of treasury and common stock to the employee
stock purchase plan of $7,987 and $360, respectively. A line of credit note
payable was opened in the amount of $10,000, and dividends were paid to the
stockholders of $7,239.
The Company renewed a bank credit line in October 2004 that provides for
funding up to $25,000 and bears interest at a variable LIBOR-based rate. At
December 31, 2004, there was a 30 day note outstanding for $10,000. The
note was renewed and is due February 14, 2005.
Capital Requirements and Resources
The Company generally uses existing resources and funds generated from
operations to meet its capital requirements. Capital expenditures totaling
$23,570 and $24,926 for the six-month periods ended December 31, 2004 and
2003, respectively, which were made for expansion of facilities and
additional equipment. These additions were funded from cash generated by
operations. Total consolidated capital expenditures for the Company are not
expected to exceed $45,000 for fiscal year 2005.
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 to 6.0 million shares on October 4, 2002. The buyback
was funded with cash from operations. At June 30, 2004, there were 315,651
shares remaining in treasury stock. During the six months ended December
31, 2004, treasury shares of 306,027 were reissued for the shares exercised
in the employee stock option plan and 9,624 were reissued for the shares
exercised in the employee stock purchase plan. At December 31, 2004, there
were no shares remaining in treasury stock.
Subsequent to December 31, 2004, the Company's Board of Directors declared a
cash dividend of $.045 per share, a 13% increase per share, on its common
stock payable on March 1, 2005, to stockholders of record on February 14,
2005. Current funds from operations are adequate for this purpose. The
Board has indicated that it plans to continue paying dividends as long as
the Company's financial outlook continues to be favorable.
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, 2004.
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,
2004. Undue reliance should not be placed on the forward-looking statements.
The Company does not undertake any obligation to publicly update any
forward-looking statements.
CONCLUSION
The Company's results of operations and its financial position continue to
be strong with increased earnings, increased gross margin growth, and
sustained growth in cash flow from operations for the three and six
months ended December 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.
ITEM 6. EXHIBITS
10.19 Asset Purchase Agreement between the Company, SER Systems, Inc. and
SER Solutions, Inc., dated December 17, 2004.
31.1 Certification of the Chief Executive Officer dated February 9, 2005.
31.2 Certification of the Chief Financial Officer dated February 9, 2005.
32.1 Written Statement of the Chief Executive Officer dated February 9,
2005.
32.2 Written Statement of the Chief Financial Officer dated February 9,
2005.
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 its behalf by the undersigned thereunto duly authorized.
JACK HENRY & ASSOCIATES, INC.
Date: February 9, 2005 /s/ John F. Prim
---------------------
John F. Prim
Chief Executive Officer
Date: February 9, 2005 /s/ Kevin D. Williams
---------------------
Kevin D. Williams
Chief Financial Officer and Treasurer