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 September 30, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file number 0-14112
JACK HENRY & ASSOCIATES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 43-1128385
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(State or Other Jurisdiction I.R.S. Employer
of Incorporation) Identification No.)
663 Highway 60, P.O. Box 807, Monett, MO 65708
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Address of 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 Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicated by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
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 October 26, 2005, Registrant has 91,251,713 shares of common stock
outstanding ($0.01 par value)
JACK HENRY & ASSOCIATES, INC.
CONTENTS
Page
PART I FINANCIAL INFORMATION Reference
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2005 and June 30, 2005 (Unaudited) 3
Condensed Consolidated Statements of Income
for the Three Months Ended September 30, 2005
and 2004 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended September 30, 2005
and 2004 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements (Unaudite 6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
ITEM 3 Quantitative and Qualitative Disclosures about
Market Risk 15
ITEM 4 Controls and Procedures 15
PART II OTHER INFORMATION
ITEM 2 Unregistered Sales of Equity Securities
and Use of Proceeds 15
ITEM 4 Submission of Matters to a Vote of Security Holders 15
ITEM 6 Exhibits 16
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)
September 30, June 30,
2005 2005
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 55,558 $ 11,608
Investments, at amortized cost 992 993
Receivables 88,908 209,922
Prepaid expenses and other 14,619 14,986
Prepaid cost of product 21,297 20,439
Deferred income taxes 2,365 2,345
---------- ----------
Total current assets 183,739 260,293
PROPERTY AND EQUIPMENT, net 243,167 243,191
OTHER ASSETS:
Prepaid cost of product 9,215 10,413
Computer software, net of amortization 32,537 29,488
Other non-current assets 7,418 6,868
Customer relationships, net of amortization 66,806 68,475
Trade names 4,009 4,010
Goodwill 191,415 191,415
---------- ----------
Total other assets 311,400 310,669
Total assets $ 738,306 $ 814,153
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,731 $ 15,895
Accrued expenses 20,422 24,844
Accrued income taxes 5,265 3,239
Note payable - 45,000
Deferred revenues 125,485 157,605
---------- ----------
Total current liabilities 156,903 246,583
LONG TERM LIABILITIES:
Deferred revenues 11,825 13,331
Deferred income taxes 38,665 37,085
---------- ----------
Total long term liabilities 50,490 50,416
Total liabilities 207,393 296,999
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 09/30/05 were 92,390,988
Shares issued at 06/30/05 were 92,050,778 924 920
Additional paid-in capital 200,667 195,878
Retained earnings 345,608 330,308
Less treasury stock at cost 890,500 shares
at 09/30/05, 553,300 shares at 06/30/05 (16,286) (9,952)
---------- ----------
Total stockholders' equity 530,913 517,154
Total liabilities and stockholders' equity $ 738,306 $ 814,153
========== ==========
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
September 30,
-------------------------
2005 2004
---------- ----------
REVENUE
License $ 16,908 $ 19,551
Support and service 99,401 83,648
Hardware 20,674 20,897
---------- ----------
Total 136,983 124,096
COST OF SALES
Cost of license 851 1,609
Cost of support and service 64,237 56,030
Cost of hardware 15,340 15,895
---------- ----------
Total 80,428 73,534
GROSS PROFIT 56,555 50,562
OPERATING EXPENSES
Selling and marketing 11,440 10,732
Research and development 6,749 6,142
General and administrative 7,805 7,465
---------- ----------
Total 25,994 24,339
OPERATING INCOME 30,561 26,223
INTEREST INCOME (EXPENSE)
Interest income 443 459
Interest expense (175) (3)
---------- ----------
Total 268 456
INCOME BEFORE INCOME TAXES 30,829 26,679
PROVISION FOR INCOME TAXES 11,407 10,005
---------- ----------
NET INCOME $ 19,422 $ 16,674
========== ==========
Diluted net income per share $ 0.21 $ 0.18
========== ==========
Diluted weighted average shares outstanding 93,998 92,485
========== ==========
Basic net income per share $ 0.21 $ 0.18
========== ==========
Basic weighted average shares outstanding 91,562 90,286
========== ==========
See notes to condensed consolidated financial statements
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
September 30,
-----------------------
2005 2004
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 19,422 $ 16,674
Adjustments to reconcile net income from
operations to cash from operating activities:
Depreciation 8,064 6,905
Amortization 2,589 2,052
Deferred income taxes 1,560 1,043
(Gain) loss on disposal of property
and equipment - 285
Stock - based compensation 149 -
Other, net (7) (3)
Changes in operating assets and liabilities,
net of acquisitions:
Receivables 121,014 94,617
Prepaid expenses, prepaid cost of product,
and other 130 3,458
Accounts payable (10,164) (4,036)
Accrued expenses (4,422) (6,785)
Income taxes (including tax benefit of $1,172
and $592 from exercise of stock options) 3,198 3,231
Deferred revenues (33,626) (29,766)
---------- ----------
Net cash from operating activities 107,907 87,675
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,047) (12,487)
Computer software developed (3,969) (1,541)
Proceeds from investments 1,000 1,000
Purchase of investments (992) (997)
Payment for acquisitions, net - (6,665)
Proceeds from sale of property and equipment - 3
Other, net 34 50
---------- ----------
Net cash from investing activities (11,974) (20,637)
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable (45,000) -
Purchase of treasury stock (6,334) -
Dividends paid (4,121) (3,612)
Proceeds from sale of common stock, net 185 180
Proceeds from issuance of common stock
upon exercise of stock options 3,287 2,481
---------- ----------
Net cash from financing activities (51,983) (951)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 43,950 $ 66,087
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 11,608 $ 53,758
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 55,558 $ 119,845
========== ==========
Net cash paid for income taxes was $6,649 and $5,743 for the three months
ended September 30, 2005 and 2004, respectively. The Company paid interest
of $175 and $2 for the three months ended September 30, 2005 and 2004,
respectively.
See notes to condensed consolidated financial statements
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and 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 implementation
services for financial institutions to utilize a JHA software system. JHA
also provides continuing support and services to customers using in-house or
outsourced systems.
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-BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (R), "Share-Based Payment" ("SFAS 123(R)"), a revision of SFAS
123. SFAS 123 (R) supersedes Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and amends Statement
of Financial Accounting Standards No. 95 "Statement of Cash Flows" ("SFAS
95"). SFAS 123(R) is similar to the approach described in SFAS 123 except
that SFAS 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the consolidated
statements of income, in lieu of pro forma disclosure. SFAS 123 (R) is
effective for fiscal periods beginning after June 15, 2005. The Company
adopted the provisions of SFAS 123 (R) as of July 1, 2005, the first day of
fiscal 2006 and is using the modified-prospective transition method with the
Black-Scholes model for estimating the fair value of equity compensation.
In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 107, "Share - Based Payment" that provided
additional guidance to public companies relating to share-based payment
transactions and the implementation of SFAS 123(R), including guidance
regarding valuation methods and related assumptions, classification of
compensation expense and income tax effects of share-based compensation.
On June 29, 2005, the Board of Directors approved the immediate vesting of
all stock options previously granted under the 1996 Stock Option Plan ("1996
SOP") that had exercised prices higher than the market price on such date.
As a result of this action, the vesting of 201,925 options was accelerated
by an average of 15 months. No other changes to these options were made.
The weighted average exercise price of these accelerated options was $21.15,
and exercise prices of the affected options ranged from $18.64 to $25.00.
The accelerated options constitute only 2.1% of the company's outstanding
options. No options held by any directors or executive officers of the
Company were accelerated or affected in any manner by this action.
The purpose of accelerating vesting of the options was to enable the Company
to reduce the impact of recognizing future compensation expense associated
with these options upon adoption of SFAS 123(R). Commencing with the
Company's fiscal year that began July 1, 2005, SFAS 123(R) requires that the
Company recognize compensation expense equal to the fair value of equity-
based compensation awards over the vesting period of each such award. The
aggregate pre-tax expense for the shares subject to acceleration that,
absent the acceleration of vesting, would have been reflected in the
Company's consolidated financial statements beginning in fiscal 2006 is
estimated to be a total of approximately $802 (approximately $510 in fiscal
2006, approximately $185 in fiscal 2007, approximately $89 in fiscal 2008
and approximately $18 in fiscal 2009).
For the first quarter of fiscal 2006, there was $149 in compensation
expense from equity-based awards. The adoption of SFAS 123 (R) did not
materially impact the Company's consolidated financial statements. The
following table illustrates the effect on net income and net income per
share for the first quarter of fiscal 2005 had the Company accounted for its
stock-based awards under the fair value method of SFAS 123.
Three Months Ended
September 30,
2004
--------
Net income, as reported $ 16,674
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 268
--------
Pro forma net income $ 16,406
========
Diluted net income per share As reported $ 0.18
Pro forma $ 0.18
Basic net income per share As reported $ 0.18
Pro forma $ 0.18
COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended September 30, 2005
and 2004 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, 2005. 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, 2005.
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 September 30, 2005, and the results
of its operations and its cash flows for the three month period ended
September 30, 2005 and 2004.
The results of operations for the period ended September 30, 2005 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 months ended September 30, 2005.
The following unaudited pro forma consolidated financial information is
presented as if the acquisitions completed in the prior fiscal year 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 (unaudited) Three Months Ended
September 30,
------------------------
2005 2004
-------- --------
Revenue $ 136,983 $ 134,612
Gross profit 56,555 55,264
-------- --------
Net Income $ 19,422 $ 18,564
======== ========
Earnings per share - diluted $ 0.21 $ 0.20
======== ========
Diluted Shares 93,998 93,998
======== ========
Earnings per share - basic $ 0.21 $ 0.20
======== ========
Basic Shares 91,562 91,562
======== ========
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Staff Position 109-1, "Application on FASB
Statement No. 109, Accounting for Income Taxes, for the Tax Deduction
Provided to U.S. Based Manufacturers by the American Jobs Creation Act of
2004" ("FSP 109-1"). FSP 109-1 clarifies how to apply Statement No. 109 to
the new law's tax deduction for income attributable to "Domestic production
activities." The Company is currently evaluating the impact of the new law
on the Company's consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.3"
("SFAS 154"). SFAS 154 changes the requirements for the accounting for, and
reporting of, a change in accounting principle. SFAS 154 requires that a
voluntary change in accounting principle be applied retrospectively with all
prior period financial statements presented using the accounting principle.
SFAS 154 is effective for accounting changes and corrections of errors in
fiscal years beginning after December 15, 2005. The implementation of SFAS
154 is not expected to have a material impact on the Company's consolidated
financial statements.
NOTE 3. SHARES USED IN COMPUTING NET INCOME PER SHARE
Three Months Ended
September 30,
------------------------
2005 2004
-------- --------
Weighted average number of
common shares outstanding - basic 91,562 90,286
Common stock equivalents 2,436 2,199
-------- --------
Weighted average number of common
and common equivalent shares
outstanding - diluted 93,998 92,485
======== ========
Per share information is based on the weighted average number of common
shares outstanding for the three month periods ended September 30, 2005 and
2004. 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 1,716 and 1,790 shares for the three-month periods
ended September 30, 2005 and 2004, 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
September 30, 2005 September 30, 2004
---------------------------- ----------------------------
Bank Credit Union Total Bank Credit Union Total
------- ------------ ------- ------- ------------ -------
REVENUE
License $ 12,317 $ 4,591 $ 16,908 $ 12,518 $ 7,033 $ 19,551
Support and service 82,726 16,675 99,401 71,240 12,408 83,648
Hardware 16,377 4,297 20,674 16,058 4,839 20,897
------- ------- ------- ------- ------- -------
Total 111,420 25,563 136,983 99,816 24,280 124,096
------- ------- ------- ------- ------- -------
COST OF SALES
Cost of license 313 538 851 418 1,191 1,609
Cost of support and service 51,933 12,304 64,237 45,701 10,329 56,030
Cost of hardware 12,117 3,223 15,340 12,116 3,779 15,895
------- ------- ------- ------- ------- -------
Total 64,363 16,065 80,428 58,235 15,299 73,534
------- ------- ------- ------- ------- -------
GROSS PROFIT $ 47,057 $ 9,498 $ 56,555 $ 41,581 $ 8,981 $ 50,562
======= ======= ======= ======= ======= =======
September 30, June 30,
2005 2005
-------- --------
Property and equipment, net
Bank systems and services $ 208,956 $ 208,541
Credit Union systems and services 34,211 34,650
-------- --------
Total $ 243,167 $ 243,191
======== ========
Identified intangible assets, net
Bank systems and services $ 242,525 $ 241,054
Credit Union systems and services 52,242 52,334
-------- --------
Total $ 294,767 $ 289,078
======== ========
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 implementation services of our systems and provide
continuing customer support services after the systems are implemented. 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 22 item-processing
centers located throughout the United States.
The first quarter of fiscal year 2006 resulted in consistent and solid
revenue increases in services with stable gross and operating margins,
resulting in a net income increase of 16% compared to the prior year's
quarter.
A detailed discussion of the major components of the results of operations
for the three months ended September 30, 2005 follows. All amounts are in
thousands and discussions compare the current three-month period ended,
September 30, 2005, to the prior year three-month period ended September 30,
2004.
REVENUE
License Revenue Three Months Ended
September 30, % Change
----------------------- --------
2005 2004
-------- --------
License $ 16,908 $ 19,551 -14%
Percentage of total revenue 12% 16%
License revenue represents the delivery of application software systems
contracted with us by the customer. We license our proprietary software
products under standard license agreements that typically provide the
customer with a non-exclusive, non-transferable right to use the software on
a single computer and for a single financial institution location.
The license revenue decrease in the quarter can be partially attributed to
the continued increasing demand, especially by banks, for item and data
processing delivered through our outsourcing offering instead of in-house.
Outsourcing does not require software license agreements and therefore the
financial institution's initial capital outlay is dramatically reduced by
the choice of this delivery alternative.
Support and Service Revenue Three Months Ended
September 30, % Change
----------------------- --------
2005 2004
-------- --------
Support and service $ 99,401 $ 83,648 +19%
Percentage of total revenue 73% 67%
Quarter Over Quarter Change $ Change % Change
-------- --------
In-House Support & Other Services $ 6,892 +17%
EFT Support 3,249 +28%
Outsourcing Services 3,183 +15%
Implementation Services 2,429 +24%
--------
Total Increase $ 15,753
========
Support and services fees are generated from implementation services
(including conversion, installation, implementation, configuration and
training), annual support 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 (EFT Support) services.
There was strong growth in all support and service revenue components for
the first quarter of fiscal 2006 due to increased software implementations
performed during the previous twelve months. 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. EFT support activity
volume increased significantly within our current customer base due to
industry and customer demand. Our credit union customer base and activity
has shown continued growth with this relatively new offering to credit
unions. Implementation services revenue increased due to solid growth in
contracting activity for new license implementations in prior quarters, as
well as merger conversions for our existing customers.
Hardware Revenue Three Months Ended
September 30, % Change
----------------------- --------
2005 2004
-------- --------
Hardware $ 20,674 $ 20,897 -1%
Percentage of total revenue 15% 17%
The Company has entered into remarketing agreements with several hardware
manufacturers under which we sell computer hardware, hardware maintenance
and related services to our customers. Revenue related to hardware sales is
recognized when the hardware is shipped to our customers.
Hardware revenue decreased minimally primarily due to sales mix of hardware
delivered during the quarter. There was an increase in the delivery of IBM
iSeries systems for the current quarter as compared to the same quarter last
year. Hardware revenue in the prior year's quarter was 17% of the total
revenue, while in the current quarter it is 15% of the total revenue. 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
Our backlog increased 11% at September 30, 2005 to $205,800 ($63,400 in-
house and $142,400 outsourcing) from $185,100 ($63,000 in-house and $122,100
outsourcing) at September 30, 2004. There was also a 3% increase from June
30, 2005, in which the backlog was $199,100 ($64,000 in-house and $135,100
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 processing centers
providing services for our outsourced customers, ATM and debit card
processing services and direct operating 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. These costs are recognized at the same time as the related
hardware revenue is recognized. Ongoing operating costs to provide support
to our customers are recognized as they are incurred.
Cost of Sales and Gross Profit Three Months Ended
September 30, % Change
----------------------- --------
2005 2004
-------- --------
Cost of License $ 851 $ 1,609 -47%
Percentage of total revenue 1% 1%
License Gross Profit $ 16,057 $ 17,942 -11%
Gross Profit Margin 95% 92%
-----------------------
Cost of support and service $ 64,237 $ 56,030 +15%
Percentage of total revenue 47% 45%
Support and Service Gross Profit $ 35,164 $ 27,618 +27%
Gross Profit Margin 35% 33%
-----------------------
Cost of hardware $ 15,340 $ 15,895 -3%
Percentage of total revenue 11% 13%
Hardware Gross Profit $ 5,334 $ 5,002 +7%
Gross Profit Margin 26% 24%
-----------------------
TOTAL COST OF SALES $ 80,428 $ 73,534 9%
Percentage of total revenue 59% 59%
TOTAL GROSS PROFIT $ 56,555 $ 50,562 12%
Gross Profit Margin 41% 41%
Cost of license decreased for the current quarter due to a decrease in the
sales and delivery of third party software, compared to last year, which
resulted in an increase in the license gross profit margin. Cost of support
and service increased due to additional headcount and depreciation expense
for new facilities and equipment as compared to last year. Cost of hardware
decreased due to a decrease in hardware sales and a change in product sales
mix during the current period. Hardware incentives and rebates received
from vendors fluctuate quarterly and annually due to changing thresholds
established by the vendors.
Gross margin on license revenue increased to 95% for the current quarter
compared to 92% in the same quarter last year due to a decrease in third
party software sales and the related costs, which the gross margins on third
party software, is significantly lower than our owned products. The gross
profit increase in support and service is due to continued strong revenue
growth, with approximately 63% of the support and service revenue for the
current quarter being recurring. In the first quarter of last fiscal year,
approximately 59% of support and service revenue was recurring. Gross
margin for support and service grew to 35% for the current quarter due
to the continuation of company-wide cost control measures and improved
processes. Hardware gross margin in the first quarter of fiscal 2006 also
increased from 24% to 26% in the first quarter of fiscal 2005, primarily due
to sales mix.
OPERATING EXPENSES
Selling and Marketing Three Months Ended
September 30, % Change
----------------------- --------
2005 2004
-------- --------
Selling and marketing $ 11,440 $ 10,732 +7%
Percentage of total revenue 8% 9%
Dedicated sales forces, inside sales teams, technical sales support teams
and channel partners 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 team is responsible for marketing and sales of specific complementary
products and services to our existing core customers.
For the three months ended September 30, 2005, selling and marketing
expenses increased due to additional headcount, mostly from acquisition
sales teams, plus the related employee costs. Selling and marketing
expense decreased slightly as a percentage of sales to only 8% as compared
to 9% in the first quarter of last fiscal year.
Research and Development Three Months Ended
September 30, % Change
----------------------- --------
2005 2004
-------- --------
Research and development $ 6,749 $ 6,142 +10%
Percentage of total revenue 5% 5%
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 once per year. We believe our research and development efforts
are highly efficient because of the extensive experience of our research and
development staff and because our product development is highly customer-
driven.
Research and development expenses increased primarily due to employee
related costs from increased headcount for ongoing development of new
products and enhancements to existing products, depreciation and equipment
maintenance expense for upgrading technology equipment. Research and
development expenses increased in the initial quarter of 2006 by 10%;
however they remained at 5% of total revenue for both years.
General and Administrative Three Months Ended
September 30, % Change
----------------------- --------
2005 2004
-------- --------
General and administrative $ 7,805 $ 7,465 +5%
Percentage of total revenue 6% 6%
General and administrative expense increased for the quarter primarily due
to increased employee costs and additional accounting and professional fees
compared to the same period last year. Although general and administrative
expenses increased in the initial quarter of 2006 by 5%, they remained at 6%
of total revenue for both years.
INTEREST INCOME (EXPENSE) - Net interest income for the three months ended
September 30, 2005 reflects a decrease of $188 when compared to the same
period last year. Interest income decreased 3% due to lower cash and cash
equivalent balances. Interest expense increased $172, due to borrowings on
the revolving bank credit facility, which as of September 30, 2005 were paid
in full.
PROVISION FOR INCOME TAXES - The provision for income taxes was $11,407 for
the three months ended September 30, 2005 compared with $10,005 for the same
period last year. For the current fiscal year, the rate of income taxes is
currently estimated at 37.0% of income before income taxes compared to 37.5%
as reported for the same quarter in fiscal 2005, prior to adjustment. The
decrease reflects changes in estimated state tax rates and from our
reevaluation of changes in state tax laws in relation to our tax structure
during fiscal 2005. In the fourth quarter of fiscal 2005, an adjustment was
made to the provision for income taxes to adjust the effective tax rate to
37.0% for the entire year.
NET INCOME - Net income increased 16% for the three months ended September
30, 2005. Net income for the first quarter of fiscal 2006 was $19,422 or
$0.21 per diluted share compared to $16,674 or $0.18 per diluted share in
the same period last year.
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 Systems and Services
Three Months Ended
September 30,
-----------------------
2005 2004 Percent Increase
-------- -------- ----------------
Revenue $ 111,420 $ 99,816 12%
Gross Profit $ 47,057 $ 41,581 13%
Gross Profit Margin 42% 42%
Revenue growth in bank systems and services is attributable to the
significant increase in support and service revenue related to maintenance
for in-house and outsourced customers, implementation services, and ongoing
steady increase in ATM and debit card processing activity. License revenue
decreased slightly and hardware increased slightly primarily due to sales
mix and products delivered during the quarter compared to the prior year.
Bank segment gross profit increased from the prior year and the gross profit
margin remained the same at 42%.
Credit Union Systems and Services
Three Months Ended
September 30,
-----------------------
2005 2004 Percent Increase
-------- -------- ----------------
Revenue $ 25,563 $ 24,280 5%
Gross Profit $ 9,498 $ 8,981 6%
Gross Profit Margin 37% 37%
Revenue in the credit union system and services segment grew substantially
in the support and service component directly relating to maintenance for
in-house and outsourced customers, and ATM and debit card processing
activity, which continues to expand in our credit union segment. This
increase in support and services more than offset the decrease in license
and hardware revenue, which license revenue was impacted by the average
value of software systems and a decrease in the number of complementary
products delivered during the quarter. The decrease in hardware revenue is
due to sales mix and reduction in the amount of hardware shipped during the
quarter. Credit union gross profit increased from the prior year and the
gross profit margin remained the same at 37%.
FINANCIAL CONDITION
Liquidity
The Company's cash and cash equivalents increased to $55,558 at September
30, 2005, from $11,608 million at June 30, 2005 and decreased from $119,845
at September 30, 2004. The increase in the cash balance from June 30, 2005
is primarily due to collection of our June 2005 annual maintenance billings,
offset by the use of cash as outlined below in investing and financing
activities.
Cash provided by operations increased to $107,907 for the three months ended
September 30, 2005 as compared to $87,675 for the same period last year.
The $20,232 increase in cash generated from operations was impacted by a
$2,748 increase in net income, an increase in depreciation and amortization
of $1,696, while the net combined increase of deferred income taxes, gain on
disposal of property and equipment, stock-based compensation, and other
expenses totaled an additional $377. Primarily contributing to the increase
in operating cash flows is the change in operating assets and liabilities
which includes a $26,397 change in receivables, less changes to prepaid
expenses, accounts payable and accrued expenses amounting to ($7,093),
changes in accrued income taxes equaled ($33) and the change in deferred
revenues ($3,860).
Cash used in investing activities for the current quarter totaled $11,974.
The largest use of cash was for capital expenditures in the amount of $8,047
for equipment and purchases of internal software, while cash used for
software development used $3,969.
Financing activities used cash of $51,983 during the current quarter. Cash
was used to repay a revolving bank credit facility of $45,000; $6,334 was
used to purchase treasury stock, while $4,121 was used to fund dividends
paid to stockholders. Cash used was offset by $3,472 from the proceeds for
the issuance of stock for stock options exercised and the sale of common
stock to the employee stock purchase plan.
Capital Requirements and Resources
The Company generally uses existing resources and funds generated from
operations to meet its capital requirements. Capital expenditures totaling
$8,047 and $12,487 for the three-month periods ended September 30, 2005 and
2004, respectively, were made for additional equipment. These additions
were funded from cash generated by operations. Total consolidated capital
expenditures for the Company are not expected to exceed $50,000 for fiscal
year 2006.
The Company renewed a bank credit line on March 22, 2005 which provides for
funding of up to $8,000 and bears interest at the prime rate (6.00% at
September 30, 2005). The credit line expires March 22, 2006 and is secured
by $1,000 of investments. At September 30, 2005, no amount was outstanding.
An unsecured revolving bank credit facility allows borrowing of up to
$150,000, which may be increased by the Company at any time prior to April
20, 2008 to $225,000. The unsecured revolving bank credit facility bears
interest at a rate equal to (a) LIBOR or (b) an alternate base rate (the
greater of (a) the Federal Funds Rate plus 1/2% or (b) the Prime Rate), plus
an applicable percentage in each case determined by the Company's leverage
ratio. The new unsecured revolving credit line terminates April 19, 2010.
At June 30, 2005, the revolving bank credit facility balance was $45,000.
On August 8, 2005, the balance of $45,000 was paid in full. At September
30, 2005, no amount was outstanding on the revolving bank credit facility.
The Board of Directors has authorized the Company to repurchase shares of
its common stock. Under this authorization, the Company may finance its
share repurchases with available cash reserves or short-term borrowings on
its existing credit facility. The share repurchase program does not include
specific price targets or timetables and may be suspended at any time. At
June 30, 2005, there were 553,300 shares remaining in treasury stock and the
Company had the remaining authority to repurchase up to 4,437,316 shares.
During the first quarter of fiscal 2006, the Company repurchased 337,200
treasury shares for $6,334. The total cost of treasury shares at September
30, 2005 is $16,286. At September 30, 2005, there were 890,500 shares
remaining in treasury stock and the Company had the authority to repurchase
up to 4,100,116 shares.
Subsequent to September 30, 2005, the Company's Board of Directors declared
a cash dividend of $.045 per share on its common stock payable on December
2, 2005, to stockholders of record on November 16, 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
condition 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, 2005.
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,
2005. 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, strong
cash flow and no debt as of and for the three months ended September 30,
2005. 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
was no change in the Company's internal control over financial reporting
that occurred during the quarter ended September 30, 2005 that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting. There have not been
any significant changes in our internal control over financial reporting or
in other factors that could significantly affect these controls subsequent
to the date of evaluation.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Issuer Purchases of Equity Securities
The following shares of the Company were repurchased during the quarter
ended September, 30, 2005:
Maximum Number
Total Total Number of of Shares that
Number Average Shares Purchased as May Yet Be
of Shares Price Part of Publicly Purchased Under
Period Purchased of Share Announced Plans the Plans (1)
-------------------- --------- -------- ------------------- ---------------
July 1-July 31, 2005 - - - 4,437,316
August 1-31, 2005 196,700 $ 18.80 196,700 4,240,616
September 1-30,2005 140,500 $ 18.76 140,500 4,100,116
--------- -------- ------------------- ---------------
Total 337,200 $ 18.78 337,200 4,100,116
========= ======== =================== ===============
(1) Purchases made under the stock repurchase authorization approved by the
Company's Board of Directors on October 4, 2002 with respect to 3.0 million
shares, which was increased by 2.0 million shares on April 29, 2005. These
authorizations have no specific dollar or share price targets and no
expiration dates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Stockholders of Jack Henry & Associates, Inc. was
held on November 1, 2005 for the purpose of electing a board of directors,
to approve the Company's Restricted Stock Plan, and to approve the Company's
2005 Non-Qualified Stock Option Plan. Proxies for the meeting were
solicited pursuant to Section 14 (a) of the Securities and Exchange Act
of 1934 and there was no solicitation in opposition to management's
recommendations. Management's nominees for director, all incumbents, were
elected with the number of votes for and withheld as indicated below:
For Withheld
---------- ---------
John W. Henry 78,733,732 6,294,874
Jerry D. Hall 81,462,114 3,566,492
Michael E. Henry 81,267,322 3,761,284
James J. Ellis 78,083,536 6,945,070
Joseph J. Maliekel 80,034,149 4,994,457
Craig R. Curry 78,686,132 6,342,474
Wesley A. Brown 82,894,414 2,134,192
Two management proposals were also submitted to the stockholders for
approval at the Annual Meeting. The Jack Henry & Associates, Inc.
Restricted Stock Plan will allow the Company to issue up to 3 million shares
of the Common Stock of the Company to employees and directors over the next
10 years. The Jack Henry & Associates, Inc. 2005 Non-Qualified Stock Option
Plan is essentially a reauthorization of the Company's 1995 Non-Qualified
Stock Option Plan and will allow the Company to issue up to 700,000
compensatory non-qualified stock options to non-employee directors. Both
plans were approved by the following votes:
For Against Withheld
---------- --------- --------
Approve the Restricted Stock Plan 63,191,217 6,284,847 167,582
Approve the 2005 Non-Qualified
Stock Option Plan 63,433,025 6,051,177 159,443
ITEM 6. EXHIBITS
31.1 Certification of the Chief Executive Officer dated November 9, 2005.
31.2 Certification of the Chief Financial Officer dated November 9, 2005.
32.1 Written Statement of the Chief Executive Officer dated November 9,
2005.
32.2 Written Statement of the Chief Financial Officer dated November 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: November 9, 2005 /s/ John F. Prim
---------------------
John F. Prim
Chief Executive Officer
Date: November 9, 2005 /s/ Kevin D. Williams
---------------------
Kevin D. Williams
Chief Financial Officer and Treasurer