Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 0-14112
JACK HENRY & ASSOCIATES, INC.
------------------------------------------------------
(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
------------------------------------------------
(Address of principal 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 Rule 12b-2 of the Exchange Act.
Yes x No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of April 23, 2003, Registrant had 87,873,177 shares of common stock
outstanding ($.01 par value).
JACK HENRY & ASSOCIATES, INC.
CONTENTS
PART I FINANCIAL INFORMATION PAGE NO.
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 3
March 31, 2003, (Unaudited) and June 30, 2002
Condensed Consolidated Statements of Income for 4
the Three and Nine Months Ended March 31, 2003
and 2002 (Unaudited)
Condensed Consolidated Statements of Cash Flows 5
for the Nine Months Ended March 31, 2003 and 2002
(Unaudited)
Notes to Condensed Consolidated Financial 6
Statements (Unaudited)
Item 2 Management's Discussion and Analysis of Results 11
of Operations and Financial Condition
Item 3 Quantitative and Qualitative Disclosure about 14
Market Risk
Item 4 Controls and Procedures 14
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 15
Part I. Financial Information
Item 1. Financial Statements
JACK HENRY & ASSOCIATES, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
March 31, June 30,
2003 2002
----------- -----------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 33,302 $ 17,765
Investments, at amortized cost 998 997
Trade receivables 62,761 131,431
Prepaid cost of product 17,054 17,663
Prepaid expenses and other 12,746 11,221
Deferred income taxes 850 900
----------- -----------
Total $ 127,711 $ 179,977
PROPERTY AND EQUIPMENT, net $ 190,838 $ 173,775
OTHER ASSETS:
Goodwill 44,542 40,335
Trade names 3,699 3,699
Customer relationships, net of amortization 60,568 63,130
Computer software, net of amortization 11,772 7,499
Prepaid cost of product 11,172 12,992
Other non-current assets 5,503 4,735
----------- -----------
Total $ 137,256 $ 132,390
----------- -----------
Total assets $ 455,805 $ 486,142
=========== ===========
LIABILITES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,946 $ 9,051
Accrued expenses 9,322 11,352
Accrued income taxes 379 225
Deferred revenues 51,889 92,028
----------- -----------
Total $ 69,536 $ 112,656
DEFERRED REVENUES 14,288 16,947
DEFERRED INCOME TAXES 20,800 15,800
----------- -----------
Total liabilities $ 104,624 $ 145,403
STOCKHOLDERS' EQUITY
Preferred stock - $1 par value; 500,000
shares authorized, none issued - -
Common stock - $0.01 par value: 250,000,000
shares authorized; shares issued at
03/31/03 and 6/30/02 were 90,519,856 905 905
Additional paid-in capital 168,447 168,061
Retained earnings 224,933 201,162
Treasury stock at cost - 2,654,179 shares
at 3/31/03; 1,568,910 shares at 6/30/02 (43,104) (29,389)
----------- -----------
Total stockholders' equity $ 351,181 $ 340,739
----------- -----------
Total liabilities and stockholders' equity $ 455,805 $ 486,142
=========== ===========
See notes to condensed consolidated financial statements
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
-------------------- --------------------
March 31, March 31,
-------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
REVENUES
License $ 10,446 $ 17,657 $ 36,322 $ 48,445
Support and service 59,168 50,070 170,348 147,920
Hardware sales 21,665 24,825 67,398 73,864
Customer reimbursements 7,619 7,232 21,371 20,349
------- ------- ------- -------
Total $ 98,898 $ 99,784 $295,439 $290,578
COST OF SALES
Cost of license 829 1,070 2,595 1,458
Cost of services 36,486 34,147 111,503 100,126
Cost of hardware 15,561 17,243 49,588 50,493
Customer reimbursement
expenses 7,619 7,232 21,371 20,349
------- ------- ------- -------
Total $ 60,495 $ 59,692 $185,057 $172,426
------- ------- ------- -------
GROSS PROFIT $ 38,403 $ 40,092 $110,382 $118,152
OPERATING EXPENSES
Selling and marketing 7,603 7,766 22,463 21,310
Research and development 4,052 2,952 11,565 9,405
General and administrative 7,457 8,502 21,205 24,664
------- ------- ------- -------
Total $ 19,112 $ 19,220 $ 55,233 55,379
------- ------- ------- -------
OPERATING INCOME 19,291 20,872 55,149 62,773
INTEREST INCOME (EXPENSE)
Interest income 134 365 512 1,755
Interest expense (29) (53) (84) (141)
------- ------- ------- -------
Total $ 105 $ 312 $ 428 $ 1,614
------- ------- ------- -------
INCOME BEFORE INCOME TAXES $ 19,396 21,184 55,577 64,387
PROVISION FOR INCOME TAXES 7,080 7,626 20,286 23,179
------- ------- ------- -------
NET INCOME $ 12,316 $ 13,558 $ 35,291 $ 41,208
======= ======= ======= =======
Diluted net income per share $ 0.14 $ 0.15 $ 0.40 $ 0.45
======= ======= ======= =======
Diluted weighted average
shares outstanding 88,940 92,483 89,110 92,485
======= ======= ======= =======
Basic net income per share $ 0.14 $ 0.15 $ 0.40 $ 0.46
======= ======= ======= =======
Basic weighted average
shares outstanding 87,742 89,608 87,836 89,181
======= ======= ======= =======
See notes to condensed consolidated financial statements.
JACK HENRY AND ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
March 31,
-------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 2003 2002
----------- -----------
Net income $ 35,291 $ 41,208
Adjustments to reconcile net income
from continuing operations to cash
from operating activities:
Depreciation 17,751 15,250
Amortization 4,648 5,015
Deferred income taxes 5,050 6,184
Other, net (51) (76)
Changes in:
Trade receivables 68,815 39,626
Prepaid expenses and other 778 (3,571)
Accounts payable (1,116) (7,960)
Accrued expenses (2,032) (2,266)
Income taxes (including tax benefit from
exercise of stock options) 544 6,658
Deferred revenues (42,917) (17,459)
----------- -----------
Net cash from operating activities $ 86,761 $ 82,609
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (34,461) (37,752)
Purchase of investments (2,990) (1,992)
Proceeds from maturity of investments 3,000 2,000
Purchase of customer contracts (304) -
Payment for acquisitions, net (6,537) (11,111)
Computer software developed (4,121) (991)
Other, net (576) 170
----------- -----------
Net cash from investing activities $ (45,989) $ (49,676)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon
exercise of stock options 1,546 11,181
Proceeds from sale of common stock 598 600
Dividends paid (9,214) (8,472)
Principal payments on long-term debt - (315)
Purchase of treasury stock (18,165) (6,708)
----------- -----------
Net cash from financing activities $ (25,235) $ (3,714)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 15,537 $ 29,219
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 17,765 $ 18,589
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,302 $ 47,808
=========== ===========
Net cash paid for income taxes was $14,692 and $11,120 for the nine
months ended March 31, 2003 and 2002, respectively.
The Company paid interest of $85 and $125 for the nine months ended
March 31, 2003 and 2002, respectively.
See notes to condensed consolidated financial statements
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Jack Henry & Associates, Inc. ("JHA" or the "Company") is a computer
software company which has developed or acquired several 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
customization services for a financial institution to install a JHA software
system. JHA also provides continuing support and services to customers
using the systems either in-house or outsourced.
CONSOLIDATION
The condensed consolidated financial statements include the accounts of JHA
and all of its wholly owned subsidiaries and all significant intercompany
accounts and transactions have been eliminated.
COMPREHENSIVE INCOME
Comprehensive income for each of the three and nine-month periods ended
March 31, 2003 and 2002, equals the Company's net income.
RECLASSIFICATION
To improve reporting disclosure, the Company has changed its reporting line
items, with installation revenue moving from license revenue to support and
service revenue and a new line item for license cost of sales. Where
appropriate, prior period financial information has been reclassified to
conform with the current period's presentation.
STOCK OPTIONS
As permitted under Statement of Financial Accounting Standards ("SFAS") No.
123, Accounting for Stock-Based Compensation, the Company has elected to
continue to follow Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employees, in accounting for stock-based
awards to employees. Under APB No. 25, the Company generally recognizes no
compensation expense with respect to such awards, since the exercise price
of the stock options awarded are equal to the fair market value of the
underlying security on the grant date.
Pro forma information regarding net income and earnings per share is
required in interim financial statements for interim periods beginning after
December 15, 2002 by SFAS No. 148, Accounting for Stock-Based Compensation-
Transition and Disclosure for awards granted after December 31, 1994, 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 follows:
(In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
----------------------------------------
March 31, March 31,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income, as reported $ 12,316 $ 13,558 $ 35,291 $ 41,208
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects 458 2,503 1,616 8,313
------- ------- ------- -------
Pro forma net income $ 11,858 $ 11,055 $ 33,675 $ 32,895
======= ======= ======= =======
Diluted net income per share
As reported $ 0.14 $ 0.15 $ 0.40 $ 0.45
Pro forma $ 0.13 $ 0.12 $ 0.38 $ 0.36
Basic net income per share
As reported $ 0.14 $ 0.15 $ 0.40 $ 0.46
Pro forma $ 0.14 $ 0.12 $ 0.38 $ 0.37
OTHER SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company are set forth in Note 1 to
the Company's consolidated financial statements included in its Annual
Report on Form 10-K ("Form 10-K") for the fiscal year ended June 30, 2002.
2. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets,
was issued in August 2001. This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting
and reporting provisions of APB No. 30, Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
for the disposal of a segment of a business (as previously defined in that
Opinion). The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001 (July
1, 2002 for JHA), and interim periods within those fiscal years, with early
application encouraged. The adoption of this standard on July 1, 2002 did
not have a material effect on the Company's consolidated financial position
or results of operations.
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections. Under this new standard,
gains and losses from extinguishments of debt should be classified as
extraordinary items only if they meet the criteria in APB Opinion No. 30.
Applying the provision of APB Opinion No. 30 will distinguish transactions
that are part of an entity's recurring operations from those that are
unusual or infrequent or that meet the criteria for classification as an
extraordinary item. The adoption of this standard on July 1, 2002, did not
have a material effect on the Company's consolidated financial position or
results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which is effective for any activity
initiated after December 31, 2002. This standard addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies the Emerging Issues Task Force ("EITF") Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). This standard requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. The accounting
for similar events and circumstances will be the same, thereby improving the
comparability and representational faithfulness of reported financial
information. The adoption of this standard on January 1, 2003 did not have
a material impact on its consolidated financial position or results of
operations.
Effective November 22, 2002, the EITF reached a consensus regarding EITF
Issue No. 02-16, Accounting by a Customer, Including a Reseller, for Cash
Consideration Received from a vendor. This consensus requires that payments
from a vendor be classified as a reduction to the price of the vendor's
goods and taken as a reduction to cost of sales unless the payments are (1)
a reimbursement for costs incurred to sell the product or (2) a payment for
assets or services provided. The consensus also requires that payments from
a vendor be recognized as a reduction to cost of sales on a rational and
systematic basis. This consensus is effective for fiscal years beginning
after December 15, 2002 (July 1, 2003 for JHA). The Company does not expect
the adoption of this consensus to have a material impact on its consolidated
financial position or results of operation.
In November 2002, FASB Interpretations No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and
107 ("FIN 45") was issued. FIN 45 elaborates on the disclosures to be made
by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that is has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing a
guarantee. The initial recognition and initial measurement provisions of
this Interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the guarantor's
fiscal year-end. The disclosure requirements in this Interpretation are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The adoption of this Interpretation on January 1, 2003
did not have a material effect on the Company's consolidated financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148. SFAS No. 148 amends SFAS
No. 123, to provide alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock base-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No.
148 is effective for financial statements for fiscal years ending after
December 15, 2002. JHA has elected to continue to account for its stock
based compensation in accordance with the provisions of APB No. 25 as
interpreted by FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB Opinion
No. 25", ("FIN 44") and present the pro forma disclosures required by SFAS
No. 123.
3. INTERIM FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q of the Securities
and Exchange Commission and in accordance with accounting principles
generally accepted in the United States of America applicable to interim
condensed consolidated financial statements, and do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete consolidated financial
statements. The condensed consolidated financial statements should be read
in conjunction with the Company's audited consolidated financial statements
and accompanying notes, which are included in its Form 10-K for the year
ended June 30, 2002.
In the opinion of management of the Company, the accompanying condensed
consolidated financial statements reflect all adjustments necessary
(consisting solely of normal recurring adjustments) to present fairly the
financial position of the Company as of March 31, 2003 the results of its
operations and its cash flows for the three and nine-month periods ended
March 31, 2003 and 2002.
The results of operations for the period ended March 31, 2003 are not
necessarily indicative of the results to be expected for the entire year.
4. ADDITIONAL INTERIM FOOTNOTE INFORMATION
The following additional information is provided to update the notes to the
Company's annual consolidated financial statements for developments during
the nine months ended March 31, 2003:
Stock Repurchase Program
On October 4, 2002, the Company's Board of Directors increased its existing
stock repurchase authorization by 3.0 million shares to 6.0 million total
shares. On September 21, 2001, the Board of Directors had originally
approved a program to repurchase up to 3.0 million shares of common stock.
As of March 31, 2003, 3,009,384 shares have been purchased for $49.1
million. No additional shares were purchased in the three-month period
ended March 31, 2003. During the nine month period ended March 31, 2003, the
Company purchased 1,356,200 shares for $18.2 million. During the three and
nine-month periods March 31, 2003, the Company issued 168,234 and 222,921
shares upon exercise of stock options and 16,654 and 48,010 shares to the
Employee Stock Purchase Plan, respectively, leaving a balance of 2,654,179
treasury shares at a cost of $43.1 million at March 31, 2003.
Acquisition of Credit Union Solutions, Inc. (CUSI)
On November 15, 2002, the Company acquired all the outstanding shares
of CUSI for $5.0 million in cash. CUSI provides in-house data processing
software, related hardware and services to smaller credit unions, primarily
those with assets less than $50 million. This acquisition expands the
potential market for the Company, as the Company's existing core products
were too expensive to sell to credit unions of this size. The purchase
price for CUSI was allocated to the assets and liabilities acquired based on
then estimated fair values at the acquisition date, resulting in allocation
to goodwill of $2.4 million, software of $1.2 million, and customer
contracts of $0.7 million, of which software and customer contracts are
being amortized on a straight-line basis over periods of ten and twenty
years, respectively. The accompanying consolidated financial statements do
not include any revenues and expenses related to this acquisition prior to
the closing date.
Acquisition of National Bancorp Data Services, LLC (NBDS)
On January 1, 2003, the Company acquired all the outstanding membership
interests in NBDS for $2.1 million in cash. NBDS provides item processing
and imaging services to financial institutions in the greater Chicago,
Illinois area. This acquisition expands our geographic footprint for item
processing centers and expands the potential market for outsourcing
customers. The purchase price for NBDS was allocated to the assets and
liabilities acquired based on then estimated fair values at the acquisition
date resulting in allocation to goodwill of $1.8 million. The accompanying
consolidated financial statements do not include any revenues and expenses
related to this acquisition prior to the closing date.
5. SHARES USED IN COMPUTING NET INCOME PER SHARE
(In Thousands)
Three Months Ended Nine Months Ended
----------------------------------------
March 31, March 31,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Weighted average number of common
shares outstanding - basic 87,742 89,608 87,836 89,181
Common stock equivalents 1,198 2,875 1,274 3,304
------- ------- ------- -------
Weighted average number of common
and common equivalent shares
outstanding - diluted 88,940 92,483 89,110 92,485
======= ======= ======= =======
Per share information is based on the weighted average number of common
shares outstanding for the periods ended March 31, 2003 and 2002. Stock
options have been included in the calculation of income per share to the
extent they are dilutive.
Non dilutive stock options to purchase approximately 5,996,888 and 6,027,280
shares and 775,222 and 642,164 shares for the three and nine month periods
ended March 31, 2003 and 2002, respectively, were not included in the
computation of diluted income per common share.
6. BUSINESS SEGMENT INFORMATION
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 evaluates the performance of the
banking and credit union segments and allocates resources to them based on
various factors, including prospects for growth, return on investment and
return on revenues.
(In Thousands)
Three Months Ended Nine Months Ended
----------------------------------------
March 31, March 31,
------------------ ------------------
2003 2002 2003 2002
------- ------- ------- -------
Revenues
Bank systems and services $ 84,384 $ 84,391 $252,854 $246,918
Credit union systems and services 14,514 15,393 42,585 43,660
------- ------- ------- -------
Total $ 98,898 $ 99,784 $295,439 $290,578
======= ======= ======= =======
Gross Profit
Bank systems and services $ 34,599 $ 35,171 $ 98,861 $104,001
Credit union systems and services 3,804 4,921 11,521 14,151
------- ------- ------- -------
Total $ 38,403 $ 40,092 $110,382 $118,152
======= ======= ======= =======
(In Thousands)
March 31, June 30,
-------------------
2003 2002
------- -------
Property and equipment, net
Bank systems and services $188,206 $170,882
Credit union systems and services 2,632 2,893
------- -------
Total $190,838 $173,775
======= =======
Identified intangible assets, net
Bank systems and services $ 50,325 $ 49,531
Credit union systems and services 25,714 24,797
------- -------
Total $ 76,039 $ 74,328
======= =======
Goodwill
Bank systems and services $ 27,314 $ 25,491
Credit union systems and services 17,228 14,844
------- -------
Total $ 44,542 $ 40,335
======= =======
7. SUBSEQUENT EVENT
On April 11, 2003, the Company granted approximately 3,670,000 stock options
to approximately 2,100 full time employees, or 94% of all full time
employees as of that date. The options were issued at the exercise price of
$10.84 per share, which represented the fair value as of that date and vest
in two equal portions based on stock price performance. The first portion
vests and becomes fully exercisable two years following the grant date, but
may vest earlier if the Company's common stock achieves a closing price of
125% or more of the exercise price on 10 consecutive trading days. The
second portion vests four years following the grant date, but may vest
earlier if the stock closes at or above 150% of the exercise price on 10 or
more consecutive trading days.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Background and Overview
Jack Henry and Associates, Inc. provides integrated computer systems for in-
house and outsourced data processing to community and regional banks, credit
unions and other financial institutions. The Company has developed and
acquired banking and credit union application software systems that
we market, together with compatible computer hardware, to financial
institutions throughout the United States. The Company also performs data
conversion and software installation for the implementation of our systems
and provides continuing customer support and services after the systems are
installed. For our customers who prefer not to make an up-front investment
in software and hardware, we provide our full range of products and services
on an outsourced basis through our eight data centers and fifteen item
processing centers, as of April 1, 2003, located across the United States.
A detailed discussion of the major components of the results of operations
for the three and nine-month periods ended March 31, 2003 compared to the
same periods in the previous year follows:
REVENUE - Revenue decreased 1% to $98.9 million for the three months ended
March 31, 2003 from $99.8 million for the same period last year. Non-
hardware revenues increased 3% to $77.2 million, accounting for 78% of third
quarter fiscal 2003 revenues, compared to $75.0 million in the third quarter
a year ago, representing 75% of revenue. License fee revenue decreased 41%
to $10.4 million compared to $17.7 million in the third quarter a year ago.
Support and service revenue increased 18% to $59.2 million for the three
months ended March 31, 2003 compared to $50.1 million in the same period in
the previous year. Customer reimbursement revenue increased 5% from $7.2
million to $7.6 million for the three-month periods ended March 31, 2002 and
2003, respectively. Hardware revenue decreased 13% to $21.7 million or 22%
of total revenue from to $24.8 million or 25% of total revenues for the
third quarter in the previous year.
For the nine months ended March 31, 2003, revenue increased 2% to $295.4
million from $290.6 million for the same period last year. Non-hardware
revenues increased 5% to $228.0 million, accounting for 77% of the year to
date revenues, compared to $216.7 million for the same period a year ago,
representing 75% of revenue. License fee revenue decreased 25% to $36.3
million compared to $48.4 million for the same period a year ago. Support
and service revenue increased 15% to $170.3 million for the nine months
ended March 31, 2003 compared to $147.9 million last year. Customer
reimbursement revenue increased 5% from $20.3 million to $21.4 million for
the nine months ended March 31, 2002 and 2003, respectively. Hardware
revenues decreased 9% to $67.4 million, or 23% of total revenue, for the
nine months ended March 31, 2003, compared to $73.9 million and represented
25% of total revenues for the nine months ended March 31, 2002.
We believe that the current decline in licensing and hardware revenue is due
to the industry-wide softness and reduction in spending in the capital goods
marketplace. Our complementary products and support and services have
remained strong contributors for the fiscal year 2003. Support and service
revenue growth of $9.1 million for the three months and $22.4 million for
the nine months ended March 31, 2003 compared to the same periods last year
is composed of $1.8 million and $7.4 million growth in outsourcing
services, $1.4 million and $4.3 million growth in ATM and debit card
processing services, $5.2 million and $11.1 million growth in in-house
support revenue, and $0.7 million increase and $0.5 million decrease in
installation services, respectively.
Our backlog increased at March 31, 2003 to $172.8 million ($64.2 in-house
and $108.6 outsourcing) from $141.7 million ($52.8 in-house and $88.9
outsourcing) at June 30, 2002 and $136.5 million ($54.0 in-house and $82.5
outsourcing) at March 31, 2002.
COST OF SALES - Cost of sales increased 1% for the three months ended March
31, 2003, from $59.7 million for the three months ended March 31, 2002 to
$60.5 million. Cost of licensing decreased $0.2 million to $0.8 million for
the three months ended March 31, 2003, compared to $1.0 million, in the same
period in the prior year. Cost of services increased 7% to $36.5 million
from $34.1 million. Customer reimbursement expenses increased 5% to $7.6
million from $7.2 million for the same three month period last year. Cost of
hardware decreased 10% to $15.6 million for the three months ended March 31,
2003 from $17.2 million for the same three-month period last year.
Cost of sales increased 7% for the nine months ended March 31, 2003, to
$185.1 million from $172.4 million for the same period ended March 31, 2002.
Cost of licensing increased $1.1 million to $2.6 million compared to $1.5
million. Cost of services increased 11% to $111.5 million from $100.1
million. Customer reimbursement expenses increased this fiscal year 5% to
$21.4 million this year from $20.3 million for the same nine-month period in
the prior year. Cost of hardware decreased 2% to $49.6 million for the nine
months ended March 31, 2003 from $50.5 million for the same nine months last
year.
Cost of services and customer reimbursements increased for the three and
nine-months ended March 31, 2003, primarily due to the increase in
outsourcing, ATM and debit card transactions processing and in-house support
revenue. While license revenue decreased for the three and nine-months
ended March 31, 2003, the cost of software license decreased slightly for
the three months and increased significantly for the nine months due to our
increased sales of third party software. Cost of service employee related
expense increased 6% and 9% or $1.2 million and $6.1 million, respectively,
for the three and nine-month periods ended March 31, 2003 to support the
increase in support and services revenues. There was also an increase of
24% or $2.9 million in cost of services depreciation and amortization
expense for the nine months ended March 31, 2003 compared to the prior year
due to capital expenditures for infrastructure and equipment in relation to
support and services being placed in service during the prior twelve months.
Cost of hardware decreased 10% for the third quarter compared to the 13%
decrease in hardware revenues due to the industry wide continued slow down
in technology spending coupled with the effect of reduced incentives earned
from hardware suppliers. The cost of hardware decreased 2% for the nine
months ended March 31, 2003 compared to the 9% decrease in hardware revenue.
In addition, during the first and second quarters of the fiscal year, the
changes in revenue and cost of hardware were significantly impacted by large
hardware discounts offered by vendors that we passed through to our
customers, which created an increase in units sold, but at reduced levels of
total revenue and profit margins. These special discounts, as distinguished
from dealer incentives, were offered for a limited time, and we do not
anticipate them to be repeated in the near term. Based on current economic
conditions and vendor incentives being offered, we do not anticipate other
significant changes in hardware costs and related margins in the immediate
future.
GROSS PROFIT - Gross profit decreased 4% to $38.4 million or 39% of revenue
in the third quarter of 2003, compared to $40.1 million or 40% of revenue
in the third quarter of 2002. Non-hardware margin was 42% for this quarter
compared to 43% in the same quarter last year. Hardware margin decreased to
28% from 31% for the three months ended March 31, 2003 and 2002,
respectively.
Gross profit decreased 7% to $110.4 million or 37% of revenue for the nine
months ended March 31, 2003, compared to $118.1 million or 41% of revenue
for the same period in the prior year. Non-hardware margin was 41% for the
nine months ended March 31, 2003 compared to 44% for the same period last
year. For the first nine months of fiscal 2003, hardware margin was 26%
compared to 32% for the same period last year.
Gross profit margins decreased primarily due to sales mix of products and
reduced vendor incentives.
OPERATING EXPENSES - Total operating expenses decreased 1% to $19.1 million
in the three months ended March 31, 2003 compared to $19.2 million in the
same period for the prior year. Selling and marketing expenses decreased
2%, research and development expenses increased 37% and general and
administrative expenses decreased 12% in the same three-month period in the
prior year.
For the nine months ending March 31, 2003 and 2002, operating expenses were
$55.2 million and $55.4 million, respectively. Selling and marketing
expenses increased 5%, research and development expenses increased 23% and
general and administrative expenses decreased 14% as compared to same nine
months ended March 31, 2002.
Selling and marketing expense decreased 2% for the three months primarily
due to lower sales commission expense relating to lower license revenue in
the current quarter and increased 5% for the nine months ended March 31,
2003, due to an increase in personnel costs related to the increased size of
our sales force in the credit union segment. Research and development
increased 37% and 23% for the three and nine-months ended March 31, 2003,
respectively, primarily due to increases in personnel to allow for continued
development of new products and improvement of existing products. General
and administrative expenses decreased 12% and 14% for the three and nine-
months ended March 31, 2003, respectively, mainly due to continued efforts
to control expenses by management, lower health care costs in relation to
employee head count, and a reduction in depreciation expense due to certain
corporate fixed assets becoming fully depreciated.
INTEREST INCOME (EXPENSE) - Net interest income for the three and nine-
months ended March 31, 2003 reflects decreases of $231,000 and $1.2 million
respectively, when compared to the same periods last year primarily due to
lower interest rates on our cash investments.
PROVISION FOR INCOME TAXES - The provision for income taxes was $7.1
million, or 36.5% of income before income taxes for the three months ended
March 31, 2003 compared with $7.6 million or 36% of income before income
taxes for the same period last year. The provision for income taxes was
$20.3 million, or 36.5% of income before income taxes for the nine months
ended March 31, 2003 compared with $23.2 million or 36% of income before
income taxes for the same period last year.
NET INCOME - Net income for the third quarter was $12.3 million or $0.14 per
diluted share compared to $13.6 million, or $.15 per diluted share in the
same period last year. For the nine months ended March 31, 2003, net income
was $35.3 million or $0.40 per diluted share compared to $41.2 million or
$.45 per diluted share for the same period last year.
Business Segment Discussion
Revenues in the bank systems and services business segment remained flat at
$84.4 million for the three months ended March 31, 2003 and 2002. Gross
profit decreased 2% from $35.2 million in the third quarter of the previous
year to $34.6 million in the current third quarter. Gross profit margin
decreased slightly to 41% from 42% for the current third quarter compared to
the same quarter in the previous year.
Revenues in the bank systems and services business segment increased 2% from
$246.9 million to $252.9 million for the nine months ended March 31, 2002
and 2003, respectively. Gross profit decreased 5% to $98.9 million for the
nine months ended March 31, 2003 from $104.0 million for the same period
ended March 31, 2002. Gross profit margin decreased 7% to 39% from 42% for
the current nine months compared to the same period in the previous year
primarily due to a decrease in license deliveries, which has the highest
gross margin of all products and services.
Revenues in the credit union systems and services business segment decreased
6% from $15.4 million to $14.5 million for the third quarter ended March 31,
2002 and 2003. Gross profit decreased 23% from $4.9 million in the third
quarter of the previous year to $3.8 million in the current third quarter.
Gross profit margin decreased in the current third quarter compared to the
same quarter in the previous year from 29% to 26%. The credit union
segment gross profit margin was also impacted by a decrease in license
deliveries, increases in personnel costs and customer reimbursements, and a
reduction in hardware margins due to reduced vendor incentives.
Revenues in the credit union systems and services business segment decreased
slightly by 2% to $42.6 million in the first nine months of fiscal 2003 from
$43.7 million for the same nine month period last year. Gross profit
decreased 19% from $14.2 million in the first nine months of the previous
year to $11.5 million in the current nine months of fiscal 2003. Gross
profit margin decreased this year as compared to the same period last year
from 32% to 27%. The credit union segment gross profit margin was also
impacted by a decrease in license deliveries, increases in personnel costs
and customer reimbursements plus a reduction in hardware margins due to
reduced vendor incentives.
All gross profit margins decreased in the three and nine-month periods
ending March 31, 2003 primarily due to a decline in licensing revenue
relating to an industry wide software slowdown along with higher employee
costs, overall higher depreciation expense and reduced vendor incentives as
described above.
FINANCIAL CONDITION
Liquidity
The Company's cash and cash equivalents and investments increased to $34.3
million at March 31, 2003, from $18.7 million at June 30, 2002. Cash
provided by operations was $86.8 million for the nine months ended March 31,
2003 as compared to $82.6 million for the nine months ended March 31, 2002,
primarily due to collection of annual in-house support fees billed at June
30, 2002 resulting in a reduction in trade receivables of $68.8 million
offset by a reduction in deferred revenues of $42.9 million. Cash used in
investing activities for the nine months ended March 31, 2003, of $46.0
million included capital expenditures of $34.5 million, primarily for
expansion at our Monett and Birmingham offices, plus acquisitions and
capitalization of software costs aggregating $10.7 million. Financing
activities used cash of $25.2 million during the nine months ended March 31,
2003, of which the majority was used to purchase treasury stock for $18.2
million. In addition, dividends paid during the nine-month period ended
March 31, 2003, were $9.2 million.
JHA has available credit lines totaling $58.0 million at March 31, 2003.
Capital Requirements and Resources
JHA generally uses existing resources and funds generated from operations
to meet its capital requirements. Capital expenditures totaling $34.5
million and $37.8 million for the nine month periods ended March 31, 2003
and 2002, respectively, were made for expansion of facilities and additional
equipment. These additions were funded from cash generated by operations.
The total consolidated capital expenditures of JHA are not expected to
exceed $52 million for fiscal year 2003.
On September 21, 2001, the Company's Board of Directors approved a stock
buyback of the Company's common stock of up to 3.0 million shares, and
approved an increase on October 4, 2002 to 6.0 million shares. Stock
buybacks totaling $18.2 million and $6.7 million for the nine months periods
ended March 31, 2003 and 2002, respectively, were funded with cash from
operations.
On April 11, 2003, the Company granted approximately 3,670,000 stock options
to approximately 2,100 full time employees, or 94% of all full time
employees as of that date. The options were issued at the exercise price of
$10.84 per share, which represented the fair value as of that date and vest
in two equal portions based on stock price performance. The first portion
vests and becomes fully exercisable two years following the grant date, but
may vest earlier if the Company's common stock achieves a closing price of
125% or more of the exercise price on 10 consecutive trading days. The
second portion vests four years following the grant date, but may vest
earlier if the stock closes at or above 150% of the exercise price on 10 or
more consecutive trading days.
The Company paid a $0.035 per share cash dividend on February 27, 2003 to
stockholders of record on February 12, 2003, which was funded from
operations. In addition, the Company's Board of Directors, subsequent to
March 31, 2003, declared a quarterly cash dividend of $0.035 per share on
its common stock payable May 16, 2003 to stockholders of record on May 1,
2003. This dividend will be funded with cash generated from operations.
Critical Accounting Policies
The Company regularly reviews its selection and application of significant
accounting policies and related financial disclosures. The application of
these accounting policies requires that management make estimates and
judgments. The estimates that affect the application of our most critical
accounting policies and require our most significant judgments are outlined
in Management's Discussion and Analysis of Financial Condition and Results
of Operations - "Critical Accounting Policies" - contained in our annual
report on Form 10-K for the year ended June 30, 2002.
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,
2002. Undue reliance should not be placed on the forward-looking
statements. The Company does not undertake any obligation to publicly update
any forward-look statements.
CONCLUSION
JHA's results of operations and its financial position continued to be good
with solid earnings, strong cash flow and no debt as of and for the nine
months ended March 31, 2003. This reflects the continuing attitude of
cooperation and commitment by each employee, management's ongoing cost
control efforts and commitment to deliver top quality products and services
to the markets it serves.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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
Evaluation of Controls and Procedures
Within 90 days prior to the filing of this report, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), an
evaluation of the effectiveness of the Company's disclosure controls and
procedures was performed. Based on this evaluation, the CEO and CFO have
concluded that the Company's disclosure controls and procedures are
effective to ensure that material information is recorded, processed,
summarized and reported by management of the Company on a timely basis in
order to comply with the Company's disclosure obligations under the
Securities Exchange Act of 1934 and the SEC rules thereunder.
There have been no significant changes in our internal controls or in other
factors that could significantly affect those controls subsequent to the
date of their last evaluation.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Written Statement of the Chief Executive Officer dated May 15, 2003.
99.2 Written Statement of the Chief Financial Officer dated May 15, 2003.
(b) Reports on Form 8-K
On January 3, 2003, the Company filed a Form 8-K with respect to the
acquisition of National Bancorp Data Services, LLC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be
signed on behalf of the undersigned thereunto duly authorized.
JACK HENRY & ASSOCIATES, INC.
Date: May 15, 2003 /s/ Michael E. Henry
--------------------
Michael E. Henry
Chairman of the Board
Chief Executive Officer
Date: May 15, 2003 /s/ Kevin D. Williams
---------------------
Kevin D. Williams
Treasurer and Chief Financial Officer
CERTIFICATION
-------------
I, Michael E. Henry, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jack Henry &
Associates, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Michael E. Henry
------------------------------
Michael E. Henry
Chief Executive Officer
CERTIFICATION
-------------
I, Kevin D. Williams, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jack Henry &
Associates, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officer and I have indicated in this
report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003
/s/ Kevin D. Williams
-------------------------------
Kevin D. Williams
Chief Financial Officer