JKHY-2012.12.31-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended December 31, 2012
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 of Incorporation)
 
(I.R.S Employer Identification No.)

663 Highway 60, P.O. Box 807, Monett, MO 65708
(Address of Principle Executive Offices)
(Zip Code)

417-235-6652
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]   No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]   No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  [X]
  
Accelerated filer  [  ]
 
 
 
Non-accelerated filer    [  ]
(Do not check if a smaller reporting company)
Smaller reporting company [  ]

Indicate 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 February 5, 2013, Registrant has 86,165,764 shares of common stock outstanding ($0.01 par value).



JACK HENRY & ASSOCIATES, INC.
CONTENTS
 
 
 
Page Reference
 
PART I
 
 
 
 
 
 
ITEM 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2
 
 
 
 
 
ITEM 3
 
 
 
 
 
ITEM 4
 
 
 
 
 
PART II
 
 
 
 
 
 
ITEM 1A
 
 
 
 
 
ITEM 2
 
 
 
 
 
ITEM 6
 
 
 
 
 
 

In this report, all references to “JHA”, the “Company”, “we”, “us”, and “our”, refer to Jack Henry & Associates, Inc., and its consolidated subsidiaries.



Table of Contents

PART I.  FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
 
December 31,
2012
 
June 30,
2012
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
192,854

 
$
157,313

Receivables, net
129,462

 
218,305

Income tax receivable
2,688

 
8,476

Prepaid expenses and other
56,582

 
61,261

Prepaid cost of product
27,350

 
23,294

Total current assets
408,936

 
468,649

PROPERTY AND EQUIPMENT, net
286,420

 
276,730

OTHER ASSETS:
 
 
 
Non-current prepaid cost of product
23,152

 
21,344

Computer software, net of amortization
122,622

 
115,785

Other non-current assets
29,589

 
30,523

Customer relationships, net of amortization
155,471

 
162,561

Trade names, net of amortization
10,027

 
10,380

Goodwill
533,291

 
533,520

Total other assets
874,152

 
874,113

Total assets
$
1,569,508

 
$
1,619,492

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
11,607

 
$
16,317

Accrued expenses
51,462

 
58,260

Deferred income tax liability
23,596

 
26,256

Notes payable and current maturities of long term debt
30,376

 
25,503

Deferred revenues
182,715

 
275,907

Total current liabilities
299,756

 
402,243

LONG TERM LIABILITIES:
 
 
 
Non-current deferred revenues
13,404

 
20,093

Non-current deferred income tax liability
106,525

 
100,932

Debt, net of current maturities
98,927

 
106,166

Other long-term liabilities
4,333

 
7,002

Total long term liabilities
223,189

 
234,193

Total liabilities
522,945

 
636,436

STOCKHOLDERS' EQUITY
 
 
 
Preferred stock - $1 par value; 500,000 shares authorized, none issued

 

Common stock - $0.01 par value; 250,000,000 shares authorized;
      Shares issued at 12/31/12 were 101,830,658
      Shares issued at 06/30/12 were 101,482,461
1,018

 
1,015

Additional paid-in capital
391,552

 
381,919

Retained earnings
1,007,246

 
944,078

Less treasury stock at cost
      15,700,971 shares at 12/31/12, 15,452,064 shares at 06/30/12
(353,253
)
 
(343,956
)
Total stockholders' equity
1,046,563

 
983,056

Total liabilities and equity
$
1,569,508

 
$
1,619,492

See notes to condensed consolidated financial statements

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Table of Contents

JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2012
 
2011
 
2012
 
2011
REVENUE
 
 
 
 
 
 
 
License
$
13,210

 
$
13,552

 
$
26,074

 
$
25,816

Support and service
250,310

 
225,609

 
494,895

 
445,879

Hardware
15,174

 
16,697

 
28,727

 
32,501

Total revenue
278,694

 
255,858

 
549,696

 
504,196

COST OF SALES
 
 
 
 
 
 
 
Cost of license
1,251

 
1,115

 
2,329

 
2,242

Cost of support and service
144,683

 
135,833

 
288,101

 
266,956

Cost of hardware
10,523

 
11,501

 
21,101

 
23,162

Total cost of sales
156,457

 
148,449

 
311,531

 
292,360

GROSS PROFIT
122,237

 
107,409

 
238,165

 
211,836

OPERATING EXPENSES
 
 
 
 
 
 
 
Selling and marketing
19,937

 
18,164

 
40,126

 
36,918

Research and development
15,691

 
15,075

 
30,337

 
30,011

General and administrative
27,181

 
13,382

 
40,759

 
26,322

Total operating expenses
62,809

 
46,621

 
111,222

 
93,251

OPERATING INCOME
59,428

 
60,788

 
126,943

 
118,585

INTEREST INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest income
190

 
106

 
378

 
234

Interest expense
(1,261
)
 
(1,448
)
 
(2,602
)
 
(2,904
)
Total interest income (expense)
(1,071
)
 
(1,342
)
 
(2,224
)
 
(2,670
)
INCOME BEFORE INCOME TAXES
58,357

 
59,446

 
124,719

 
115,915

PROVISION FOR INCOME TAXES
17,852

 
20,921

 
41,738

 
40,916

NET INCOME
$
40,505

 
$
38,525

 
$
82,981

 
$
74,999

Diluted earnings per share
$
0.47

 
$
0.44

 
$
0.96

 
$
0.86

Diluted weighted average shares outstanding
86,639

 
87,371

 
86,622

 
87,253

Basic earnings per share
$
0.47

 
$
0.45

 
$
0.96

 
$
0.87

Basic weighted average shares outstanding
86,084

 
86,572

 
86,097

 
86,488

Cash dividends paid per share
$
0.115

 
$
0.105

 
$
0.230

 
$
0.210


See notes to condensed consolidated financial statements

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Table of Contents

JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
Six Months Ended
 
December 31,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
82,981

 
$
74,999

Adjustments to reconcile net income from operations
     to net cash from operating activities:
 
 
 
Depreciation
24,420

 
22,076

Amortization
24,037

 
25,337

Change in deferred income taxes
2,933

 
3,910

Expense for stock-based compensation
4,109

 
3,014

(Gain)/loss on disposal of assets
703

 
(182
)
Changes in operating assets and liabilities:
 
 
 
Change in receivables  
89,193

 
80,910

Change in prepaid expenses, prepaid cost of product and other
(251
)
 
(17,195
)
Change in accounts payable
(4,710
)
 
(5,302
)
Change in accrued expenses
(7,456
)
 
(4,404
)
Change in income taxes
3,090

 
16,882

Change in deferred revenues
(99,881
)
 
(103,784
)
Net cash from operating activities
119,168

 
96,261

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(18,957
)
 
(18,913
)
Proceeds from sale of assets
265

 
2,641

Customer contracts acquired
(186
)
 
(670
)
Computer software developed
(23,826
)
 
(15,695
)
Proceeds from investments

 
2,000

Purchase of investments

 
(2,000
)
Net cash from investing activities
(42,704
)
 
(32,637
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Repayments on credit facilities
(17,336
)
 
(18,047
)
Purchase of treasury stock
(9,297
)
 

Dividends paid
(19,813
)
 
(18,167
)
Excess tax benefits from stock-based compensation
2,354

 
980

Proceeds from issuance of common stock upon exercise of stock options
4,296

 
3,761

Minimum tax withholding payments related to share based compensation
(2,799
)
 
(1,626
)
Proceeds from sale of common stock, net
1,672

 
1,552

Net cash from financing activities
(40,923
)
 
(31,547
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
$
35,541

 
$
32,077

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
$
157,313

 
$
63,125

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
192,854

 
$
95,202


Net cash paid for income taxes was $33,361 for the three months ended December 31, 2012, compared to $19,145 net cash received for the same period last year. The Company paid interest of $1,953 and $1,873 for the three months ended December 31, 2012 and 2011, respectively. Capital expenditures exclude property and equipment additions totaling $15,661 and $14,261 that were in accrued liabilities or were acquired via capital lease during the three months ended December 31, 2012 and 2011, respectively.

See notes to condensed consolidated financial statements

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Table of Contents

JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
(Unaudited)

NOTE 1.    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the company
Jack Henry & Associates, Inc. and Subsidiaries (“JHA” or the “Company”) is a provider of integrated computer systems and services 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), by providing the conversion and software implementation services for financial institutions to utilize JHA software systems, and by providing other related services. 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 intercompany accounts and transactions have been eliminated.
Fair value of financial instruments
For cash equivalents, amounts receivable or payable and short-term borrowings, fair values approximate carrying value, based on the short-term nature of the assets and liabilities. The fair value of long term debt also approximates carrying value as estimated using discounted cash flows based on the Company’s current incremental borrowing rates or quoted prices in active markets.
The Company's estimates of the fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets, and requires that observable inputs be used in the valuations when available. The three levels of the hierarchy are as follows:
Level 1: observable inputs such as quoted prices in active markets
Level 2: inputs other than the quoted prices in active markets that are observable either directly or indirectly
Level 3: unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions
Fair value of financial assets, included in cash and cash equivalents, is as follows:
 
 
Estimated Fair Value Measurements
 
 
 
 
Quoted Prices
 
Significant
 
Significant
 
 
 
 
in Active
 
Observable
 
Unobservable
 
 
 
 
Markets
 
Other Inputs
 
Inputs
 
Total Fair
 
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Value
December 31, 2012
 
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
 
Money market funds
 
$
154,352

 
$

 
$

 
$
154,352

June 30, 2012
 
 

 
 
 
 
 
 

Financial Assets:
 
 
 
 
 
 
 
 
Money market funds
 
$
116,013

 
$

 
$

 
$
116,013

Comprehensive income
Comprehensive income for the three and six-month periods ended December 31, 2012 and 2011 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

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Table of Contents

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, 2012. 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, 2012.
In the opinion of the management of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to present fairly the financial position of the Company as of December 31, 2012, the results of its operations for the three and six-month periods ended December 31, 2012 and 2011, and its cash flows for the six-month periods ended December 31, 2012 and 2011.
The results of operations for the period ended December 31, 2012 are not necessarily indicative of the results to be expected for the entire year.

NOTE 2.    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 period ended December 31, 2012.
Common stock
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 facilities. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At December 31, 2012, there were 15,701 shares in treasury stock and the Company had the remaining authority to repurchase up to 4,290 additional shares. The total cost of treasury shares at December 31, 2012 is $353,253. During fiscal 2013, the Company repurchased 249 treasury shares for $9,297. At June 30, 2012, there were 15,452 shares in treasury stock and the Company had authority to repurchase up to 4,539 additional shares.
Impact of Hurricane Sandy
Included within general & administrative operating expenses are $13,686 of expenses, including $1,450 of contingent liabilities, related to the impact of widespread flooding caused by Hurricane Sandy on our Lyndhurst, New Jersey item processing center. Other than the contingent amounts, we expect no further significant costs related to this in future periods. Insurance claims are being made by JHA to recover the above expenses. These claims have not been finalized and no amounts have been recorded for these potential insurance recoveries in the financial results for the period ending December 31, 2012. The amount recovered may differ from the amount of the expense.
Commitments and contingencies
For fiscal 2013, the Board of Directors approved bonus plans for its executive officers and general managers. Under the plan, bonuses may be paid following the end of the current fiscal year based upon achievement of operating income and individually tailored performance targets. For general managers, one half of each manager’s bonus is contingent upon meeting individual business unit objectives established by the executive officer to whom the general manager reports.
The Company has entered into agreements that provide its executive officers with compensation totaling two years’ base salary and target bonus in the event the Company terminates the executive without cause within the period from 90 days before to two years after a change in control of the Company. The Company has also entered into agreements that provide its general managers with compensation totaling one year of base salary and target bonus under circumstances identical to those contained in the executive officer agreements.

NOTE 3.    RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-05, Comprehensive Income in June 2011, which was effective for the Company beginning July 1, 2012. The updated guidance requires non-owner changes in stockholders' equity to be reported either in a single continuous statement of comprehensive income or in two separate but consecutive statements, rather than as part of the statement of changes in stockholders' equity. No changes in disclosure were required as a result of the update.
In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment, which was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to

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perform the two-step goodwill impairment test. The provisions in this update were effective for the Company beginning July 1, 2012 and its adoption did not have any impact on the financial statements.
In July 2012, the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other. The amendments in the update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The provisions in this update will be effective for the Company beginning July 1, 2013.

NOTE 4.    DEBT
The Company’s outstanding long and short term debt is as follows:
 
December 31,
 
June 30,
 
2012
 
2012
LONG TERM DEBT
 
 
 
Term loan
$
116,250

 
$
127,500

Capital leases
11,177

 
3,518

Other borrowings
205

 
445

 
127,632

 
131,463

Less current maturities
28,705

 
25,297

Debt, net of current maturities
$
98,927

 
$
106,166

SHORT TERM DEBT
 
 
 
Capital leases
$
1,671

 
$
206

Current maturities of long-term debt
28,705

 
25,297

Notes payable and current maturities of long term debt
$
30,376

 
$
25,503

The Company has a bank credit facility agreement that includes a revolving credit facility and a term loan.
Revolving credit facility
The long term revolving loan allows for borrowings of up to $150,000, which may be increased by the Company at any time until maturity to $250,000. The revolving loan terminates June 4, 2015. At December 31, 2012, there was no outstanding revolving loan balance.
Term loan
The term loan had an original principal balance of $150,000, with quarterly principal payments of $5,625 that began on September 30, 2011. The remaining outstanding balance on June 4, 2015 is due and payable on that date. At December 31, 2012, the outstanding balance of $116,250 was bearing interest at a rate of 2.37%, and $22,500 will be maturing within the next twelve months.
Each of the above loans bear interest at a variable rate equal to (a) a rate based on LIBOR or (b) an alternate base rate (the greater of (a) the Federal Funds Rate plus 0.5%, (b) the Prime Rate or (c) LIBOR plus 1.0%), plus an applicable percentage in each case determined by the Company's leverage ratio. The loans are secured by pledges of capital stock of certain subsidiaries of the Company. The loans are also guaranteed by certain subsidiaries of the Company. The credit facility is subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the agreement. As of December 31, 2012, the Company was in compliance with all such covenants.
Capital leases
The Company has entered into various capital lease obligations for the use of certain computer equipment. Long term capital lease obligations were entered into of which $11,177 remains outstanding at December 31, 2012 and $6,060 will be maturing within the next twelve months. The Company also has short term capital lease obligations totaling $1,671 at December 31, 2012.
Other lines of credit
The Company renewed an unsecured bank credit line on April 29, 2012 which provides for funding of up to $5,000 and bears interest at the prime rate less 1% (2.25% at December 31, 2012). The credit line was renewed through April 29, 2014. At December 31, 2012, no amount was outstanding.


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NOTE 5.    INCOME TAXES
The effective tax rate of 30.6% of income before income taxes for the quarter ended December 31, 2012 is lower than 35.2% for the same quarter in fiscal 2012 primarily due to the release of $2,840 of previously unrecognized tax benefits during the current quarter subsequent to the close of an Internal Revenue Service audit of fiscal 2010 and 2011. The rate of income taxes for the six month period ending December 31, 2012 of 33.5% of income before income taxes compared to 35.3% as reported for the same period in fiscal 2012 also fluctuated due to the release of the previously unrecognized tax benefits noted above.
At December 31, 2012, the Company had $3,100 of gross unrecognized tax benefits, $2,129 of which, if recognized, would affect our effective tax rate. Our policy is to include interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2012, we had accrued interest and penalties of $584 related to uncertain tax positions.
During the fiscal year ended June 30, 2012, the Internal Revenue Service initiated an examination of the Company’s U.S. federal income tax returns for fiscal years ended June 30, 2010 and June 30, 2011. This audit was completed during the quarter ended December 31, 2012. The U.S. federal and state income tax returns for June 30, 2009 and all subsequent years remain subject to examination as of December 31, 2012 under statute of limitations rules. We anticipate potential changes resulting from the expiration of statutes of limitations will not significantly change the unrecognized tax benefits balance within twelve months of December 31, 2012.

NOTE 6.    STOCK-BASED COMPENSATION
For the three months ended December 31, 2012 and 2011, there was $2,375 and $1,771, respectively, in compensation expense from equity-based awards. Pre-tax operating income for the first six months of fiscal 2013 and 2012 includes $4,109 and $3,014 of equity-based compensation costs respectively.
2005 NSOP and 1996 SOP
The Company previously issued options to employees under the 1996 Stock Option Plan (“1996 SOP”) and to outside directors under the 2005 Non-Qualified Stock Option Plan (“2005 NSOP”). No stock options were issued under the 1996 SOP or the 2005 NSOP during the six months ended December 31, 2012.
Changes in stock options outstanding and exercisable are as follows:
2005 NSOP & 1996 SOP – Stock options
 
 
 
 
 
 
Number of
 Shares
 
Weighted
 Average
 Exercise
 Price
 
Aggregate
 Intrinsic
 Value
Outstanding July 1, 2012
464

 
$
16.19

 
 
Granted

 

 
 
Forfeited

 

 
 
Exercised
(213
)
 
13.87

 
 
Outstanding December 31, 2012
251

 
$
18.15

 
$
5,297

Vested December 31, 2012
251

 
$
18.15

 
$
5,297

Exercisable December 31, 2012
251

 
$
18.15

 
$
5,297

Compensation cost related to outstanding options has been fully recognized. The weighted-average remaining contractual term on options currently exercisable as of December 31, 2012 was 2.84 years.
Restricted Stock Plan
The Company issues both unit awards and share awards under the Restricted Stock Plan. The following table summarizes non-vested unit awards as of December 31, 2012, as well as activity for the six months then ended:

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Unit awards
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding July 1, 2012
672

 
18.05

Granted
174

 
42.39

Vested

 

Forfeited

 

Outstanding December 31, 2012
846

 
$
23.05

The weighted average assumptions used in this model to estimate fair value at the measurement date and resulting values are as follows:
Volatility
23.3
%
Risk free interest rate
0.33
%
Dividend yield
1.2
%
Stock Beta
0.864

At December 31, 2012, there was $11,452 of compensation expense that has yet to be recognized related to non-vested restricted stock unit awards, which will be recognized over a weighted-average period of 1.56 years.
The following table summarizes non-vested share awards as of December 31, 2012, as well as activity for the six months then ended:
Share awards
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding July 1, 2012
332

 
$
23.13

Granted
45

 
35.59

Vested
(117
)
 
22.64

Forfeited
(2
)
 
28.94

Outstanding December 31, 2012
258

 
$
25.41

At December 31, 2012, there was $2,986 of compensation expense that has yet to be recognized related to non-vested restricted stock share awards, which will be recognized over a weighted-average period of 1.29 years.

NOTE 7.    EARNINGS PER SHARE
The following table reflects the reconciliation between basic and diluted earnings per share:
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2012
 
2011
 
2012
 
2011
Net Income
$
40,505

 
$
38,525

 
$
82,981

 
$
74,999

Common share information:
 
 
 
 
 
 
 
Weighted average shares outstanding for basic earnings per share
86,084

 
86,572

 
86,097

 
86,488

Dilutive effect of stock options and restricted stock
555

 
799

 
525

 
765

Weighted average shares outstanding for diluted earnings per share
86,639

 
87,371

 
86,622

 
87,253

Basic earnings per share
$
0.47

 
$
0.45

 
$
0.96

 
$
0.87

Diluted earnings per share
$
0.47

 
$
0.44

 
$
0.96

 
$
0.86

Per share information is based on the weighted average number of common shares outstanding for the three and six-month periods ended December 31, 2012 and 2011. Stock options and restricted stock have been included in the calculation of earnings per share to the extent they are dilutive. There were no anti-dilutive stock options or restricted stock excluded for the three month periods ended December 31, 2012 and December 31, 2011. 149 anti-dilutive stock options and restricted stock were excluded from the computation of diluted earnings per share for the six-month period

10

Table of Contents

ended December 31, 2012 (241 shares were excluded from the computation for the six-month period ended December 31, 2011).

NOTE 8.    BUSINESS SEGMENT INFORMATION
The Company is a provider of integrated computer systems that perform data processing (available for in-house installations or outsourced services) for banks and credit unions. The Company’s operations are classified into two reportable 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.


11

Table of Contents

 
Three Months Ended
 
Three Months Ended
 
December 31, 2012
 
December 31, 2011
 
Bank
 
Credit Union
 
Total
 
Bank
 
Credit Union
 
Total
REVENUE
 
 
 
 
 
 
 
 
 
 
 
License
$
7,524

 
$
5,686

 
$
13,210

 
$
9,540

 
$
4,012

 
$
13,552

Support and service
189,898

 
60,412

 
250,310

 
173,189

 
52,420

 
225,609

Hardware
10,712

 
4,462

 
15,174

 
13,020

 
3,677

 
16,697

Total revenue
208,134

 
70,560

 
278,694

 
195,749

 
60,109

 
255,858

COST OF SALES
 
 
 
 
 
 
 
 
 
 
 
Cost of license
1,034

 
217

 
1,251

 
933

 
182

 
1,115

Cost of support and service
109,156

 
35,527

 
144,683

 
103,422

 
32,411

 
135,833

Cost of hardware
7,184

 
3,339

 
10,523

 
8,663

 
2,838

 
11,501

Total cost of sales
117,374

 
39,083

 
156,457

 
113,018

 
35,431

 
148,449

GROSS PROFIT
$
90,760

 
$
31,477

 
122,237

 
$
82,731

 
$
24,678

 
107,409

 
 
 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
62,809

 
 
 
 
 
46,621

 
 
 
 
 
 
 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
(1,071
)
 
 
 
 
 
(1,342
)
 
 
 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
 
 
 
$
58,357

 
 
 
 
 
$
59,446

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
Six Months Ended
 
December 31, 2012
 
December 31, 2011
 
Bank
 
Credit Union
 
Total
 
Bank
 
Credit Union
 
Total
REVENUE
 
 
 
 
 
 
 
 
 
 
 
License
$
14,804

 
$
11,270

 
$
26,074

 
$
17,214

 
$
8,602

 
$
25,816

Support and service
375,963

 
118,932

 
494,895

 
342,264

 
103,615

 
445,879

Hardware
19,793

 
8,934

 
28,727

 
23,379

 
9,122

 
32,501

Total revenue
410,560

 
139,136

 
549,696

 
382,857

 
121,339

 
504,196

COST OF SALES
 
 
 
 
 
 
 
 
 
 
 
Cost of license
1,721

 
608

 
2,329

 
1,834

 
408

 
2,242

Cost of support and service
217,878

 
70,223

 
288,101

 
203,195

 
63,761

 
266,956

Cost of hardware
14,395

 
6,706

 
21,101

 
16,111

 
7,051

 
23,162

Total cost of sales
233,994

 
77,537

 
311,531

 
221,140

 
71,220

 
292,360

GROSS PROFIT
$
176,566

 
$
61,599

 
238,165

 
$
161,717

 
$
50,119

 
211,836

 
 
 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
111,222

 
 
 
 
 
93,251

 
 
 
 
 
 
 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
(2,224
)
 
 
 
 
 
(2,670
)
 
 
 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
 
 
 
$
124,719

 
 
 
 
 
$
115,915



12

Table of Contents

 
December 31,
 
June 30,
 
2012
 
2012
Property and equipment, net
 
 
 
Bank systems and services
$
256,964

 
$
245,069

Credit Union systems and services
29,456

 
31,661

Total
$
286,420

 
$
276,730

Intangible assets, net
 
 
 
Bank systems and services
$
591,664

 
$
591,857

Credit Union systems and services
229,747

 
230,389

Total
$
821,411

 
$
822,246


The Company has not disclosed any additional asset information by segment, as the information is not produced internally and its preparation is impracticable.



13

Table of Contents

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements included in this Form 10-Q.
RESULTS OF OPERATIONS
Background and Overview
Jack Henry & Associates, Inc. (JHA) is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Our solutions are marketed and supported through three primary brands. Jack Henry Banking® supports banks ranging from community to mid-tier, multi-billion dollar institutions with information and transaction processing solutions. Symitar® is a leading provider of information and transaction processing solutions for credit unions of all sizes. ProfitStars® provides specialized products and services that enable financial institutions of every asset size and charter, and diverse corporate entities outside the financial services industry, to mitigate and control risks, optimize revenue and growth opportunities, and contain costs. JHA's integrated solutions are available for in-house installation and outsourced and hosted delivery.
The majority of our revenue is derived from recurring outsourcing fees and transaction processing fees that predominantly have contract terms of five years or greater. Support and service fees also include in-house maintenance fees on primarily annual contract terms. Less predictable software license fees and hardware sales complement our primary revenue sources. We continually seek opportunities to increase revenue while at the same time containing costs to expand margins.
In the second quarter of fiscal 2013, revenues increased 9% or $22,836 compared to the same period in the prior year, with strong growth continuing in our support & service revenue component, particularly in our electronic payment services. In the six months ending December 31, 2012, revenues increased 9% or $45,500 compared to the same six months last year, with strong growth continuing in all components of our support & service revenues. The growth in revenue and the Company's continued focus on cost management continued to drive gross margins up, for both the three and six month periods presented.
Operating expenses increased 35% for the quarter and 19% for the six month period ended December 31, 2012 mainly due to $13,686 expenses, including $1,450 of contingent liabilities, related to the impact of widespread flooding caused by Hurricane Sandy on our Lyndhurst, New Jersey item processing center. Other than the contingent amounts, we expect no further significant costs related to this in future periods. Insurance claims are being made by JHA to recover the Hurricane Sandy related expenses.  These claims have not been finalized and no amounts have been recorded for these potential insurance recoveries in the financial results for the period ending December 31, 2012. The amount recovered may differ from the amount of the expense.
The increased operating expenses, partially offset by a reduced effective tax rate driven by the release of $2,840 of previously unrecognized tax benefits, resulted in a combined 5% increase in net income for the quarter and 11% for the year-to-date.
We continue into fiscal 2013 with cautious optimism following strong second quarter operating results. Significant portions of our business continue to come from recurring revenue and our healthy sales pipeline is also encouraging. Our customers continue to face regulatory and operational challenges which our products and services address, and in these times they have an even greater need for our solutions that directly address institutional profitability and efficiency. Our strong balance sheet, access to extensive lines of credit, the strength of our existing product line and an unwavering commitment to superior customer service position us well to address current and future opportunities to extend our customer base and produce returns for our stockholders.
A detailed discussion follows of the major components of the results of operations for the three and six-month periods ended December 31, 2012. All amounts are in thousands and discussions compare the current three and six-month periods ended December 31, 2012, to the prior year three and six-month periods ended ended December 31, 2011.
REVENUE
License Revenue
Three Months Ended
 
%
 
Six Months Ended
 
%
 
December 31,
 
Change
 
December 31,
 
Change
 
2012
 
2011
 
 
 
2012
 
2011
 
 
License
$
13,210

 
$
13,552

 
(3
)%
 
$
26,074

 
$
25,816

 
1
%
Percentage of total revenue
5
%
 
5
%
 
 
 
5
%
 
5
%
 
 

14

Table of Contents

License revenue for core products remained consistent with last year. Current quarter license revenue decreased only slightly compared to the same period last year and the revenues for the first six months of fiscal 2013 increased slightly.
While license fees will fluctuate, recent trends indicate that our customers are increasingly electing to contract for our products via outsourced delivery rather than a traditional license as our outsourced delivery does not require an up-front capital investment in license fees. We expect this trend to continue in the long term.
Support and Service Revenue
Three Months Ended
 
%
 
Six Months Ended
 
%
 
December 31,
 
Change
 
December 31,
 
Change
 
2012
 
2011
 
 
 
2012
 
2011
 
 
Support and service
$
250,310

 
$
225,609

 
11
%
 
$
494,895

 
$
445,879

 
11
%
Percentage of total revenue
90
%
 
88
%
 
 
 
90
%
 
88
%
 
 
 
Qtr over Qtr
 
 
 
Year over Year
 
 
 
$ Change
 
% Change
 
 
 
$ Change
 
% Change
 
 
In-House Support & Other Services
$
2,863

 
4
%
 
 
 
$
7,629

 
5
%
 
 
Electronic Payment Services
15,172

 
18
%
 
 
 
27,439

 
16
%
 
 
Outsourcing Services
5,047

 
11
%
 
 
 
9,198

 
10
%
 
 
Implementation Services
1,619

 
8
%
 
 
 
4,750

 
13
%
 
 
Total Increase
$
24,701

 
 
 
 
 
$
49,016

 
 
 
 
There was growth in all support and service revenue components for the current quarter and year-to-date.
In-house support and other services revenue increased, both for the quarter and year-to-date, due to annual maintenance fee increases as our customers’ assets grow. Revenue from our complementary products has also grown as the total number of supported in-house products has grown.
Electronic payment services continue to experience the largest growth. The quarterly and year-to-date revenue increases are attributable to strong performance across debit/credit card processing services, online bill payment services and ACH processing.
Outsourcing services for banks and credit unions continue to drive revenue growth as customers continue to show a preference for outsourced delivery of our solutions. We expect the trend towards outsourced product delivery to benefit outsourcing services revenue for the foreseeable future. Revenues from outsourcing services are typically earned under multi-year service contracts and therefore provide a long-term stream of recurring revenues.
Implementation services revenue increased for the quarter due mainly to increased implementations of our core banking platform products and related complementary products, coupled with higher merger conversion revenues from our core banking and credit union platform products.
Hardware Revenue
Three Months Ended
 
%
 
Six Months Ended
 
%
 
December 31,
 
Change
 
December 31,
 
Change
 
2012
 
2011
 
 
 
2012
 
2011
 
 
Hardware
$
15,174

 
$
16,697

 
(9
)%
 
$
28,727

 
$
32,501

 
(12
)%
Percentage of total revenue
5
%
 
7
%
 
 
 
5
%
 
6
%
 
 
Hardware revenue continues to fluctuate from quarter to quarter. Revenue decreased for the three and six month periods due to a decrease in the number of third party hardware systems and components delivered. Although there will be continuing quarterly fluctuations, we expect there to be an overall decreasing trend in hardware sales due to the change in sales mix towards outsourcing contracts, which typically do not include hardware, and the general deflationary trend of computer prices.
BACKLOG
Our backlog of $452,239 ($89,796 in-house and $362,443 outsourcing) at December 31, 2012 increased 19% from $378,778 ($73,742 in-house and $305,036 outsourcing) at December 31, 2011. The current quarter backlog increased 7% from September 30, 2012, when backlog was $423,352 ($92,153 in-house and $331,199 outsourcing).


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Table of Contents

COST OF SALES AND GROSS PROFIT
 
Three Months Ended
 
%
 
Six Months Ended
 
%
 
December 31,
 
Change
 
December 31,
 
Change
 
2012
 
2011
 
 
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of License
$
1,251

 
$
1,115

 
12
 %
 
$
2,329

 
$
2,242

 
4
 %
Percentage of  total revenue
<1%

 
<1%

 
 
 
<1%

 
<1%

 
 
License Gross Profit
$
11,959

 
$
12,437

 
(4
)%
 
$
23,745

 
$
23,574

 
1
 %
Gross Profit Margin
91
%
 
92
%
 
 
 
91
%
 
91
%
 
 
Cost of support and service
$
144,683

 
$
135,833

 
7
 %
 
$
288,101

 
$
266,956

 
8
 %
Percentage of  total revenue
52
%
 
53
%
 
 
 
52
%
 
53
%
 
 
Support and Service Gross Profit
$
105,627

 
$
89,776

 
18
 %
 
$
206,794

 
$
178,923

 
16
 %
Gross Profit Margin
42
%
 
40
%
 
 
 
42
%
 
40
%
 
 
Cost of hardware
$
10,523

 
$
11,501

 
(9
)%
 
$
21,101

 
$
23,162

 
(9
)%
Percentage of  total revenue
4
%
 
4
%
 
 
 
4
%
 
5
%
 
 
Hardware Gross Profit
$
4,651

 
$
5,196

 
(10
)%
 
$
7,626

 
$
9,339

 
(18
)%
Gross Profit Margin
31
%
 
31
%
 
 
 
27
%
 
29
%
 
 
TOTAL COST OF SALES
$
156,457

 
$
148,449

 
5
 %
 
$
311,531

 
$
292,360

 
7
 %
Percentage of  total revenue
56
%
 
58
%
 
 
 
57
%
 
58
%
 
 
TOTAL GROSS PROFIT
$
122,237

 
$
107,409

 
14
 %
 
$
238,165

 
$
211,836

 
12
 %
Gross Profit Margin
44
%
 
42
%
 
 
 
43
%
 
42
%
 
 
Cost of license depends greatly on third party reseller agreement software vendor costs. During the quarter, sales of these third party vendor licenses increased as a percentage of total license revenue leading to higher related costs and slightly decreased gross profit margins. Year-to-date gross profit margins remained consistent with the prior period.
Gross profit margins in support and service increased for the three and six month periods due to economies of scale realized from increased revenues, particularly in electronic payment services.
In general, changes in cost of hardware trend consistently with hardware revenue. For the current quarter, gross margins remain consistent with the prior year. Year-to-date margins have decreased slightly, being impacted by reduced sales of higher margin products related to hardware upgrades in the first quarter of the current year.

OPERATING EXPENSES
Selling and Marketing
Three Months Ended
 
%
 
Six Months Ended
 
%
 
December 31,
 
Change
 
December 31,
 
Change
 
2012
 
2011
 
 
 
2012
 
2011
 
 
Selling and marketing
$
19,937

 
$
18,164

 
10
%
 
$
40,126

 
$
36,918

 
9
%
Percentage of total revenue
7
%
 
7
%
 
 
 
7
%
 
7
%
 
 
Selling and marketing expenses for the quarter and year-to-date have increased mainly due to higher commission expenses. This is in line with increased sales volume of long term service contracts on which commissions are paid as a percentage of total revenue. Selling and Marketing costs remain consistent as a percentage of total revenue.
Research and Development
Three Months Ended
 
%
 
Six Months Ended
 
%
 
December 31,
 
Change
 
December 31,
 
Change
 
2012
 
2011
 
 
 
2012
 
2011
 
 
Research and development
$
15,691

 
$
15,075

 
4
%
 
$
30,337

 
$
30,011

 
1
%
Percentage of total revenue
6
%
 
6
%
 
 
 
6
%
 
6
%
 
 
Research and development expenses increased slightly for the three and six month periods ended December 31, 2012 primarily due to increased salary and contractor services costs.

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Table of Contents

General and Administrative
Three Months Ended
 
%
 
Six Months Ended
 
%
 
December 31,
 
Change
 
December 31,
 
Change
 
2012

2011
 
 
 
2012
 
2011
 
 
General and administrative
$
27,181

 
$
13,382

 
103
%
 
$
40,759

 
$
26,322

 
55
%
Percentage of total revenue
10
%
 
5
%
 
 
 
7
%
 
5
%
 
 
General and administrative expenses for the quarter and year-to-date have increased compared to last year due mainly to $13,686 of expenses related to the impact of widespread flooding caused by Hurricane Sandy on our Lyndhurst, New Jersey item processing center.
Excluding these expenses, non-GAAP general and administrative expenses would have been $13,495 and $27,073 for the quarter and year-to-date current year periods, respectively, and the non-GAAP increase would have been $113, or 1% for the quarter and $751, or 3%, for the year-to-date compared to the prior year.
Insurance claims have been made by JHA to recover the Hurricane Sandy related expenses.  These claims have not been finalized and no amounts have been recorded in relation to these gain contingencies in the financial results for the period ending December 31, 2012.
INTEREST INCOME AND EXPENSE
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
%
 
Six Months Ended
 
%
 
December 31,
 
Change
 
December 31,
 
Change
 
2012
 
2011
 
 
 
2012
 
2011
 
 
Interest Income
$
190

 
$
106

 
79
 %
 
$
378

 
$
234

 
62
 %
Interest Expense
$
(1,261
)
 
$
(1,448
)
 
(13
)%
 
$
(2,602
)
 
$
(2,904
)
 
(10
)%
Interest income for the three and six-month periods ended December 31, 2012 fluctuated due to changes in invested balances and yields on invested balances. Interest expense decreased for the quarter and year-to-date due to the lower outstanding balance on our term loan compared to last year.
PROVISION FOR INCOME TAXES
The provision for income taxes was $17,852 and $41,738 for the three and six-month periods ended December 31, 2012 compared with $20,921 and $40,916 for the same periods last year. As of the end of the current quarter, the effective rate of income taxes is 30.6% and 33.5% of income before income taxes for the quarter and year-to-date respectively, compared to 35.2% and 35.3% as reported in fiscal 2012. The current year income tax rate was lower primarily due to the tax impact of the Lyndhurst, New Jersey expenses ($4,893) and the recognition of $2,840 of previously unrecognized tax benefits during the current quarter following the close of an Internal Revenue Service audit of fiscal years 2010 and 2011.
On January 1, 2013, the Research and Experimentation Credit was renewed, retroactive to January 1, 2012. No financial impact of this renewal is included in the current financial statements. The effect of this renewal, including the retrospective portion, will be included in our third quarter financial results.
NET INCOME
Net income increased 5% for the three months ended December 31, 2012. For the second quarter of fiscal 2013, it was $40,505 or $0.47 per diluted share compared to $38,525, or $0.44 per diluted share in the same period last year. Net income also increased for the six month period ended December 31, 2012 to $82,981 or $0.96 per diluted share compared to $74,999 or $0.86 per diluted share, for the same six month period last year.
Excluding the after-tax effect of the Lyndhurst, New Jersey expenses, non-GAAP net income would have increased 28% for the three months ended December 31, 2012.  For the second quarter of fiscal 2013, net income would have been $49,298 or $0.57 per diluted share compared to $38,525, or $0.44 per diluted share in the same period last year.


17

Table of Contents

 
Three Months Ended December 31, 2012
 
 
Lyndhurst,
 
 
 
New Jersey
 
 
GAAP
Expenses
Non-GAAP
Gross Profit
$
122,237

$

$
122,237

Operating Expenses
62,809

(13,686
)
49,123

Operating Income
59,428

13,686

73,114

Interest Income (Expense)
(1,071
)
                        -  

(1,071
)
Income Before Income Taxes
58,357

13,686

72,043

Provision for Income Taxes
17,852

4,893

22,745

Net Income
40,505

8,793

49,298

Diluted weighted average shares outstanding
86,639

86,639

86,639

Diluted earnings per share
$
0.47

$
0.10

$
0.57


The Company reports its financial results in accordance with U.S. GAAP.  The Company believes that the non-GAAP financial measures discussed above allows management and investors to understand and compare the Company's results in a more consistent manner.  The non-GAAP measures should be considered supplemental and not a substitute for the Company's results that were recorded in accordance with GAAP for the periods presented.

BUSINESS SEGMENT DISCUSSION
The Company is a provider of integrated computer systems that perform data processing (available for in-house installations or outsourced services) for banks and credit unions. The Company’s operations are classified into two reportable 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
 
%
 
Six Months Ended
 
%
 
December 31,
 
Change
 
December 31,
 
Change
 
2012

2011
 
 
 
2012
 
2011
 
 
Revenue
$
208,134

 
$
195,749

 
6
%
 
$
410,560

 
$
382,857

 
7
%
Gross Profit
$
90,760

 
$
82,731

 
10
%
 
$
176,566

 
$
161,717

 
9
%
Gross Profit Margin
44
%
 
42
%
 
 
 
43
%
 
42
%
 
 
Revenue in the Bank segment increased 6% compared to the equivalent quarter last fiscal year. This was primarily due to growth in all areas of support and service revenue, particularly in electronic payment transaction processing services revenue which grew 17% over the same period last year.
Year-to-date revenue increased 7% for the six month period due mainly to a 10% increase in support and service revenue. Within support and service revenue, the increase was driven by 15% year-over-year growth in electronic payment services revenues from transaction processing.
Gross profit margins increases for both the quarter and year-to-date have been driven by increased margins in our support and service component of revenue mainly due to economies of scale realized in electronic payment services.

Credit Union Systems and Services
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
%
 
Six Months Ended
 
%
 
December 31,
 
Change
 
December 31, 2012
 
Change
 
2012
 
2011
 
 
 
2012
 
2011
 
 
Revenue
$
70,560

 
$
60,109

 
17
%
 
$
139,136

 
$
121,339

 
15
%
Gross Profit
$
31,477

 
$
24,678

 
28
%
 
$
61,599

 
$
50,119

 
23
%
Gross Profit Margin
45
%
 
41
%
 
 
 
44
%
 
41
%
 
 

18

Table of Contents

Revenue in the Credit Union segment increased 17% from the same quarter last year mainly due to support & service revenue which grew 15%, coupled with an increase in complementary product license revenues. Support & service revenue increased due mainly to an 21% increase in electronic payment services from continuing growth of our online bill payment processing and debit/credit card processing services in the Credit Union segment.
Year-to-date revenue in the Credit Union segment has increased 15% over the prior year. Support & service revenues grew 15% through increases in electronic payment services (which grew 19%) due to the continuing growth of our transaction processing and debit/credit card processing services.
Gross profit margins for the Credit Union segment for the three and six month periods have increased mainly due to economies of scale realized in increased transaction volume in our payment processing services.

FINANCIAL CONDITION
Liquidity
The Company's cash and cash equivalents totaled $192,854 at December 31, 2012, increasing from $157,313 at June 30, 2012, and from $95,202 at December 31, 2011. The increase from June 30, 2012 is primarily due to continued receipts from our annual maintenance billings.
The following table summarizes net cash from operating activities in the statement of cash flows:
 
Six Months Ended
 
December 31,
 
2012
 
2011
Net income
$
82,981

 
$
74,999

Non-cash expenses
56,202

 
54,155

Change in receivables
89,193

 
80,910

Change in deferred revenue
(99,881
)
 
(103,784
)
Change in other assets and liabilities
(9,327
)
 
(10,019
)
Net cash provided by operating activities
$
119,168

 
$
96,261

Cash provided by operating activities for the fiscal year to date increased 24% compared to last year. Cash from operations is primarily used to repay debt, pay dividends and fund acquisitions and other capital expenditures. The increase compared to last year reflects increased earnings driven by continued strong revenue growth, ongoing cost control and decreased interest costs.
Cash used in investing activities for the current year totaled $42,704. The largest use of cash included $23,826 for the development of software and $18,957 capital expenditures on facilities and equipment, which includes spending on our online bill payment data center migration. Other uses of cash included $186 for the acquisition of customer contracts. These expenditures have been partially offset by proceeds of $265 from the sale of assets. In the first six months of fiscal 2012, cash used in investing activities totaled $32,637 which included capital expenditures for facilities and equipment of $18,913, including ongoing build-out of our Allen, TX facility, computer equipment and related purchased software, with other major uses of cash being $15,695 for the development of software and $670 for the acquisition of customer contracts. This expenditure has been partially offset by $2,641 proceeds from an aircraft sale.
Financing activities used cash of $40,923 during the current year. There were cash outflows to repay long and short term borrowings on our credit facilities of $17,336, dividends paid to stockholders of $19,813, and purchase of treasury shares of $9,297. Cash used was partially offset by $5,523 net proceeds from the issuance of stock and tax related to stock-based compensation. Net cash used by financing activities in the first six months of last year was $31,547 and includes $18,047 repayments on our credit facilities and $18,167 in dividend payments to shareholders, partially offset by $4,667 of net proceeds from the issuance of stock and tax related to stock-based compensation.
We have not experienced any significant issues with our current collection efforts. Furthermore, we believe that any future impact to our liquidity would be minimized by our access to available lines of credit.
Capital Requirements and Resources
The Company generally uses existing resources and funds generated from operations to meet its capital requirements. Capital expenditures totaling $18,957 and $18,913 for the six-month periods ended December 31, 2012 and 2011, respectively, were made primarily for additional equipment and the improvement of existing facilities. These additions were funded from cash generated by operations. Total consolidated capital expenditures for the Company for fiscal year 2013 are not expected to exceed $50,000 and will be funded from cash generated by operations.

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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 facilities. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At December 31, 2012, there were 15,701 shares in treasury stock and the Company had the remaining authority to repurchase up to 4,290 additional shares. The total cost of treasury shares at December 31, 2012 is $353,253. During fiscal 2013, the Company repurchased 249 treasury shares for $9,297. At June 30, 2012, there were 15,452 shares in treasury stock and the Company had the authority to repurchase up to 4,539 additional shares.
The Company has entered into a bank credit facility agreement that includes a revolving loan and a term loan.
Revolving credit facility
The long term revolving loan allows for borrowings of up to $150,000, which may be increased by the Company at any time until maturity to $250,000. The revolving loan terminates June 4, 2015. At December 31, 2012, there was no outstanding revolving loan balance.
Term loan
The term loan had an original principal balance of $150,000, with quarterly principal payments of $5,625 that began on September 30, 2011. The remaining outstanding balance on June 4, 2015 is due and payable on that date. At December 31, 2012, the outstanding balance of $116,250 was bearing interest at a rate of 2.37%, and $22,500 will be maturing within the next twelve months.
Each of the above loans bear interest at a variable rate equal to (a) a rate based on LIBOR or (b) an alternate base rate (the greater of (a) the Federal Funds Rate plus 0.5%, (b) the Prime Rate or (c) LIBOR plus 1.0%), plus an applicable percentage in each case determined by the Company's leverage ratio. The loans are secured by pledges of capital stock of certain subsidiaries of the Company. The loans are also guaranteed by certain subsidiaries of the Company. The credit facility is subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the agreement. As of December 31, 2012, the Company was in compliance with all such covenants.
Capital leases
The Company has entered into various capital lease obligations for the use of certain computer equipment. Long term capital lease obligations were entered into of which $11,177 remains outstanding at December 31, 2012 and $6,060 will be maturing within the next twelve months. The Company also has short term capital lease obligations totaling $1,671 at December 31, 2012.
Other lines of credit
The Company renewed an unsecured bank credit line on April 29, 2012 which provides for funding of up to $5,000 and bears interest at the prime rate less 1% (2.25% at December 31, 2012). The credit line was renewed through April 29, 2014. At December 31, 2012, no amount was outstanding.
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, 2012.
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, 2012. 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 solid, with increased gross profit and net income for the three and six-month periods ended December 31, 2012, compared to the same period a year ago. We continue to be cautiously optimistic, as we maintain significant levels of recurring revenue and continue to see a strong backlog of contracts for products and services yet to be delivered. Our overall results reflect the continuing attitude of

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cooperation and commitment by each employee, management's ongoing cost control efforts and our commitment to continue delivering top quality products and superior services to all of our customers in the markets we serve. We believe that we are well positioned to address current and future opportunities which will arise to extend our customer base and produce returns for our stockholders.

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 outstanding debt. We do not currently use any derivative financial instruments. We actively monitor these risks through a variety of controlled procedures involving senior management.
Based on the controls in place and the credit worthiness of the customer base, we believe the credit risk associated with the extension of credit to our customers will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Based on our outstanding debt with variable interest rates as of December 31, 2012, a 1% increase in our borrowing rate would increase annual interest expense in fiscal 2013 by less than $1,200.

ITEM 4.        CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, 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 operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. For this purpose, disclosure controls and procedures include controls and procedures designed to ensure that information that is required to be disclosed under the Exchange Act is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION
Item 1A.    RISK FACTORS

The Company's business and the results of its operations are affected by numerous factors and uncertainties, some of which are beyond our control. The following is a description of some of the important risks and uncertainties that may cause the actual results of the Company's operations in future periods to differ from those expected or desired. This discussion includes a number of forward-looking statements and you should refer to the qualifications and limitations on such statements in the paragraph headed “Forward Looking Statements” immediately preceding Part I of our Form 10-K for the year ended June 30, 2012.  The risk factors have not changed materially from the date of our Form 10-K for the year ended June 30, 2012 other than changes to our descriptions of the risks of general market and economic conditions and risks of operational failure.
Our business may be adversely impacted by U.S. and global market and economic conditions. We derive most of our revenue from products and services we provide to the financial services industry. If the economic environment worsens, reduction in demand from current and potential clients for our products and services, which could have a material adverse effect on our business, results of operations and financial condition.
Changes in the banking and credit union industry could reduce demand for our products. Cyclical fluctuations in economic conditions affect profitability and revenue growth at commercial banks and credit unions. Unfavorable economic conditions negatively affect the spending of banks and credit unions, including spending on computer software and hardware. Such conditions could reduce both our sales to new customers and upgrade/complementary product sales to existing customers. The Company could also experience the loss of customers due to their financial failure.
Competition or general economic conditions may result in decreased demand or require price reductions or other concessions to customers which could result in lower margins and reduce income. We vigorously compete with a variety of software vendors in all of our major product lines. We compete on the basis of product quality, reliability, performance, ease of use, quality of support and services, integration with other products and pricing. Some of our competitors may have advantages over us due to their size, product lines, greater marketing resources, or exclusive intellectual property rights. If competitors offer more favorable pricing, payment or other contractual terms, warranties, or functionality, or if general economic conditions decline such that customers are less willing or able to pay the cost of our products and services, we may need to lower prices or offer favorable terms in order to successfully compete.
Security problems could damage our reputation and business. We rely on industry-standard encryption, network and Internet security systems, most of which we license from third parties, to provide the security and authentication necessary to effect secure transmission of data. Our services and infrastructure are increasingly reliant on the Internet. Computer networks and the Internet are vulnerable to unauthorized access, computer viruses and other disruptive problems such as denial of service attacks and other forms of cyber-terrorism. Individual personal computers can be stolen, and customer data media can be lost in shipment. Under state and proposed federal laws requiring consumer notification of security breaches, the costs to remediate security breaches can be substantial. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may render our security measures inadequate. Security risks may result in liability to us and also may deter financial institutions from purchasing our products. We will continue to expend significant capital and other resources protecting against the threat of security breaches, and we may need to expend resources alleviating problems caused by breaches. Eliminating computer viruses and addressing other security problems may result in interruptions, delays or cessation of service to users, any of which could harm our business.
Failures associated with payment transactions could result in financial loss. The volume and dollar amount of payment transactions that we process is very large and continues to grow. We settle funds on behalf of financial institutions, other businesses and consumers and receive funds from clients, card issuers, payment networks and consumers on a daily basis for a variety of transaction types. Transactions facilitated by us include debit card, credit card, electronic bill payment transactions, Automated Clearing House (ACH) payments and check clearing that supports consumers, financial institutions and other businesses. If the continuity of operations, integrity of processing, or ability to detect or prevent fraudulent payments were compromised in connection with payments transactions, this could result in financial as well as reputational loss to us. In addition, we rely on various financial institutions to provide ACH services in support of funds settlement for certain of our products. If we are unable to obtain such ACH services in the future, that could have a material adverse effect on our business, financial position and results of operations. In addition, we may issue credit to consumers, financial institutions or other businesses as part of the funds settlement. A default on this credit by a counterparty could result in a financial loss to us.

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Operational failure in our outsourcing facilities could expose us to damage claims, increase regulatory scrutiny and cause us to lose customers. Damage or destruction that interrupts our outsourcing operations could cause delays and failures in customer processing which could hurt our relationship with customers, expose us to damage claims, and cause us to incur substantial additional expense to relocate operations and repair or replace damaged equipment. Our back-up systems and procedures may not prevent disruption, such as a prolonged interruption of our transaction processing services. In the event that an interruption extends for more than several hours, we may experience data loss or a reduction in revenues by reason of such interruption. A significant interruption of service could have a negative impact on our reputation, could lead our present and potential customers to choose other service providers, and lead to increased regulatory scrutiny of the critical services we provide to financial institutions, with resulting increases in compliance burdens and costs.
If we fail to adapt our products and services to changes in technology, we could lose existing customers and be unable to attract new business. The markets for our software and hardware products and services are characterized by changing customer requirements and rapid technological changes. These factors and new product introductions by our existing competitors or by new market entrants could reduce the demand for our existing products and services and we may be required to develop or acquire new products and services. Our future success is dependent on our ability to enhance our existing products and services in a timely manner and to develop or acquire new products and services. If we are unable to develop or acquire new products and services as planned, or if we fail to sell our new or enhanced products and services, we may incur unanticipated expenses or fail to achieve anticipated revenues.
Consolidation and failures of financial institutions will continue to reduce the number of our customers and potential customers. Our primary market consists of approximately 7,300 commercial and savings banks and 7,300 credit unions. The number of commercial banks and credit unions has decreased because of failures over the last few years and mergers and acquisitions over the last several decades and is expected to continue to decrease as more consolidation occurs.
The services we provide to our customers are subject to government regulation that could hinder the development of portions of our business or impose constraints on the way we conduct our operations. The financial services industry is subject to extensive and complex federal and state regulation. As a supplier of services to financial institutions, portions of our operations are examined by the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the National Credit Union Association, among other regulatory agencies. These agencies regulate services we provide and the manner in which we operate, and we are required to comply with a broad range of applicable laws and regulations. In addition, existing laws, regulations, and policies could be amended or interpreted differently by regulators in a manner that has a negative impact on our existing operations or that limits our future growth or expansion. Our customers are also regulated entities, and actions by regulatory authorities could determine both the decisions they make concerning the purchase of data processing and other services and the timing and implementation of these decisions. Concerns are growing with respect to the use, confidentiality, and security of private customer information. Regulatory agencies, Congress and state legislatures are considering numerous regulatory and statutory proposals to protect the interests of consumers and to require compliance with standards and policies that have not been defined.
The software we provide to our customers is also affected by government regulation. We are generally obligated to our customers to provide software solutions that comply with applicable federal and state regulations. In particular, numerous new regulations have been proposed and are still being written to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Substantial software research and development and other corporate resources have been and will continue to be applied to adapt our software products to this evolving, complex and often unpredictable regulatory environment. Our failure to provide compliant solutions could result in significant fines or consumer liability on our customers, for which we may bear ultimate liability.
Our growth may be affected if we are unable to find or complete suitable acquisitions. We have augmented the growth of our business with a number of acquisitions and we plan to continue to acquire appropriate businesses, products and services. This strategy depends on our ability to identify, negotiate and finance suitable acquisitions. Substantial recent merger and acquisition activity in our industry has affected the availability and pricing of such acquisitions. If we are unable to acquire suitable acquisition candidates, we may experience slower growth.
Acquisitions may be costly and difficult to integrate. We have acquired a number of businesses in the last several years and will continue to explore acquisitions in the future. We may not be able to successfully integrate acquired companies. We may encounter problems with the integration of new businesses including: financial control and computer system compatibility; unanticipated costs; unanticipated quality or customer problems with acquired products or services; differing regulatory  and industry standards; diversion of management's attention; adverse effects on existing business relationships with suppliers and customers; loss of key employees; and significant amortization expenses related to acquired assets. To finance future acquisitions, we may have to increase our borrowing or sell

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equity or debt securities to the public. If we fail to integrate our acquisitions, our business, financial condition and results of operations could be materially and adversely affected. Failed acquisitions could also produce material and unpredictable impairment charges as we periodically review our acquired assets.
The loss of key employees could adversely affect our business. We depend on the contributions and abilities of our senior management. Our Company has grown significantly in recent years and our management remains concentrated in a small number of key employees. If we lose one or more of our key employees, we could suffer a loss of sales and delays in new product development, and management resources would have to be diverted from other activities to compensate for this loss. We do not have employment agreements with any of our executive officers.
If others claim that we have infringed their intellectual property rights, we could be liable for significant damages. We have agreed to indemnify many of our customers against claims that our products and services infringe on the proprietary rights of others. We anticipate that the number of infringement claims will increase as the number of our software solutions and services increases and the functionality of our products and services expands. Any such claims, whether with or without merit, could be time-consuming, result in costly litigation and may not be resolved on terms favorable to us.
We may not be able to manage growth. We have grown both internally and through acquisitions. Our expansion has and will continue to place significant demands on our administrative, operational, financial and management personnel and systems. We may not be able to enhance and expand our product lines, manage costs, adapt our infrastructure and modify our systems to accommodate future growth.
Expansion of services to non-traditional customers could expose us to new risks. Some of our recent acquisitions include business lines that are marketed outside our traditional, regulated, and litigation-averse base of financial institution customers. These non-regulated customers may entail greater operational, credit and litigation risks than we have faced before and could result in increases in bad debts and litigation costs.
Failure to achieve favorable renewals of service contracts could negatively affect our outsourcing business. Our contracts with our customers for outsourced data processing services generally run for a period of five or more years. Because of the rapid growth of our outsourcing business over the last five years, we will experience greater numbers of these contracts coming up for renewal over the next few years. Renewal time presents our customers with the opportunity to consider other providers or to renegotiate their contracts with us. If we are not successful in achieving high renewal rates upon favorable terms, our outsourcing revenues and profit margins will suffer.

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 December 31, 2012:
 
Total Number of Shares Purchased
 
Average Price of Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans (1)
October 1 - October 31, 2012
120,710

 
$
37.45

 
120,710

 
4,289,645

November 1 - November 30, 2012

 

 

 
4,289,645

December 1 - December 31, 2012

 

 

 
4,289,645

Total
120,710

 
37.45

 
120,710

 
4,289,645

(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, increased by 2.0 million shares on April 29, 2005, by 5.0 million shares on August 28, 2006, by 5.0 million shares on February 4, 2008, and by 5.0 million shares on August 25, 2008. These authorizations have no specific dollar or share price targets and no expiration dates.

ITEM 6. EXHIBITS
    
10.1        Jack Henry & Associates, Inc. 2005 Non-Qualified Stock Option Plan

31.1        Certification of the Chief Executive Officer dated February 7, 2013

31.2        Certification of the Chief Financial Officer dated February 7, 2013

32.1        Written Statement of the Chief Executive Officer dated February 7, 2013

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32.2        Written Statement of the Chief Financial Officer dated February 7, 2013

101.INS*    XBRL Instance Document

101.SCH*    XBRL Taxonomy Extension Schema Document

101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*    XBRL Taxonomy Extension Label Linkbase Document

101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document

* Furnished with this quarterly report on Form 10-Q are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at December 31, 2012 and June 30, 2012, (ii) the Condensed Consolidated Statements of Income for the three and six-month periods ended December 31, 2012 and 2011, (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2012 and 2011, and (iv) Notes to Condensed Consolidated Financial Statements.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
JACK HENRY & ASSOCIATES, INC.
 
 
 
 
Date:
February 7, 2013
 
/s/ John F. Prim
 
 
 
John F. Prim
 
 
 
Chief Executive Officer and Chairman
 
 
 
 
Date:
February 7, 2013
 
/s/ Kevin D. Williams
 
 
 
Kevin D. Williams
 
 
 
Chief Financial Officer and Treasurer


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