Jack Henry & Associates, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2019 (fiscal 2019 Q3), not 2018 Q3 as stated in the request metadata. Financial amounts below are in millions of dollars unless otherwise noted; prior-year figures were recast for ASC 606.
Business context and results
Jack Henry provides banking and credit-union technology, payment processing, software, and related services. Its reportable segments are Core, Payments, Complementary, and Corporate & Other. Revenue is primarily domestic; less than 1% came from outside the United States.
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $380.4 | $374.0 | $1,159.2 | $1,092.5 |
| Operating income | $76.4 | $90.7 | $267.9 | $272.6 |
| Net income | $59.3 | $69.1 | $210.9 | $297.2 |
| Diluted EPS | $0.77 | $0.89 | $2.72 | $3.83 |
| Operating margin | 20.1% | 24.2% | 23.1% | 24.9% |
| Cost of revenue / revenue | 61.9% | 58.4% | 58.9% | 57.6% |
Cash, liquidity, and debt
- Nine-month operating cash flow was $233.4, versus $234.9 a year earlier. Investing used $148.0 and financing used $81.4; cash increased $4.0 to $35.4 at March 31, 2019.
- Cash and cash equivalents were $35.4; current assets were $388.6 and current liabilities $330.9. Total assets were $2,002.9 and stockholders’ equity $1,426.0.
- Debt consisted of $35.0 outstanding on a $300.0 revolving credit facility, with capacity to increase the facility to $600.0. The facility matures February 20, 2020; the company reported compliance with its financial covenants. A separate $5.0 bank line had no borrowings.
- Capital spending on facilities and equipment was $42.4 year to date; fiscal 2019 spending was not expected to exceed $50.0. Software development spending was $81.4. Dividends paid were $88.0; the board subsequently declared a $0.40-per-share dividend payable June 7, 2019.
Material changes and management commentary
- Quarterly revenue rose 2% reported; excluding lower deconversion fees and fiscal 2019 acquisitions, management said revenue grew 5%. Nine-month revenue rose 6%; excluding those items, management said it grew 8%.
- Processing revenue grew 6% in the quarter and 9% year to date, supported by transaction volumes. Services and support fell 1% in the quarter, largely because deconversion fees declined $10.3, but grew 5% year to date.
- Quarter operating income declined 16% and net income declined 14%. Management attributed pressure principally to lower deconversion revenue and higher operating costs, including personnel, bonuses, amortization, facilities, and spending on the card-processing platform and faster-payments initiatives. Excluding specified items, management said quarterly operating income declined 1%.
- Nine-month operating income fell 2% and net income fell 29%. The prior-year comparison included a $100.5 tax benefit from remeasurement of deferred tax liabilities following the Tax Cuts and Jobs Act. The current nine-month effective tax rate was 21.3%, versus negative 9.3% in the adjusted prior-year period.
- Management cited strong recurring revenue, a healthy sales pipeline, customer demand for solutions addressing profitability, efficiency, and security, and a strong balance sheet. The filing provides no specific earnings or revenue guidance.
Other notable items, risks, and contingencies
- ASC 606 was adopted retrospectively. It accelerated recognition of certain software-related revenue and reduced deferred revenue; the prior-year financial statements in this filing are adjusted for the adoption.
- Acquisitions of BOLTS Technologies and Agiletics in October 2018 cost $15.0 and $7.6, respectively. Their reported contributions were small and included net losses for the periods disclosed. Ensenta, acquired in fiscal 2018, contributed to current-period growth.
- The company expects lease accounting changes effective July 1, 2019 to add right-of-use assets and lease liabilities; it did not expect a significant impact on income before taxes.
- Variable-rate debt exposes the company to interest-rate risk; management estimated a 1% rate increase would add $0.35 of annual interest expense. The company reported routine legal proceedings, with no expected material adverse effect, and $10.8 of gross unrecognized tax benefits.
- Management identified no material change in internal control over financial reporting and concluded disclosure controls were effective. The filing describes no specific numerical operating forecast.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is fiscal 2019 Q3, ended March 31, 2019.
- Assess whether recurring processing and cloud growth can offset lower deconversion fees and whether higher costs and platform investments stabilize margins.
- Separate operating performance from the prior-year TCJA tax benefit when comparing year-to-date net income and EPS.
- Review ASC 606’s effect on revenue timing, deferred revenue, and comparability with periods before adoption.
- Monitor the $35.0 revolving borrowing, February 2020 facility maturity, capital spending, and execution of the card-platform and faster-payments initiatives.