Jack Henry & Associates, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended June 30, 2019; filed August 26, 2019. The request metadata says “2018 Q4,” but this filing reports FY2019 and includes FY2019 fourth-quarter results.
Business context
Jack Henry provides core banking and credit-union software, payment processing, cloud and outsourcing services, and complementary technology products. Its three principal brands are Jack Henry Banking, Symitar, and ProfitStars, serving more than 9,000 customers. Revenue is primarily recurring, including long-term outsourcing contracts, support fees, and transaction processing.
Financial performance
Amounts below are in millions of dollars, except per-share data. Prior periods reflect retrospective adoption of ASC 606 where stated.
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $1,552.7 | $1,470.8 | +5.6% |
| Operating income | $347.3 | $357.5 | -2.9% |
| Net income | $271.9 | $365.0 | -25.5% |
| Diluted EPS | $3.52 | $4.70 | -25.1% |
| Operating cash flow | $431.1 | $412.1 | +4.6% |
- Services and support revenue grew 4% to $958.5 million; processing revenue grew 8% to $594.2 million. Excluding deconversion-fee declines and FY2019 acquisitions, management reported 6% growth in services and support and strong organic growth in processing.
- Gross margin, calculated as revenue less cost of revenue, was approximately 40.5%, versus 42.0% in FY2018. Operating margin was approximately 22.4%, versus 24.3%.
- Operating expenses rose 8%, driven by compensation and headcount, card-platform development, acquisition-related costs, higher rent, and amortization. FY2019 had no business-disposal gain; FY2018 included a $1.9 million gain.
- Cash and cash equivalents were $93.6 million at year-end, up from $31.4 million. Total assets were $2.18 billion and stockholders’ equity was $1.43 billion. The company reported no outstanding debt at June 30, 2019.
- The $300 million revolving facility, expandable to $600 million, had no balance outstanding and was scheduled to terminate February 20, 2020; the company planned to renew or replace it. It was in compliance with its covenants. A separate $5 million credit line was also undrawn.
- Dividends paid were $118.7 million; share repurchases were $54.9 million. Declared dividends per share rose to $1.54 from $1.36.
Fourth-quarter results and changes versus prior periods
For the quarter ended June 30, 2019, revenue was $393.5 million, compared with $378.3 million in the year-earlier quarter. Operating income was $79.4 million versus $85.0 million; net income was $61.0 million versus $67.8 million; diluted EPS was $0.79 versus $0.87.
Annual net income fell chiefly because FY2018 included a substantial tax benefit from remeasurement of deferred tax liabilities following the Tax Cuts and Jobs Act (TCJA). FY2018 recorded an $8.9 million income-tax benefit, including a $106.8 million deferred-tax remeasurement benefit; FY2019 recorded $75.4 million of tax expense at a 21.7% effective rate. Lower deconversion fees also weighed on FY2019 comparisons. Revenue growth was broad-based, while the Payments segment’s cost of revenue grew faster than its revenue, partly due to Ensenta amortization and investment in the card platform.
Liquidity, outlook, risks, and unusual items
- Cash provided by operations was $431.1 million. Investing activities used $190.6 million, including $111.1 million for software development, $53.6 million of capital expenditures, and $20.0 million for acquisitions. Financing activities used $178.3 million, primarily for dividends and repurchases.
- Backlog was $785.2 million at June 30, 2019, including $707.6 million of outsourcing services backlog. The filing states that $514.0 million of that outsourcing backlog was not expected to be realized during FY2020 because of contract duration.
- Management described FY2019 as a strong year, expressed cautious optimism about economic improvement, and cited recurring revenue and a healthy sales pipeline. It provided no specific numerical FY2020 revenue or earnings guidance.
- Off-balance-sheet contractual obligations totaled $665.1 million: $71.6 million of operating leases and $593.5 million of purchase commitments. The latter includes a $555.8 million remaining commitment under the strategic card-processing agreement with First Data and PSCU.
- Beginning July 1, 2019, lease accounting adoption was expected to add approximately $70–$73 million of right-of-use assets and $73–$75 million of lease liabilities, with no significant net-income impact expected.
- Key risks include cybersecurity and data breaches, processing or outsourcing interruptions, payment and third-party vendor failures, regulatory and privacy compliance, customer-industry consolidation, competition, contract renewals, technology change, acquisition integration, and goodwill or intangible-asset impairment.
- ASC 606 was adopted retrospectively and changed the timing of software-related revenue recognition. The company also disclosed an immaterial misclassification in prior-year balance-sheet amounts and an immaterial $23.5 million classification error in previously filed FY2019 quarterly comparisons. Management and the auditor concluded internal controls were effective; the auditor identified revenue recognition estimates and performance obligations as a critical audit matter.
- Two acquisitions were completed in FY2019: BOLTS Technologies and Agiletics. On July 1, 2019, after year-end, the company acquired Geezeo for a net cash outlay of $37.8 million; purchase-price allocation was incomplete at filing.
Important facts for investors to verify
- Underlying organic growth and margins after separating deconversion fees, acquisition contributions, and the FY2018 TCJA tax benefit.
- Execution, costs, and expected economics of the card-processing platform commitment and Payments segment investment.
- Renewal rates and realization timing for the $707.6 million outsourcing backlog, as well as future contract and purchase commitments.
- Renewal or replacement of the revolving credit facility before its February 2020 termination date.
- Impact of the July 2019 lease-standard adoption and integration and purchase accounting for Geezeo.
- Revenue-recognition judgments, the disclosed prior-period classification errors, and ongoing cybersecurity, regulatory, and service-continuity risks.