Jack Henry & Associates, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended June 30, 2015. The request metadata refers to 2014 Q4, but this filing is the FY2015 annual report; it also presents FY2015 fourth-quarter results. Unless otherwise noted, financial figures below are in millions of dollars.
Business context
Jack Henry provides core banking and credit-union processing systems, payments, outsourcing, and related technology services through Jack Henry Banking, Symitar, and ProfitStars. It served nearly 10,900 customers. Revenue is predominantly recurring support, service, and transaction-processing fees; support and service represented 96% of FY2015 revenue. The company reports bank and credit-union segments.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $1,256.2 | $1,173.2 | +7% |
| Gross profit / margin | $535.9 / 43% | $493.8 / 42% | +9%; margin +1 point |
| Operating income | $317.9 | $288.3 | +10% |
| Net income | $211.2 | $186.7 | +13% |
| Diluted EPS | $2.59 | $2.19 | +18% |
| Operating cash flow | $373.8 | $341.7 | +9% |
| Cash and cash equivalents at year-end | $148.3 | $70.4 | +$77.9 |
| Long-term debt at year-end | $50.1 | $3.7 | Increased |
Investing activities used $137.0 million, including $76.9 million for software development and $54.4 million in capital expenditures. Financing activities used $158.9 million, including $122.7 million of share repurchases and $76.4 million of dividends, partly offset by $90.0 million of credit-facility borrowings. The company had $50.0 million drawn on its $300 million revolving facility at year-end, was in covenant compliance, and reported access to additional credit capacity. Quarterly dividends declared were $0.94 per share for FY2015, versus $0.84 in FY2014.
Bank-segment revenue rose 7% to $962.7 million; credit-union revenue rose 7% to $293.5 million. Credit-union gross margin improved to 46% from 44%, while bank gross margin increased to 42% from 41%. Backlog was $527.8 million at year-end, up from $513.2 million; $431.5 million related to outsourcing, much of which is scheduled beyond FY2016.
Material changes versus FY2014
- Growth was led by support and service revenue, up 8% to $1,200.7 million. Electronic payment services increased $38.3 million and outsourcing services increased $35.5 million.
- Hardware revenue declined 10% to $52.9 million, reflecting a shift toward outsourcing and hardware price deflation.
- Gross margin rose one percentage point as revenue growth outpaced cost growth. Operating expenses increased 6%; the effective tax rate declined to 33.3% from 35.1%.
- Cash increased primarily because of revolving-credit borrowings and lower share repurchases than in FY2014. The share count also declined, contributing to EPS growth.
Outlook, risks, and unusual items
- Management described itself as cautiously optimistic about economic improvement, citing recurring revenue, a healthy sales pipeline, and customer demand for efficiency and profitability solutions. It gave no numerical FY2016 guidance.
- In June 2015, the company restated prior-period financial statements because of errors in accounting for revenue from certain bundled, multi-element software arrangements. The identified material weakness in related financial-reporting controls remained unremediated at June 30, 2015. Management said it expected remediation during FY2016. The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting.
- The company identified disclosure controls as ineffective because of the material weakness. Risks include further misstatements or restatements, costs and potential litigation related to the restatement, and investor-confidence impacts.
- A 2013 patent-infringement case seeks damages and other relief. The Patent Trial and Appeal Board found relevant patent claims unpatentable in 2015; the plaintiff sought rehearing. The company said it could not reasonably estimate any possible loss.
- A 2013 regulatory agreement requires assessment and improvement of disaster-recovery, business-continuity, and compliance processes following disruption from Super Storm Sandy. The company reported meeting the agreement’s deadlines and continuing work toward full compliance.
- Other key exposures include cybersecurity and service outages, payment-processing and settlement risk, regulatory change, customer-bank consolidation, competition, contract-renewal terms, and acquisition integration. The company completed the Bayside Business Solutions acquisition for $10 million on July 1, 2015, after fiscal year-end.
Important facts for investors to verify
- Review the restatement disclosures and confirm whether FY2016 remediation actions resolve the revenue-recognition control weakness; monitor subsequent auditor assessments.
- Assess the durability and margins of recurring payment and outsourcing revenue, backlog conversion, and contract renewal rates.
- Track revolving-credit borrowings, variable-rate exposure, cash generation, capital spending, dividends, and share repurchases.
- Monitor the DataTreasury litigation, regulatory-agreement compliance, and any material cybersecurity, processing, or business-continuity events.
- Confirm the financial and operating contribution of the post-year-end Bayside acquisition and its completed purchase accounting.