Jack Henry & Associates, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended June 30, 2014, compared with fiscal 2013. The request metadata says “2013 Q4,” but the filing is an annual report for FY2014; its fourth-quarter data are included below where relevant. Dollar amounts are in millions unless stated otherwise.
Business context
Jack Henry provides core banking and credit-union processing systems, outsourced data processing, payment services, and related technology through Jack Henry Banking, Symitar, and ProfitStars. It served nearly 11,300 customers. Revenue is predominantly recurring: support and service generated 91% of FY2014 revenue, including outsourcing and electronic payment processing.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $1,210.1 | $1,129.4 | +7% |
| Gross profit / margin | $518.6 / 42.9% | $477.0 / 42.2% | +9% |
| Operating income / margin | $312.0 / 25.8% | $265.5 / 23.5% | +18% |
| Net income / margin | $201.1 / 16.6% | $176.6 / 15.6% | +14% |
| Diluted earnings per share | $2.36 | $2.04 | +16% |
| Cash from operations | $341.7 | $309.2 | +11% |
| Cash and cash equivalents at year-end | $70.4 | $127.9 | Down $57.5 |
Support and service revenue rose 8% to $1,098.4 million, led by electronic payments (+9%) and outsourcing (+10%). License revenue declined 3% to $53.0 million, and hardware revenue declined 1% to $58.7 million. Bank-segment revenue increased 8% to $913.0 million; credit-union revenue increased 6% to $297.1 million. Credit-union gross margin rose to 45% from 44%; bank gross margin was 42% in both years.
Cash used in investing was $131.8 million, including $33.2 million for facilities and equipment, $62.2 million for software development, $16.3 million for internal-use software, and $27.9 million for Banno. Financing used $267.4 million, principally $175.7 million of share repurchases and $71.3 million of dividends.
Liquidity, debt, and capital allocation
Working capital was negative $44.4 million, versus positive $35.6 million a year earlier. Management attributed this largely to $312.0 million of current deferred revenue, mainly prepaid annual maintenance; it said the cost to provide those services is substantially below the recorded liability and did not anticipate liquidity problems. The company had $70.4 million in cash and access to an unused $150 million revolving facility, with no balance outstanding at June 30, 2014. Total reported debt was approximately $9.1 million, primarily capital leases; the company was in compliance with credit-facility covenants. The board declared a subsequent quarterly dividend of $0.22 per share.
Material changes and unusual items
- FY2014 growth and margin expansion reflected higher recurring support and service revenue and continued cost management. Operating expenses fell 2%, partly because FY2013 included $12.4 million of Hurricane Sandy-related costs; FY2014 included $2.9 million of insurance recoveries related to the event.
- The effective tax rate increased to 35.4% from 32.0%, in part because FY2013 benefited from previously unrecognized tax benefits and a retroactive research-credit extension.
- Jack Henry acquired Banno, a mobile banking, web-development, and marketing technology provider, effective March 1, 2014, for $27.9 million in cash. Included post-acquisition results were $0.8 million of revenue and a $1.1 million after-tax net loss; the purchase-price allocation was preliminary.
- In December 2013, the company entered into a regulatory agreement with banking regulators following the 2012 disruption at its Lyndhurst, New Jersey processing center during Super Storm Sandy. It committed to assess, improve, and monitor disaster recovery and business continuity, and reported meeting the agreement’s deadlines while continuing work toward full compliance.
- A patent-infringement suit brought by DataTreasury was pending. The company said it intended to defend the matter but could not reasonably estimate a possible loss or range.
Outlook, commentary, and risks
Management gave no numeric revenue or earnings guidance. It described itself as cautiously optimistic about economic improvement, cited a healthy sales pipeline and continuing customer needs for efficiency and profitability solutions, and expected outsourcing to remain a growth driver. It also anticipated continued financial-institution consolidation and noted that regulatory developments, including Dodd-Frank, could defer customer spending.
Key disclosed risks include service outages and disaster recovery, cyber and data-security incidents, payment-processing or settlement failures, evolving regulation and the regulatory agreement, competition and pricing pressure, customer consolidation or failures, retention and renewal terms for long-term outsourcing contracts, technology changes, acquisition execution, and dependence on two principal hardware suppliers. The filing also reports an unqualified audit opinion and effective internal control over financial reporting.
Important facts for investors to verify
- Whether recurring payment and outsourcing growth continues, and whether contract renewals preserve revenue and margins.
- Progress toward full compliance with the regulatory agreement and the resilience of processing and disaster-recovery operations.
- Final Banno purchase accounting, integration, and contribution to results after its reported initial-period loss.
- Outcome and any potential financial exposure from the DataTreasury litigation and uncertain tax positions.
- Cash generation relative to ongoing software investment, dividends, and share repurchases, particularly given negative working capital and lower year-end cash.