Business context and reporting period
Jack Henry & Associates, Inc. provides core banking and credit-union systems, payment processing, outsourced data services, and related technology through Jack Henry Banking, Symitar, and ProfitStars. The filing is the fiscal 2013 Form 10-K for the year ended June 30, 2013—not a calendar 2012 fourth-quarter report, as the request metadata suggests. Unless noted, amounts below are in millions of dollars.
Most revenue is recurring support, service, and transaction-processing revenue; support and service represented about 90% of fiscal 2013 revenue. The company served more than 11,300 customers and reported two segments: bank systems and services, and credit-union systems and services.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $1,129.4 | $1,027.1 | +10% |
| Gross profit / margin | $477.0 / 42% | $423.7 / 41% | +13% |
| Operating income | $265.5 | $236.2 | +12% |
| Net income | $176.6 | $155.0 | +14% |
| Diluted EPS | $2.04 | $1.78 | +15% |
| Operating cash flow | $309.2 | $264.6 | +17% |
Net margin was approximately 15.6%, compared with 15.1% in FY2012. Support and service revenue grew 12% to $1,015.2 million, led by electronic payment services and outsourcing. License revenue was essentially flat at $54.8 million; hardware revenue fell 6% to $59.4 million. Bank-segment revenue rose 9% to $848.1 million; credit-union revenue rose 13% to $281.3 million, with its gross margin improving to 44% from 41%.
Cash and cash equivalents were $127.9 million at June 30, 2013, down from $157.3 million. Working capital was $35.6 million, compared with $66.4 million. The company repaid the remaining $127.5 million term loan during the year and had no balance on its $150 million revolving facility. Total reported debt, largely capital leases, was about $15.3 million; the revolving facility matures June 2015. The company reported compliance with its credit-facility covenants and no variable-rate debt outstanding at year-end.
Investing activities used $97.2 million, including $46.3 million in capital expenditures and $51.3 million for software development. Financing activities used $241.3 million, including $145.2 million in debt repayments, $58.1 million in share repurchases, and $48.2 million in dividends. The annual dividend declared per share was $0.56, up from $0.44.
Material changes versus the prior comparable period
- Revenue growth accelerated to 10% from 6% in FY2012; gross margin rose by about one percentage point.
- Operating expenses increased 13%, including a $12.5 million net expense related to Hurricane Sandy flooding at the Lyndhurst, New Jersey processing center. The company received $2.4 million in insurance recoveries; further claims were unresolved and no additional recovery was recorded.
- Operating cash flow increased by $44.6 million. Cash declined despite stronger operating cash flow, primarily because the term loan was repaid.
- Backlog increased to $498.8 million from $435.3 million, including $393.0 million of outsourcing backlog. $311.7 million of outsourcing backlog was not expected to be realized in FY2014 because of contract duration.
- Fiscal 2013 fourth-quarter revenue was $298.1 million and net income was $47.7 million, versus $266.6 million and $43.3 million, respectively, in the FY2012 fourth quarter. Diluted EPS was $0.55 versus $0.50.
Outlook, risks, and unusual items
Management described itself as cautiously optimistic about economic improvement, citing record FY2013 revenue, recurring revenue, and a healthy sales pipeline. It expected continued customer investment in solutions that improve efficiency and performance, and expected the shift toward outsourced delivery to support outsourcing revenue. No specific FY2014 revenue or earnings guidance was provided. Management noted that regulation, including implementation of Dodd-Frank, could cause customers to defer discretionary spending.
- Key disclosed risks include cybersecurity or data breaches, payment-processing failures, and outages at outsourcing facilities, with potential financial, regulatory, and reputational consequences.
- Financial-institution consolidation and failures may reduce the customer base; competition, pricing pressure, and unfavorable contract renewals could affect revenue and margins.
- Regulatory change requires ongoing product and compliance investment. The company also depends on timely technology development and on a limited number of hardware suppliers.
- A patent-infringement lawsuit filed in May 2013 by DataTreasury alleges infringement of two patents and seeks damages and injunctive relief. The company said it would defend the case; at this stage it could not estimate a possible loss or range.
- Other contingencies included $4.959 million of uncertain-tax-position liabilities excluded from the contractual-obligations table because timing and amount could not be reasonably estimated. The filing reported $59.259 million of off-balance-sheet contractual obligations; its separate obligations table totals $74.554 million including capital leases and notes payable.
The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the reporting-period distinction: this is FY2013, ended June 30, 2013, with quarterly data included for FY2013 and FY2012.
- Track whether recurring payment and outsourcing growth continues, and whether the shift to outsourcing affects license revenue and margins as management expects.
- Monitor recovery of Hurricane Sandy costs and the outcome of the DataTreasury litigation; the filing does not quantify potential litigation exposure or unresolved insurance recoveries.
- Review contract renewals, backlog conversion, customer consolidation, and the effects of evolving financial-services regulation.
- Assess ongoing capital allocation—debt repayment, share repurchases, dividends, and software and infrastructure investment—against cash generation and liquidity.