Jack Henry(US:JKHY)2023-08-24 20:24Part I Business The company provides technology solutions and payment processing services primarily to US financial institutions - The company provides technology solutions to over 7,500 financial institutions and diverse corporate entities13 Customer Base Overview | Customer Type | Number Served | Asset Range (Banks) | | :--- | :--- | :--- | | Core Banks | 940 | Up to $50 billion | | Core Credit Unions | Over 710 | All sizes | | Non-Core Customers | Nearly 5,880 | All sizes and charters | - The company's fundamental business strategy is to generate organic revenue and earnings growth, augmented by strategic acquisitions and a long-term technology modernization strategy3033 - In fiscal year 2023, the company acquired Payrailz, LLC, a provider of cloud-native digital payment capabilities, to enhance its technology modernization strategy32 Research and Development Expenses (in millions) | Fiscal Year | R&D Expense | Capitalized Software | | :--- | :--- | :--- | | 2023 | $142.7 | $166.1 | | 2022 | $121.4 | $148.2 | | 2021 | $109.0 | $128.3 | - The company's primary competitors for core solutions include Fidelity National Information Services, Inc. (FIS), Fiserv, Inc., and Finastra61 - As of June 30, 2023, the company had approximately 7,120 full-time and part-time employees73 Risk Factors The company faces operational, business, and regulatory risks including data security, competition, and industry consolidation - Data security breaches, system failures, or other cyber incidents could damage the company's reputation and business85 - The company's business is subject to risks from failures of its technological infrastructure or outsourcing facilities, which could lead to service interruptions and loss of customers88 - Intense competition from a variety of vendors could lead to decreased demand or price reductions, potentially lowering margins and income92 - The financial services industry is subject to extensive and complex government regulation, and failure to comply could increase costs and impose constraints on operations97 - Consolidation and failures of financial institutions are expected to continue, reducing the number of current and potential customers104 - The company's growth may be affected if it is unable to find or successfully integrate suitable acquisitions105106 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None114 Properties The company owns and leases significant office space across the US and operates five aircraft to service customers - The company owns approximately 802,000 square feet of office space and leases approximately 477,000 square feet115 Legal Proceedings The company is involved in routine legal proceedings that are not expected to have a material adverse effect - Management does not expect current lawsuits to have a material adverse effect on the company's consolidated financial statements117 Mine Safety Disclosures This section is not applicable to the company - None118 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock (JKHY) trades on Nasdaq, with a history of dividends and no recent share repurchases - The company's common stock is traded on the Nasdaq Global Select Market under the symbol 'JKHY'120 - The company has paid quarterly dividends every quarter since fiscal 1991120 Issuer Purchases of Equity Securities (Quarter Ended June 30, 2023) | Period | Total Number of Shares Purchased | Average Price of Share | Maximum Number of Shares that May Yet Be Purchased Under the Plans | | :--- | :--- | :--- | :--- | | April 1 - April 30, 2023 | — | $ — | 3,796,265 | | May 1 - May 31, 2023 | — | $ — | 3,796,265 | | June 1 - June 30, 2023 | — | $ — | 3,796,265 | | Total | — | $ — | 3,796,265 | 5-Year Cumulative Total Return Comparison | Year | JKHY | S&P 500 | S&P Composite 1500 Software & Services | | :--- | :--- | :--- | :--- | | 2018 | 100.00 | 100.00 | 100.00 | | 2019 | 103.86 | 110.42 | 120.01 | | 2020 | 144.24 | 118.70 | 153.51 | | 2021 | 129.62 | 167.13 | 204.88 | | 2022 | 144.28 | 149.39 | 171.21 | | 2023 | 135.69 | 178.66 | 222.19 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) FY2023 revenue grew 7% to $2.08 billion, with net income up 1%, impacted by acquisition costs and tax law changes Results of Operations (FY2023 vs FY2022) FY2023 revenue rose 7% to $2.08 billion, driven by services and processing, while net income grew 1% to $366.6 million Fiscal 2023 vs. 2022 Performance Summary (in thousands, except per share data) | Metric | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $2,077,702 | $1,942,884 | 7% | | Operating Income | $480,688 | $474,619 | 1% | | Net Income | $366,646 | $362,916 | 1% | | Diluted EPS | $5.02 | $4.94 | 2% | - Excluding deconversion fees and revenue from the newly acquired Payrailz, the company's revenue grew by 8% ($147.8 million)138 Revenue Breakdown (in thousands) | Revenue Stream | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Services and support | $1,214,701 | $1,156,365 | 5% | | Processing | $863,001 | $786,519 | 10% | Operating Expenses Breakdown (in thousands) | Expense Category | FY 2023 | FY 2022 | % Change | | :--- | :--- | :--- | :--- | | Cost of Revenue | $1,219,062 | $1,128,614 | 8% | | Research and Development | $142,678 | $121,355 | 18% | | Selling, General, and Administrative | $235,274 | $218,296 | 8% | Reportable Segment Discussion All four segments reported revenue growth, led by Corporate and Other (23%) and supported by solid gains in Payments and Complementary Segment Revenue and Cost of Revenue (FY 2023 vs. 2022, in thousands) | Segment | Revenue (2023) | Revenue % Change | Cost of Revenue (2023) | Cost of Revenue % Change | | :--- | :--- | :--- | :--- | :--- | | Core | $656,164 | 5% | $283,531 | 8% | | Payments | $767,339 | 7% | $423,474 | 10% | | Complementary | $583,893 | 7% | $239,044 | 6% | | Corporate and Other | $70,306 | 23% | $273,013 | 7% | - During fiscal 2023, the Remit product was transferred from the Complementary segment to the Payments segment, leading to reclassification of prior year data for comparability157 Liquidity and Capital Resources Cash decreased due to the Payrailz acquisition and lower operating cash flow, funded by increased debt facilities - Cash and cash equivalents decreased to $12.2 million at June 30, 2023, from $48.8 million at June 30, 2022165 - Net cash provided by operating activities decreased by 24% to $381.6 million in FY2023, largely due to increased cash income tax payments related to IRC Section 174 law changes165301 - The company used $229.6 million for the acquisition of Payrailz and $166.1 million for capitalized software development166 - In August 2022, the company entered into a new five-year, $600 million unsecured credit agreement, and in May 2023, it entered into a $180 million term loan agreement176178 Critical Accounting Estimates Management applies significant judgment to estimates for revenue recognition, software capitalization, and acquisition accounting - Significant judgment is required for revenue recognition, including identifying performance obligations and estimating variable consideration in long-term customer contracts184185 - Capitalization of software development costs involves significant judgment in determining when technological feasibility is met and estimating useful lives for amortization191 - Purchase accounting for acquisitions requires estimates for the fair values of assets and liabilities acquired, which impacts the amount of goodwill recorded195196 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are credit risk and interest rate risk on its $275 million of variable-rate debt - The company is exposed to interest rate risk on its $275 million of outstanding variable-rate debt as of June 30, 2023198 - A hypothetical 1% increase in the borrowing rate would increase the company's annual interest expense by $2.75 million198 Financial Statements and Supplementary Data This section presents the audited consolidated financial statements, auditor's report, and management's report on internal controls Auditor and Management Reports The independent auditor issued an unqualified opinion, identifying revenue recognition as a critical audit matter - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the financial statements and internal controls206 - The audit identified Revenue Recognition as a Critical Audit Matter due to the significant judgment required by management214215 - Management concluded that the company's internal control over financial reporting was effective as of June 30, 2023220 Consolidated Financial Statements The financial statements show revenue growth, an expanded balance sheet from acquisitions, and reduced cash from operations Consolidated Statements of Income (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | REVENUE | $2,077,702 | $1,942,884 | $1,758,225 | | OPERATING INCOME | $480,688 | $474,619 | $398,719 | | INCOME BEFORE INCOME TAXES | $474,574 | $472,267 | $397,725 | | NET INCOME | $366,646 | $362,916 | $311,469 | | Diluted earnings per share | $5.02 | $4.94 | $4.12 | Consolidated Balance Sheets (in thousands) | | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Total current assets | $627,962 | $613,524 | | Total assets | $2,773,826 | $2,455,564 | | Total current liabilities | $523,759 | $543,830 | | Total long-term liabilities | $641,557 | $530,111 | | Total liabilities | $1,165,316 | $1,073,941 | | Total stockholders' equity | $1,608,510 | $1,381,623 | Consolidated Statements of Cash Flows (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $381,559 | $504,631 | $462,129 | | Net cash from investing activities | ($409,673) | ($196,344) | ($162,250) | | Net cash from financing activities | ($8,430) | ($310,492) | ($462,232) | | NET CHANGE IN CASH | ($36,544) | ($2,205) | ($162,353) | Notes to Consolidated Financial Statements The notes detail revenue disaggregation, acquisition accounting for Payrailz, debt structure, and subsequent events - As of June 30, 2023, the estimated revenue expected to be recognized in the future from remaining performance obligations is $5.9 billion267 - The acquisition of Payrailz on August 31, 2022, had a final purchase price of $230.2 million, resulting in $117.3 million of goodwill allocated to the Payments segment323326 - Total outstanding debt as of June 30, 2023, was $275 million, consisting of $95 million from a revolving credit facility and $180 million from a term loan293294296 - Subsequent to year-end, the Board declared a cash dividend of $0.52 per share and initiated a voluntary separation program with an expected cost of $17-18 million340341 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023 - The CEO and CFO concluded that the company's disclosure controls and procedures are effective to provide reasonable assurance that required information is reported in a timely manner344 - There were no material changes in the company's internal control over financial reporting during the fourth quarter of fiscal 2023346 Part III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees Required information on directors, compensation, and governance is incorporated by reference from the company's proxy statement - Information required by Items 10, 11, 12, 13, and 14 is omitted from this report and will be incorporated by reference from the Company's Proxy Statement for its 2023 Annual Meeting of Stockholders350 Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K report - This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including various agreements, compensation plans, and required CEO/CFO certifications357359361 Form 10-K Summary The company has elected not to provide a Form 10-K summary - None367