WASHINGTON, D.C. 20549
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” ”accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
See notes to condensed consolidated financial statements
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
(Unaudited)
| |
NOTE 1. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Company
Jack Henry & Associates, Inc. and subsidiaries (“JHA”("Jack Henry," "JKHY," or the “Company”"Company") is a provider of integrated computer systems and services thatservices. The Company has developed and acquired a number of banking and credit union software systems. The Company's revenues are predominately earned by marketing those systems to financial institutions nationwide together with computer equipment (hardware), by providing the conversion and implementation services for financial institutions to utilize JHAJKHY systems, and by providing other related services. JHAJKHY also provides continuing support and services to customers using in-houseon-premise or outsourced systems.
Consolidation
The condensed consolidated financial statements include the accounts of JHAJKHY and all of its subsidiaries, which are wholly-owned, and all intercompany accounts and transactions have been eliminated.
Comprehensive Income
Comprehensive income for the three months ended September 30, 20192020 and 20182019 equals the Company’s net income.
Change in Accounting Policy
The Company adopted FASB Accounting Standards Codification ("ASC") Topic 326, Financial Instruments - Credit Losses, ("CECL") with an adoption date of July 1, 2020 (see Note 2). As a result, the Company changed its accounting policy for allowance for credit losses. The accounting policy pursuant to CECL is disclosed below. The adoption of CECL resulted in an immaterial cumulative effect adjustment recorded in retained earnings as of July 1, 2020.
Allowance for Credit Losses
The Company monitors trade and other receivable balances and contract assets and estimates the allowance for lifetime expected credit losses. Estimates of expected credit losses are based on historical collection experience and other factors, including those related to current market conditions and events.
The following table summarizes allowance for credit losses activity for the quarter ended September 30, 2020:
| | | | | |
| Allowance for credit losses at June 30, 2020 | $ | 6,719 | |
| Cumulative effect of accounting standards update adoption | 493 | |
| Current quarter provision for expected credit losses | 540 | |
| Write-offs charged against allowance | (1,023) | |
| Recoveries of amounts previously written off | (3) | |
| Other | 5 | |
| Allowance for credit losses at September 30, 2020 | $ | 6,731 | |
While the novel coronavirus ("COVID-19") pandemic did not result in a significant increase in the Company’s expected credit loss allowance recorded as of September 30, 2020, the Company believes it is reasonably possible that future developments related to the economic impact of the COVID-19 pandemic could have a material impact on management’s estimates (see Use of Estimates below).
Property and Equipment
Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Accumulated depreciation at September 30, 20192020 totaled $384,896$417,121 and at June 30, 20192020 totaled $388,481.$404,388.
Intangible Assets
Intangible assets consist of goodwill, customer relationships, computer software, and trade names acquired in business acquisitions in addition to internally developed computer software. The amounts are amortized, with the exception of those intangible assets with an indefinite life (such as goodwill), over an estimated economic benefit
period, generally three to twenty years. Accumulated amortization of intangible assets totaled $736,825$846,659 and $707,518$812,856 at September 30, 20192020 and June 30, 2019,2020, respectively.
Purchase of Investments
During fiscal 2018, theThe Company madehad an investment of $5,000 forin the purchase of preferred stock of Automated Bookkeeping, Inc ("Autobooks"). During the first quarter of fiscal 2020, the Company made an additional investment in Autobooks of $1,000, for a total investment$6,000 at September 30, 2019 of $6,000, representing2020 and June 30, 2020, which represented a non-controlling share of the voting equity as of that date.each of those dates. The total investment was recorded at cost and is included within other non-current assets on the Company's balance sheet. The fair value of the investment has not been estimated, as estimation is not practicable. There have been no events or changes in circumstances that would indicate an impairment and no price changes resulting from observing a similar or identical investment. An impairment and/or an observable price change would be an adjustment to recorded cost. Fair value will not be estimated unless there are identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment.
During the first quarter of fiscal 2020, the Company invested $150 for interests in a renewable energy investment tax credit fund. The investment is included within other non-current assets on the Company's balance sheet. At September 30, 2019, the Company had commitments to invest an additional $14,850 for interests in the renewable energy investment tax credit fund that it expects to fund during the remainder of fiscal 2020.
Common Stock
The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves or borrowings on its existing line-of-credit. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At September 30, 2019,2020, there were 26,60827,393 shares in treasury stock and the Company had the remaining authority to repurchase up to 3,3832,598 additional shares. The total cost of treasury shares at September 30, 20192020 is $1,124,269.$1,247,546. During the first three months of fiscal 2020,2021, the Company repurchased 100400 treasury shares. At June 30, 2019,2020, there were 26,50826,993 shares in treasury stock and the Company had authority to repurchase up to 3,4832,998 additional shares.
Income Taxes
Deferred tax liabilities and assets are recognized for the tax effects of differences between the financial statement and tax basis of assets and liabilities. A valuation allowance would be established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based upon the technical merits of the position. The tax benefit recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Also, interest and penalties expenseexpenses are recognized on the full amount of deferred benefits for uncertain tax positions. The Company's policy is to include interest and penalties related to unrecognized tax benefits in income tax expense.
Interim Financial Statements
The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission ("SEC") and in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") applicable to interim condensed consolidated financial statements, and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes, which are included in its Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended June 30, 2019.2020. The accounting policies followed by the Company are set forth in Note 1 to the Company's consolidated financial statements included in its Form 10-K for the fiscal year ended June 30, 2019,2020, with updates to certain policies included in this Note 1.
In the opinion of the management of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairly in all material respects the financial position of the Company as of September 30, 2019,2020, the results of its operations for the three months ended September 30, 20192020 and 2018,2019, changes in stockholders' equity for the three months ended September 30, 20192020 and 2018,2019, and its cash flows for the three months ended September 30, 20192020 and 2018.2019. The condensed consolidated balance sheet at June 30, 20192020 was derived from audited annual financial statements, but does not contain all of the footnote disclosures from the annual financial statements.
The results of operations for the three months ended September 30, 20192020 are not necessarily indicative of the results to be expected for the entire year.
The extent to which the COVID-19 pandemic will directly or indirectly impact our business and financial results, including revenue, expenses, cost of revenues, research and development, and selling, general and administrative
expenses, will depend on future developments that are highly uncertain, such as new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of September 30, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, the Company’s allowance for credit losses, as well as the carrying value of goodwill and other long-lived assets. While there was not a material impact to the Company’s consolidated financial statements as of and for the quarter ended September 30, 2020, the Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Guidance
The FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases, in February 2016. This ASU aims to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and requiring disclosure of key information regarding leasing arrangements to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. Specifically, the standard requires operating lease commitments to be recorded on the balance sheet as operating lease liabilities and right-of-use assets, and the cost of those operating leases to be amortized on a straight-line basis.
The Company adopted the new standard effective July 1, 2019 using the optional transition method in ASU 2018-11. Under this method, the Company did not adjust its comparative period financial statements for the effects of the new standard or make the new, expanded required disclosures for periods prior to the effective date. The Company elected the package of practical expedients permitted under the new standard, which among other things, allows it to carry forward its historical lease classifications. In addition, the Company has made a policy election to keep leases with an initial term of twelve months or less off of the balance sheet. The Company also elected the practical expedient to not separate the non-lease components of a contract from the lease component to which they relate.
The adoption of standard resulted in the recognition of lease liabilities of $77,393 and right-to-use assets of $74,084 as of July 1, 2019. Adoption of the standard did not have a material impact on the Company’s condensed consolidated statements of income or condensed consolidated statements of cash flows.
Not Yet Adopted
In August of 2018, the FASB issued ASU No. 2018-15, Intangibles, Goodwill and Other - Internal-Use Software (Subtopic 350-40), which broadens the scope of Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The costs are capitalized or expensed depending on the nature of the costs and the project
stage during which they are incurred, consistent with costs for internal-use software. The amendments in this update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The ASU will be effective for the Company on July 1, 2020, with early adoption permitted. The Company plans to early adopt ASU No. 2018-15 on January 1, 2020 and does not expect the adoption to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASUAccounting Standard Update ("ASU") No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, (“ASU 2017-04”), which eliminates Step 2 of the goodwill impairment test that had required a hypothetical purchase price allocation. Rather, entities should apply the same impairment assessment to all reporting units and recognize an impairment loss for the amount by which a reporting unit’s carrying amount exceeds its fair value, without exceeding the total amount of goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted ASU No. 2017-04 on July 1, 2020 and the adoption did not have a material impact on its condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), or CECL, which prescribes an impairment model for most financial instruments based on expected losses rather than incurred losses. Under this model, an estimate of expected credit losses over the contractual life of the instrument is to be recorded as of the end of a reporting period as an allowance to offset the amortized cost basis, resulting in a net presentation of the amount expected to be collected on the financial instrument. For most instruments, entities must apply the standard using a cumulative-effect adjustment to beginning retained earnings as of the beginning of the fiscal year of adoption.
The Company adopted CECL effective July 1, 2020 using the required modified retrospective approach, which resulted in a cumulative-effect decrease to beginning retained earnings of $493. Financial assets and liabilities held by the Company subject to the “expected credit loss” model prescribed by CECL include trade and other receivables as well as contract assets (see Note 1).
Not Yet Adopted
In December of 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions and simplifies other requirements of Topic 740 guidance. The ASU will be effective prospectively for the Company on July 1, 2021. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual orperiod that includes that interim goodwill impairment tests in fiscal years beginning after December 15, 2019, withperiod. Additionally, an entity that elects early adoption permitted.must adopt all the amendments in the same period. The Company plans to adopt ASU No. 2017-04 when required2019-12 effective July 1, 2021 and does not expect the adoption to have a material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, with an allowance for credit losses valuation account that is deducted to present the net carrying value at the amount expected to be collected. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company plans to adopt ASU No. 2016-13 when required and is evaluating the impact on its consolidated financial statements.
NOTE 3. REVENUE AND DEFERRED COSTS
Revenue Recognition
The Company generates revenue from data processing, transaction processing, software licensing and related services, professional services, and hardware sales.
Disaggregation of Revenue
The tables below present the Company's revenue disaggregated by type of revenue. Refer to Note 11,10, Reportable Segment Information, for disaggregated revenue by type and reportable segment. The majority of the Company’s revenue is earned domestically, with revenue from customers outside the United States comprising less than 1% of total revenue.
|
| | | | | | | |
| | Three Months Ended September 30, |
| | 2019 | | 2018 |
| Processing | $ | 159,197 |
| | $ | 145,975 |
|
| | | | |
| Outsourcing & Cloud | 108,583 |
| | 97,359 |
|
| Product Delivery & Services | 71,361 |
| | 57,964 |
|
| In-House Support | 98,864 |
| | 91,245 |
|
| Services & Support | 278,808 |
| | 246,568 |
|
| | | | |
| Total Revenue | $ | 438,005 |
| | $ | 392,543 |
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, |
| | | | | 2020 | | 2019 |
| Outsourcing & Cloud | | | | | $ | 120,959 | | | $ | 108,583 | |
| Product Delivery & Services | | | | | 56,897 | | | 71,361 | |
| In-House Support | | | | | 103,141 | | | 98,864 | |
| Services & Support | | | | | 280,997 | | | 278,808 | |
| | | | | | | |
| Processing | | | | | 170,803 | | | 159,197 | |
| | | | | | | |
| Total Revenue | | | | | $ | 451,800 | | | $ | 438,005 | |
Contract Balances
The following table provides information about contract assets and contract liabilities from contracts with customers.
|
| | | | | | | |
| | September 30,
2019 | | June 30,
2019 |
| Receivables, net | $ | 234,362 |
| | $ | 310,080 |
|
| Contract Assets- Current | 21,233 |
| | 21,446 |
|
| Contract Assets- Non-current | 54,330 |
| | 50,640 |
|
| Contract Liabilities (Deferred Revenue)- Current | 266,831 |
| | 339,752 |
|
| Contract Liabilities (Deferred Revenue)- Non-current | $ | 58,723 |
| | $ | 54,554 |
|
| | | | | | | | | | | |
| September 30,
2020 | | June 30,
2020 |
| Receivables, net | $ | 223,013 | | | $ | 300,945 | |
| Contract Assets- Current | 21,136 | | | 21,609 | |
| Contract Assets- Non-current | 53,788 | | | 54,293 | |
| Contract Liabilities (Deferred Revenue)- Current | 254,764 | | | 318,161 | |
| Contract Liabilities (Deferred Revenue)- Non-current | 67,745 | | | 71,461 | |
Contract assets primarily result from revenue being recognized when or as control of a solution or service is transferred to the customer, but where invoicing is contingent upon the completion of other performance obligations or payment terms differ from the provisioning of services. The current portion of contract assets is reported within prepaid expenses and other in the condensed consolidated balance sheet, and the non-current portion is included in other non-current assets. Contract Liabilitiesliabilities (deferred revenue) primarily relate to consideration received from customers in advance of delivery of the related goods and services to the customer. Contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period.
The Company analyzes contract language to identify if a significant financing component does exist, and would adjust the transaction price for any material effects of the time value of money if the timing of payments provides either party to the contract with a significant benefit of financing the transaction.
DuringFor the three months ended September 30, 20192020 and 2018,2019, the Company recognized revenue of $94,054$93,047 and $88,121,$94,054, respectively, that was included in the corresponding deferred revenue balance at the beginning of the periods.
Amounts recognized that relate to performance obligations satisfied (or partially satisfied) in prior periods were immaterial for each period presented. These adjustments are primarily the result of transaction price re-allocations due to changes in estimates of variable consideration.
Transaction Price Allocated to Remaining Performance Obligations
As of September 30, 2019,2020, estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period totaled $3,691,321.$4,063,582. The Company expects to recognize approximately 28%28.21% over the next 12 months, 19%19.52% in 13-24 months, and the balance thereafter.
Contract Costs
The Company incurs incremental costs to obtain a contract as well as costs to fulfill contracts with customers that are expected to be recovered. These costs consist primarily of sales commissions, which are incurred only if a contract is obtained, and customer conversion or implementation-related costs. Capitalized costs are amortized based on the transfer of goods or services to which the asset relates, in line with the percentage of revenue recognized for each performance obligation to which the costs are allocated.
Capitalized costs totaled $246,387$288,917 and $231,273,$271,010, at September 30, 20192020 and June 30, 2019,2020, respectively.
ForDuring the three months ended September 30, 20192020 and 2018,2019, amortization of deferred contract costs wastotaled $33,825 and $31,393, and $26,821, respectively. There were no impairment losses in relation to capitalized costs for the periods presented.
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
For cash equivalents, amounts receivable or payable and short-term borrowings, fair values approximate carrying value, based on the short-term nature of the assets and liabilities.
The Company's estimates of the fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets, and requires that observable inputs be used in the valuations when available. The three levels of the hierarchy are as follows:
Level 1: inputs to the valuation are quoted prices in an active market for identical assets
Level 2: inputs to the valuation include quoted prices for similar assets in active markets that are observable either directly or indirectly
Level 3: valuation is based on significant inputs that are unobservable in the market and the Company's own estimates of assumptions that we believe market participants would use in pricing the asset
Fair value of financial assets, included in cash and cash equivalents, and financial liabilities is as follows:
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| | | | | | | | | | | | | | | | |
| | | Estimated Fair Value Measurements | | Total Fair |
| | | Level 1 | | Level 2 | | Level 3 | | Value |
| September 30, 2019 | | | | | | | | |
| Financial Assets: | | | | | | | | |
| Money market funds | | $ | 87,308 |
| | $ | — |
| | $ | — |
| | $ | 87,308 |
|
| June 30, 2019 | | |
| | | | | | |
|
| Financial Assets: | | | | | | | | |
| Money market funds | | $ | 81,945 |
| | $ | — |
| | $ | — |
| | $ | 81,945 |
|
|
| | | | | | | | | | | | | | | | |
| Non-Recurring Fair Value Measurements | | | | | | | | |
| September 30, 2019 | | | | | | | | |
| Long-lived assets held for sale | | $ | — |
| | $ | 1,300 |
| | $ | — |
| | $ | 1,300 |
|
| June 30, 2019 | | | | | | | | |
Long-lived assets held for sale (a) | | $ | — |
| | $ | 1,300 |
| | $ | — |
| | $ | 1,300 |
|
(a) In accordance with ASC Subtopic 360-10, long-lived assets held for sale with a carrying value of $4,575 were written down to their fair value of $1,300, resulting in an impairment totaling $3,275, which was included in earnings for the period ended June 30, 2017. These assets are expected to be disposed of by sale in the third quarter of fiscal 2020.
NOTE 5. LEASES
The Company adopted ASU 2016-02 and its related amendments (collectively known as “ASC 842”) on July 1, 2019 using the optional transition method in ASU 2018-11. Therefore, the reported results for the three months ended September 30, 2019 reflect the application of ASC 842 while the reported results for the three months ended September 30, 2018 were not adjusted and continue to be reported under the accounting guidance, ASC 840, Leases (“ASC 840”), in effect for the prior period.
The Company determines if an arrangement is a lease at inception. The lease term begins on the commencement date, which is the date the Company takes possession of the property and may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. The lease term is used to determine lease classification as an operating or finance lease and is used to calculate straight-line expense for operating leases. The Company elected the package of practical expedients permitted under the transition guidance within ASU 2016-02 to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs.
Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. As a practical expedient, leaseLease agreements with lease and non-lease components are accounted for as a single lease component for all asset classes, which are comprised of real estate leases and equipment leases. ROU assets and lease liabilities are recognized at the commencement date based uponon the present value of lease payments over the lease term. ROU assets also include prepaid lease payments and exclude lease incentives received. The Company estimates contingent lease incentives when it is probable that the Company is entitled to the incentive at lease commencement. Since the Company’s leases do not typically provide an implicit rate, the Company uses its incremental borrowing rate based upon the information available at commencement date for both real estate and equipment leases.date. The determination of the incremental borrowing rate requires judgment. The Company determines the incremental borrowing ratejudgment and is determined by using the Company’s current unsecured borrowing rate, adjusted for various factors such as collateralization and term to align with the terms of the lease. The Company elected the short-term lease recognition exemption for all leases that qualify. Therefore, leases with an initial term of 12 months or less are not recorded on the balance sheet; instead, lease payments are recognized as lease expense on a straight-line basis over the lease term.
The Company leases certain office space, data centers and equipment. The Company’s leases haveequipment with remaining terms of 1 to 1113 years. Certain leases contain renewal options for varying periods, which are at the Company’s sole discretion. For leases where the Company is reasonably certain to exercise a renewal option, such option periods have been included in the determination of the Company’s ROU assets and lease liabilities. Certain leases require the Company to pay taxes, insurance, maintenance, and other operating expenses associated with the leased asset. Such amounts
are not included in the measurement of the lease liability to the extent they are variable in nature. These variableVariable lease costs are recognized as a variable lease expense when incurred. Certain leases include options to purchase the leased asset at the end of the lease term, which is assessed as a part of the Company’s lease classification determination. The depreciable life of the ROU asset and leasehold improvements are limited by the expected lease term unless the Company is reasonably certain of a transfer of title or purchase option.
At September 30, 2019,2020 and June 30, 2020, the Company had operating lease assets of $70,976. Total$65,242 and $63,948 and financing lease assets of $356 and $355, respectively. At September 30, 2020, total operating lease liabilities of $74,230$69,913 were comprised of current operating lease liabilities of $12,042$13,012 and noncurrent operating lease liabilities of $62,188.$56,901, and total financing lease liabilities of $295 were comprised of current financing lease liabilities of $126 and noncurrent financing lease liabilities of $169. At June 30, 2020, total operating lease liabilities of $68,309 were comprised of current operating lease liabilities of $11,712 and noncurrent operating lease liabilities of $56,597, and total financing lease liabilities of $323 were comprised of current financing lease liabilities of $115 and noncurrent financing lease liabilities of $208.
Operating lease assets are included within other non-current assets and operating lease liabilities are included withwithin accrued expenses (current portion) and other long-term liabilities (noncurrent portion) in the Company’s condensed consolidated balance sheet. Operating lease assets were recorded net of accumulated amortization of $3,436$16,911 and $13,719 as of September 30, 2019.2020 and June 30, 2020, respectively. Financing lease assets are included within property and equipment, net and financing lease liabilities are included within notes payable (current portion) and long-term debt (noncurrent portion) in the Company’s condensed consolidated balance sheet. Financing lease assets were recorded net of accumulated amortization of $67 and $38 as of September 30, 2020 and June 30, 2020, respectively.
Operating lease costs for the three months ended September 30, 2020 and 2019 were $3,909 and $4,007, respectively. Financing lease costs for the three months ended September 30, 2020 and 2019 were $31 and $0, respectively. Total operating and financing lease costs for the respective quarters included approximately $879 of variable lease costs.
costs of approximately $1,380 and $879. Operating and financing lease expense isare included within cost of services, research and development, and selling, general & administrative expense, dependent upon the nature and use of the ROU asset, in the Company’s condensed consolidated statement of income.
Operating cash flows from operating leases for
For the three months ended September 30, 2020 and 2019, werethe Company had operating cash flows for payments on operating leases of $3,298 and $3,927, and right-of-use assets obtained in exchange for operating lease liabilities of $4,485 and $1,370, respectively. Operating cash flows for interest paid on financing leases for the three months ended September 30, 2020 and 2019 were $1,370.$2 and $0, respectively.
As of September 30, 2019,2020 and June 30, 2020, the weighted-average remaining lease term for the Company's operating leases was 8486 months and 88 months and the weighted-average discount rate was 2.96%.2.66% and 2.76%, respectively. As of September 30, 2020 and June 30, 2020 the weighted-average remaining lease term for the Company's financing leases was 30 months and 33 months, respectively. The weighted-average discount rate for the Company's financing leases was 2.42% as of September 30, 2020 and June 30, 2020.
Maturity of Lease Liabilities under ASC 842
Future minimum rental payments on leases with initial non-cancellable lease terms in excess of one year were due as follows at September 30, 2019:
|
| | | | |
| Due dates | | Future Minimum Rental Payments |
| | | |
| 2020 (remaining period) | | $ | 10,609 |
|
| 2021 | | 13,847 |
|
| 2022 | | 12,442 |
|
| 2023 | | 10,785 |
|
| 2024 | | 8,635 |
|
| Thereafter | | 26,608 |
|
| Total lease payments | | $ | 82,926 |
|
| Less: interest | | (8,696 | ) |
| Present value of lease liabilities | | $ | 74,230 |
|
Operating lease payments include $8,976 related to options to extend lease terms that are reasonably certain of being exercised. At September 30, 2019, there were no legally binding lease payments for leases signed but not yet commenced.
Maturity of Lease Liabilities under ASC 840
Future minimum rental payments on operating leases with initial non-cancellable lease terms in excess of one year were due as follows at JuneSeptember 30, 2019:2020*:
| | | | | | | | |
| Due Dates (fiscal year) | | Future Minimum Rental Payments |
| | |
| 2021 (remaining period) | | $ | 10,174 | |
| 2022 | | 13,233 | |
| 2023 | | 11,772 | |
| 2024 | | 9,640 | |
| 2025 | | 6,899 | |
| Thereafter | | 25,164 | |
| Total lease payments | | $ | 76,882 | |
| Less: interest | | (6,969) | |
| Present value of lease liabilities | | $ | 69,913 | |
*Financing leases were immaterial to the quarter, so a maturity of lease liabilities table has only been included for operating leases. |
| | | | |
| Due dates | | Future Minimum Rental Payments |
| | | |
| 2020 | | $ | 15,559 |
|
| 2021 | | 13,539 |
|
| 2022 | | 11,860 |
|
| 2023 | | 10,169 |
|
| 2024 | | 8,835 |
|
| Thereafter | | 11,671 |
|
| Total lease payments | | $ | 71,633 |
|
Rent expense for all operating leases was $15,196 during the year ended June 30, 2019.
NOTE 6.5. DEBT
Revolving credit facility
On February 10, 2020, the Company entered into a five-year senior, unsecured revolving credit facility. The revolving credit facility allows for borrowings of up to $300,000,$300,000, which may be increased by the Company at any time until maturity to $600,000.$700,000. The credit facility bears interest at a variable rate equal to (a) a rate based on LIBORa eurocurrency rate or (b) an alternate base rate (the highest of (i) 0%, (ii) the U.S. Bank prime rate ("Prime RateRate") for such day, (ii)(iii) the sum of the Federal Funds Effective Rate for such day plus 0.50% and (iii)(iv) the Eurocurrency Rateeurocurrency rate for a one-month Interest Periodinterest period on such day for dollars plus 1.0%), plus an applicable percentage in each case determined by the Company's leverage ratio. The credit facility is guaranteed by certain subsidiaries of the Company. The credit facilityCompany and is subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the credit facility agreement. As of September 30, 2019,2020, the Company was in compliance with all such covenants. The revolving credit facility terminates February 20, 2020.10, 2025. There was 0 outstanding balance under the credit facility balance at either September 30, 20192020 or at June 30, 2019.2020.
Other lines of credit
The Company has an unsecured bank credit line which provides for funding of up to $5,000$5,000 and bears interest at the prime rate less 1%. The credit line was renewed in May 2019 and expires on April 30, 2021. At September 30, 2019, 0 amount was outstanding.2021. There was also 0 balance outstanding at September 30, 2020 or June 30, 2019.2020.
Interest
The Company paid interest of $97$79 and $65$97 during the three months ended September 30, 20192020 and 2018,2019, respectively.
NOTE 7.6. INCOME TAXES
The effective tax rate was 24.6%22.4% of income before income taxes for the quarter ended September 30, 2019,2020, compared to 19.2%24.6% for the same quarter of the priorin fiscal year.2020. The increase todecrease in the Company's tax rate was primarily due to the difference in impact of stock-based compensation. A significant excess tax benefit was recognized inshare-based compensation that vested during each of the prior year quarter from stock-based compensation. The stock-based compensation resulted in an excess tax deficiency in the current quarter.periods.
The Company paid income taxes, net of refunds, of $455 and $1,090 in the three months ended September 30, 2020 and 2019, and paid income taxes of $388 and received refunds of $679 in the three months ended September 30, 2018.respectively.
At September 30, 2019,2020, the Company had $11,596$10,969 of gross unrecognized tax benefits, $10,815$10,167 of which, if recognized, would affect our effective tax rate. WeThe Company had accrued interest and penalties of $1,771$1,774 and $1,413$1,771 related to uncertain tax positions at September 30, 20192020 and 2018,2019, respectively.
The U.S. federal and state income tax returns for fiscal 20162017 and all subsequent years remain subject to examination as of September 30, 20192020 under statute of limitations rules. We anticipate potential changes due to lapsing statutes of limitations and examination closures could reduce the unrecognized tax benefits balance by $3,000 - $4,000$3,500 to $4,500 within twelve months of September 30, 2019.2020.
NOTE 8.7. STOCK-BASED COMPENSATION
Our operating income for the three months ended September 30, 2020 and 2019 included $4,625 and 2018 included $2,853 and $1,771 of stock-based compensation costs, respectively.
Stock Options
On November 10, 2015, the Company adopted the 2015 Equity Incentive Plan ("2015 EIP") for its employees and non-employee directors. The plan allows for grants of stock options, stock appreciation rights, restricted stock shares or units, and performance shares or units. The maximum number of shares authorized for issuance under the plan is 3,000. For stock options, terms and vesting periods of the options are determined by the Compensation Committee of the Board of Directors when granted. The option period must expire not more than ten years from the option grant date. The options granted under this plan are exercisable beginning three years after the grant date at an exercise price equal to 100% of the fair market value of the stock at the grant date. The options terminate upon surrender of the option, ninety days after termination of employment, upon the expiration of one year following notification of a deceased optionee, or ten years after grant.
The Company previously issued options to outside directors under the 2005 Non-Qualified Stock Option Plan (“2005 NSOP”). No additional stock options may be issued under this plan.
A summary of option plan activity under these plansthis plan is as follows:
|
| | | | | | | | | | |
| | Number of Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| Outstanding July 1, 2019 | 32 |
| | $ | 87.27 |
| | |
| Granted | — |
| | — |
| | |
| Forfeited | — |
| | — |
| | |
| Exercised | — |
| | — |
| | |
| Outstanding September 30, 2019 | 32 |
| | $ | 87.27 |
| | $ | 1,860 |
|
| Vested and Expected to Vest September 30, 2019 | 32 |
| | $ | 87.27 |
| | $ | 1,860 |
|
| Exercisable September 30, 2019 | 32 |
| | $ | 87.27 |
| | $ | 1,860 |
|
| | | | | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Exercise Price | | Aggregate
Intrinsic
Value |
| Outstanding July 1, 2020 | 22 | | | $ | 87.27 | | | |
| Granted | 0 | | | 0 | | | |
| Forfeited | 0 | | | 0 | | | |
| Exercised | 0 | | | 0 | | | |
| Outstanding September 30, 2020 | 22 | | | $ | 87.27 | | | $ | 1,633 | |
| Vested and Expected to Vest September 30, 2020 | 22 | | | $ | 87.27 | | | $ | 1,633 | |
| Exercisable September 30, 2020 | 22 | | | $ | 87.27 | | | $ | 1,633 | |
At September 30, 2019,2020, there was 0 compensation cost yet to be recognized related to outstanding options. For options currently exercisable, the weighted average remaining contractual term (remaining period of exercisability) as of September 30, 20192020 was 6.755.75 years.
Restricted Stock Unit Awards
The Company issues both share awards and unit awards under the 2015 EIP, and previously issued these awards through the 2005 Restricted Stock Plan. The following table summarizes non-vested share awards as of September 30, 2019, as well as activity for the three months then ended:
|
| | | | | | |
| Share awards | Shares | | Weighted Average Grant Date Fair Value |
| Outstanding July 1, 2019 | 6 |
| | $ | 87.27 |
|
| Granted | — |
| | — |
|
| Vested | (6 | ) | | 87.27 |
|
| Forfeited | — |
| | — |
|
| Outstanding September 30, 2019 | — |
| | $ | — |
|
At September 30, 2019, there was 0 compensation expense yet to be recognized related to non-vested restricted stock share awards.
EIP. The following table summarizes non-vested restricted stock unit awards as of September 30, 2019, as well as activity for the three months then ended:2020:
|
| | | | | | | | | | |
| Unit awards | Units | | Weighted Average Grant Date Fair Value | | Aggregate Intrinsic Value |
| Outstanding July 1, 2019 | 298 |
| | $ | 107.00 |
| | |
| Granted | 3 |
| | 130.61 |
| | |
| Vested | (31 | ) | | 75.34 |
| | |
| Forfeited | (51 | ) | | 74.59 |
| | |
| Outstanding September 30, 2019 | 219 |
| | $ | 119.42 |
| | $ | 31,910 |
|
| | | | | | | | | | | | | | | | | |
| Unit awards | Units | | Weighted
Average
Grant Date
Fair Value | | Aggregate Intrinsic Value |
| Outstanding July 1, 2020 | 307 | | | $ | 136.41 | | | |
| Granted | 63 | | | 190.03 | | | |
| Vested | (73) | | | 90.52 | | | |
| Forfeited | 0 | | | 0 | | | |
| Outstanding September 30, 2020 | 297 | | | $ | 158.95 | | | $ | 48,251 | |
The 363 unit awards granted in fiscal 20202021 had service requirements and performance targets, with 28 only having service requirements. Those 28 were valued at the weighted-average fair value of the non-vested unit awardsunits based on the fair market value of the Company’s equity shares on the grant date, less the present value of expected future dividends to be declared during the vesting period, consistent with the methodology for calculating compensation expense on such awards. The remaining 35 unit awards granted in fiscal 2021 had performance targets along with service requirements, all of which were valued using a Monte Carlo pricing model as of the measurement date customized to the specific provisions of the Company’s plan design to value the unit awards as of the grant date. Per the Company's award vesting and settlement provisions, approximately half of the awards that utilize a Monte Carlo pricing model were valued at grant on the basis of Total Shareholder Return (TSR) in comparison to the compensation peer group made up of participants approved by the Compensation Committee of the Company's Board of Directors for fiscal year 2021, and the other half of the awards utilizing a Monte Carlo pricing model were valued at grant on the basis of Total Shareholder Return in comparison to the Standard & Poor's 1500 Information Technology Index (S&P 1500 IT Index) participants. The Monte Carlo inputs used in the model to estimate fair value at the measurement date and resulting values for these performance unit awards are as follows.
| | | | | | | | | | | | | |
| Compensation Peer Group | | S&P 1500 IT Index | | |
| Volatility | 25.17 | % | | 25.17 | % | | |
| Risk free interest rate | 0.11 | % | | 0.11 | % | | |
| Annual dividend based on most recent quarterly dividend | 1.72 | | | 1.72 | | | |
| Beginning TSR | 37 | % | | 30 | % | | |
At September 30, 2019,2020, there was $10,841$26,847 of compensation expense, excluding forfeitures, that has yet to be recognized related to non-vested restricted stock unit awards, which will be recognized over a weighted average period of 1.171.60 years.
NOTE 9.8. EARNINGS PER SHARE
The following table reflects the reconciliation between basic and diluted earnings per share.
|
| | | | | | | |
| | Three Months Ended September 30, |
| | 2019 | | 2018 |
| Net Income | $ | 89,370 |
| | $ | 83,551 |
|
| Common share information: | | | |
| Weighted average shares outstanding for basic earnings per share | 76,972 |
| | 77,188 |
|
| Dilutive effect of stock options and restricted stock | 95 |
| | 349 |
|
| Weighted average shares outstanding for diluted earnings per share | 77,067 |
| | 77,537 |
|
| Basic earnings per share | $ | 1.16 |
| | $ | 1.08 |
|
| Diluted earnings per share | $ | 1.16 |
| | $ | 1.08 |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| | 2020 | | 2019 | | | | |
| Net Income | $ | 91,216 | | | $ | 89,370 | | | | | |
| Common share information: | | | | | | | |
| Weighted average shares outstanding for basic earnings per share | 76,507 | | | 76,972 | | | | | |
| Dilutive effect of stock options and restricted stock | 206 | | | 95 | | | | | |
| Weighted average shares outstanding for diluted earnings per share | 76,713 | | | 77,067 | | | | | |
| Basic earnings per share | $ | 1.19 | | | $ | 1.16 | | | | | |
| Diluted earnings per share | $ | 1.19 | | | $ | 1.16 | | | | | |
Per share information is based on the weighted average number of common shares outstanding for the three months ended September 30, 20192020 and 2018.2019. Stock options and restricted stock units have been included in the
calculation of earnings per share to the extent they are dilutive. There were 0 anti-dilutive stock options or restricted stock sharesunits excluded for the quarter ended September 30, 20192020 and 0 anti-dilutive stock options or restricted stock shares excluded for the quarter ended September 30, 2018.2019.
NOTE 10.9. BUSINESS ACQUISITIONS
Geezeo
On July 1, 2019,, the Company acquired all of the equity interest of GeezeoDebtFolio, Inc. ("Geezeo") for $37,776 paid in cash. The primary reason for the acquisition was to expand the Company's digital financial management solutions and the purchase was funded by cash generated from operations. Geezeo is a Boston-based provider of retail and business digital financial management solutions.
Management has completed a preliminary purchase price allocation and its assessment of the fair value of acquired assets and liabilities assumed. The recognized amounts of identifiable assets acquired and liabilities assumed, based on their fair values as of July 1, 2019 are set forth below:
|
| | | |
| Current assets | $ | 9,018 |
|
| Long-term assets | 397 |
|
| Identifiable intangible assets | 19,114 |
|
| Non-current deferred income tax liability | (2,593 | ) |
| Total other liabilities assumed | (7,247 | ) |
| Total identifiable net assets | 18,689 |
|
| Goodwill | 19,087 |
|
| Net assets acquired | $ | 37,776 |
|
The amounts shown above may change as management finalizes its assessment of the fair value of acquired assets and liabilities and continues to evaluate the income tax implications of this business combination. | | | | | |
| Current assets | $ | 8,925 | |
| Long-term assets | 397 | |
| Identifiable intangible assets | 19,114 | |
| Deferred income tax liability | (2,593) | |
| Total other liabilities assumed | (7,457) | |
| Total identifiable net assets | 18,386 | |
| Goodwill | 19,390 | |
| Net assets acquired | $ | 37,776 | |
The goodwill of $19,087$19,390 arising from this acquisition consists largely of the growth potential, synergies and economies of scale expected from combining the operations of the Company with those of Geezeo, together with the value of
Geezeo Geezeo's assembled workforce. The goodwill from this acquisition has been allocated to our Complementary segment and is not deductible for income tax purposes.
Identifiable intangible assets from this acquisition consist of customer relationships of $10,522, computer software of $5,791, and other intangible assets of $2,801. The amortization period for acquired customer relationships, computer software, and other intangible assets is 15 years for each.
Current assets were inclusive of cash acquired of $7,492.$7,400. The fair value of current assets acquired included accounts receivable of $1,373, NaN of which were expected to be uncollectible.
Costs incurred related to the acquisition of Geezeo in fiscal 2020 totaled $25$30 for professional services, travel, and other fees, and were expensed as incurred and reported within cost of revenue and selling, general, and administrative expense.
The Company's condensed consolidated statements of income for the first quarterthree months ended September 30, 2020 included revenue of fiscal 2020$3,213 and after-tax net income of $1,265 resulting from Geezeo's operations. The Company's condensed consolidated statements of income for the three months ended September 30, 2019 included revenue of $2,392 and after-tax net income of $38 resulting from Geezeo's operations.
The accompanying condensed consolidated statements of income for the three months ended September 30, 20192020 and 20182019 do not include any revenues and expenses related to this acquisition prior to the acquisition date. The impact of this acquisition was considered immaterial to both the current and prior periods of our condensed consolidated financial statements and pro forma financial information has not been provided.
BOLTS Technologies, Inc
On October 5, 2018, the Company acquired all of the equity interest of BOLTS Technologies, Inc. for $15,046 paid in cash. The acquisition was funded by cash generated from operations. BOLTS Technologies is the developer of boltsOPEN, a next-generation digital account opening solution.
Management has completed a purchase price allocation and its assessment of the fair value of acquired assets and liabilities assumed. The recognized amounts of identifiable assets acquired and liabilities assumed, based on their fair values as of October 5, 2018 are set forth below:
|
| | | |
| Current assets | $ | 1,384 |
|
| Identifiable intangible assets | 2,274 |
|
| Total other liabilities assumed | (1,505 | ) |
| Total identifiable net assets | 2,153 |
|
| Goodwill | 12,893 |
|
| Net assets acquired | $ | 15,046 |
|
The amounts shown above include measurement period adjustments made during fiscal 2019 related to income taxes.
The goodwill of $12,893 arising from this acquisition consists largely of the growth potential, synergies and economies of scale expected from combining the operations of the Company with those of BOLTS, together with the value of BOLTS' assembled workforce. The goodwill from this acquisition has been allocated to our Complementary segment and is not deductible for income tax purposes.
Identifiable intangible assets from this acquisition consist of customer relationships of $567, computer software of $1,409, and other intangible assets of $298. The weighted average amortization period for acquired customer relationships, computer software, and other intangible assets is 15 years, 10 years, and 10 years, respectively.
Current assets were inclusive of cash acquired of $1,365. The fair value of current assets acquired included accounts receivable of $14, NaN of which were expected to be uncollectible.
Costs incurred related to the acquisition of BOLTS in fiscal 2019 totaled $23 for legal, valuation, and other fees, and were expensed as incurred within selling, general, and administrative expense.
The Company's condensed consolidated statements of income for the first quarter of fiscal 2020 included revenue of $44 and after-tax net loss of $175 resulting from BOLTS' operations.
The accompanying condensed consolidated statements of income for the three months ended September 30, 2019 and 2018 do not include any revenues and expenses related to this acquisition prior to the acquisition date. The impact of this acquisition was considered immaterial to both the current and prior periods of our condensed consolidated financial statements and pro forma financial information has not been provided.
Agiletics, Inc.
On October 1, 2018, the Company acquired all of the equity interest of Agiletics, Inc. for $7,649 paid in cash. The acquisition was funded by cash generated from operations. Agiletics is a provider of escrow, investment, and liquidity management solutions for banks serving commercial customers.
Management has completed a purchase price allocation and its assessment of the fair value of acquired assets and liabilities assumed. The recognized amounts of identifiable assets acquired and liabilities assumed, based on their fair values as of October 1, 2018 are set forth below:
|
| | | |
| Current assets | $ | 2,170 |
|
| Identifiable intangible assets | 3,090 |
|
| Non-current deferred income tax liability | (872 | ) |
| Total other liabilities assumed | (738 | ) |
| Total identifiable net assets | 3,650 |
|
| Goodwill | 3,999 |
|
| Net assets acquired | $ | 7,649 |
|
The amounts shown above include measurement period adjustments made during fiscal 2019 related to income taxes.
The goodwill of $3,999 arising from this acquisition consists largely of the growth potential, synergies and economies of scale expected from combining the operations of the Company with those of Agiletics. The goodwill from this acquisition has been allocated to our Core segment and is not deductible for income tax purposes.
Identifiable intangible assets from this acquisition consist of customer relationships of $2,198, computer software of $701, and other intangible assets of $191. The weighted average amortization period for acquired customer relationships, computer software, and other intangible assets is 15 years, 10 years, and 10 years, respectively.
Current assets were inclusive of cash acquired of $1,349. The fair value of current assets acquired included accounts receivable of $302, NaN of which were expected to be uncollectible.
Costs incurred related to the acquisition of Agiletics in fiscal 2019 totaled $36 for legal, valuation, and other fees, and were expensed as incurred within selling, general, and administrative expense.
The Company's condensed consolidated statements of income for the first quarter of fiscal 2020 included revenue of $549 and after-tax net income of $165resulting from Agiletics' operations.
The accompanying condensed consolidated statements of income for the three months ended September 30, 2019 and 2018 do not include any revenues and expenses related to this acquisition prior to the acquisition date. The impact of this acquisition was considered immaterial to both the current and prior periods of our condensed consolidated financial statements and pro forma financial information has not been provided.
NOTE 11.10. REPORTABLE SEGMENT INFORMATION
The Company is a provider of integrated computer systems that perform data processing (available for in-houseon-premise installations or outsourced services) for banks and credit unions.
The Company’s operations are classified into 4 reportable segments: Core, Payments, Complementary, and Corporate & Other. The Core segment provides core information processing platforms to banks and credit unions, which consist of integrated applications required to process deposit, loan, and general ledger transactions, and maintain centralized customer/member information. The Payments segment provides secure payment processing tools and services, including:including ATM, debit, and credit card transaction processing services;services, online and mobile bill pay solutions; ACHsolutions, Automated Clearing House ("ACH") origination and remote deposit capture processing;processing, and risk management products and services. The Complementary segment provides additional software and services that can be integrated with our Core solutions or used independently. The Corporate & Other segment includes hardware revenue and costs, as well as operating costs not directly attributable to the other three segments.
The Company evaluates the performance of its segments and allocates resources to them based on various factors, including performance against trend, budget, and forecast. Only revenue and costs of revenue are considered in the evaluation for each segment.
An immaterial adjustment was made to reclassify revenue recognized in fiscal 2019 from the Complementary to the Core Segment to be consistent with the current year's allocation of revenue by segment. For the three months ended September 30, 2019, the amount reclassified totaled $1,603. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2020 |
| Core | | Payments | | Complementary | | Corporate & Other | | Total |
| REVENUE | | | | | | | | | |
| Services and Support | $ | 150,461 | | | $ | 16,304 | | | $ | 102,675 | | | $ | 11,557 | | | $ | 280,997 | |
| Processing | 8,569 | | | 140,429 | | | 21,805 | | | 0 | | | 170,803 | |
| Total Revenue | 159,030 | | | 156,733 | | | 124,480 | | | 11,557 | | | 451,800 | |
| | | | | | | | | |
| Cost of Revenue | 67,589 | | | 86,328 | | | 48,325 | | | 60,687 | | | 262,929 | |
| Research and Development | | | | | | | | | 26,057 | |
| Selling, General, and Administrative | | | | | | | | | 45,226 | |
| | | | | | | | | |
| | | | | | | | | |
| Total Expenses | | | | | | | | | 334,212 | |
| | | | | | | | | |
| SEGMENT INCOME | $ | 91,441 | | | $ | 70,405 | | | $ | 76,155 | | | $ | (49,130) | | | |
| | | | | | | | | |
| OPERATING INCOME | | | | | | | | | 117,588 | |
| | | | | | | | | |
| INTEREST INCOME (EXPENSE) | | | | | | | | | (49) | |
| | | | | | | | | |
| INCOME BEFORE INCOME TAXES | | | | | | | | | $ | 117,539 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, 2019 |
| | Core | | Payments | | Complementary | | Corporate & Other | | Total |
| REVENUE | | | | | | | | | |
| Services and Support | $ | 148,090 |
| | $ | 17,308 |
| | $ | 98,451 |
| | $ | 14,959 |
| | $ | 278,808 |
|
| Processing | 7,806 |
| | 132,438 |
| | 18,744 |
| | 209 |
| | 159,197 |
|
| Total Revenue | 155,896 |
| | 149,746 |
| | 117,195 |
| | 15,168 |
| | 438,005 |
|
| | | | | | | | | | |
| Cost of Revenue | 63,306 |
| | 76,624 |
| | 46,674 |
| | 59,187 |
| | 245,791 |
|
| Research and Development | | | | | | | | | 24,591 |
|
| Selling, General, and Administrative | | | | | | | | | 49,436 |
|
| Total Expenses | | | | | | | | | 319,818 |
|
| | | | | | | | | | |
| SEGMENT INCOME | $ | 92,590 |
| | $ | 73,122 |
| | $ | 70,521 |
| | $ | (44,019 | ) | | |
| | | | | | | | | | |
| OPERATING INCOME | | | | | | | | | 118,187 |
|
| | | | | | | | | | |
| INTEREST INCOME (EXPENSE) | | | | | | | | | 352 |
|
| | | | | | | | | | |
| INCOME BEFORE INCOME TAXES | | | | | | | | | $ | 118,539 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2019 |
| Core | | Payments | | Complementary | | Corporate & Other | | Total |
| REVENUE | | | | | | | | | |
| Services and Support | $ | 148,090 | | | $ | 17,308 | | | $ | 98,451 | | | $ | 14,959 | | | $ | 278,808 | |
| Processing | 7,806 | | | 132,438 | | | 18,744 | | | 209 | | | 159,197 | |
| Total Revenue | 155,896 | | | 149,746 | | | 117,195 | | | 15,168 | | | 438,005 | |
| | | | | | | | | |
| Cost of Revenue | 63,306 | | | 76,624 | | | 46,674 | | | 59,187 | | | 245,791 | |
| Research and Development | | | | | | | | | 24,591 | |
| Selling, General, and Administrative | | | | | | | | | 49,436 | |
| | | | | | | | | |
| | | | | | | | | |
| Total Expenses | | | | | | | | | 319,818 | |
| | | | | | | | | |
| SEGMENT INCOME | $ | 92,590 | | | $ | 73,122 | | | $ | 70,521 | | | $ | (44,019) | | | |
| | | | | | | | | |
| OPERATING INCOME | | | | | | | | | 118,187 | |
| | | | | | | | | |
| INTEREST INCOME (EXPENSE) | | | | | | | | | 352 | |
| | | | | | | | | |
| INCOME BEFORE INCOME TAXES | | | | | | | | | $ | 118,539 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, 2018 |
| | Core | | Payments | | Complementary | | Corporate & Other | | Total |
| REVENUE | | | | | | | | | |
| Services and Support | $ | 131,991 |
| | $ | 12,770 |
| | $ | 88,460 |
| | $ | 13,347 |
| | $ | 246,568 |
|
| Processing | 7,164 |
| | 121,427 |
| | 17,245 |
| | 139 |
| | 145,975 |
|
| Total Revenue | 139,155 |
| | 134,197 |
| | 105,705 |
| | 13,486 |
| | 392,543 |
|
| | | | | | | | | | |
| Cost of Revenue | 59,216 |
| | 65,707 |
| | 41,830 |
| | 53,359 |
| | 220,112 |
|
| Research and Development | | | | | | | | | 24,026 |
|
| Selling, General, and Administrative | | | | | | | | | 45,183 |
|
| Total Expenses | | | | | | | | | 289,321 |
|
| | | | | | | | | | |
| SEGMENT INCOME | $ | 79,939 |
| | $ | 68,490 |
| | $ | 63,875 |
| | $ | (39,873 | ) | | |
| | | | | | | | | | |
| OPERATING INCOME | | | | | | | | | 103,222 |
|
| | | | | | | | | | |
| INTEREST INCOME (EXPENSE) | | | | | | | | | 144 |
|
| | | | | | | | | | |
| INCOME BEFORE INCOME TAXES | | | | | | | | | $ | 103,366 |
|
The Company has not disclosed any additional asset information by segment, as the information is not generated for internal management reporting to the Chief Operating Decision Maker.
NOTE 12:11: SUBSEQUENT EVENTS
None.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements included in this Form 10-Q for the quarter ended September 30, 2019.2020.
OVERVIEW
Jack Henry & Associates, Inc. ("JHA"JKHY") is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Its solutions are marketed and supported through three primary brands. Jack Henry Banking® is a top provider of information and transaction processing solutions to U.S. banks ranging from community banks to multi-billion-dollar asset institutions. Symitar® is a leading provider of information and transaction processing solutions for credit unions of all sizes. ProfitStars® provides specialized products and services that enable financial institutions of every asset size and charter, and diverse corporate entities outside the financial services industry, to mitigate and control risks, optimize revenue and growth opportunities, and contain costs. JHA'sJKHY's integrated solutions are available for in-houseon-premise installation and outsourced delivery in our private cloud.
Our two primary revenue streams are "Services"services and support" and "Processing"."processing." Services and support includes: "Outsourcing"outsourcing and cloud" fees that predominantly have contract terms of five years or longer at inception; "Product"product delivery and services" revenue, which includes revenue from the sales of licenses, implementation services, deconversion fees, consulting, and hardware; and "In-house"in-house support" revenue, which is composed of maintenance fees which primarily contain annual contract terms. Processing revenue includes: "Remittance""remittance" revenue from payment processing, remote capture, and automated clearing house (ACH)ACH transactions; "Card""card" fees, including card transaction processing and monthly fees; and "Transaction"transaction and digital" revenue, which includes transaction and mobile processing fees. We continually seek opportunities to increase revenue while at the same time containing costs to expand margins.
All dollar amounts in the following discussion are in thousands, except per share amounts.
COVID-19 Impact and Response
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic and the President of the United States declared the outbreak as a national emergency. As COVID-19 has rapidly spread, federal, state and local governments have responded by imposing varying degrees of restrictions, including widespread “stay-at-home” orders, social distancing requirements, travel limitations, quarantines, and forced closures or limitations on operations of non-essential businesses. Such restrictions have resulted in significant economic disruptions and uncertainty.
The health, safety, and well-being of our employees and customers is of paramount importance to us. In March 2020, we established an internal task force composed of executive officers and other members of management to frequently assess updates to the COVID-19 situation and recommend Company actions. We offered remote working as a recommended option to employees whose job duties allow them to work off-site. This recommended remote working option is currently extended until at least January 4, 2021, and our internal task force will continue to evaluate recommending further extensions. Based on guidance from the U.S. Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency, the Company was designated as essential critical infrastructure because of our support of the financial services industry. As of October 26, 2020, the majority of our employees were continuing to work remotely. Our internal task force considers federal, state and local guidance, as well as employee-specific and facility-specific factors, when recommending Company actions. At such time that our internal task force recommends that our remote employees begin to return to our facilities, we have prepared procedures to assist with a safe, gradual and deliberate approach, including a return-to-office training, enhanced sanitation procedures and face mask requirements, which are currently being utilized by our employees who are required to be on-site to perform their required job functions.
We have suspended all non-essential business travel until at least January 4, 2021, and our internal task force will continue to evaluate the need for further extensions. We have put additional safety precautions into place for travel that is essential. We have also updated the health benefits available to our employees by waiving out-of-pocket expenses related to testing and treatment of COVID-19. Despite the move to a principally remote workforce, we honored our 2020 summer internship program through virtual methods.
Customers
We are working closely with our customers who are scheduled for on-site visits to ensure their needs are met while taking necessary safety precautions when our employees are required to be at a customer site. Delays of customer system installations due to COVID-19 have been limited, and we have developed processes to handle remote
installations when available. We expect these processes to provide flexibility and value both during and after the COVID-19 pandemic. However, we have experienced delays related to continuing customer migrations to our new card processing platform. We completed the migrations of our core customers and are on track for the revised schedule for non-core customers by March 31, 2021. We continue to work with our customers to support them during this difficult time, and, to that end, have waived certain late fees in connection with our products and services. We have also enhanced our lending service offerings to support the Paycheck Protection Program that was introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on March 27, 2020. Even though a substantial portion of our workforce has worked remotely during the outbreak and business travel has been curtailed, we have not yet experienced significant disruption to our operations. We believe our technological capabilities are well positioned to allow our employees to work remotely for the foreseeable future without materially impacting our business.
Financial impact
We have seen delays in certain product installations due to COVID-19 with the associated revenue pushed from the current period to future periods. These headwinds may continue to impact our license, hardware, installation and pass-through revenues throughout fiscal 2021. Despite the changes and restrictions caused by COVID-19, the overall financial and operational impact on our business has been limited and our liquidity, balance sheet, and business trends remain strong. We experienced positive operating cash flows during the first quarter of fiscal 2021, and we do not expect that to change in the near term. However, we are unable to accurately predict the future impact of COVID-19 due to a number of uncertainties, including further government actions; the duration, severity and recurrence of the outbreak; the speed of economic recovery; the potential impact to our customers, vendors, and employees; and how the potential impact might affect future customer services, processing and installation-related revenue, and processes and efficiencies within the Company directly or indirectly impacting financial results. We will continue to monitor COVID-19 and its possible impact on the Company and to take steps necessary to protect the health and safety of our employees and customers.
RESULTS OF OPERATIONS
In the first quarter of fiscal 2020,2021, total revenue increased 12%3%, or $45,462,$13,795, compared to the same quarter in the prior fiscal year. Excluding an increase of $7,004Adjusting total revenue in both periods for deconversion fees quarter-over-quarter, and excludingfee revenue, of $2,392 from the company acquired in fiscal 2020,which decreased $9,004 to $5,882, total revenue would have increased 9%5% for the quarter.quarter compared to the same period a year ago.
Operating expenses increased 11%5% compared to the first quarter of fiscal 2019. Direct cost of product2020, due to increased includingdirect costs and higher personnel costs partially offset by travel expense savings. The increased direct costs were primarily related to our new card payment processing platform and faster payments initiatives.platform. Higher personnel costs were primarily duerelated to thea headcount increase of 2%4% at September 30, 20192020 compared to September 30, 2018, contributing to increased salaries and benefits. Other reasons for the increase include increased hardware costs and higher amortization expense primarily related to developed software.2019.
Operating income increased 14%decreased 1% for the first quarter. Excludingquarter of fiscal 2021 compared to the first quarter of fiscal 2020. Adjusting operating income for both periods for the effect of deconversion fees of $5,219 in the current fiscal quarter and income from$13,649 in the prior fiscal 2020 acquisitions, operating income increased 9%.year first quarter, would have resulted in an increase of 7% for the first quarter of fiscal 2021 compared to the same period a year ago.
The provision for income taxes increased 47%decreased 10% compared to the prior fiscal year first quarter, primarily due to the increase in operating income as stated above, and an increaseda decreased effective tax rate caused by differencesmainly attributable to the difference in impact of share-based compensation that vested during each of the tax impacts of stock-based compensation quarter-over-quarter.periods. The effective tax rate for the first quarter of fiscal 2021 was 24.6%22.4% compared to 19.2%24.6% in the same quarter a year ago.
The above changes led to an increase in net income of 7%2% for the first quarter of fiscal 20202021 compared to the first quarter inof fiscal 2019.2020.
We move into the second quarter of fiscal 20202021 with optimism following strong performance in the first quarter.quarter, but with limited visibility of the future impact of the COVID-19 pandemic. Significant portions of our business continue to come from recurring revenues and our healthy sales pipeline is also remains encouraging. Our customers continue to face regulatory and operational challenges which our products and services address, and in these uncertain times, we believe they have an even greater need for our solutions that directly address institutional profitability, efficiency, and security. Our strong balance sheet, access to extensive lines of credit, the continued strength of our existing product linelines of revenue, and an unwavering commitment to superior customer service should position us well to address current and future opportunities.
A detailed discussion of the major components of the results of operations for the three months endingended September 30, 20192020 follows. Discussions compare the current fiscal year's three months endingended September 30, 20192020 to the prior year's three months endingended September 30, 2018.2019.
REVENUE
| | | Services and Support | Three Months Ended September 30, | | %
Change | Services and Support | | Three Months Ended September 30, | | %
Change |
| | 2019 | | 2018 | | | | | 2020 | | 2019 | | |
| Services and Support | $ | 278,808 |
| | $ | 246,568 |
| | 13 | % | Services and Support | | $ | 280,997 | | | $ | 278,808 | | | 1 | % |
| Percentage of total revenue | 64 | % | | 63 | % | | |
| Percentage of total revenue | | 62 | % | | 64 | % | | |
The Company’s operations are classified into four reportable segments: Core, Payments, Complementary, and Corporate and Other. The Core segment provides core information processing platforms to banks and credit unions, which consist of integrated applications required to process deposit, loan, and general ledger transactions, and maintain centralized customer/member information. The Payments segment provides secure payment processing tools and services, including ATM, debit, and credit card processing services; online and mobile bill pay solutions; ACH origination and remote deposit capture processing; and risk management products and services. The Complementary segment provides additional software, processing platforms, and services that can be integrated with our core solutions or used independently. The Corporate &and Other segment includes revenue and costs from hardware and other products not attributed to any of the other three segments, as well as operating costs not directly attributable to the other three segments.
Cost of revenue for the Corporate and Other segment includes operating cost not directly attributable to any of the other three segments. The increased cost of revenue in the first quarter isof fiscal 2021 of 3% compared to the equivalent quarter in the prior fiscal year was primarily related to increased salaries and benefits frompersonnel costs related to an increase in headcount over the prior fiscal year quarter and pay raises occurring within the trailing twelve month period, as well as increased direct product costs.quarter.
The following table summarizes net cash from operating activities in the statement of cash flows:
The Company generally uses existing resources and funds generated from operations to meet its capital requirements. Capital expenditures totaling $13,101$4,478 and $24,001$13,101 for the three months endingended September 30, 20192020 and September 30, 2018,2019, respectively, were made primarily for additional equipment and the improvement of existing facilities. These additions were funded from cash generated by operations. Total consolidated capital expenditures on facilities and equipment for the Company for fiscal year 20202021 are not expected to exceed $50,000$63,000 and will be funded from cash generated by operations.
The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves or borrowings on its existing line-of-credit. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At September 30, 2019,2020, there were 26,60827,393 shares in treasury stock and the Company had the remaining authority to repurchase up to 3,3832,598 additional shares. The total cost of treasury shares at September 30, 20192020 is $1,124,269.$1,247,546. During the first three months of fiscal 2020,2021, the Company repurchased 100400 treasury shares. At June 30, 2019,2020, there were 26,50826,993 shares in treasury stock and the Company had authority to repurchase up to 3,4832,998 additional shares.
The Company has an unsecured bank credit line which provides for funding of up to $5,000 and bears interest at the prime rate less 1%. The credit line was renewed in May 2019 and expires on April 30, 2021. At September 30, 2019,2020 and June 30, 2020, no amount was outstanding. There was also no balance outstanding at June 30, 2019.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, volatilities, correlations or other market factors such as liquidity, will result in losses for a certain financial instrument or group of financial instruments. We are currently exposed to credit risk on credit extended to customers and at times are exposed to interest rate risk on outstanding debt. We do not currently use any derivative financial instruments. We actively monitor these risks through a variety of controlled procedures involving senior management.
Based on the controls in place and the credit worthiness of the customer base, we believe the credit risk associated with the extension of credit to our customers will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of our management, including the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-1513a-15(e) and 15d-15.15d-15(e). Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. For this purpose, disclosure controls and procedures include controls and procedures designed to ensure that information that is required to be disclosed under the Exchange Act is accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
We are subject to various routine legal proceedings and claims arising in the ordinary course of our business. In the opinion of management, any liabilities resulting from current lawsuits are not expected, either individually or in the aggregate, to have a material adverse effect on our consolidated financial statements. In accordance with U.S. GAAP, we record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These liabilities are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case or proceeding.
The following shares of the Company were repurchased during the quarter ended September 30, 2019:2020:
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.