UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2020
| OR | |||||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
| For the transition period from ______________ to ________________ | |||||
Commission file number 0-14112
JACK HENRY & ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
| (State or Other Jurisdiction of Incorporation) | (I.R.S Employer Identification No.) | |||||||
(Address of Principle Executive Offices)
(Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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)
Yes ☐ No ☒
As of April 28, 2020, the Registrant had 76,615,436 shares of Common Stock outstanding ($0.01 par value).
TABLE OF CONTENTS
| Page Reference | ||||||||
| PART I | FINANCIAL INFORMATION | |||||||
| ITEM 1. | Condensed Consolidated Balance Sheets as of March 31, 2020 and June 30, 2019 (Unaudited) | |||||||
| Condensed Consolidated Statements of Income for the Three and Nine Months Ended March 31, 2020 and 2019 (Unaudited) | ||||||||
| Condensed Consolidated Statements of Changes in Stockholders' Equity for the Three and Nine Months Ended March 31, 2020 and 2019 (Unaudited) | ||||||||
| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2020 and 2019 (Unaudited) | ||||||||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | ||||||||
| ITEM 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||||||
| ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk | |||||||
| ITEM 4. | Controls and Procedures | |||||||
| PART II | OTHER INFORMATION | |||||||
| ITEM 1. | Legal Proceedings | |||||||
| ITEM 1A. | Risk Factors | |||||||
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||||
| ITEM 6. | Exhibits | |||||||
| Signatures | ||||||||
In this report, all references to “JHA”, the “Company”, “we”, “us”, and “our”, refer to Jack Henry & Associates, Inc., and its wholly owned subsidiaries.
FORWARD LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements may appear throughout this report, including without limitation, in Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “seek,” “anticipate,” “estimate,” “future,” “intend,” “plan,” “strategy,” “predict,” “likely,” “should,” “will,” “would,” “could,” “can,” “may,” and similar expressions. Forward-looking statements are based only on management’s current beliefs, expectations and assumptions regarding the future of the Company, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, including Part II, Item 1A, "Risk Factors" in this report, those discussed in our Annual Report on Form 10-K for the year ended June 30, 2019, in particular, those included in Item 1A, “Risk Factors” of such report, and those discussed in other documents we file with the Securities and Exchange Commission (“SEC”). Any forward-looking statement made in this report speaks only as of the date of this report, and the Company expressly disclaims any obligation to publicly update or revise any forward-looking statement, whether because of new information, future events or otherwise.
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
3
| JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES | |||||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||||
| (In Thousands, Except Share and Per Share Data) | |||||||||||
| (Unaudited) | |||||||||||
| March 31, 2020 | June 30, 2019 | ||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Receivables, net | |||||||||||
| Income tax receivable | |||||||||||
| Prepaid expenses and other | |||||||||||
| Deferred costs | |||||||||||
| Assets held for sale | |||||||||||
| Total current assets | |||||||||||
| PROPERTY AND EQUIPMENT, net | |||||||||||
| OTHER ASSETS: | |||||||||||
| Non-current deferred costs | |||||||||||
| Computer software, net of amortization | |||||||||||
| Other non-current assets | |||||||||||
| Customer relationships, net of amortization | |||||||||||
| Other intangible assets, net of amortization | |||||||||||
| Goodwill | |||||||||||
| Total other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| CURRENT LIABILITIES: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Notes payable and current maturities of long-term debt | |||||||||||
| Deferred revenues | |||||||||||
| Total current liabilities | |||||||||||
| LONG-TERM LIABILITIES: | |||||||||||
| Non-current deferred revenues | |||||||||||
| Deferred income tax liability | |||||||||||
| Debt, net of current maturities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| STOCKHOLDERS' EQUITY | |||||||||||
| Preferred stock - $1 par value; 500,000 shares authorized, none issued | |||||||||||
| Common stock - $0.01 par value; 250,000,000 shares authorized; 103,599,644 shares issued at March 31, 2020; 103,496,026 shares issued at June 30, 2019 | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Less treasury stock at cost 26,992,903 shares at March 31, 2020; 26,507,903 shares at June 30, 2019 | ( | ( | |||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See notes to condensed consolidated financial statements
4
| JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES | |||||||||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF INCOME | |||||||||||||||||||||||
| (In Thousands, Except Per Share Data) | |||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| REVENUE | $ | $ | $ | $ | |||||||||||||||||||
| EXPENSES | |||||||||||||||||||||||
| Cost of Revenue | |||||||||||||||||||||||
| Research and Development | |||||||||||||||||||||||
| Selling, General, and Administrative | |||||||||||||||||||||||
| Loss on Disposal of Assets, net | |||||||||||||||||||||||
| Total Expenses | |||||||||||||||||||||||
| OPERATING INCOME | |||||||||||||||||||||||
| INTEREST INCOME (EXPENSE) | |||||||||||||||||||||||
| Interest Income | |||||||||||||||||||||||
| Interest Expense | ( | ( | ( | ( | |||||||||||||||||||
| Total Interest Income (Expense) | ( | ||||||||||||||||||||||
| INCOME BEFORE INCOME TAXES | |||||||||||||||||||||||
| PROVISION FOR INCOME TAXES | |||||||||||||||||||||||
| NET INCOME | $ | $ | $ | $ | |||||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | |||||||||||||||||||
| Basic weighted average shares outstanding | |||||||||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted weighted average shares outstanding | |||||||||||||||||||||||
See notes to condensed consolidated financial statements
5
| JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES | |||||||||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY | |||||||||||||||||||||||
| (In Thousands, Except Share and Per Share Data) | |||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, | March 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| PREFERRED SHARES: | |||||||||||||||||||||||
| COMMON SHARES: | |||||||||||||||||||||||
| Shares, beginning of period | |||||||||||||||||||||||
| Shares issued for equity-based payment arrangements | |||||||||||||||||||||||
| Shares issued for Employee Stock Purchase Plan | |||||||||||||||||||||||
| Shares, end of period | |||||||||||||||||||||||
| COMMON STOCK - PAR VALUE $0.01 PER SHARE: | |||||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Shares issued for equity-based payment arrangements | |||||||||||||||||||||||
| Shares issued for Employee Stock Purchase Plan | |||||||||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | |||||||||||||||||||
| ADDITIONAL PAID-IN CAPITAL: | |||||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Shares issued for equity-based payment arrangements | ( | ||||||||||||||||||||||
| Tax withholding related to share based compensation | ( | ( | ( | ( | |||||||||||||||||||
| Shares issued for Employee Stock Purchase Plan | |||||||||||||||||||||||
| Stock-based compensation expense | |||||||||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | |||||||||||||||||||
| RETAINED EARNINGS: | |||||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Dividends | ( | ( | ( | ( | |||||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | |||||||||||||||||||
| TREASURY STOCK: | |||||||||||||||||||||||
| Balance, beginning of period | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Purchase of treasury shares | ( | ( | ( | ||||||||||||||||||||
| Balance, end of period | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| TOTAL STOCKHOLDERS' EQUITY | $ | $ | $ | $ | |||||||||||||||||||
| Dividends declared per share | $ | $ | $ | $ | |||||||||||||||||||
See notes to condensed consolidated financial statements.
6
| JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES | |||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
| (In Thousands) | |||||||||||
| (Unaudited) | |||||||||||
| Nine Months Ended | |||||||||||
| March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net Income | $ | $ | |||||||||
| Adjustments to reconcile net income from operations to net cash from operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
| Change in deferred income taxes | |||||||||||
| Expense for stock-based compensation | |||||||||||
| (Gain)/loss on disposal of assets | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Change in receivables | |||||||||||
| Change in prepaid expenses, deferred costs and other | ( | ( | |||||||||
| Change in accounts payable | ( | ( | |||||||||
| Change in accrued expenses | ( | ||||||||||
| Change in income taxes | |||||||||||
| Change in deferred revenues | ( | ( | |||||||||
| Net cash from operating activities | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Payment for acquisitions, net of cash acquired | ( | ( | |||||||||
| Capital expenditures | ( | ( | |||||||||
| Proceeds from the sale of assets | |||||||||||
| Customer contracts acquired | ( | ||||||||||
| Purchased software | ( | ( | |||||||||
| Computer software developed | ( | ( | |||||||||
| Purchase of investments | ( | ||||||||||
| Net cash from investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Borrowings on credit facilities | |||||||||||
| Repayments on credit facilities and financing leases | ( | ||||||||||
| Purchase of treasury stock | ( | ( | |||||||||
| Dividends paid | ( | ( | |||||||||
| Proceeds from issuance of common stock upon exercise of stock options | |||||||||||
| Tax withholding payments related to share based compensation | ( | ( | |||||||||
| Proceeds from sale of common stock | |||||||||||
| Net cash from financing activities | ( | ( | |||||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | $ | $ | |||||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | $ | $ | |||||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | $ | |||||||||
See notes to condensed consolidated financial statements
7
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
Description of the Company
Jack Henry & Associates, Inc. and subsidiaries (“JHA” or the “Company”) is a provider of integrated computer systems and services. 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 JHA systems, and by providing other related services. JHA also provides continuing support and services to customers using on-premise or outsourced systems.
Consolidation
Comprehensive Income
Comprehensive income for the three and nine months ended March 31, 2020 and 2019 equals the Company’s net income.
Property and Equipment
Intangible Assets
Loss on Disposal of Assets, net
Loss on disposal of assets, net, in the condensed consolidated statements of income consisted of the following:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| March 31, 2020 | March 31, 2019 | March 31, 2020 | March 31, 2019 | ||||||||||||||||||||
| Gains on sale of facilities, net | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Loss on abandonment of developed software | |||||||||||||||||||||||
| (Gains) losses on disposal of other assets, net | ( | ||||||||||||||||||||||
| Loss on disposal of assets, net | $ | $ | $ | $ | |||||||||||||||||||
As detailed in the above table, during the three and nine months ended March 31, 2020, the Company recorded gains on sales of facilities, net, primarily related to the sale of the Houston, TX facility, as well as a loss on abandonment of developed software representing the write-off of the Company's investment in the Enterprise Risk Mitigation Solution ("ERMS"). The remainder of the loss on disposal of assets, net, for the three and nine months ended March 31, 2020 and 2019 was related to gains/losses on disposal of other assets, net.
Purchase of Investments
The Company had an investment in the preferred stock of Automated Bookkeeping, Inc ("Autobooks") of $6,000 at March 31, 2020 and $5,000 at June 30, 2019, which represented a non-controlling share of the voting equity as of 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. 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
8
are identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment.
Common Stock
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 expenses 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. 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, 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 March 31, 2020, the results of its operations for the three and nine months ended March 31, 2020 and 2019, changes in stockholders' equity for the three and nine months ended March 31, 2020 and 2019, and its cash flows for the nine months ended March 31, 2020 and 2019. The condensed consolidated balance sheet at June 30, 2019 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 and nine months ended March 31, 2020 are not necessarily indicative of the results to be expected for the entire year.
Use of Estimates
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 March 31, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, the Company’s allowance for doubtful accounts and 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 March 31, 2020, the Company’s future assessment of the magnitude and duration of COVID-19, as well as other
9
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Guidance
In August of 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 required ASU effective date for the Company is July 1, 2020, with early adoption permitted. The Company early-adopted ASU No. 2018-15 for its fiscal 2020 third quarter. The Company chose prospective adoption and there was no material impact on its consolidated financial statements for the quarter or year-to-date period.
The FASB issued 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 the 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 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 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 period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company will adopt ASU No. 2019-12 when required, or sooner as allowed, and is assessing the timing of adoption and evaluating the impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, 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. ASU No. 2017-04 will be effective prospectively for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company plans to adopt ASU No. 2017-04 when required 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,
10
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, 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 March 31, | Nine Months Ended March 31, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Outsourcing & Cloud | $ | $ | $ | $ | |||||||||||||||||||
| Product Delivery & Services | |||||||||||||||||||||||
| In-House Support | |||||||||||||||||||||||
| Services & Support | |||||||||||||||||||||||
| Processing | |||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | |||||||||||||||||||
Contract Balances
The following table provides information about contract assets and contract liabilities from contracts with customers.
| March 31, 2020 | June 30, 2019 | ||||||||||
| Receivables, net | $ | $ | |||||||||
| Contract Assets- Current | |||||||||||
| Contract Assets- Non-current | |||||||||||
| Contract Liabilities (Deferred Revenue)- Current | |||||||||||
| Contract Liabilities (Deferred Revenue)- Non-current | |||||||||||
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 liabilities (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.
During the three months ended March 31, 2020 and 2019, the Company recognized revenue of $87,768 and $85,076 , respectively, that was included in the corresponding deferred revenue balance at the beginning of the periods. For the nine months ended March 31, 2020 and 2019, the Company recognized revenue of $216,684 and
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$218,913 , 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 March 31, 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 $3,951,522 . The Company expects to recognize approximately 26 % over the next 12 months, 20 % 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 $259,399 and $231,273 , at March 31, 2020 and June 30, 2019, respectively.
For the three months ended March 31, 2020 and 2019, amortization of deferred contract costs was $28,849 and $27,527 , respectively. During the nine months ended March 31, 2020 and 2019, amortization of deferred contract costs totaled $88,063 and $79,784 , 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:
| Estimated Fair Value Measurements | Total Fair | |||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Value | |||||||||||||||||||||||
| March 31, 2020 | ||||||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||||
Money market funds | $ | $ | $ | $ | ||||||||||||||||||||||
Financial Liabilities: | ||||||||||||||||||||||||||
Revolving credit facility | $ | $ | $ | $ | ||||||||||||||||||||||
| June 30, 2019 | ||||||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||||
Money market funds | $ | $ | $ | $ | ||||||||||||||||||||||
| Non-Recurring Fair Value Measurements | ||||||||||||||||||||||||||
| June 30, 2019 | ||||||||||||||||||||||||||
Long-lived assets held for sale (a) | $ | $ | $ | $ | ||||||||||||||||||||||
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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 and nine months ended March 31, 2020 reflect the application of ASC 842 while the reported results for the three and nine months ended March 31, 2019 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, lease 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 commencement date based upon 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. The determination of the incremental borrowing rate requires judgment. The Company determines the incremental borrowing rate 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 have remaining terms of 1 to 11 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 variable 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 March 31, 2020, the Company had operating lease assets of $64,546 and financing lease assets of $253 . Total operating lease liabilities of $67,774 were comprised of current operating lease liabilities of $11,718 and noncurrent operating lease liabilities of $56,056 . Total financing lease liabilities of $247 were comprised of current financing lease liabilities of $81 and noncurrent financing lease liabilities of $166 .
Operating lease assets are included within other non-current assets and operating lease liabilities are included with 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 $10,259 as of March 31, 2020. Financing lease assets are included within property and equipment, net and financing lease liabilities are included with notes payable (current portion) and long-term debt (noncurrent portion) in the Company’s
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condensed consolidated balance sheet. Financing lease assets were recorded net of accumulated amortization of $9 as of March 31, 2020.
Operating lease costs for the three and nine months ended March 31, 2020 were $3,999 and $12,030 , respectively. Financing lease costs for the three and nine months ended March 31, 2020 were both $10 . Total operating and financing lease costs for the quarter and year-to-date period included variable lease costs of approximately $934 and $2,593 , respectively.
Operating and financing lease expense is 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 for payments on operating leases for the nine months ended March 31, 2020 were $11,676 and right-of-use assets obtained in exchange for operating lease liabilities were $2,138 . Operating cash flows for interest paid on financing leases for the nine months ended March 31, 2020 were $1 .
As of March 31, 2020, the weighted-average remaining lease term for the Company's operating leases was 81 months and the weighted-average discount rate was 2.96 %. As of March 31, 2020, the weighted-average remaining lease term for the Company's financing leases was 36 months and the weighted-average discount rate was 2.73 %.
Maturity of Lease Liabilities under ASC 842
Future minimum rental payments on operating leases with initial non-cancellable lease terms in excess of one year were due as follows at March 31, 2020*:
| Due dates | Future Minimum Rental Payments | |||||||
| 2020 (remaining period) | $ | |||||||
| 2021 | ||||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| Thereafter | ||||||||
| Total lease payments | $ | |||||||
| Less: interest | ( | |||||||
| Present value of lease liabilities | $ | |||||||
*Financing leases were immaterial to the quarter and year-to-date period, so a maturity of lease liabilities table has only been included for operating leases.
Lease payments include $5,002 related to options to extend lease terms that are reasonably certain of being exercised. At March 31, 2020, there were no legally binding lease payments for leases signed but not yet commenced.
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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 June 30, 2019:
| Due dates | Future Minimum Rental Payments | |||||||
| 2020 | $ | |||||||
| 2021 | ||||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| Thereafter | ||||||||
| Total lease payments | $ | |||||||
Rent expense for all operating leases was $15,196 during the year ended June 30, 2019.
NOTE 6. DEBT
Revolving credit facility
On February 10, 2020, the Company entered into a new five-year senior, unsecured revolving credit facility. The new credit facility allows for borrowings of up to $300,000 , which may be increased by the Company at any time until maturity to $700,000 . The new credit facility bears interest at a variable rate equal to (a) a rate based on a eurocurrency rate or (b) an alternate base rate (the highest of (i) 0%, (ii) the U.S. Bank prime rate ("Prime Rate") for such day, (iii) the sum of the Federal Funds Effective Rate for such day plus 0.50 % and (iv) the eurocurrency rate for a one-month interest period on such day for dollars plus 1.0 %), plus an applicable percentage in each case determined by the Company's leverage ratio. The new credit facility is guaranteed by certain subsidiaries of the Company 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 March 31, 2020, the Company was in compliance with all such covenants. The new revolving credit facility terminates February 10, 2025 . There was $55,000 outstanding under the new credit facility at March 31, 2020.
The Company also terminated its prior unsecured credit agreement on February 10, 2020. There was no outstanding balance under the terminated credit facility at June 30, 2019.
Other lines of credit
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 March 31, 2020, There was no balance outstanding at March 31, 2020 or June 30, 2019.
Interest
The Company paid interest of $275 and $283 during the nine months ended March 31, 2020 and 2019, respectively.
NOTE 7. INCOME TAXES
The effective tax rate was 19.7 % of income before income taxes for the quarter ended March 31, 2020, compared to 22.4 % for the same quarter of the prior fiscal year. For the nine months ended March 31, 2020, the effective tax rate was 22.7 % compared to 21.3 % for the nine months ended March 31, 2019. The decrease in the Company's tax rate quarter over quarter was primarily the result of the difference in uncertain tax positions released, with the lapsing of statute of limitations, between the two periods. The increase in effective tax rate fiscal year to date over the prior year to date was primarily due to the difference in the impact of stock-based compensation partially offset by the difference in uncertain tax positions released. The tax benefits recognized from stock-based compensation in the prior year significantly exceeded the tax benefits recognized in the current year.
The Company paid income taxes, net of refunds, of $49,970 in the nine months ended March 31, 2020 and paid income taxes, net of refunds, of $47,644 in the nine months ended March 31, 2019.
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At March 31, 2020, the Company had $9,825 of gross unrecognized tax benefits, $9,169 of which, if recognized, would affect our effective tax rate. We had accrued interest and penalties of $1,498 and $1,485 related to uncertain tax positions at March 31, 2020 and 2019, respectively.
The U.S. federal and state income tax returns for fiscal 2016 and all subsequent years remain subject to examination as of March 31, 2020 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 to $4,000 within twelve months of March 31, 2020.
NOTE 8. STOCK-BASED COMPENSATION
Our operating income for the three months ended March 31, 2020 and 2019 included $4,691 and $3,505 of stock-based compensation costs, respectively. For the nine months ended March 31, 2020 and 2019, stock-based compensation costs included in operating income totaled $11,688 and $8,651 , 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 plans is as follows:
| Number of Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value | |||||||||||||||
| Outstanding July 1, 2019 | $ | ||||||||||||||||
| Granted | |||||||||||||||||
| Forfeited | |||||||||||||||||
| Exercised | ( | ||||||||||||||||
| Outstanding March 31, 2020 | $ | $ | |||||||||||||||
| Vested and Expected to Vest March 31, 2020 | $ | $ | |||||||||||||||
| Exercisable March 31, 2020 | $ | $ | |||||||||||||||
At March 31, 2020, there was no 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 March 31, 2020 was 6.25 years.
Restricted Stock 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 March 31, 2020, as well as activity for the nine months then ended:
| Share awards | Shares | Weighted Average Grant Date Fair Value | |||||||||
| Outstanding July 1, 2019 | $ | ||||||||||
| Granted | |||||||||||
| Vested | |||||||||||