JACK HENRY & ASSOCIATES, INC. The following section provides management's view of the Company's financial condition and results of operations and should be read in conjunction with the Selected Financial Data, the audited consolidated financial statements, and related notes included elsewhere in this report. All dollar and share amounts, except per share amounts, are in thousands and discussions compare fiscal 2020 to fiscal 2019. Discussions of fiscal 2018 items and comparisons between fiscal 2018 and fiscal 2019 that are not included in this Form 10-K can be found in Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2019 . OVERVIEWJack Henry & Associates, Inc. is headquartered inMonett, Missouri , employs approximately 6,800 associates nationwide, and is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Its solutions serve nearly 8,700 customers and are marketed and supported through three primary brands. Jack Henry Banking® is a top provider of information and transaction processing solutions toU.S. banks ranging from community banks to multi-billion-dollar asset institutions with assets up to$50 billion . Symitar® is a leading provider of information and transaction processing solutions for credit unions of all sizes. ProfitStars® provides highly 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's integrated solutions are available for in-house installation and outsourced delivery in our private cloud. Each of our brands share the fundamental commitment to provide high-quality business solutions, service levels that consistently exceed customer expectations, integration of solutions and practical new technologies. The quality 22 -------------------------------------------------------------------------------- Table of Contents of our solutions, our high service standards, and the fundamental way we do business typically foster long-term customer relationships, attract prospective customers, and have enabled us to capture substantial market share. Through internal product development, disciplined acquisitions, and alliances with companies offering niche solutions that complement our proprietary solutions, we regularly introduce new products and services and generate new cross-sales opportunities across our three primary marketed brands. We provide compatible computer hardware for our in-house installations and secure processing environments for our outsourced solutions in our private cloud. We perform data conversions, software implementations, initial and ongoing customer training, and ongoing customer support services. We believe our primary competitive advantage is customer service. Our support infrastructure and strict standards provide service levels we believe to be the highest in the markets we serve and generate high levels of customer satisfaction and retention. We consistently measure customer satisfaction using comprehensive annual surveys and randomly generated daily surveys we receive in our everyday business. Dedicated surveys are also used to grade specific aspects of our customer experience, including product implementation, education, and consulting services. Our two primary revenue streams are "services and support" and "processing." Services and support includes: "outsourcing and cloud" fees that predominantly have contract terms of five years or longer at inception; "product delivery and services" revenue, which includes revenue from the sales of licenses, implementation services, deconversion fees, consulting, and hardware; and "in-house support" revenue, composed of maintenance fees which primarily contain annual contract terms. Processing revenue includes: "remittance" revenue from payment processing, remote capture, and ACH transactions; "card" fees, including card transaction processing and monthly fees; and "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. We have four reportable segments: Core, Payments, Complementary, and Corporate and Other. The respective segments include all related revenues along with the related cost of sales. COVID-19 Impact and Response InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic and the President ofthe 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. InMarch 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 leastJanuary 4, 2021 , and our internal task force will continue to evaluate recommending further extensions. Based on guidance from theU.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 ofAugust 13, 2020 , the majority of our employees were working 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 employeeswho are required to be on site to perform their required job functions. We have suspended all non-essential business travel until at leastJanuary 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 customerswho 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 23 -------------------------------------------------------------------------------- Table of Contents COVID-19 pandemic. However, we have experienced delays related to continuing customer migrations to our new card processing platform. We are on track to meet the revised schedule to complete migrations of our core customers bySeptember 30, 2020 , and non-core customers byMarch 31, 2021 , to the new platform. 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 CARES Act, which was signed into law onMarch 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 saw a decrease of card processing transaction volumes late in the third quarter of fiscal 2020 and into the early portion of the fourth quarter due to COVID-19, which slowed the rate of growth of our processing revenue for those periods versus a year ago. In addition, installations have been delayed and the associated revenue pushed from the current period to future periods. These headwinds may also impact our processing and installation revenues moving into fiscal 2021. Although transaction levels have since returned to more normal levels, the recurrence of lower-than-normal card processing transaction rates is uncertain and will depend upon when requirements for business closures and other restrictions are normalized and how quickly economic recovery occurs. 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 fourth quarter, 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 and the potential impact to our customers, vendors, and employees, as well as how the potential impact might affect future customer services, processing 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. For a further discussion of the uncertainties and risks associated with COVID-19, see Part II, Item 1A "Risk Factors" in this Annual Report on Form 10-K. A detailed discussion of the major components of the results of operations follows. RESULTS OF OPERATIONS FISCAL 2020 COMPARED TO FISCAL 2019 In fiscal 2020, revenues increased 9% or$144,376 compared to fiscal 2019. Deconversion fees increased$23,684 to$53,914 , compared to the prior fiscal year. Revenue from fiscal 2020 acquisitions totaled$8,969 . Excluding these factors, adjusted revenue increased 7%, with growth in each of our revenue streams as discussed in detail below. Operating expenses increased 9% year over year, primarily due to costs related to our new card payment processing platform, increased salaries and benefits in fiscal 2020, partly due to increased headcount compared to fiscal 2019, increases in related revenue, and increased depreciation and amortization expense. We move into fiscal 2021 following strong performance in fiscal 2020. Significant portions of our business continue to provide recurring revenue and our sales pipeline is also encouraging. Our customers continue to face regulatory and operational challenges which our products and services address, and in these times, they have an even greater need for our solutions that directly address institutional profitability, efficiency, and security. We believe our strong balance sheet, access to extensive lines of credit, the strength of our existing product line and an unwavering commitment to superior customer service position us well to address current and future opportunities. A detailed discussion of the major components of the results of operations for the fiscal year endedJune 30, 2020 follows. REVENUE Services and Support Revenue Year Ended June 30, % Change 2020 2019 Services and Support$ 1,051,451 $ 958,489 10 % Percentage of total revenue 62 % 62 % 24
-------------------------------------------------------------------------------- Table of Contents Services and support includes: "outsourcing and cloud" fees that predominantly have contract terms of five years or greater at inception; "product delivery and services" revenue, which includes revenue from the sales of licenses, implementation services, deconversion fees, consulting, and hardware; and "in-house support" revenue, which is composed of maintenance fees which primarily contain annual contract terms. In the fiscal year endedJune 30, 2020 , services and support revenue grew 10% over the prior fiscal year. Excluding deconversion fees from each period, which totaled$53,914 in fiscal 2020 and$30,230 in fiscal 2019 and excluding revenue from the fiscal 2020 acquisition totaling$8,969 , adjusted services and support revenue grew 6%. The adjusted increase was primarily driven by an increase in outsourcing and cloud revenue resulting from organic growth in data processing and hosting fee revenue, as well as higher implementation fee revenue primarily related to our private cloud offerings. Higher software usage revenue within in-house support also contributed to the increase, resulting partially from the addition of new customers. These increases were partially offset by decreased maintenance fees within in-house support revenue and on-premise implementation fees within product delivery and services revenue due to more customers opting for outsourced delivery. Processing Revenue % Year Ended June 30, Change 2020 2019 Processing$ 645,616 $ 594,202 9 % Percentage of total revenue 38 % 38 % Processing revenue includes: "remittance" revenue from payment processing, remote capture, and ACH transactions; "card" fees, including card transaction processing and monthly fees; and "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. Processing revenue increased 9% for the fiscal year endedJune 30, 2020 compared to the fiscal year endedJune 30, 2019 , with strong organic growth in each component. OPERATING EXPENSES Cost of Revenue % Year Ended June 30, Change 2020 2019 Cost of Revenue$ 1,008,464 $ 923,030 9 % Percentage of total revenue 59 % 59 % Cost of revenue for fiscal 2020 increased 9% compared to fiscal 2019. Excluding costs related to deconversion fees from each period, which totaled$4,055 in fiscal 2020 and$2,192 in fiscal 2019, and excluding costs related to the fiscal 2020 acquisition totaling$4,054 , adjusted cost of revenue also increased 9%. The adjusted increase was driven by higher direct costs of product, including spending related to the ongoing project to expand our credit and debit card platform, and increases in related revenue; higher salary and benefit expenses, in part due to a 5% increase in headcount atJune 30, 2020 compared to a year ago that reflects organic growth within our product lines; and increased depreciation and amortization expense mainly related to capitalized software. Partially offsetting adjusted cost of revenue increases were the savings realized from non-essential travel restrictions imposed at the Company due to the COVID-19 pandemic (see "COVID-19 Impact and Response" on page 23). Cost of revenue remained consistent as a percentage of total revenue for fiscal 2020 and fiscal 2019. The Company continues to focus on management of costs which contributes to the consistency of this percentage. Research and Development % Year Ended June 30, Change 2020 2019
Research and Development
6 % 6 %
We devote significant effort and expense to develop new software, service
products and continually upgrade and enhance our existing offerings. We believe
our research and development efforts are highly efficient because of the
extensive experience of our research and development staff and because our
product development is highly customer driven.
Research and development expenses for fiscal 2020 increased 14% compared to
fiscal 2019. Excluding costs related to the fiscal 2020 acquisition totaling
$1,980 , adjusted research and development expense increased 12%.
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The adjusted increase was primarily due to increased salary and benefit
expenses, in part due to a 4% increase in headcount at June 30, 2020 compared to
a year ago that reflects organic growth within our product lines, as well as an
increase in licenses and fees. A portion of the adjusted research and
development expense is a result of our investment in digital platforms. Research
and development expense remained consistent as a percentage of total revenue for
fiscal 2020 and fiscal 2019. The Company continues to focus on management of
costs which contributes to the consistency of this percentage.
Selling, General, and Administrative %
Year Ended June 30 , Change
2020 2019
Selling, General, and Administrative
12 % 12 %
Selling, general and administrative costs included all expenses related to sales
efforts, commissions, finance, legal, and human resources, plus all
administrative costs. Excluding costs related to deconversion fees from fiscal
2020 (there were no deconversion fees related to selling, general, and
administrative for fiscal 2019), which totaled $973 , the fiscal 2020 acquisition
of $2,063 , and the fiscal 2020 loss on disposal of certain assets, net, of
$4,789 , adjusted selling, general, and administrative expense increased 2%
compared to fiscal 2019. The adjusted increase was primarily due to increased
salaries and benefit expenses, in part due to a 5% increase in headcount at
June 30, 2020 compared to a year ago. Partially offsetting adjusted selling,
general, and administrative expense increases were the savings realized from
non-essential travel restrictions imposed at the Company due to the COVID-19
pandemic (see "COVID-19 Impact and Response" on page 23). Selling, general, and
administrative expense remained consistent as a percentage of total revenue for
fiscal 2020 and fiscal 2019. The Company continues to focus on management of
costs which contributes to the consistency of this percentage.
INTEREST INCOME AND EXPENSE %
Year Ended June 30, Change
2020 2019
Interest Income $ 1,137 $ 876 30 %
Interest Expense $ (688) $ (926) (26) %
Interest income fluctuated due to changes in invested balances and yields on
invested balances. Interest expense decreased in fiscal 2020 due mainly to lower
interest rates during the year and the timing of invested balances.
PROVISION/ (BENEFIT) FOR INCOME TAXES %
Year Ended June 30, Change
2020 2019
Provision/ (Benefit) for Income Taxes $ 84,408 $ 75,350 12 %
Effective Rate 22.1 % 21.7 %
The increase to the Company's effective tax rate in fiscal 2020 compared to
fiscal 2019 was primarily due to the difference in the tax benefits recognized
from stock-based compensation between the two periods.
NET INCOME
Net income increased 9% to $296,668 , or $3.86 per diluted share, in fiscal 2020
from $271,885 , or $3.52 per diluted share, in fiscal 2019 primarily due to
increased deconversion fee revenue, organic growth in our lines of revenue, year
over year, and inorganic contributions from our fiscal 2020 acquisition.
REPORTABLE SEGMENT DISCUSSION
The Company is a leading provider of technology solutions and payment processing
services primarily for financial services organizations.
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
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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.
During fiscal 2020, immaterial adjustments were made to reclassify revenue
recognized in fiscal 2019 from the Complementary to the Core segment and from
the Complementary to the Payments segment to be consistent with the current
year's allocation of revenue by segment. For the fiscal year ended June 30,
2019 , the amount reclassified totaled $2,614 .
Core
2020 % Change 2019
Revenue $ 582,166 9 % $ 536,032
Cost of Revenue $ 252,878 4 % $ 243,989
In fiscal 2020, revenue in the Core segment increased 9% compared to fiscal
2019. Excluding deconversion fees from both years, which totaled $25,927 in
fiscal 2020 and $14,907 in fiscal 2019, adjusted revenue in the Core segment
increased 7%. The adjusted increase was primarily due to increased outsourcing
and cloud revenue. Cost of revenue in the Core segment increased 4% for fiscal
2020 compared to fiscal 2019 primarily due to increased salaries and benefits
partially due to increased headcount at June 30, 2020 compared to a year ago.
Cost of revenue decreased 2% as a percentage of revenue for fiscal 2020 compared
to fiscal 2019.
Payments
2020 % Change 2019
Revenue $ 597,693 9 % $ 549,330
Cost of Revenue $ 319,739 17 % $ 273,261
In fiscal 2020, revenue in the Payments segment increased 9% compared to fiscal
2019. Excluding deconversion fees from both years of $15,411 in fiscal 2020 and
$8,603 in fiscal 2019, adjusted revenue in the Payments segment increased 8%.
The adjusted increase was primarily due to organic growth within the card
processing and remittance revenue lines. Cost of revenue in the Payments segment
increased 17% for fiscal 2020 compared to fiscal 2019 primarily due to increased
spending related to the ongoing project to expand our credit and debit card
platform. Cost of revenue increased 4% as a percentage of revenue for fiscal
2020 compared to fiscal 2019.
Complementary
2020 % Change 2019
Revenue $ 463,349 11 % $ 415,601
Cost of Revenue $ 191,577 9 % $ 175,737
Revenue in the Complementary segment increased 11% for fiscal 2020 compared to
fiscal 2019. Excluding deconversion fees from both years, which totaled $12,145
in fiscal 2020 and $6,672 in fiscal 2019, and excluding revenue of $8,969 from
fiscal 2020 acquisitions, adjusted revenue in the Complementary segment
increased 8%. The adjusted increase was driven by increases in outsourcing and
cloud and in-house support revenue within our services and support revenue line,
as well as transaction and digital processing revenue within our processing
revenue line. Cost of revenue in the Complementary segment increased 9% for
fiscal 2020 compared to fiscal 2019, primarily due to increased amortization
expense mainly related to capitalized software and higher direct costs largely
related to the growth in outsourcing and cloud. Cost of revenue decreased 1% as
a percentage of revenue for fiscal 2020 compared to fiscal 2019.
Corporate and Other
2020 % Change 2019
Revenue $ 53,859 4 % $ 51,728
Cost of Revenue $ 244,270 6 % $ 230,043
The increase in revenue in the Corporate and Other segment for fiscal 2020
compared to fiscal 2019 was mainly due to increased hardware revenue within our
services and support revenue line.
Cost of revenue for the Corporate and Other segment includes operating costs not
directly attributable to any of the other three segments. The increased cost of
revenue in fiscal 2020 compared to fiscal 2019 was primarily related to
increased salaries and benefits, partially due to increased headcount at
June 30, 2020 compared to a year ago, and increased depreciation expense.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased to $213,345 at June 30, 2020
from $93,628 at June 30, 2019 . Cash at the end of fiscal 2020 was higher
primarily due to an increase in net cash from operating activities, partially
offset by an increase in the purchase of treasury stock and an increase in
dividends paid.
The following table summarizes net cash from operating activities in the
statement of cash flows:
Year Ended
June 30,
2020 2019
Net income $ 296,668 $ 271,885
Non-cash expenses 218,004 180,987
Change in receivables 10,540 (11,777)
Change in deferred revenue (4,871) 23,656
Change in other assets and liabilities (9,809) (33,623)
Net cash provided by operating activities
Cash provided by operating activities for fiscal 2020 increased 18% compared to fiscal 2019. Cash from operations is primarily used to repay debt, pay dividends and repurchase stock, and for capital expenditures. Cash used in investing activities for fiscal 2020 totaled$197,906 and included:$117,262 for the ongoing enhancements and development of existing and new product and service offerings; capital expenditures on facilities and equipment of$53,538 , mainly for the purchase of computer equipment;$30,376 , net of cash acquired, for the purchase of Geezeo;$6,710 for the purchase and development of internal use software; and$1,150 for purchase of investments. This was partially offset by$11,130 of proceeds from asset sales. Cash used in investing activities for fiscal 2019 totaled$190,635 and included:$111,114 for the ongoing enhancements and development of existing and new product and service offerings; capital expenditures on facilities and equipment of$53,598 , mainly for the purchase of computer equipment;$19,981 , net of cash acquired, for the purchases of BOLTS and Agiletics;$6,049 for the purchase and development of internal use software; and$20 for customer contracts. These expenditures were partially offset by$127 of proceeds from the sale of assets. Financing activities used cash of$192,909 for fiscal 2020. Cash used was$127,421 for dividends paid to stockholders;$71,549 for the purchase of treasury shares; and$6,094 of net cash inflow from the issuance of stock and tax related to stock-based compensation. Borrowings and repayments on our revolving credit facility netted to a repayment of$33 . Financing activities used cash in fiscal 2019 of$178,305 . Cash used was$118,745 for dividends paid to stockholders;$54,864 for the purchase of treasury shares; and$4,696 of net cash outflow from the issuance of stock and tax related to stock-based compensation. Borrowings and repayments on our revolving credit facility netted to zero. Capital Requirements and Resources The Company generally uses existing resources and funds generated from operations to meet its capital requirements. Capital expenditures totaling$53,538 and$53,598 for fiscal years endedJune 30, 2020 andJune 30, 2019 , respectively, were made primarily for additional equipment and the improvement of existing facilities. These additions were funded from cash generated by operations. AtJune 30, 2020 , the Company had no outstanding purchase commitments related to property and equipment. The COVID-19 pandemic has created significant uncertainty as to general global economic and market conditions for the beginning of our fiscal 2021 and beyond. We believe we have adequate capital resources and sufficient access to external financing sources to satisfy our current and reasonably anticipated requirements for funds to conduct our operations and meet other needs in the ordinary course of our business. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. 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 short-term borrowings on its existing credit facilities. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. AtJune 30, 2020 , there were 26,993 shares in treasury stock and the Company had the remaining authority to repurchase up to 2,998 additional shares. The total cost of treasury shares atJune 30, 2020 is$1,181,673 . During fiscal 2020, the Company repurchased 485 treasury shares for 28 -------------------------------------------------------------------------------- Table of Contents$71,549 . AtJune 30, 2019 , there were 26,508 shares in treasury stock and the Company had authority to repurchase up to 3,483 additional shares. Revolving credit facility OnFebruary 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) theU.S. Bank 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 ofJune 30, 2020 , the Company was in compliance with all such covenants. The new revolving credit facility terminatesFebruary 10, 2025 . There was no outstanding balance under the new credit facility atJune 30, 2020 . The Company also terminated its prior unsecured credit agreement onFebruary 10, 2020 . There was no outstanding balance under the terminated credit facility atJune 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 inMay 2019 and expires onApril 30, 2021 . There was no balance outstanding atJune 30, 2020 orJune 30, 2019 . OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS AtJune 30, 2020 , the Company's total operating lease obligations were$75,549 , consisting of long-term operating leases for various facilities and equipment which expire from 2020 to 2033 (see Note 3 to the consolidated financial statements for further information on the Company's leases). AtJune 30, 2020 , the Company's total contractual obligations were$1,227,089 and included the above-described operating lease obligations and$1,151,540 related to off-balance sheet purchase obligations. Included in off-balance sheet purchase obligations were open purchase orders of$82,303 and a strategic services agreement entered into by JHA in fiscal 2017 with First Data® and PSCU® to provide full-service debit and credit card processing on a single platform to all existing core bank and credit union customers, as well as to expand our card processing platform to financial institutions outside our core customer base. This agreement and subsequent amendments include a total purchase commitment atJune 30, 2020 of$1,068,961 over the remaining term of the contract, which currently extends untilJanuary 2036 , subject to certain renewal terms. The contractual obligations table below excludes$11,677 of liabilities for uncertain tax positions as we are unable to reasonably estimate the ultimate amount or timing of settlement. Contractual obligations by Less than More than period as of June 30, 2020 1 year 1-3 years 3-5 years 5 years TOTAL Operating lease obligations$ 13,444 $ 23,237 $ 14,499 $ 24,369 $ 75,549 Purchase obligations 123,545 99,919 118,845 809,231 1,151,540 Total$ 136,989 $ 123,156 $ 133,344 $ 833,600 $ 1,227,089 29
-------------------------------------------------------------------------------- Table of Contents RECENT ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Guidance In August of 2018, theFinancial Accounting Standards Board ("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 required ASU effective date for the Company isJuly 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, inFebruary 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 effectiveJuly 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 ofJuly 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 Adopted at Fiscal Year End 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 onJuly 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. InJanuary 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 afterDecember 15, 2019 , with early adoption permitted. The Company adopted ASU No. 2017-04 onJuly 1, 2020 and does not expect the adoption to have a material impact on its consolidated financial statements. InJune 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 afterDecember 15, 2019 , including interim periods within those fiscal years, with early adoption permitted. The Company is currently in the process of evaluating the impacts of adopting this standard, including the processes, systems, data and controls that will be necessary to estimate credit reserves for impacted areas. Financial assets held by the Company subject to the "expected credit loss" model prescribed by 30 -------------------------------------------------------------------------------- Table of Contents the standard include trade and other receivables and contract assets. While the Company continues to evaluate the expected impact on its consolidated financial statements and related disclosures, it currently expects the adoption of this guidance will result in an acceleration in the timing for recognition of credit losses, and may also result in an increase in the reserve for these credit losses due to the requirement to record upfront the losses that are expected over the remaining contractual lives of its financial assets. The Company adopted ASU No. 2016-13 onJuly 1, 2020 and does not expect the adoption to have a material impact on its consolidated financial statements. CRITICAL ACCOUNTING POLICIES We prepare our consolidated financial statements in accordance withU.S. GAAP. The significant accounting policies are discussed in Note 1 to the consolidated financial statements. The preparation of consolidated financial statements in accordance withU.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, as well as disclosure of contingent assets and liabilities. We base our estimates and judgments upon historical experience and other factors believed to be reasonable under the circumstances. Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements. We have identified several critical accounting estimates. An accounting estimate is considered critical if both: (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b) the impact of changes in the estimates and assumptions would have a material effect on the consolidated financial statements. Revenue Recognition We generate revenue from data processing, transaction processing, software licensing and related services, professional services, and hardware sales. Significant Judgments in Application of the Guidance Identification of Performance Obligations We enter into contracts with customers that may include multiple types of goods and services. At contract inception, we assess the solutions and services promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a solution or service (or bundle of solutions or services) that is distinct - that is, if the solution or service is separately identifiable from other items in the arrangement and if the customer can benefit from the solution or service on its own or together with other resources that are readily available. Significant judgment is used in the identification and accounting for all performance obligations. We recognize revenue when or as we satisfy each performance obligation by transferring control of a solution or service to the customer. Determination of Transaction Price The amount of revenue recognized is based on the consideration we expect to receive in exchange for transferring goods and services to the customer. Our contracts with our customers frequently contain some component of variable consideration. We estimate variable consideration in our contracts primarily using the expected value method, based on both historical and current information. Where appropriate, we may constrain the estimated variable consideration included in the transaction price in the event of a high degree of uncertainty as to the final consideration amount. Significant judgment is used in the estimate of variable consideration of customer contracts that are long-term and include uncertain transactional volumes. Taxes collected from customers and remitted to governmental authorities are not included in revenue. We include reimbursements from customers for expenses incurred in providing services (such as for postage, travel and telecommunications costs) in revenue, while the related costs are included in cost of revenue. Technology or service components from third parties are frequently included in or combined with our applications or service offerings. Whether we recognize revenue based on the gross amount billed to the customer or the net amount retained involves judgment in determining whether we control the good or service before it is transferred to the customer. This assessment is made at the performance obligation level. 31 -------------------------------------------------------------------------------- Table of Contents Allocation of Transaction Price The transaction price, once determined, is allocated between the various performance obligations in the contract based upon their relative standalone selling prices. The standalone selling prices are determined based on the prices at which we separately sell each good or service. For items that are not sold separately, we estimate the standalone selling prices using all information that is reasonably available, including reference to historical pricing data. The following describes the nature of our primary types of revenue: Processing Processing revenue is generated from transaction-based fees for electronic deposit and payment services, electronic funds transfers and debit and credit card processing. Our arrangements for these services typically require us to "stand-ready" to provide specific services on a when and if needed basis by processing an unspecified number of transactions over the contractual term. The fees for these services may be fixed or variable (based upon performing an unspecified quantity of services), and pricing may include tiered pricing structures. Amounts of revenue allocated to these services are recognized as those services are performed. Customers are typically billed monthly for transactions processed during the month. We evaluate tiered pricing to determine if a material right exists. If, after that evaluation, we determine a material right does exist, we assign value to the material right based upon standalone selling price after estimation of breakage associated with the material right. Outsourcing and Cloud Outsourcing and cloud revenue is generated from data and item processing services and hosting fees. Our arrangements for these services typically require us to "stand-ready" to provide specific services on a when and if needed basis. The fees for these services may be fixed or variable (based upon performing an unspecified quantity of services), and pricing may include tiered pricing structures. Amounts of revenue allocated to these services are recognized as those services are performed. Data and item processing services are typically billed monthly. We evaluate tiered pricing to determine if a material right exists. If, after that evaluation, we determine a material right does exist, we assign value to the material right based upon standalone selling price. Product Delivery and Services Product delivery and services revenue is generated primarily from software licensing and related professional services and hardware delivery. Software licenses, along with any professional services from which they are not considered distinct, are recognized as they are delivered to the customer. Hardware revenue is recognized upon delivery. Professional services that are distinct are recognized as the services are performed. Deconversion fees are also included within product delivery and services and are considered a contract modification. Therefore, we recognize these fees over the remaining modified contract term. In-House Support In-house support revenue is generated from software maintenance for ongoing client support and software usage, which includes a license and ongoing client support. Our arrangements for these services typically require us to "stand-ready" to provide specific services on a when and if needed basis. The fees for these services may be fixed or variable (based upon performing an unspecified quantity of services). Software maintenance fees are typically billed to the customer annually in advance and recognized ratably over the maintenance term. Software usage is typically billed annually in advance, with the license delivered and recognized at the outset, and the maintenance fee recognized ratably over the maintenance term. Accordingly, we utilize the practical expedient which allows entities to disregard the effects of a financing component when the contract period is one year or less. Contract Costs We incur 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. Depreciation and Amortization Expense The calculation of depreciation and amortization expense is based on the estimated economic lives of the underlying property, plant and equipment and intangible assets, which have been examined for their useful life and determined that no impairment exists. We believe it is unlikely that any significant changes to the useful lives of our tangible and intangible assets will occur in the near term, but rapid changes in technology or changes in market 32 -------------------------------------------------------------------------------- Table of Contents conditions could result in revisions to such estimates that could materially affect the carrying value of these assets and our future consolidated operating results. For long-lived assets, we consider whether any impairment indicators are present. If impairment indicators are identified, we test the recoverability of the long-lived assets. If this recoverability test is failed, we determine the fair value of the long-lived assets and recognize an impairment loss if the fair value is less than its carrying value. Capitalization of software development costs We capitalize certain costs incurred to develop commercial software products. For software that is to be sold, significant areas of judgment include: establishing when technological feasibility has been met and costs should be capitalized, determining the appropriate period over which to amortize the capitalized costs based on the estimated useful lives, estimating the marketability of the commercial software products and related future revenues, and assessing the unamortized cost balances for impairment. Costs incurred prior to establishing technological feasibility are expensed as incurred. Amortization begins on the date of general release and the appropriate amortization period is based on estimates of future revenues from sales of the products. We consider various factors to project marketability and future revenues, including an assessment of alternative solutions or products, current and historical demand for the product, and anticipated changes in technology that may make the product obsolete. For internal use software, capitalization begins at the beginning of application development. Costs incurred prior to this are expensed as incurred. Significant estimates and assumptions include determining the appropriate amortization period based on the estimated useful life and assessing the unamortized cost balances for impairment. Amortization begins on the date the software is placed in service and the amortization period is based on estimated useful life. A significant change in an estimate related to one or more software products could result in a material change to our results of operations. Estimates used to determine current and deferred income taxes We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We also must determine the likelihood of recoverability of deferred tax assets and adjust any valuation allowances accordingly. Considerations include the period of expiration of the tax asset, planned use of the tax asset, and historical and projected taxable income as well as tax liabilities for the tax jurisdiction to which the tax asset relates. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in one or more of these factors. Also, liabilities for uncertain tax positions require significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect our financial results. Assumptions related to purchase accounting and goodwill We account for our acquisitions using the purchase method of accounting. This method requires estimates to determine the fair values of assets and liabilities acquired, including judgments to determine any acquired intangible assets such as customer-related intangibles, as well as assessments of the fair value of existing assets such as property and equipment. Liabilities acquired can include balances for litigation and other contingency reserves established prior to or at the time of acquisition and require judgment in ascertaining a reasonable value. Third-party valuation firms may be used to assist in the appraisal of certain assets and liabilities, but even those determinations would be based on significant estimates provided by us, such as forecast revenues or profits on contract-related intangibles. Numerous factors are typically considered in the purchase accounting assessments, which are conducted by Company professionals from legal, finance, human resources, information systems, program management and other disciplines. Changes in assumptions and estimates of the acquired assets and liabilities would result in changes to the fair values, resulting in an offsetting change to the goodwill balance associated with the business acquired. As goodwill is not amortized, goodwill balances are regularly assessed for potential impairment. Such assessments include a qualitative assessment of factors that may indicate a potential for impairment, such as: macroeconomic conditions, industry and market changes, our overall financial performance, changes in share price, and an assessment of other events or changes in circumstances that could negatively impact us. If that qualitative assessment indicates a potential for impairment, a quantitative assessment is then required, including an analysis of future cash flow projections as well as a determination of an appropriate discount rate to calculate present values. Cash flow projections are based on management-approved estimates, which involve the input of numerous 33
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Table of Contents Company professionals from finance, operations and program management. Key factors used in estimating future cash flows include assessments of labor and other direct costs on existing contracts, estimates of overhead costs and other indirect costs, and assessments of new business prospects and projected win rates. Our most recent assessment indicates that no reporting units are currently at risk of impairment as the fair value of each reporting unit is significantly in excess of the carrying value. However, significant changes in the estimates and assumptions used in purchase accounting and goodwill impairment testing could have a material effect on the consolidated financial statements.
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