filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 2019 to fiscal 2018 and compare fiscal 2018 to fiscal 2017.
OVERVIEW
Jack Henry & Associates, Inc. (JHA) is headquartered in Monett, Missouri, employs approximately 6,500 associates nationwide, and is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Its solutions serve over 9,000 customers and are marketed and supported through three primary brands. Jack Henry Banking® is a top provider of information and transaction processing solutions to U.S. banks ranging from community banks to multi-billion-dollar asset institutions 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 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, which is composed of maintenance fees which primarily contain annual contract terms. Processing revenue includes: "Remittance" revenue from payment processing, remote capture, and automated clearing house (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.
We continue to focus on our objective of providing the best integrated solutions, products and customer service to our clients. We are cautiously optimistic regarding ongoing economic improvement and expect our clients to continue investing in our products and services to improve their operating efficiencies and performance. We anticipate that consolidation within the financial services industry will continue. Regulatory conditions and legislation will continue to impact financial institutions' discretionary spending.
A detailed discussion of the major components of the results of operations follows.
RESULTS OF OPERATIONS
FISCAL 2019 COMPARED TO FISCAL 2018
In fiscal 2019, revenues increased 6% or $81,894 compared to fiscal 2018. Deconversion fees decreased $15,941 compared to the prior fiscal year. Revenue from fiscal 2019 acquisitions totaled $1,052. Excluding these factors, total revenue increased 7%, with growth in each of our revenue streams as discussed in detail below.
Operating expenses increased 8% year over year, primarily due to increased salaries and benefits in fiscal 2019, partly due to increased headcount compared to fiscal 2018, costs related to our new card payment processing platform, bonuses provided by the Company in response to the lower tax rate resulting from the TCJA, the Ensenta acquisition, increased rent expense related to new facilities, and increased amortization expense.
The TCJA had a large impact on our fiscal 2018 provision/ (benefit) for income taxes and net income, which impacted year-over-year comparison as discussed below.
We move into fiscal 2020 following a strong performance in fiscal 2019. Significant portions of our business continue to provide recurring revenue and our healthy 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 ended June 30, 2019 follows. Fiscal years 2018 and 2017 have been recast to reflect our retrospective adoption of Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, and related amendments, collectively referred to as Accounting Standards Codification ("ASC") 606.
REVENUE
| Services and Support Revenue | Year Ended June 30, | % Change | ||||||||
| 2019 | 2018 | |||||||||
| Services and Support | $ | 958,489 | $ | 920,739 | 4 | % | ||||
| Percentage of total revenue | 62 | % | 63 | % |
Services and support includes: "Outsourcing and cloud" fees that predominantly have contract terms of five years or greater at inception; "Product delivery & 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 ended June 30, 2019, services and support revenue grew 4% over the prior fiscal year. Excluding deconversion fees, which totaled $30,230 in fiscal 2019 and $46,171 in fiscal 2018, and excluding revenue from fiscal 2019 acquisitions totaling $944, services and support revenue grew 6%. The increase was primarily driven by an increase in outsourcing and cloud revenue resulting from organic growth in hosting and data processing fees complemented by added revenue from Ensenta. In-house support revenue also contributed to the increase, primarily from higher software usage revenue resulting partially from the addition of new customers. These increases were partially offset by decreased product delivery and services revenue due to reduced license and in-house implementation revenue as more customers opted for outsourced delivery.
| Processing Revenue | Year Ended June 30, | % Change | ||||||||
| 2019 | 2018 | |||||||||
| Processing | $ | 594,202 | $ | 550,058 | 8 | % | ||||
| Percentage of total revenue | 38 | % | 37 | % |
Processing revenue includes: "Remittance" revenue from payment processing, remote capture, and automated clearing house (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 8% for the fiscal year ended June 30, 2019 as compared to the fiscal year ended June 30, 2018, with strong organic growth in each component, complemented by added remittance revenue from Ensenta.
OPERATING EXPENSES
| Cost of Revenue | Year Ended June 30, | % Change | ||||||||
| 2019 | 2018 | |||||||||
| Cost of Revenue | $ | 923,030 | $ | 853,138 | 8 | % | ||||
| Percentage of total revenue | 59 | % | 58 | % |
Cost of Revenue increased 8% compared to fiscal 2018, and increased 1% as a percentage of total revenue. Excluding costs related to deconversions, fiscal 2019 acquisitions, and bonuses provided by the Company in response to the lower tax rate resulting from the TCJA, cost of revenue increased 7%. The increase was driven by increased salaries and benefits; higher direct costs of product, including spending related to the ongoing project to expand our credit and debit card platform; increased amortization expense; and higher rent expense related to new facilities. The Company continues to focus on cost management.
| Research & Development | Year Ended June 30, | % Change | ||||||||
| 2019 | 2018 | |||||||||
| Research & Development | $ | 96,378 | $ | 90,340 | 7 | % | ||||
| Percentage of total revenue | 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 increased 7% primarily due to increased salary and benefit expenses, in part due to a 3% increase in headcount, but were consistent with the prior year as a percentage of total revenue. Excluding the bonuses provided by the Company in response to the lower tax rate following the TCJA and costs attributable to companies acquired in fiscal 2019, research and development expense increased 4%.
| Selling, General, and Administrative | Year Ended June 30, | % Change | ||||||||
| 2019 | 2018 | |||||||||
| Selling, General, and Administrative | $ | 185,998 | $ | 171,710 | 8 | % | ||||
| Percentage of total revenue | 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 bonuses provided by the Company in response to the lower tax rate resulting from the TCJA, selling, general, and administrative expense increased 6%. These expenses increased primarily due to increased commissions, salaries, and benefits.
Gains on Disposal of Businesses
No businesses were disposed during fiscal 2019. In fiscal 2018, we recognized gains on the disposal of businesses totaling $1,894 due to the sales of our ATM Manager and jhaDirect product lines.
| INTEREST INCOME AND EXPENSE | Year Ended June 30, | % Change | ||||||||
| 2019 | 2018 | |||||||||
| Interest Income | $ | 876 | $ | 575 | 52 | % | ||||
| Interest Expense | $ | (926 | ) | $ | (1,920 | ) | (52 | )% |
Interest income fluctuated due to changes in invested balances and yields on invested balances. Interest expense decreased in fiscal 2019 due mainly to lower amounts borrowed on our revolving credit facility during the year.
| PROVISION/ (BENEFIT) FOR INCOME TAXES | Year Ended June 30, | % Change | ||||||||
| 2019 | 2018 | |||||||||
| Provision/ (Benefit) for Income Taxes | $ | 75,350 | $ | (8,876 | ) | 949 | % | |||
| Effective Rate | 21.7 | % | (2.5 | )% |
The increase in the effective tax rate was primarily the result of the significant tax benefit recognized in the prior fiscal year as a result of the re-measurement of net deferred tax liabilities upon enactment of the TCJA on December 22, 2017. That increase in the provision/ (benefit) for income taxes is partially offset by the reduced U.S. federal corporate tax rate of 21% effective for the current year, and increased excess tax benefits from share-based payments recognized during fiscal 2019. Excluding the fiscal 2018 TCJA tax benefit resulting from the re-measurement of net deferred tax liabilities, provision/ (benefit) for income taxes decreased 23%.
NET INCOME
Net income decreased 26% to $271,885, or $3.52 per diluted share, in fiscal 2019 from $365,034, or $4.70 per diluted share, in fiscal 2018. The significant decrease is primarily attributable to the TCJA impacts on the prior year provision/ (benefit) for income taxes, as well as decreased deconversion revenue in fiscal 2019.
FISCAL 2018 COMPARED TO FISCAL 2017
In fiscal 2018, revenues increased 6% or $82,507 compared to fiscal 2017. Deconversion fees increased $7,343 compared to the prior fiscal year. Revenue from fiscal 2018 acquisitions totaled $17,368. Fiscal 2017 included $10,897 of revenue from divested companies. Excluding these factors, total revenue increased 5%, with growth in each of our revenue streams as discussed in detail below.
Operating expenses increased 6%, due to increased headcount driving increased salaries and benefits, costs related to fiscal 2018 acquisitions, and professional services expenses incurred due to contracting with outside experts in preparation for our adoption of the new Accounting Standards Codification ("ASC") Topic 606 revenue standard. Excluding costs related to deconversion fees from each year, expenses related to fiscal 2018 acquisitions, fiscal 2017 costs related to divestitures, and gains on the disposal of businesses from each year, operating expenses increased 5%.
The TCJA had a large impact on our provision/ (benefit) for income taxes and net income, which are discussed below.
REVENUE
| Services and Support | Year Ended June 30, | % Change | ||||||||
| 2018 | 2017 | |||||||||
| Services and Support | $ | 920,739 | $ | 881,735 | 4 | % | ||||
| Percentage of total revenue | 63 | % | 64 | % |
Services and support revenue grew 4% in fiscal 2018. Excluding deconversion fees, revenue from fiscal 2018 acquisitions totaling $9,074, and fiscal 2017 revenue related to divestitures of $10,745, services and support revenue grew 4%. The growth was due mainly to increased outsourcing and cloud revenue, as well as growth within our in-house support revenue component due to higher software usage revenue.
| Processing | Year Ended June 30, | % Change | ||||||||
| 2018 | 2017 | |||||||||
| Processing | $ | 550,058 | $ | 506,555 | 9 | % | ||||
| Percentage of total revenue | 37 | % | 36 | % |
Processing revenue increased 9% in fiscal 2018, with strong growth in each of its three components. Ensenta contributed to the growth with added remittance revenue. Excluding $8,294 of revenue from fiscal 2018 acquisitions, and excluding fiscal 2017 revenue related to divestitures totaling $152, processing revenue increased 7% for the year with significant increases in each of its three components.
OPERATING EXPENSES
| Cost of Revenue | Year Ended June 30, | % Change | ||||||||
| 2018 | 2017 | |||||||||
| Cost of Revenue | $ | 853,138 | $ | 805,855 | 6 | % | ||||
| Percentage of total revenue | 58 | % | 58 | % |
Cost of revenue for fiscal 2018 increased 6% compared to fiscal 2017, in line with the revenue increase, and remained a consistent percentage of total revenue in each year.
| Research and Development | Year Ended June 30, | % Change | ||||||||
| 2018 | 2017 | |||||||||
| Research and Development | $ | 90,340 | $ | 84,753 | 7 | % | ||||
| Percentage of total revenue | 6 | % | 6 | % |
Research and development expenses increased primarily due to a 4% increase in headcount, but were consistent
with the prior year as a percentage of total revenue.
| Selling, General, and Administrative | Year Ended June 30, | % Change | ||||||||
| 2018 | 2017 | |||||||||
| Selling, General, and Administrative | $ | 171,710 | $ | 159,235 | 8 | % | ||||
| Percentage of total revenue | 12 | % | 11 | % |
Selling, general, and administrative expenses increased in fiscal 2018 primarily due to increased commissions, salaries, and benefits, and higher professional services expenses incurred due to contracting with outside experts in preparation for our adoption of the ASC 606 revenue standard.
Gain on Disposal of Businesses
In fiscal 2018, we recognized gains on disposal of businesses totaling $1,894, due to the sales of our ATM Manager and jhaDirect product lines.
In fiscal 2017, we recognized gains on the disposal of businesses totaling $3,270. $2,136 was related to the fiscal 2016 sale of Alogent, and $1,134 related to the sale of our Regulatory Filing products to Fed Reporter on May 1, 2017.
| INTEREST INCOME AND EXPENSE | Year Ended June 30, | % Change | ||||||||
| 2018 | 2017 | |||||||||
| Interest Income | $ | 575 | $ | 248 | 132 | % | ||||
| Interest Expense | $ | (1,920 | ) | $ | (996 | ) | 93 | % |
Interest income fluctuated due to changes in invested balances and yields on invested balances. Interest expense increased in fiscal 2018 due mainly to increased borrowing, which was primarily used for the acquisition of Ensenta Corporation, and has now been re-paid.
| PROVISION/ (BENEFIT) FOR INCOME TAXES | Year Ended June 30, | % Change | ||||||||
| 2018 | 2017 | |||||||||
| Provision/ (Benefit) for Income Taxes | $ | (8,876 | ) | $ | 111,408 | (108 | )% | |||
| Effective Rate | (2.5 | )% | 32.7 | % |
The significant decrease in the effective tax rate was primarily a result of the TCJA enacted December 22, 2017, which included a reduction to the U.S. federal statutory income tax rate to 21% effective January 1, 2018. A blended 28% U.S federal statutory income tax rate was applied to fiscal 2018. We recorded a net tax benefit of $106,801 related to the re-measurement of our net deferred tax liabilities and $21,551 related to the impacts on current year operations.
NET INCOME
Net income increased 59% to $365,034, or $4.70 per diluted share, in fiscal 2018 from $229,561, or $2.93 per diluted share, in fiscal 2017. The significant increase is primarily attributable to the TCJA.
REPORTABLE SEGMENT DISCUSSION
The Company is a leading provider of technology solutions and payment processing services primarily for financial services organizations.
Beginning in the first quarter of fiscal 2018, JHA changed its reportable segment structure from two customer-centric segments, Bank and Credit Union, to four product-centric segments. The change was made based on the view of our Chief Executive Officer, who is also our Chief Operating Decision Maker, that the Company could be more effectively managed using a product-centric approach and was driven by the first budgetary process under his administration.
The Company’s operations are classified into four reportable segments: Core, Payments, Complementary, and Corporate and Other. The Core segment provides core information processing platforms to banks and credit unions, which consist of integrated applications required to process deposit, loan, and general ledger transactions, and maintain centralized customer/member information. The Payments segment provides secure payment processing tools and services, including ATM, debit, and credit card processing services; online and mobile bill pay solutions; ACH origination and remote deposit capture processing; and risk management products and services. The Complementary segment
provides additional software, processing platforms, and services that can be integrated with our core solutions or used independently. The Corporate & 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.
The fiscal 2017 period presented below has been retroactively recast to conform to the new segment structure adopted July 1, 2017. Both prior year periods presented have also been recast to reflect the Company's retrospective adoption of ASC 606.
| Core | |||||||||||||||||
| 2019 | % Change | 2018 | % Change | 2017 | |||||||||||||
| Revenue | $ | 534,429 | 5 | % | $ | 509,821 | 7 | % | $ | 477,605 | |||||||
| Cost of Revenue | $ | 243,989 | 5 | % | $ | 232,868 | 6 | % | $ | 219,440 |
In fiscal 2019, revenue in the Core segment increased 5% compared to fiscal 2018, driven by increases in outsourcing and cloud revenue and in-house support revenue. Excluding deconversion fees, which totaled $14,907 and $22,161, for fiscal 2019 and 2018, respectively, and excluding revenue of $923 from fiscal 2019 acquisitions, revenue in the Core segment increased 6%, due to increased outsourcing and cloud and in-house support revenue. Cost of revenue remained a consistent percentage of revenue for fiscal 2019 and fiscal 2018.
In fiscal 2018, revenue in the Core segment increased 7%, primarily due to increased revenue within each component of our services and support revenue stream. Cost of revenue increased 6% for fiscal 2018 compared to fiscal 2017, but remained consistent as a percentage of revenue.
| Payments | |||||||||||||||||
| 2019 | % Change | 2018 | % Change | 2017 | |||||||||||||
| Revenue | $ | 548,319 | 8 | % | $ | 508,331 | 8 | % | $ | 471,988 | |||||||
| Cost of Revenue | $ | 273,261 | 11 | % | $ | 245,269 | 10 | % | $ | 222,685 |
In fiscal 2019, revenue in the Payments segment increased 8% compared to fiscal 2018. Excluding deconversion revenue of $8,603 and $13,004, respectively, revenue increased 9% in the Payments segment, due to organic growth within remittance and card processing, as well as added revenue from Ensenta. Cost of revenue increased 11%, partially due to increased headcount and amortization expenses related to Ensenta, as well as increased spending related to the ongoing project to expand our credit and debit card platform. Cost of revenue increased 2% as a percentage of revenue in fiscal 2019 as compared to fiscal 2018.
In fiscal 2018, revenue in the Payments segment increased compared to fiscal 2017, due primarily to increased card and remittance processing revenue. The increases were partially due to the acquisition of Ensenta. Cost of revenue increased 10%, and increased 1% as a percentage of revenue.
| Complementary | |||||||||||||||||
| 2019 | % Change | 2018 | % Change | 2017 | |||||||||||||
| Revenue | $ | 418,215 | 6 | % | $ | 395,419 | 5 | % | $ | 375,811 | |||||||
| Cost of Revenue | $ | 175,737 | 7 | % | $ | 163,905 | 6 | % | $ | 155,084 |
Revenue in the Complementary segment increased 6% for the fiscal year ended June 30, 2019 compared to the prior year. After excluding deconversion revenue from each period, which totaled $6,672 and $10,855 for the fiscal years ended June 30, 2019 and 2018, respectively, and excluding revenue of $126 from fiscal 2019 acquisitions, revenue increased 7%. The increase was driven by increases in outsourcing and cloud revenue and in-house support within our services and support revenue stream, as well as transaction and digital processing revenue within our processing revenue stream. Cost of revenue increased 7% for the year, and increased 1% as a percentage of revenue.
In fiscal 2018, revenue in the Complementary segment increased 5%, due to higher outsourcing and cloud revenue within services and support, as well as increased transaction and digital processing revenue. Cost of revenue increased 6% for fiscal 2018 compared to fiscal 2017, but remained a consistent percentage of revenue.
| Corporate and Other | |||||||||||||||||
| 2019 | % Change | 2018 | % Change | 2017 | |||||||||||||
| Revenue | $ | 51,728 | (10 | )% | $ | 57,226 | (9 | )% | $ | 62,886 | |||||||
| Cost of Revenue | $ | 230,043 | 9 | % | $ | 211,096 | 1 | % | $ | 208,646 |
The decrease in revenue in the Corporate and Other segment for the fiscal year ended June 30, 2019 was due to decreased services and support revenue. This is in part due to the sale of our jhaDirect product line, which was sold during the first quarter of fiscal 2018.
The decreased revenue in fiscal 2018 compared to fiscal 2017 in the Corporate and Other segment is largely due to the loss of revenue following the sale of our jhaDirect product. Fiscal 2017 included revenue from jhaDirect totaling $6,571.
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 2019 is primarily related to bonuses provided by the Company in response to the lower tax rate resulting from the TCJA and increased rent and maintenance contract expenses related to new facilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased to $93,628 at June 30, 2019 from $31,440 at June 30, 2018. Cash at the end of fiscal 2018 was lower due primarily to the acquisition of Ensenta and higher repayment of debt in fiscal 2018.
The following table summarizes net cash from operating activities in the statement of cash flows:
| Year Ended | |||||||
| June 30, | |||||||
| 2019 | 2018 | ||||||
| Net income | $ | 271,885 | $ | 365,034 | |||
| Non-cash expenses | 180,987 | 87,906 | |||||
| Change in receivables | (11,777 | ) | 21,489 | ||||
| Change in deferred revenue | 23,656 | 1,255 | |||||
| Change in other assets and liabilities | (33,623 | ) | (63,542 | ) | |||
| Net cash provided by operating activities | $ | 431,128 | $ | 412,142 |
Cash provided by operating activities increased 5% compared to fiscal 2018. 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 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 Technologies, Inc. and Agiletics, Inc.; $6,049 for the purchase and development of internal use software; and $20 for customer contracts. This was partially offset by $127 of proceeds from asset sales.
Cash used in investing activities for fiscal 2018 totaled $291,826 and included: $137,562, net of cash acquired, for the purchases of Ensenta Corporation and Vanguard Software Group; $96,647 for the development of software; capital expenditures on facilities and equipment of $40,135, mainly for the purchase of computer equipment; $13,138 for the purchase and development of internal use software; and $5,000 for the purchase of preferred stock of Automated Bookkeeping, Inc. These expenditures were partially offset by $350 of proceeds from the sale of businesses and $306 of proceeds from the sale of assets.
Financing activities used cash of $178,305 for fiscal 2019. 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 re-payments on our revolving credit facility netted to $0.
Financing activities used cash in fiscal 2018 of $203,641. Cash used was $175,000 for repayment on our revolving credit facility; dividends paid to stockholders of $105,021; and $48,986 for the purchase of treasury shares. This was partially offset by borrowings of $125,000 on our revolving credit facility and $366 of net cash inflow from the issuance of stock and tax related to stock-based compensation.
Capital Requirements and Resources
The Company generally uses existing resources and funds generated from operations to meet its capital requirements. Capital expenditures totaling $53,598 and $40,135 for fiscal years ended June 30, 2019 and June 30, 2018, respectively, were made primarily for additional equipment and the improvement of existing facilities. These additions
were funded from cash generated by operations. At June 30, 2019, the Company had an estimated $2,673 of outstanding purchase commitments related to property and equipment.
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. At June 30, 2019, there were 26,508 shares in treasury stock and the Company had the remaining authority to repurchase up to 3,483 additional shares. The total cost of treasury shares at June 30, 2019 is $1,110,124. During fiscal 2019, the Company repurchased 400 treasury shares for $54,864. At June 30, 2018, there were 26,108 shares in treasury stock and the Company had authority to repurchase up to 3,883 additional shares.
Revolving credit facility
The revolving credit facility allows for borrowings of up to $300,000, which may be increased by the Company at any time until maturity to $600,000. The credit facility bears interest at a variable rate equal to (a) a rate based on LIBOR or (b) an alternate base rate (the highest of (i) the Prime Rate for such day, (ii) the sum of the Federal Funds Effective Rate for such day plus 0.50% and (iii) 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 credit facility is guaranteed by certain subsidiaries of the Company. The credit facility is subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the agreement. As of June 30, 2019, the Company was in compliance with all such covenants. The revolving credit facility terminates February 20, 2020 and at June 30, 2019 there was no outstanding balance. Prior to termination, the Company plans to renew the current credit facility or replace it with a similar credit facility.
Other lines of credit
The Company renewed an unsecured bank credit line on May 1, 2019 which provides for funding of up to $5,000 and bears interest at the prime rate less 1%. The credit line was renewed through April 30, 2021. At June 30, 2019, no amount was outstanding.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
At June 30, 2019, the Company’s total off-balance sheet contractual obligations were $665,107. This balance consists of $71,633 of long-term operating leases for various facilities and equipment which expire from 2020 to 2030 and $593,474 of purchase commitments. In fiscal 2017, JHA entered a strategic services agreement 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 expand its card processing platform to financial institutions outside our core customer base. This agreement includes a purchase commitment of $555,754 over the remaining term of the contract. The remainder of the purchase commitments relate mainly to open purchase orders. The contractual obligations table below excludes $12,009 of liabilities for uncertain tax positions as we are unable to reasonably estimate the ultimate amount or timing of settlement.
| Contractual obligations by period as of June 30, 2019 | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | TOTAL | |||||||||||||||
| Operating lease obligations | $ | 15,559 | $ | 25,399 | $ | 19,004 | $ | 11,671 | $ | 71,633 | ||||||||||
| Purchase obligations | 62,637 | 86,875 | 107,188 | 336,774 | 593,474 | |||||||||||||||
| Total | $ | 78,196 | $ | 112,274 | $ | 126,192 | $ | 348,445 | $ | 665,107 |
The operating lease obligations included on this table will be recorded on the balance sheet beginning in fiscal 2020 due to the Company's adoption of ASU No. 2016-02, issued by the FASB in February 2016 and effective for the Company on July 1, 2019.
RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Guidance
The Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, in May 2014. This standard (and related amendments collectively referred to as “ASC 606”) is part of an effort to create a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”). The new standard has superseded much of the authoritative literature for revenue recognition. The new model enacts a five-step process for achieving the core principle, which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services. The standard was effective for the Company on July 1, 2018. Entities are allowed to transition to the new standard by either recasting prior periods (full retrospective) or recognizing the cumulative effect as of the beginning of the period of adoption (modified retrospective).
The Company adopted the new standard using the full retrospective transition approach, using certain practical expedients. The Company has not disclosed the amount of transaction price allocated to remaining performance obligations for reporting periods presented before the date of initial application. Also, the Company did not separately consider the effects of contract modifications that occurred before the beginning of the earliest reporting period presented, but reflects the aggregate effect of all modifications that occurred before the beginning of the earliest period presented. As a result, all fiscal 2018 and fiscal 2017 financial information has been adjusted for the effects of applying ASC 606. The details of the significant changes are disclosed below:
Software Revenue Recognition
The Company previously recognized software license and related services within the scope of ASC Topic 985-605, which required the establishment of vendor-specific objective evidence (“VSOE”) of fair value in order to separately recognize revenue for each software-related good or service. Due to the inability to establish VSOE, the Company had previously deferred all revenue on software-related goods and services on a master contract until all the goods and services had been delivered. Under ASC 606, VSOE is no longer required for separation of otherwise distinct performance obligations within a revenue arrangement. This change has resulted in earlier recognition of revenue for the Company’s software-related goods and services, leading to a decrease in deferred revenue balances within its adjusted consolidated balance sheets.
Impacts on Financial Statements
See tables in Item 8, Note 1 to the Consolidated Financial Statements for the impacts ASC 606 had on prior period financial statements.
ASU 2016-15 issued by the FASB in August 2016 clarifies cash flow classification of eight specific cash flow issues and is effective for our annual reporting period beginning July 1, 2018. The adoption of this standard did not have any impact on our financial statements.
Not Yet Adopted
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. ASU No. 2016-02 will be effective for JHA's annual reporting period beginning July 1, 2019. The Company established a cross-functional team to implement this standard and evaluated arrangements that would be subject to the standard, implemented software to meet the reporting and disclosure requirements of the standard, and assessed the impact of the standard on its processes and internal controls. The Company will adopt the new standard using the optional transition method in ASU 2018-11. Under this method, the Company will 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 will recognize a cumulative-effect adjustment, as necessary, to the opening balance of retained earnings for fiscal 2020 upon adoption of the standard.
We will take advantage of the transition package of practical expedients permitted within the new standard, which among other things, allows us to carryforward the historical lease classification. In addition, we will make an accounting policy election that will keep leases with an initial term of twelve months or less off of the balance sheet. The Company also elected the practical expedient not to separate the non-lease components of a contract from the lease component to which they relate.
Upon adoption of the standard, the Company will record right-of-use assets of approximately $70,000 to $73,000 and lease obligations of approximately $73,000 to $75,000 on the its balance sheet as of July 1, 2019. Adoption of the standard is not expected to significantly impact the Company's net income and is not expected to have a material impact on the Company's compliance with the financial covenants under its credit facility.
In August of 2018, the FASB issued ASU No. 2018-15, Intangibles, Goodwill and Other - Internal-Use Software (Subtopic 350-40), which broadens the scope of Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with costs for internal-use software. The amendments in this update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The ASU will be effective for the Company on July 1, 2020, with early adoption permitted. The Company is currently evaluating the impact that the guidance will have on its financial statements.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with U.S. GAAP. The significant accounting policies are discussed in Note 1 to the consolidated financial statements. The preparation of consolidated financial statements in accordance with U.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.
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 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 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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