This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements included in this Form 10-Q for the quarter endedSeptember 30, 2020 . OVERVIEWJack Henry & Associates, Inc. ("JKHY") is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Its solutions are marketed and supported through three primary brands. Jack Henry Banking® is a top provider of information and transaction processing solutions toU.S. banks ranging from community banks to multi-billion-dollar asset institutions. Symitar® is a leading provider of information and transaction processing solutions for credit unions of all sizes. ProfitStars® provides specialized products and services that enable financial institutions of every asset size and charter, and diverse corporate entities outside the financial services industry, to mitigate and control risks, optimize revenue and growth opportunities, and contain costs. JKHY's integrated solutions are available for on-premise installation and outsourced delivery in our private cloud. 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. All dollar amounts in the following discussion are in thousands, except per share amounts. 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 ofOctober 26, 2020 , the majority of our employees were continuing to work remotely. Our internal task force considers federal, state and local guidance, as well as employee-specific and facility-specific factors, when recommending Company actions. At such time that our internal task force recommends that our remote employees begin to return to our facilities, we have prepared procedures to assist with a safe, gradual and deliberate approach, including a return-to-office training, enhanced sanitation procedures and face mask requirements, which are currently being utilized by our 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 19 -------------------------------------------------------------------------------- Table of Contents installations when available. We expect these processes to provide flexibility and value both during and after the COVID-19 pandemic. However, we have experienced delays related to continuing customer migrations to our new card processing platform. We completed the migrations of our core customers and are on track for the revised schedule for non-core customers byMarch 31, 2021 . We continue to work with our customers to support them during this difficult time, and, to that end, have waived certain late fees in connection with our products and services. We have also enhanced our lending service offerings to support the Paycheck Protection Program that was introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law 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 have seen delays in certain product installations due to COVID-19 with the associated revenue pushed from the current period to future periods. These headwinds may continue to impact our license, hardware, installation and pass-through revenues throughout fiscal 2021. Despite the changes and restrictions caused by COVID-19, the overall financial and operational impact on our business has been limited and our liquidity, balance sheet, and business trends remain strong. We experienced positive operating cash flows during the first quarter of fiscal 2021, and we do not expect that to change in the near term. However, we are unable to accurately predict the future impact of COVID-19 due to a number of uncertainties, including further government actions; the duration, severity and recurrence of the outbreak; the speed of economic recovery; the potential impact to our customers, vendors, and employees; and how the potential impact might affect future customer services, processing and installation-related revenue, and processes and efficiencies within the Company directly or indirectly impacting financial results. We will continue to monitor COVID-19 and its possible impact on the Company and to take steps necessary to protect the health and safety of our employees and customers. RESULTS OF OPERATIONS In the first quarter of fiscal 2021, total revenue increased 3%, or$13,795 , compared to the same quarter in the prior fiscal year. Adjusting total revenue in both periods for deconversion fee revenue, which decreased$9,004 to$5,882 , total revenue would have increased 5% for the quarter compared to the same period a year ago. Operating expenses increased 5% compared to the first quarter of fiscal 2020, due to increased direct costs and higher personnel costs partially offset by travel expense savings. The increased direct costs were primarily related to our card payment processing platform. Higher personnel costs were primarily related to a headcount increase of 4% atSeptember 30, 2020 compared toSeptember 30, 2019 . Operating income decreased 1% for the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020. Adjusting operating income for both periods for the effect of deconversion fees of$5,219 in the current fiscal quarter and$13,649 in the prior fiscal year first quarter, would have resulted in an increase of 7% for the first quarter of fiscal 2021 compared to the same period a year ago. The provision for income taxes decreased 10% compared to the prior fiscal year first quarter, primarily due to a decreased effective tax rate mainly attributable to the difference in impact of share-based compensation that vested during each of the periods. The effective tax rate for the first quarter of fiscal 2021 was 22.4% compared to 24.6% in the same quarter a year ago. The above changes led to an increase in net income of 2% for the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020. We move into the second quarter of fiscal 2021 with optimism following strong performance in the first quarter, but with limited visibility of the future impact of the COVID-19 pandemic. Significant portions of our business continue to come from recurring revenues and our sales pipeline also remains encouraging. Our customers continue to face regulatory and operational challenges which our products and services address, and in these uncertain times, we believe they have an even greater need for our solutions that directly address institutional profitability, efficiency, and security. Our strong balance sheet, access to extensive lines of credit, the continued strength of our existing lines of revenue, and an unwavering commitment to superior customer service should position us well to address current and future opportunities. A detailed discussion of the major components of the results of operations for the three months endedSeptember 30, 2020 follows. Discussions compare the current fiscal year's three months endedSeptember 30, 2020 to the prior year's three months endedSeptember 30, 2019 . 20 --------------------------------------------------------------------------------
Table of Contents REVENUE Services and Support % Three Months Ended September 30, Change 2020 2019 Services and Support$ 280,997 $ 278,808 1 % Percentage of total revenue 62 % 64 % Services and support revenue increased 1% in the first quarter of fiscal 2021 compared to the same quarter a year ago. Adjusting services and support revenue for deconversion fee revenue from each period, which was$5,882 in the current fiscal year quarter and$14,886 in the prior fiscal year quarter, this revenue line would have grown 4% for the quarter compared to the same quarter last fiscal year. Services and support revenue growth was primarily driven by data processing and hosting fees and software usage fees reflecting customer favorability of our term license model, partially offset by a decrease in product delivery and services revenue, particularly deconversion fee revenue, quarter over quarter. Processing % Three Months Ended September 30, Change 2020 2019 Processing$ 170,803 $ 159,197 7 % Percentage of total revenue 38 % 36 % Processing revenue increased 7% in the first quarter of fiscal 2021 compared to the same quarter last fiscal year. The increase was primarily driven by higher card and Jack Henry digital revenue due to expanding volumes, complemented by increases in the other processing components, quarter over quarter. OPERATING EXPENSES Cost of Revenue % Three Months Ended September 30, Change 2020 2019 Cost of Revenue$ 262,929 $ 245,791 7 % Percentage of total revenue 58 % 56 % Cost of revenue for the first quarter of fiscal 2021 increased 7% over the prior fiscal year first quarter and increased as a percentage of total revenue. The increase was primarily due to higher costs associated with our card processing platform and higher personnel costs related to increased headcount atSeptember 30, 2020 compared to a year ago due to organic growth within our product lines. The increase in costs was partially offset by travel expense savings as a result of COVID-19 travel limitations. Research and Development % Three Months Ended September 30, Change 2020 2019 Research and Development$ 26,057 $ 24,591 6 % Percentage of total revenue 6 % 6 % Research and development expense increased 6% for the first quarter of fiscal 2021 over the prior fiscal year first quarter. The increase was primarily due to higher personnel costs related to increased headcount atSeptember 30, 2020 compared to a year ago. Research and development expense for the quarter remained consistent compared to the prior fiscal year quarter as a percentage of total revenue. Selling, General, and Administrative Three Months Ended % September 30, Change 2020 2019 Selling, General, and Administrative$ 45,226 $ 49,436 (9) % Percentage of total revenue 10 % 11 % Selling, general, and administrative expense decreased 9% in the first quarter of fiscal 2021 over the same quarter in the prior fiscal year. Personnel cost increases for the quarter were more than offset by travel expense savings as a result of COVID-19 travel limitations and lower expenses related to both our national sales meeting andSymitar Education Conference being held virtually this year (see "COVID-19 Impact and Response" section above). Selling, 21 -------------------------------------------------------------------------------- Table of Contents general, and administrative expense decreased as a percentage of total revenue this fiscal year quarter versus the prior fiscal year quarter. INTEREST INCOME (EXPENSE) % Three Months Ended September 30, Change 2020 2019 Interest Income$ 68 $ 508 (87) % Interest Expense$ (117) $ (156) (25) % •Interest income fluctuated due to changes in invested balances and yields on invested balances during the first quarter of fiscal 2021 compared to the same quarter a year ago. Interest expense decreased when compared to the prior fiscal year period due to interest rate fluctuations and length of borrowing time. There was no outstanding balance under the credit facility atSeptember 30, 2020 and no outstanding balance atSeptember 30, 2019 . PROVISION FOR INCOME TAXES % Three Months Ended September 30, Change 2020 2019 Provision for Income Taxes$ 26,323 $ 29,169 (10) % Effective Rate 22.4 % 24.6 % The decrease in effective tax rate for the three months endedSeptember 30, 2020 compared to the prior fiscal year quarter was primarily due to the difference in impact of share-based compensation that vested during each of the periods. NET INCOME Net income increased 2% to$91,216 , or$1.19 per diluted share, for the first quarter of fiscal 2021 compared to$89,370 , or$1.16 per diluted share, in the same period of fiscal 2020, resulting in a 3% increase in diluted earnings per share. The increase in net income was primarily driven by the above factors and a decrease in effective tax rate compared to the prior fiscal year quarter. REPORTABLE SEGMENT DISCUSSION The Company is a leading provider of technology solutions and payment processing services primarily for financial services organizations. The Company's operations are classified into four reportable segments: Core, Payments, Complementary, and Corporate and Other. The Core segment provides core information processing platforms to banks and credit unions, which consist of integrated applications required to process deposit, loan, and general ledger transactions, and maintain centralized customer/member information. The Payments segment provides secure payment processing tools and services, including ATM, debit, and credit card processing services; online and mobile bill pay solutions; ACH origination and remote deposit capture processing; and risk management products and services. The Complementary segment provides additional software, processing platforms, and services that can be integrated with our core solutions or used independently. The Corporate and Other segment includes revenue and costs from hardware and other products not attributed to any of the other three segments, as well as operating costs not directly attributable to the other three segments. Core Three Months Ended September 30, % Change 2020 2019 Revenue$ 159,030 $ 155,896 2 % Cost of Revenue$ 67,589 $ 63,306 7 % Revenue in the Core segment increased 2% and cost of revenue increased 7% for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . Adjusting Core revenue for deconversion fee revenue in both periods, which totaled$2,332 for the first quarter of fiscal 2021 and$7,133 for the first quarter of fiscal 2020, Core segment revenue would have increased 5% quarter over quarter. The increase in Core revenue was primarily driven by the growth in data processing and hosting fee revenue, as well as customer call support revenue. Cost of revenue increased 2% as a percentage of revenue for the first quarter of fiscal 2021 compared to the same quarter of fiscal 2020. 22 --------------------------------------------------------------------------------
Table of Contents Payments Three Months Ended September 30, % Change 2020 2019 Revenue$ 156,733 $ 149,746 5 % Cost of Revenue$ 86,328 $ 76,624 13 % Revenue in the Payments segment increased 5% for the first quarter of fiscal 2021 compared to the equivalent quarter of the prior fiscal year. Adjusting Payments revenue for deconversion fee revenue in both periods, which totaled$1,847 for the first quarter of fiscal 2021 and$4,970 for the first quarter of fiscal 2020, Payments revenue would have increased 7% quarter over quarter. Payments revenue growth was primarily due to increased card and remittance revenue within the processing line of revenue. Cost of revenue increased 13% quarter over quarter primarily due to increased costs related to our credit and debit card processing platform. Cost of revenue as a percentage of revenue increased 4% for the first quarter of fiscal 2021 compared to the same quarter of fiscal 2020. Complementary Three Months Ended September 30, % Change 2020 2019 Revenue$ 124,480 $ 117,195 6 % Cost of Revenue$ 48,325 $ 46,674 4 % Revenue in the Complementary segment increased 6% for the first quarter of fiscal 2021 compared to the equivalent quarter of the prior fiscal year, and 7% after adjusting Complementary revenue for deconversion fee revenue from both periods, which totaled$1,721 and$2,768 for the quarters endedSeptember 30, 2020 and 2019, respectively. The increase in Complementary revenue was primarily driven by increased hosting fees and higher Jack Henry digital revenue. Cost of revenue decreased 1% as a percentage of revenue, quarter over quarter, due to ongoing cost control efforts. Corporate and Other Three Months Ended
2020 2019 Revenue$ 11,557 $ 15,168 (24) % Cost of Revenue$ 60,687 $ 59,187 3 % Revenue in the Corporate and Other segment decreased 24% for the first quarter of fiscal 2021 compared to the equivalent quarter of the prior fiscal year. The decrease was primarily due to lower other revenue and hardware revenue. Revenue classified in the Corporate and Other segment includes revenue from other products and services and hardware not specifically attributed to any of the other three segments. Cost of revenue for the Corporate and Other segment includes operating cost not directly attributable to any of the other three segments. The increased cost of revenue in the first quarter of fiscal 2021 of 3% compared to the equivalent quarter in the prior fiscal year was primarily related to increased personnel costs related to an increase in headcount over the prior fiscal year quarter. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents decreased to$195,320 atSeptember 30, 2020 from$213,345 atJune 30, 2020 . 23 -------------------------------------------------------------------------------- The following table summarizes net cash from operating activities in the statement of cash flows: Three Months Ended September 30, 2020 2019 Net income$ 91,216 $ 89,370 Non-cash expenses 50,602 47,308 Change in receivables 77,439 77,123 Change in deferred revenue (67,113) (68,939)
Change in other assets and liabilities (37,667) (21,810)
Net cash provided by operating activities
Cash provided by operating activities for the first three months of fiscal 2021 decreased 7% compared to the same period last year. Cash from operations is primarily used to repay debt, pay dividends, repurchase stock, and for capital expenditures. Cash used in investing activities for the first three months of fiscal 2021 totaled$31,188 and included:$31,451 for the ongoing enhancements and development of existing and new product and service offerings; capital expenditures on facilities and equipment of$4,478 ; and$1,374 for the purchase and development of internal use software. This was partially offset by$6,115 of proceeds from completed and pending dispositions. Cash used in investing activities for the first three months of fiscal 2020 totaled$75,425 and included$30,285 , net of cash acquired, for the acquisition of Geezeo;$28,475 for the development of software; capital expenditures of$13,101 ;$2,424 for the purchase and development of internal use software; and$1,150 for the purchase of investments. This was partially offset by$10 of proceeds from the sale of assets. Financing activities used cash of$101,314 for the first three months of fiscal 2021, including$65,873 for the purchase of treasury shares, dividends paid to stockholders of$32,815 ,$2,598 net cash outflow from the issuance of stock and tax withholding related to stock-based compensation, and$28 for payments on financing leases. Financing activities used cash in the first three months of fiscal 2020 totaled$44,576 , which included$30,771 for the payment of dividends,$14,145 for the purchase of treasury shares, and$340 net cash inflow from the issuance of stock and tax withholding 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$4,478 and$13,101 for the three months endedSeptember 30, 2020 andSeptember 30, 2019 , respectively, were made primarily for additional equipment and the improvement of existing facilities. These additions were funded from cash generated by operations. Total consolidated capital expenditures on facilities and equipment for the Company for fiscal year 2021 are not expected to exceed$63,000 and will be funded from cash generated by operations. The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves or borrowings on its existing line-of-credit. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. AtSeptember 30, 2020 , there were 27,393 shares in treasury stock and the Company had the remaining authority to repurchase up to 2,598 additional shares. The total cost of treasury shares atSeptember 30, 2020 is$1,247,546 . During the first three months of fiscal 2021, the Company repurchased 400 treasury shares. AtJune 30, 2020 , there were 26,993 shares in treasury stock and the Company had authority to repurchase up to 2,998 additional shares. Revolving credit facility OnFebruary 10, 2020 , the Company entered into a five-year senior, unsecured revolving credit facility. The 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 credit facility bears interest at a variable rate equal to (a) a rate based on a eurocurrency rate or (b) an alternate base rate (the highest of (i) 0%, (ii) the 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 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 ofSeptember 30, 2020 , the Company was in compliance with all such covenants. The revolving credit facility 24 -------------------------------------------------------------------------------- terminatesFebruary 10, 2025 . There was no outstanding balance under the credit facility atSeptember 30, 2020 orJune 30, 2020 . 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 . AtSeptember 30, 2020 andJune 30, 2020 , no amount was outstanding. 25
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