Jack Henry & Associates, Inc.
HENRY JACK & ASSOCIATES INC (Form: 10-Q, Received: 02/09/2017 09:42:01)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended December 31, 2016
OR
 
 
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to ________________

Commission file number 0-14112

JACK HENRY & ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
43-1128385
(State or Other Jurisdiction of Incorporation)
 
(I.R.S Employer Identification No.)

663 Highway 60, P.O. Box 807, Monett, MO 65708
(Address of Principle Executive Offices)
(Zip Code)

417-235-6652
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ]  No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ X ]  No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[X]
  
Accelerated filer
[ ]
 
 
 
 
 
Non-accelerated filer
[  ]
(Do not check if a smaller reporting company)
Smaller reporting company
[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  
Yes [  ] No [ X ]



APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

As of February 6, 2017 , the Registrant had 77,629,679 shares of Common Stock outstanding ($0.01 par value).



TABLE OF CONTENTS
 
 
Page Reference
 
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
Condensed Consolidated Balance Sheets as of December 31, 2016 and June 30, 2016 (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Six Months Ended December 31, 2016 and 2015 (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2016 and 2015 (Unaudited)
 
 
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
ITEM 4.
Controls and Procedures
 
 
 
PART II
OTHER INFORMATION
 
 
 
ITEM 2.
Unregistered Sales Of Equity Securities And Use Of Proceeds
 
 
 
ITEM 6.
Exhibits
 
 
 
 
Signatures
 
 
 

In this report, all references to “JHA”, the “Company”, “we”, “us”, and “our”, refer to Jack Henry & Associates, Inc., and its wholly owned subsidiaries.

FORWARD LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, in Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements are identified at “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016 . We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.


3


PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS

4

Table of Contents

JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
 
December 31,
2016
 
June 30,
2016
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
64,188

 
$
70,310

Receivables, net
146,256

 
253,923

Income tax receivable
9,649

 
15,636

Prepaid expenses and other
60,845

 
56,588

Deferred costs
42,799

 
35,472

Total current assets
323,737

 
431,929

PROPERTY AND EQUIPMENT, net
289,273

 
298,564

OTHER ASSETS:
 
 
 
Non-current deferred costs
104,154

 
99,799

Computer software, net of amortization
234,091

 
222,115

Other non-current assets
76,773

 
70,461

Customer relationships, net of amortization
97,536

 
104,085

Other intangible assets, net of amortization
39,678

 
35,706

Goodwill
552,853

 
552,853

Total other assets
1,105,085

 
1,085,019

Total assets
$
1,718,095

 
$
1,815,512

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
15,863

 
$
14,596

Accrued expenses
67,555

 
85,411

Notes payable and current maturities of long term debt

 
200

Deferred revenues
245,170

 
343,525

Total current liabilities
328,588

 
443,732

LONG TERM LIABILITIES:
 
 
 
Non-current deferred revenues
162,271

 
177,529

Non-current deferred income tax liability
197,346

 
188,601

Debt, net of current maturities
50,000

 

Other long-term liabilities
8,478

 
9,440

Total long term liabilities
418,095

 
375,570

Total liabilities
746,683

 
819,302

STOCKHOLDERS' EQUITY
 
 
 
Preferred stock - $1 par value; 500,000 shares authorized, none issued

 

Common stock - $0.01 par value; 250,000,000 shares authorized;
103,034,095 shares issued at December 31, 2016
102,903,971 shares issued at June 30, 2016;
1,030

 
1,029

Additional paid-in capital
441,733

 
440,123

Retained earnings
1,508,668

 
1,431,192

Less treasury stock at cost
25,410,212 shares at December 31, 2016;
24,208,517 shares at June 30, 2016
(980,019
)
 
(876,134
)
Total stockholders' equity
971,412

 
996,210

Total liabilities and equity
$
1,718,095

 
$
1,815,512

See notes to condensed consolidated financial statements

5

Table of Contents

    
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2016
 
2015
 
2016
 
2015
REVENUE
 
 
 
 
 
 
 
License
$
849

 
$
634

 
$
1,543

 
$
2,237

Support and service
337,515

 
320,219

 
670,561

 
627,966

Hardware
10,189

 
12,019

 
21,477

 
24,287

Total revenue
348,553

 
332,872

 
693,581

 
654,490

 
 
 
 
 
 
 
 
COST OF SALES
 
 
 
 
 
 
 
Cost of license
59

 
498

 
311

 
680

Cost of support and service
191,269

 
181,989

 
377,161

 
356,703

Cost of hardware
6,818

 
7,958

 
15,436

 
16,726

Total cost of sales
198,146

 
190,445

 
392,908

 
374,109

 
 
 
 
 
 
 
 
GROSS PROFIT
150,407

 
142,427

 
300,673

 
280,381

 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
Selling and marketing
21,903

 
22,231

 
44,030

 
43,982

Research and development
20,873

 
18,862

 
40,611

 
37,416

General and administrative
19,025

 
16,547

 
36,008

 
33,659

Total operating expenses
61,801

 
57,640

 
120,649

 
115,057

 
 
 
 
 
 
 
 
OPERATING INCOME
88,606

 
84,787

 
180,024

 
165,324

 
 
 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest income
60

 
91

 
167

 
204

Interest expense
(184
)
 
(276
)
 
(326
)
 
(496
)
Total interest income (expense)
(124
)
 
(185
)
 
(159
)
 
(292
)
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
88,482

 
84,602

 
179,865

 
165,032

 
 
 
 
 
 
 
 
PROVISION FOR INCOME TAXES
29,668

 
25,254

 
58,807

 
54,318

 
 
 
 
 
 
 
 
NET INCOME
$
58,814

 
$
59,348

 
$
121,058

 
$
110,714

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.76

 
$
0.75

 
$
1.55

 
$
1.38

Basic weighted average shares outstanding
77,814

 
79,473

 
78,114

 
80,009

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.75

 
$
0.74

 
$
1.54

 
$
1.38

Diluted weighted average shares outstanding
78,180

 
79,770

 
78,512

 
80,252


See notes to condensed consolidated financial statements

6

Table of Contents

JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
Six Months Ended
 
December 31,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
121,058

 
$
110,714

Adjustments to reconcile net income from operations
     to net cash from operating activities:
 
 
 
Depreciation
24,892

 
25,973

Amortization
44,568

 
37,012

Change in deferred income taxes
8,745

 
6,267

Expense for stock-based compensation
4,230

 
5,112

(Gain)/loss on disposal of assets and businesses
671

 
(290
)
Changes in operating assets and liabilities:
 
 
 
Change in receivables  
107,667

 
98,487

Change in prepaid expenses, deferred costs and other
(22,241
)
 
(27,913
)
Change in accounts payable
1,221

 
(4,280
)
Change in accrued expenses
(18,339
)
 
(6,687
)
Change in income taxes
5,007

 
(4,204
)
Change in deferred revenues
(113,612
)
 
(92,911
)
Net cash from operating activities
163,867

 
147,280

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Payment for acquisitions, net of cash acquired

 
(8,275
)
Capital expenditures
(17,405
)
 
(31,506
)
Proceeds from the sale of assets
830

 
2,747

Internal use software
(11,455
)
 
(8,183
)
Computer software developed
(41,673
)
 
(47,903
)
Net cash from investing activities
(69,703
)
 
(93,120
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings on credit facilities
50,000

 
100,000

Repayments on credit facilities
(200
)
 
(52,374
)
Purchase of treasury stock
(103,885
)
 
(155,122
)
Dividends paid
(43,582
)
 
(39,972
)
Proceeds from issuance of common stock upon exercise of stock options
1

 
1

Tax withholding payments related to share based compensation
(5,394
)
 
(2,501
)
Proceeds from sale of common stock
2,774

 
2,621

Net cash from financing activities
(100,286
)
 
(147,347
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
$
(6,122
)
 
$
(93,187
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
$
70,310

 
$
148,313

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
64,188

 
$
55,126


See notes to condensed consolidated financial statements

7

Table of Contents

JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
(Unaudited)

NOTE 1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Company
Jack Henry & Associates, Inc. and subsidiaries (“JHA” or the “Company”) is a provider of integrated computer systems and services that has developed and acquired a number of banking and credit union software systems. The Company's revenues are predominately earned by marketing those systems to financial institutions nationwide together with computer equipment (hardware), by providing the conversion and implementation services for financial institutions to utilize JHA systems, and by providing other related services. JHA also provides continuing support and services to customers using in-house or outsourced systems.
Consolidation
The condensed consolidated financial statements include the accounts of JHA and all of its subsidiaries, which are wholly-owned, and all intercompany accounts and transactions have been eliminated.
Comprehensive Income
Comprehensive income for the three and six months ended December 31, 2016 and 2015 equals the Company’s net income.
Property and Equipment and Intangible Assets
Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets.  Accumulated depreciation at December 31, 2016 totaled $350,717 and at June 30, 2016 totaled $328,159 .
Intangible assets consist of goodwill, customer relationships, computer software, and trade names acquired in business acquisitions in addition to internally developed computer software. The amounts are amortized, with the exception of those with an indefinite life (such as goodwill), over an estimated economic benefit period, generally three to twenty years.  Accumulated amortization of intangible assets totaled $480,315 and $435,871 at December 31, 2016 and June 30, 2016 , respectively.
Common Stock
The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves or borrowings on its existing line-of-credit. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At December 31, 2016 , there were 25,410 shares in treasury stock and the Company had the remaining authority to repurchase up to 4,580 additional shares. The total cost of treasury shares at December 31, 2016 is $980,019 . During the first six months of fiscal 2017 , the Company repurchased 1,202 treasury shares for $103,885 . At June 30, 2016 , there were 24,209 shares in treasury stock and the Company had authority to repurchase up to 5,782 additional shares.
Dividends declared per share were $0.28 and $0.25 , for the three months ended December 31, 2016 and 2015 , respectively. Dividends declared per share for the six months ended December 31, 2016 and 2015 were $0.56 and $0.50 , respectively.
Interim Financial Statements
The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America applicable to interim condensed consolidated financial statements, and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes, which are included in its Annual Report on Form 10-K  (“Form 10-K”) for the fiscal year ended June 30, 2016 . The accounting policies followed by the Company are set forth in Note 1 to the Company's consolidated financial statements included in its Form 10-K for the fiscal year ended June 30, 2016 .
In the opinion of the management of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairly the financial

8


position of the Company as of December 31, 2016 , the results of its operations for the three and six months ending December 31, 2016 and 2015 , and its cash flows for the six months ending December 31, 2016 and 2015 . The condensed consolidated balance sheet at June 30, 2016 was derived from audited annual financial statements, but does not contain all of the footnote disclosures from the annual financial statements.
The results of operations for the period ended December 31, 2016 are not necessarily indicative of the results to be expected for the entire year.
Litigation
We are subject to various routine legal proceedings and claims, including the following:
In 2013 a patent infringement lawsuit entitled DataTreasury Corporation v. Jack Henry & Associates, Inc. et. al . was filed against the Company, several subsidiaries and a number of customer financial institutions in the US District Court for the Eastern District of Texas.  The complaint seeks damages, interest, injunctive relief, and attorneys' fees for the alleged infringement of two patents, as well as trebling of damage awards for alleged willful infringement.  We believe we have strong defenses and have defended the lawsuit vigorously.  A part of that defense has been the filing of challenges to the validity of plaintiff's patents in post-grant proceedings at the Patent Trial and Appeal Board ("PTAB") of the U.S. Patent and Trademark Office. In 2015, the PTAB issued decisions holding that all relevant claims of the plaintiff's patents are unpatentable and invalid.  DataTreasury's appeal of the PTAB decisions to the U.S. Court of Appeals for the Federal Circuit was unsuccessful pursuant to decisions rendered on October 13, 2016. On January 11, 2017 DataTreasury petitioned the Supreme Court to review the Federal Court's affirmance.  At this stage, we cannot make a reasonable estimate of possible loss or range of loss, if any, arising from this lawsuit.

NOTE 2.    FAIR VALUE OF FINANCIAL INSTRUMENTS
For cash equivalents, amounts receivable or payable and short-term borrowings, fair values approximate carrying value, based on the short-term nature of the assets and liabilities.
The Company's estimates of the fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets, and requires that observable inputs be used in the valuations when available. The three levels of the hierarchy are as follows:
Level 1: inputs to the valuation are quoted prices in an active market for identical assets
Level 2: inputs to the valuation include quoted prices for similar assets in active markets that are observable either directly or indirectly
Level 3: valuation is based on significant inputs that are unobservable in the market and the Company's own estimates of assumptions that we believe market participants would use in pricing the asset
Fair value of financial assets, included in cash and cash equivalents, and financial liabilities is as follows:
 
 
Estimated Fair Value Measurements
 
Total Fair
 
 
Level 1
 
Level 2
 
Level 3
 
Value
December 31, 2016
 
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
 
Money market funds
 
$
32,610

 
$

 
$

 
$
32,610

 Certificate of Deposit
 
$

 
$
2,000

 
$

 
$
2,000

Financial Liabilities:
 
 
 
 
 
 
 
 
Revolving credit facility
 
$

 
$
50,000

 
$

 
$
50,000

June 30, 2016
 
 

 
 
 
 
 
 

Financial Assets:
 
 
 
 
 
 
 
 
Money market funds
 
$
35,782

 
$

 
$

 
$
35,782

  Certificate of Deposit
 
$

 
$
1,000

 
$

 
$
1,000


NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers in May 2014. The new standard will supersede much of the existing

9


authoritative literature for revenue recognition. In August 2015, the FASB also issued ASU No. 2015-14 which deferred the effective date of the new standard by one year, but allows early application as of the original effective date. We do not intend to adopt the provisions of the new standard early, so the standard and related amendments will be effective for the Company for its annual reporting period beginning July 1, 2018, including interim periods within that reporting period. In March 2016, the FASB issued ASU No. 2016-08, which addresses principal versus agent considerations under the new revenue standard. ASU No. 2016-10 and ASU No. 2016-12, and ASU No. 2016-20 also address specific aspects of the new standard. Entities are allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect as of the beginning of the period of adoption. The Company is currently evaluating the newly issued guidance, including which transition approach will be applied, and continuing to assess all potential impacts of the standard. We expect the adoption of this standard to have a significant impact on our revenue recognition currently subject to Accounting Standards Codification (ASC) Topic 985.
In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability (same treatment as debt discounts). ASU No. 2015-03 is effective for the Company in its fiscal year ending June 30, 2017. In August 2015, the FASB issued ASU No. 2015-15, which clarified that for line-of-credit arrangements, debt issuance costs may continue to be presented as an asset. The Company currently does not have any debt that would fall into the scope of ASU 2015-03, and all of our debt issuance costs relate to our revolving credit facility. Therefore, this currently has no impact on our financial statements.
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. ASU No. 2016-02 will be effective for Jack Henry's annual reporting period beginning July 1, 2019 and early adoption is permitted. The Company is currently assessing the impact this new standard will have on our consolidated financial statements.
The FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, in March 2016. The new standard is intended to simplify several aspects of the accounting and presentation of share-based payment transactions, including reporting of excess tax benefits and shortfalls, statutory minimum withholding considerations, and classification within the statement of cash flows. The standard allows a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate them. ASU No. 2016-09 is effective for the Company’s annual reporting period beginning July 1, 2017. Management elected to early adopt this standard as of July 1, 2016 and has elected to continue our current practice of estimating forfeitures. The adoption of this standard had the following impacts on our condensed consolidated financial statements.
Condensed consolidated statements of income- The new standard requires that the tax effects of share-based compensation be recognized in the provision for income taxes. Previously, these amounts were recognized in additional paid-in capital. For the quarter, we recognized $73 of net tax benefits as reductions of income tax expense, which reduced our effective income tax rate for the second quarter by 0.1% . There was no impact to earnings per share for the quarter. Net tax benefits related to share-based compensation awards of  $2,344 for the six months ended   December 31, 2016  were recognized as reductions of income tax expense. These tax benefits reduced our effective income tax rate for the year-to-date period by  1.3% , and caused an increase in basic and diluted earnings per share of  $0.03  for the six months ended December 31, 2016 . In addition, in calculating potential common shares used to determine diluted earnings per share, generally accepted accounting principles require us to use the treasury stock method. The new standard requires that assumed proceeds under the treasury stock method be modified to exclude the amount of excess tax benefits that would have been recognized in additional paid-in capital. These changes were applied on a prospective basis.
Condensed consolidated statements of cash flows- The Company elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively to all periods presented which resulted in an increase to both net cash provided by operations and net cash used in financing of $301 for the six months ended December 31, 2015 . The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented on our consolidated cash flows statements since such cash flows have historically been presented as a financing activity.
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. Early adoption is permitted. We don't expect any significant impact to our financial statements as a result of this standard.


10


NOTE 4.    DEBT

Capital leases
The Company had previously entered into various capital lease obligations for the use of certain computer equipment, but has no capital lease obligations at December 31, 2016 . At June 30, 2016 , capital lease obligations totaled $200 .
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 December 31, 2016 , the Company was in compliance with all such covenants. The revolving loan terminates February 20, 2020 and at December 31, 2016 , there was a $50,000 outstanding revolving loan balance, which was borrowed on December 12, 2016 . There was no outstanding balance at June 30, 2016 .
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 expires April 30, 2017 . At December 31, 2016 , no amount was outstanding. There also was no balance outstanding at June 30, 2016 .
Interest
The Company paid interest of $188 and $333 during the six months ended December 31, 2016 and 2015 , respectively.

NOTE 5.    INCOME TAXES
The effective tax rate was  33.5%  of income before income taxes for the quarter ended  December 31, 2016 , compared to 29.9%  for the same quarter in fiscal 2016 . The increase in the effective tax rate was primarily due to the recognition of a tax benefit included in the second quarter of fiscal 2016 from the retroactive extension of the federal Research and Experimentation Credit ("R&E Credit").
The Company paid income taxes, net of refunds, of $44,539 and $52,254 in the six months ended December 31, 2016 and 2015 , respectively.
At December 31, 2016 , the Company had $6,334 of gross unrecognized tax benefits, $4,781 of which, if recognized, would affect our effective tax rate. We had accrued interest and penalties of $1,284 and $1,415 related to uncertain tax positions at December 31, 2016 and 2015 , respectively.
During the period ended June 30, 2016, the Internal Revenue Service commenced an examination of the Company’s U.S. federal income tax returns for the fiscal years ended June 30, 2014 and 2015. The examination was completed during the quarter ending December 31, 2016 . The closing of the examination did not result in a material change to the Company’s financial statements. 
The U.S. federal and state income tax returns for fiscal 2013 and all subsequent years remain subject to examination as of December 31, 2016 under statute of limitations rules. We anticipate potential changes due to lapsing statutes of limitations and examination closures could reduce the unrecognized tax benefits balance by $1,000 - $2,000 within twelve months of December 31, 2016 .

NOTE 6.    STOCK-BASED COMPENSATION
Our operating income for the three months ended December 31, 2016 and 2015 included $3,032 and $3,142 of stock-based compensation costs, respectively. For the six months ended December 31, 2016 and 2015 , stock-based compensation totaled $4,230 and $5,112 , respectively.

11


2015 Equity Incentive Plan and 2005 Non-Qualified Stock Option Plan
On November 10, 2015 , the Company adopted the 2015 Equity Incentive Plan ("2015 EIP") for its employees and non-employee directors. The plan allows for grants of stock options, stock appreciation rights, restricted stock shares or units, and performance shares or units. The maximum number of shares authorized for issuance under the plan is 3,000 . For stock options, terms and vesting periods of the options are determined by the Compensation Committee of the Board of Directors when granted. The option period must expire not more than ten years from the option grant date. The options granted under this plan are exercisable beginning three years after the grant date at an exercise price equal to 100% of the fair market value of the stock at the grant date. The options terminate upon surrender of the option, upon the expiration of one year following notification of a deceased optionee, or 10 years after grant.
The Company previously issued options to outside directors under the 2005 Non-Qualified Stock Option Plan (“2005 NSOP”). No additional stock options may be issued under this plan.
A summary of option plan activity under these plans is as follows:
 
Number of Shares
 
Weighted Average Exercise Price
 
Aggregate
 Intrinsic
 Value
Outstanding July 1, 2016
50

 
22.14

 
 
Granted
32

 
87.27

 
 
Forfeited

 

 
 
Exercised

 

 
 
Outstanding December 31, 2016
82

 
$
47.41

 
$
3,379

Vested and Expected to Vest December 31, 2016
82

 
$
47.41

 
$
3,379

Exercisable December 31, 2016
50

 
$
22.14

 
$
3,332

The Company utilized a Black-Scholes option pricing model to estimate fair value of the stock option grants at the grant date. Assumptions such as expected life, volatility, risk-free interest rate, and dividend yield impact the fair value estimate. These assumptions are subjective and generally require significant analysis and judgment to develop. The risk free interest rate used in our estimate was determined from external data, while volatility, expected life, and dividend yield assumptions were derived from our historical experience with share-based payment arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances. The assumptions used in estimating fair value and resulting compensation expenses at the grant dates are as follows:
Expected Life (years)
6.50

Volatility
19.60
%
Risk free interest rate
1.24
%
Dividend yield
1.28
%
At December 31, 2016 , there was $416 of compensation cost yet to be recognized related to outstanding options. The weighted average remaining contractual term on options currently exercisable as of December 31, 2016 was 2.50 years .
2015 Equity Incentive Plan and 2005 Restricted Stock Plan
The Company issues both share awards and unit awards under the 2015 EIP, and previously issued these through the 2005 Restricted Stock Plan. The following table summarizes non-vested share awards as of December 31, 2016 , as well as activity for the six months then ended:
Share awards
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding July 1, 2016
58

 
44.95

Granted
17

 
87.27

Vested
(36
)
 
35.42

Forfeited
(1
)
 
65.52

Outstanding December 31, 2016
38

 
$
72.81


12


At December 31, 2016 , there was $1,667 of compensation expense that has yet to be recognized related to non-vested restricted stock share awards, which will be recognized over a weighted-average period of 1.37 years .
The following table summarizes non-vested unit awards as of December 31, 2016 , as well as activity for the six months then ended:
Unit awards
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Aggregate Intrinsic Value
Outstanding July 1, 2016
429

 
58.06

 
 
Granted
118

 
76.40

 
 
Vested
(134
)
 
49.79

 
 
Forfeited
(37
)
 
54.14

 
 
Outstanding December 31, 2016
376

 
$
67.14

 
$
33,334

The Company utilized a Monte Carlo pricing model customized to the specific provisions of the Company’s plan design to value unit awards subject to performance targets on the grant dates. The weighted average assumptions used in this model to estimate fair value at the measurement date and resulting values for 85 unit awards granted in fiscal 2017 are as follows:
Volatility
16.00
%
Risk free interest rate
0.93
%
Dividend yield
1.30
%
Stock Beta
0.684

The remaining 33 unit awards granted are not subject to performance targets, and therefore the estimated fair value at measurement date is valued in the same manner as restricted stock share award grants.
At December 31, 2016 , there was $14,232 of compensation expense that has yet to be recognized related to non-vested restricted stock unit awards, which will be recognized over a weighted-average period of 1.51 years .

NOTE 7.    EARNINGS PER SHARE
The following table reflects the reconciliation between basic and diluted earnings per share.
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2016
 
2015
 
2016
 
2015
Net Income
$
58,814

 
$
59,348

 
$
121,058

 
$
110,714

Common share information:
 
 
 
 
 
 
 
Weighted average shares outstanding for basic earnings per share
77,814

 
79,473

 
78,114

 
80,009

Dilutive effect of stock options and restricted stock
366

 
297

 
398

 
243

Weighted average shares outstanding for diluted earnings per share
78,180

 
79,770

 
78,512

 
80,252

Basic earnings per share
$
0.76

 
$
0.75

 
$
1.55

 
$
1.38

Diluted earnings per share
$
0.75

 
$
0.74

 
$
1.54

 
$
1.38

Per share information is based on the weighted average number of common shares outstanding for the three and six months ended December 31, 2016 and 2015 . Stock options and restricted stock have been included in the calculation of earnings per share to the extent they are dilutive. There were 32 anti-dilutive stock options and restricted stock shares excluded for the three month period ended December 31, 2016 and no  shares excluded for the  three month period ended   December 31, 2015 . For the six months ended December 31, 2016 , there were 32 anti-dilutive shares excluded, and for the six months ended December 31, 2015 , no shares were excluded.


13


NOTE 8.    BUSINESS ACQUISITION
Bayside Business Solutions, Inc.
Effective July 1, 2015 , the Company acquired all of the equity interests of Bayside Business Solutions, an Alabama-based company that provides technology solutions and payment processing services primarily for the financial services industry, for $10,000 paid in cash. This acquisition was funded using existing operating cash. The acquisition of Bayside Business Solutions expanded the Company’s presence in commercial lending within the industry.
Management has completed a purchase price allocation of Bayside Business Solutions and its assessment of the fair value of acquired assets and liabilities assumed. The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their fair values as of July 1, 2015 are set forth below:
Current assets
$
1,922

Long-term assets
253

Identifiable intangible assets
5,005

Total liabilities assumed
(3,279
)
Total identifiable net assets
3,901

Goodwill
6,099

Net assets acquired
$
10,000

The goodwill of $6,099 arising from this acquisition consists largely of the growth potential, synergies and economies of scale expected from combining the operations of the Company with those of Bayside Business Solutions, together with the value of Bayside Business Solutions’ assembled workforce. Goodwill from this acquisition, none of which is expected to be deductible for income tax purposes, has been allocated in our Bank Systems and Services segment.
Identifiable intangible assets from this acquisition consist of customer relationships of $3,402 , $659 of computer software and other intangible assets of $944 . The weighted average amortization period for acquired customer relationships, acquired computer software, and other intangible assets is 15 years , 5 years , and 20 years , respectively.
Current assets were inclusive of cash acquired of $1,725 . The fair value of current assets acquired included accounts receivable of $178 . The gross amount of receivables was $178 , none of which was expected to be uncollectible.
During fiscal year 2016, the Company incurred $55 in costs related to the acquisition of Bayside Business Solutions. These costs included fees for legal, valuation and other fees. These costs were expensed as incurred and were included within general and administrative expenses.
The Company's consolidated statements of income for the second quarter of fiscal 2017 included revenue of $1,464 and after-tax net income of $202 resulting from Bayside Business Solutions' operations. For the second quarter of fiscal 2016 , Bayside contributed revenue of $989 and after-tax net income of $44 .
The results of Bayside Business Solutions’ operations included in the Company’s consolidated statements of income for the six months ended December 31, 2016 included revenue of $2,934 and after-tax net income of $450 . For the six months ended December 31, 2015 , Bayside Business Solutions' contributed $1,730 to revenue, with an after-tax net loss of $310 .
The impact of this acquisition was considered immaterial to both the current and prior periods of our consolidated financial statements and pro forma financial information has not been provided.

NOTE 9.    REPORTABLE SEGMENT INFORMATION
The Company is a provider of integrated computer systems that perform data processing (available for in-house installations or outsourced services) for banks and credit unions. The Company’s operations are classified into two reportable segments: bank systems and services (“Bank”) and credit union systems and services (“Credit Union”). The Company evaluates the performance of its segments and allocates resources to them based on various factors, including prospects for growth, return on investment, and return on revenue.


14


 
Three Months Ended
 
Three Months Ended
 
December 31, 2016
 
December 31, 2015
 
Bank
 
Credit Union
 
Total
 
Bank
 
Credit Union
 
Total
REVENUE
 
 
 
 
 
 
 
 
 
 
 
License
$
745

 
$
104

 
$
849

 
$
563

 
$
71

 
$
634

Support and service
253,568

 
83,947

 
337,515

 
232,731

 
87,488

 
320,219

Hardware
6,246

 
3,943

 
10,189

 
7,735

 
4,284

 
12,019

Total revenue
260,559

 
87,994

 
348,553

 
241,029

 
91,843

 
332,872

COST OF SALES
 
 
 
 
 
 
 
 
 
 
 
Cost of license
49

 
10

 
59

 
448

 
50

 
498

Cost of support and service
150,088

 
41,181

 
191,269

 
137,787

 
44,202

 
181,989

Cost of hardware
3,965

 
2,853

 
6,818

 
4,979

 
2,979

 
7,958

Total cost of sales
154,102

 
44,044

 
198,146

 
143,214

 
47,231

 
190,445

GROSS PROFIT
$
106,457

 
$
43,950

 
150,407

 
97,815

 
44,612

 
142,427

 
 
 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
61,801

 
 
 
 
 
57,640

 
 
 
 
 
 
 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
(124
)
 
 
 
 
 
(185
)
 
 
 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
 
 
 
$
88,482

 
 
 
 
 
$
84,602


 
Six Months Ended
 
Six Months Ended
 
December 31, 2016
 
December 31, 2015
 
Bank
 
Credit Union
 
Total
 
Bank
 
Credit Union
 
Total
REVENUE
 
 
 
 
 
 
 
 
 
 
 
License
$
1,200

 
$
343

 
$
1,543

 
$
1,809

 
$
428

 
$
2,237

Support and service
503,889

 
166,672

 
670,561

 
460,354

 
167,612

 
627,966

Hardware
13,292

 
8,185

 
21,477

 
15,579

 
8,708

 
24,287

Total revenue
518,381

 
175,200

 
693,581

 
477,742

 
176,748

 
654,490

COST OF SALES
 
 
 
 
 
 
 
 
 
 
 
Cost of license
242

 
69

 
311

 
562

 
118

 
680

Cost of support and service
292,899

 
84,262

 
377,161

 
273,153

 
83,550

 
356,703

Cost of hardware
9,291

 
6,145

 
15,436

 
10,532

 
6,194

 
16,726

Total cost of sales
302,432

 
90,476

 
392,908

 
284,247

 
89,862

 
374,109

GROSS PROFIT
$
215,949

 
$
84,724

 
300,673

 
$
193,495

 
$
86,886

 
280,381

 
 
 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
120,649

 
 
 
 
 
115,057

 
 
 
 
 
 
 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
(159
)
 
 
 
 
 
(292
)
 
 
 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
 
 
 
$
179,865

 
 
 
 
 
$
165,032



15


The Company has not disclosed any additional asset information by segment, as the information is not produced internally and its preparation is impracticable.

NOTE 10: SUBSEQUENT EVENTS
None.





16


ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements included in this Form 10-Q for the quarter ended December 31, 2016 .
OVERVIEW
Jack Henry & Associates, Inc. (JHA) 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® supports banks ranging from community to multi-billion dollar institutions with information and transaction processing solutions.  Symitar® is a leading provider of information and transaction processing solutions for credit unions of all sizes.  ProfitStars® provides specialized products and services that enable financial institutions of every asset size and charter, and diverse corporate entities outside the financial services industry, to mitigate and control risks, optimize revenue and growth opportunities, and contain costs. JHA's integrated solutions are available for in-house installation and outsourced delivery.
A significant portion of our revenue is derived from recurring outsourcing fees and electronic payment transaction processing fees that predominantly have contract terms of five years or greater at inception. Support and service fees also include in-house maintenance fees which primarily contain annual contract terms, implementation services revenue, and bundled services revenue, which is a combination of license, implementation, and maintenance revenue from our revenue arrangements. Less predictable software license fees and hardware sales complement our primary revenue sources. We continually seek opportunities to increase revenue while at the same time containing costs to expand margins.
RESULTS OF OPERATIONS
In the second quarter of fiscal 2017 , revenues increased 5% or $15,681 compared to the same quarter in the prior year, with strong growth continuing in our support and service revenues, particularly in our OutLink and bundled services revenue streams. Cost of sales increased 4% and gross margin increased 6% . The Company continues to focus on cost management. The second quarter of fiscal 2016 included $8,251 in revenue from the Company's Alogent product line, which was sold in the fourth quarter of fiscal 2016 . Excluding Alogent revenue and cost from the prior year quarter, revenue for the second quarter increased 7% and gross margin increased 9% .
Operating expenses increased 7% compared to the second quarter of fiscal 2016 , mainly due to increased salaries and benefits. The provision for income taxes increased 17% compared to the prior quarter, primarily due to the recognition of a tax benefit in the prior year second quarter from the retroactive extension of the federal Research and Experimentation Credit.
The increased revenue and above changes resulted in a 5% increase in income before income taxes, however the higher effective tax rate led to a 1% decrease in net income for the second quarter of fiscal 2017 compared to the second quarter in fiscal 2016 .
In the six months ended December 31, 2016 , revenues increased 6% or $39,091 compared to the same six months last year, with all of the growth occurring in our support & service revenue, particularly our Outlink, bundled services, and electronic payment services revenue. Cost of sales increased 5% , gross margin increased 7% , and operating expenses increased 5% for the six month period ended December 31, 2016 . Provision for income taxes increased 8% compared to the prior year-to-date period. The increased revenue and above changes resulted in a 9% increase in net income for the six month period.
We move into the third quarter of fiscal 2017 following strong performance in the second quarter. Significant portions of our business continue to come from 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. 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 three and six months ending December 31, 2016 follows. All dollar amounts are in thousands and discussions compare the current three and six months ending December 31, 2016 to the prior year three and six months ending December 31, 2015 .

17

Table of Contents

REVENUE
License Revenue
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
% Change
 
2016
 
2015
 
 
 
2016
 
2015
 
 
License
$
849

 
$
634

 
34
%
 
$
1,543

 
$
2,237

 
(31
)%
Percentage of total revenue
<1%

 
<1%

 
 
 
<1%

 
<1%

 
 

Non-bundled license revenue for the second quarter was higher than for the same quarter of fiscal 2016 due mainly to increased sales of Synergy standalone licenses. The year-to-date period of fiscal 2017 was lower than the same period of the prior year due mainly to a reduction of standalone license sales in both our Banking and Credit Union segments. Such license fees will fluctuate as non-bundled license sales are sporadic in nature.
Support and Service Revenue
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
%
Change
 
2016
 
2015
 
 
 
2016
 
2015
 
 
Support and service
$
337,515

 
$
320,219

 
5
%
 
$
670,561

 
$
627,966

 
7
%
Percentage of total revenue
97
%
 
96
 %
 
 
 
97
%
 
96
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Qtr over Qtr
 
 
 
Year over Year
 
 
 
$ Change
 
% Change
 
 
 
$ Change
 
% Change
 
 
In-House Support & Other Services
$
413

 
 %
 
 
 
$
929

 
1
 %
 
 
Electronic Payment Services
1,005

 
1
 %
 
 
 
10,295

 
4
 %
 
 
Outsourcing Services
12,523

 
17
 %
 
 
 
25,624

 
18
 %
 
 
Implementation Services
(2,124
)
 
(13
)%
 
 
 
(3,596
)
 
(11
)%
 
 
Bundled Products & Services
5,479

 
30
 %
 
 
 
9,343

 
34
 %
 
 
Total Increase
$
17,296

 
 
 
 
 
$
42,595

 
 
 
 
There was growth in most support and service revenue components in the second quarter of fiscal 2017 compared to the same quarter last year, as well as in the year-to-date period ended December 31, 2016 .
In-house support and other services revenue increased in both the quarter and year-to-date period due mainly to increased revenue from work orders and from customers consulting with our Client Services Consulting group. The group's operational assessments help banks and credit unions maximize their operating efficiency and productivity, identify new revenue and market opportunities, and reduce costs.
Electronic payment services revenue continues to show growth. The revenue increase in both the quarter and year-to-date period is attributable to increased revenue across debit/credit card transaction processing services and ACH processing. A portion of the increase in the quarter was offset by lower deconversion fees compared to the second quarter of fiscal 2016 . These are fees charged when agreements are canceled prior to the end of their contracted term. Deconversion fees for electronic payment services decreased $5,333 for the second quarter compared to the prior year second quarter, and without the impact of these fees electronic payment services revenue grew 5% . For the year-to-date period, deconversion fees within electronic payment services are down $2,767 , and excluding the impact of these fees, revenue grew 5% .
Outsourcing services for banks and credit unions continue to drive revenue growth as customers continue to show a preference for outsourced delivery of our solutions. Revenues from outsourcing services are typically earned under multi-year service contracts and therefore provide a long-term stream of recurring revenues. We expect the trend towards outsourced product delivery to benefit outsourcing services revenue for the foreseeable future. The increases in outsourcing revenue in both the quarter and year-to-date period were mainly due to increased data processing fees. Deconversion fees also increased $3,218 for the quarter ended December 31, 2016 compared to the same quarter in the prior year, and $6,623 for the year-to-date period. Excluding the impact of deconversion fees, outsourcing revenue grew 13% in the second quarter compared to the prior year second quarter and 14% in the year-to-date period.
Implementation services include revenue from implementations for our electronic payment services customers as well as standalone customization services, merger conversion services, image conversion services and network monitoring services. Implementation services revenue was lower in both the current quarter and year-to-date periods due to revenue from Alogent included in the prior year.

18

Table of Contents

Bundled products and services revenue is combined revenue from the multiple elements in our bundled arrangements, including license, implementation services and maintenance, which cannot be recognized separately due to a lack of vendor-specific objective evidence of fair value. Bundled products and services revenue increased quarter-to-date and year-to-date due to terminations of pending products and services on certain contracts that have allowed for the release of revenue that was being deferred until contract completion in our banking core and complementary arrangements, as well as increased revenue being released due to completion of final installations and services on our banking multiple element arrangements. Bundled revenue for our credit union arrangements was down for both the quarter and year-to-date compared to the same periods of fiscal 2016 .
Hardware Revenue
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
%
Change
 
2016
 
2015
 
 
 
2016
 
2015
 
 
Hardware
$
10,189

 
$
12,019

 
(15
)%
 
$
21,477

 
$
24,287

 
(12
)%
Percentage of total revenue
3
%
 
4
%
 
 

 
3
%
 
4
%
 
 
Hardware revenue decreased in the second quarter and year-to-date period of fiscal 2017 compared to the same quarter and year-to-date period a year ago due to decreases in revenue from power systems, servers, scanners, and other hardware compared to the prior year. Although there will be quarterly fluctuations, we expect an overall decreasing trend in hardware revenue to continue due to the change in sales mix towards outsourcing contracts, which typically do not include hardware, and the general deflationary trend of computer hardware prices.
COST OF SALES AND GROSS PROFIT
 
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
%
Change
 
2016
 
2015
 
 
 
2016
 
2015
 
 
Cost of License
$
59

 
$
498

 
(88
)%
 
$
311

 
$
680

 
(54
)%
Percentage of total revenue
<1%

 
<1%

 
 
 
<1%

 
<1%

 
 
License Gross Profit
$
790

 
$
136

 
481
 %
 
$
1,232

 
$
1,557

 
(21
)%
Gross Profit Margin

93
%
 
21
%
 
 
 
80
%
 
70
%
 
 
Cost of support and service
$
191,269

 
$
181,989

 
5
 %
 
$
377,161

 
$
356,703

 
6
 %
Percentage of total revenue
55
%
 
55
%
 
 
 
54
%
 
55
%
 
 
Support and Service Gross Profit
$
146,246

 
$
138,230

 
6
 %
 
$
293,400

 
$
271,263

 
8
 %
Gross Profit Margin

43
%
 
43
%
 
 
 
44
%
 
43
%
 
 
Cost of hardware
$
6,818

 
$
7,958

 
(14
)%
 
$
15,436

 
$
16,726

 
(8
)%
Percentage of total revenue
2
%
 
2
%
 
 
 
2
%
 
3
%
 
 
Hardware Gross Profit
$
3,371

 
$
4,061

 
(17
)%
 
$
6,041

 
$
7,561

 
(20
)%
Gross Profit Margin

33
%
 
34
%
 
 
 
28
%
 
31
%
 
 
TOTAL COST OF SALES
$
198,146

 
$
190,445

 
4
 %
 
$
392,908

 
$
374,109

 
5
 %
Percentage of total revenue
57
%
 
57
%
 
 
 
57
%
 
57
%
 
 
TOTAL GROSS PROFIT
$
150,407

 
$
142,427

 
6
 %
 
$
300,673

 
$
280,381

 
7
 %
Gross Profit Margin
43
%
 
43
%
 
 
 
43
%
 
43
%
 
 
Cost of license consists of the direct costs of third party software that are a part of a non-bundled arrangement. Non-bundled license sales are sporadic in nature, and shifts in the sales mix between the products that make up the associated costs cause fluctuations in the margins from period to period.
Cost of support and service increased 5% in the current quarter, in line with the revenue increase and gross profit margin was a consistent 43% of revenue in both the current and prior year second quarter. For the year-to-date period, cost of support and service increased just 6% while revenue increased 7% , contributing to an increase in gross profit of 8% .
In general, changes in cost of hardware trend consistently with hardware revenue. For the current quarter and year-to-date period, margins were lower due to increased sales of lower margin hardware upgrade products.

19

Table of Contents


OPERATING EXPENSES
Selling and Marketing
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
%
Change
 
2016
 
2015
 
 
 
2016
 
2015
 
 
Selling and marketing
$
21,903

 
$
22,231

 
(1
)%
 
$
44,030

 
$
43,982

 
%
Percentage of total revenue
6
%
 
7
%
 
 
 
6
%
 
7
%
 
 
Selling and marketing expenses for the second quarter of fiscal 2017 decreased over the prior year quarter due mainly to decreased commission expense for license and hardware. Selling and marketing expense declined as a percentage of total revenue in both the quarter and the six months ending December 31, 2016 compared to same periods of the prior year.
Research and Development
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
%
Change
 
2016
 
2015
 
 
 
2016
 
2015
 
 
Research and development
$
20,873

 
$
18,862

 
11
%
 
$
40,611

 
$
37,416

 
9
%
Percentage of total revenue
6
%
 
6
%
 
 
 
6
%
 
6
%
 
 
Research and development expenses increased for the quarter and year-to-date, primarily due to increased salary and personnel costs from increased headcount and annual pay increases, however remained consistent with the prior year as a percentage of total revenue.
General and Administrative
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
%
Change
 
2016
 
2015
 
 
 
2016
 
2015
 
 
General and administrative
$
19,025

 
$
16,547

 
15
%
 
$
36,008

 
$
33,659

 
7
%
Percentage of total revenue
5
%
 
5
%
 
 
 
5
%
 
5
%
 
 
General and administrative expenses in the current quarter and fiscal year-to-date were higher than in the same periods of fiscal 2016 , due mainly to increased headcount, salaries, and related costs, but remained at a consistent percentage of total revenue.
INTEREST INCOME AND EXPENSE
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
%
Change
 
2016
 
2015
 
 
 
2016
 
2015
 
 
Interest Income
$
60

 
$
91

 
(34
)%
 
$
167

 
$
204

 
(18
)%
Interest Expense
$
(184
)
 
$
(276
)
 
(33
)%
 
$
(326
)
 
$
(496
)
 
(34
)%
Interest income fluctuated due to changes in invested balances and yields on invested balances. Interest expense remained low for both the current and prior periods. Lower borrowings in the current year resulted in lower interest expense for both the quarter and year-to-date periods compared to the prior year periods.
PROVISION FOR INCOME TAXES
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
%
Change
 
2016
 
2015
 
 
 
2016
 
2015
 
 
Provision For Income Taxes
$
29,668

 
$
25,254

 
17
%
 
$
58,807

 
$
54,318

 
8
%
Effective Rate
33.5
%
 
29.9
%
 
 
 
32.7
%
 
32.9
%
 
 
The increase in the effective tax rate for the quarter was primarily due to recognition of a tax benefit included in the second quarter of fiscal 2016 from the retroactive extension of the federal Research and Experimentation Credit ("R&E Credit"). The year-to-date tax rate is consistent with the prior year.
NET INCOME
Net income decreased 1% to $58,814 , or $0.75 per diluted share for the second quarter of fiscal 2017 , compared to $59,348 , or $0.74 per diluted share, in the same period of fiscal 2016 . The decrease was due to the higher effective

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tax rate in the current quarter. Net Income for the year-to-date period increased to $121,058 , or $1.54 per diluted share in fiscal 2017 from $110,714 , or $1.38 per diluted share in the prior year-to-date period.

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 two reportable segments: bank systems and services (“Bank”) and credit union systems and services (“Credit Union”). The Company evaluates the performance of its segments and allocates resources to them based on various factors, including prospects for growth, return on investment, and return on revenue.
Bank Systems and Services
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended December 31,
 
% Change
 
Six Months Ended December 31,
 
% Change
 
2016
 
2015
 

 
2016
 
2015
 

Revenue
$
260,559

 
$
241,029

 
8
%
 
$
518,381

 
$
477,742

 
9
%
Gross profit
$
106,457

 
$
97,815

 
9
%
 
$
215,949

 
$
193,495

 
12
%
Gross profit margin
41
%
 
41
%
 
 

 
42
%
 
41
%
 
 

Revenue in the Bank segment increased  8%  compared to the equivalent quarter last fiscal year, despite revenue headwinds of $8,251 due to the sale of Alogent in the fourth quarter of fiscal 2016. Excluding Alogent revenue from the prior year quarter, banking segment revenue increased 12% . The increase in the current quarter was due to a 9% increase in support & services revenues, partly offset by decreased hardware sales. The increase in support & service revenue was driven by increased outsourcing services, transaction processing services, and increased recognition of bundled revenue, and was partially offset by decreased in-house maintenance due to the conversion of more customers to OutLink and decreased stand-alone implementation revenue.
For the six months ending December 31, 2016 , revenue for the Bank segment increased 9% over the same period last year, driven also by a 9% increase in support and service revenue. Excluding the impact of Alogent revenue from the first six months of the prior year, banking segment revenue increased 12% . Areas generating the highest revenue growth were outsourcing, transaction processing, and bundled revenue. In-house maintenance and stand-alone implementation decreased compared to the six months ending December 31, 2015 .
Gross profit margin for the second quarter was consistent with the prior year quarter, and year-to-date gross profit margin showed a slight increase.
Credit Union Systems and Services
 
Three Months Ended December 31,
 
% Change
 
Six Months Ended December 31,
 
% Change
 
2016
 
2015
 
 
 
2016
 
2015
 
 
Revenue
$
87,994

 
$
91,843

 
(4
)%
 
$
175,200

 
$
176,748

 
(1
)%
Gross profit
$
43,950

 
$
44,612

 
(1
)%
 
$
84,724

 
$
86,886

 
(2
)%
Gross profit margin
50
%
 
49
%
 
 
 
48
%
 
49
%
 
 
Revenue in the Credit Union segment for the three months ended December 31, 2016 decreased 4% due mainly to decreases in support & service revenue. Support & service revenues were 4% lower than in the same quarter of fiscal 2016 due mainly to decreased deconversion fees in electronic payment services and decreased revenue from Europay, Mastercard and Visa (EMV) card manufacturing. These decreases were partially offset by increased in-house support and services from annual maintenance renewal fee increases.
Year-to-date revenue for the Credit Union segment decreased 1% over the same period last year due again to the decreased deconversion fees in electronic payment services, and partially offset by increased annual maintenance fees.
Gross profit margin for the Credit Union segment increased slightly for the quarter, but year-to-date are slightly lower than the six months ending December 31, 2015 .


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LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased to $64,188 at December 31, 2016 from $70,310 at June 30, 2016 . The decrease from  June 30, 2016  is primarily due to the purchase of treasury shares.
The following table summarizes net cash from operating activities in the statement of cash flows:
 
Six Months Ended
 
December 31,
 
2016
 
2015
Net income
$
121,058

 
$
110,714

Non-cash expenses
83,106

 
74,074

Change in receivables
107,667

 
98,487

Change in deferred revenue
(113,612
)
 
(92,911
)
Change in other assets and liabilities
(34,352
)
 
(43,084
)
Net cash provided by operating activities
$
163,867

 
$
147,280

Cash provided by operating activities increased 11% 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 six months of fiscal 2017 totaled $69,703 and included $41,673 for the ongoing enhancements and development of existing and new product service offerings, capital expenditures on facilities and equipment of $17,405 , mainly for the purchase of computer equipment, and $11,455 for the purchase and development of internal use software. This was partially offset by $830 of proceeds from asset sales. Cash used in investing activities for the first six months of fiscal 2016 totaled $93,120 and included $47,903 for the development of software, capital expenditures of $31,506 , $8,183 for the purchase and development of internal use software, and $8,275 for the acquisition of Bayside, partially offset by $2,747 of proceeds from the sale of assets.
Financing activities used cash of $100,286 for the first six months of fiscal 2017 . Cash used was $103,885 for the purchase of treasury shares, dividends paid to stockholders of $43,582 , repayment of capital leases of $200 , and $2,619 net cash outflow from the issuance of stock and tax related to stock-based compensation. This was partly offset by borrowing of $50,000 on our revolving credit facility. Financing activities used cash in the first six months of fiscal 2016 of $147,347 . Cash used was $155,122 for the purchase of treasury shares, repayments on our revolving credit facility and capital leases of $52,374 , and dividends paid to stockholders of $39,972 . This was partially offset by borrowings of $100,000 and $121 net cash inflow from the issuance of stock and tax related to stock-based compensation.
At December 31, 2016 , the Company had negative working capital of $4,851 , however, the largest component of current liabilities was deferred revenue of $245,170 , which primarily relates to our annual in-house maintenance agreements and deferred bundled product and service arrangements. The cash outlay necessary to provide the services related to these deferred revenues is significantly less than this recorded balance. In addition, we have not experienced any significant issues with our current collection efforts and we have access to remaining lines of credit in excess of $250,000 . We continue to generate substantial cash inflows from operations. Therefore, we do not anticipate any liquidity problems arising from this condition.
Capital Requirements and Resources
The Company generally uses existing resources and funds generated from operations to meet its capital requirements. Capital expenditures totaling $17,405 and $31,506 for the six months ending December 31, 2016 and December 31, 2015 , 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  2017  are not expected to exceed  $60,000  and will be funded from cash generated by operations.
The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves or borrowings on its existing line-of-credit. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At December 31, 2016 , there were 25,410 shares in treasury stock and the Company had the remaining authority to repurchase up to 4,580 additional shares. The total cost of treasury shares at December 31, 2016 is $980,019 . During the first six months of fiscal 2017 , the Company repurchased 1,202 treasury shares for $103,885 . At June 30, 2016 , there were 24,209 shares in treasury stock and the Company had authority to repurchase up to 5,782 additional shares.

22

Table of Contents

Capital leases
The Company had previously entered into various capital lease obligations for the use of certain computer equipment, but has no capital lease obligations at December 31, 2016 .
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 December 31, 2016 , the Company was in compliance with all such covenants. The revolving loan terminates February 20, 2020 and at December 31, 2016 , the outstanding revolving loan balance was $50,000 .
Other lines of credit
The Company has an unsecured bank credit line on which provides for funding of up to $5,000 and bears interest at the prime rate less 1% . The credit line expires April 30, 2017 . At December 31, 2016 , no amount was outstanding.


23


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, volatilities, correlations or other market factors such as liquidity, will result in losses for a certain financial instrument or group of financial instruments. We are currently exposed to credit risk on credit extended to customers and at times are exposed to interest risk on outstanding debt. We do not currently use any derivative financial instruments. We actively monitor these risks through a variety of controlled procedures involving senior management.
Based on the controls in place and the credit worthiness of the customer base, we believe the credit risk associated with the extension of credit to our customers will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
Based on our outstanding debt with variable interest rates as of December 31, 2016 , a 1% increase in our borrowing rate would increase our annual interest expense by $500 .

ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of our management, including the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, the CEO and CFO concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. For this purpose, disclosure controls and procedures include controls and procedures designed to ensure that information that is required to be disclosed under the Exchange Act is accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ending December 31, 2016 , there was no change in internal control over financial reporting that has materially affected, or is reasonably likely to affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION
ITEM 1.        LEGAL PROCEEDINGS
Information with regard to our legal proceedings may be found at "Litigation" in Note 1 to the Financial Statements in Part 1, Item1, which is incorporated herein by reference.

ITEM 2.        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following shares of the Company were repurchased during the quarter ended December 31, 2016 :
 
Total Number of Shares Purchased  (1)
 
Average Price of Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans  (1)
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans  (2)
October 1- October 31, 2016

 
$

 

 
5,081,924

November 1- November 30, 2016
501,622

 
84.84

 
501,520

 
4,580,404

December 1- December 31, 2016
538

 
89.58

 

 
4,580,404

Total
502,160

 
84.84

 
501,520

 
4,580,404

(1) 501,520 shares were purchased through a publicly announced repurchase plan. There were 640 shares surrendered to the Company to satisfy tax withholding obligations in connection with employee restricted stock awards.
(2) Total stock repurchase authorizations approved by the Company's Board of Directors as of February 17, 2015 were for 30.0 million shares. These authorizations have no specific dollar or share price targets and no expiration dates.

24

Table of Contents



ITEM 6.        EXHIBITS

10.61
Jack Henry & Associates, Inc. 2006 Employee Stock Purchase Plan, as amended and restated effective November 10, 2016, attached as Exhibit 99.1 to the Company's Current Report on Form 8-K filed November 16, 2016.

31.1
Certification of the Chief Executive Officer.

31.2
Certification of the Chief Financial Officer.

32.1
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.

32.2
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

101.INS*
XBRL Instance Document

101.SCH*
XBRL Taxonomy Extension Schema Document

101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*
XBRL Taxonomy Extension Label Linkbase Document

101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document

* Furnished with this quarterly report on Form 10-Q are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets at December 31, 2016 and June 30, 2016 , (ii) the Condensed Consolidated Statements of Income for the three and six months ended December 31, 2016 and 2015 , (iii) the Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2016 and 2015 , and (iv) Notes to Condensed Consolidated Financial Statements.

25

Table of Contents


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
 
JACK HENRY & ASSOCIATES, INC.
 
 
 
 
Date:
February 9, 2017
 
/s/ David B. Foss
 
 
 
David B. Foss
 
 
 
Chief Executive Officer and President
 
 
 
 
Date:
February 9, 2017
 
/s/ Kevin D. Williams
 
 
 
Kevin D. Williams
 
 
 
Chief Financial Officer and Treasurer


26


EXHIBIT 31.1
CERTIFICATION
I, David B. Foss, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jack Henry & Associates, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter, (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the  registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: February 9, 2017
 
 
/s/ David B. Foss
 
 
David B. Foss
 
 
Chief Executive Officer
 
 
 
 
 
 





EXHIBIT 31.2
CERTIFICATION
I, Kevin D. Williams, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jack Henry & Associates, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter, (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the  registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Date: February 9, 2017
 
 
/s/ Kevin D. Williams
 
 
Kevin D. Williams
 
 
Chief Financial Officer
 
 
 
 
 
 





EXHIBIT 32.1

Certification of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350

Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Chief Executive Officer of Jack Henry & Associates, Inc. (the "Company"), hereby certify that the Quarterly Report on Form 10-Q of the Company for the six month period ended ended December 31, 2016 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Dated:   February 9, 2017
 
 
*/s/ David B. Foss
 
 
David B. Foss
 
 
Chief Executive Officer