Jack Henry & Associates
Annual Report 2016

Plain-text annual report

2016 ANNUAL REPORT JACK HENRY & ASSOCIATES, INC. ® 2 0 1 6 A N N U A L R E P O R T 4 0 Y E A R S S T R O N G Every company has a story, and this year we’re honored to say that ours is 40 years old. Since our founding in 1976 when Jack Henry and Jerry Hall wrote their vision for Jack Henry & Associates, Inc.® on a napkin, we’ve experienced tremendous growth thanks to the dedication and hard work of our associates, the partnership of our clients, and the commitment of our shareholders. From our humble beginnings, the values and philosophy established by our co-founders have guided us, and they remain the cornerstone of our culture, business, and success today. To commemorate our 40 year anniversary, in early 2016 we initiated a campaign where we asked those who have experienced our culture firsthand to share their own stories. Hundreds of associates, clients, and partners responded to the question: What does the Jack Henry & Associates culture mean to you? The answers we received were varied – from the heartfelt and patriotic to the humorous and nostalgic – and each submission added a unique perspective on what it means to be a part of our amazing culture. Read more about this anniversary campaign beginning on page 12 of this report. Thank you to our associates, clients, business partners, and shareholders. You have been integral in building a culture that we’re proud to share and celebrate. TOGETHER, WE ARE 40 YEARS STRONG. TA B L E O F C O N T E N T S 2 | FINANCIAL HIGHLIGHTS 3 | JHA’S STOCK PERFORMANCE THROUGH THE YEARS 4 | SHAREHOLDERS’ LETTER 8 | COMPANY TIMELINE 10 | JHA TODAY 12 | THE 40TH ANNIVERSARY CULTURE PROJECT 21 | MARKET FOR REGISTRANT’S COMMON EQUITY 22 | PERFORMANCE GRAPH 23 | SELECTED FINANCIAL DATA 23 | MANAGEMENT’S DISCUSSION AND ANALYSIS 36 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 37 | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 62 | QUARTERLY FINANCIAL INFORMATION 64 | BOARD OF DIRECTORS AND EXECUTIVE OFFICERS 1 2016 ANNUAL REPORTF I N A N C I A L H I G H L I G H T S (IN MILLIONS EXCEPT PER SHARE DATA) R E V E N U E N E T I N C O M E $1,173 $1,256 $1,355 D I L U T E D E A R N I N G S P E R S H A R E $2.19 $2.59 $3.12 2014 2015 2016 2014 2015 2016 $187 $211 $249 $1,681 $1,837 $1,816 T O TA L A S S E T S S T O C K H O L D E R S ’ E Q U I T Y D I V I D E N D S D E C L A R E D P E R S H A R E $967 $992 $996 2014 2015 2016 $0.84 $0.94 $1.06 20 14 20 15 20 16 20 14 20 15 20 16 20 14 20 15 20 16 2 2016 ANNUAL REPORTJ H A S T O C K P E R F O R M A N C E T H R O U G H T H E Y E A R S On November 20, 1985, an Initial Public Offering (IPO) made Since our IPO, our market capitalization has grown JHA a public company trading 3,125,000 common shares 32,537%, a compounded average annual growth rate of on the NASDAQ exchange under the symbol JKHY. Over 20.9%. Our total shareholder return (change in stock price the 30+ years since, our stock has generated extraordinary plus dividends paid) has grown 25,513% since our IPO, a returns for our shareholders. compounded average annual growth of 19.9%. If you had exercised the exceptional foresight to invest in 100 shares of Jack Henry common stock at the time of the IPO in 1985 at the offering price of $6.75 per share, and continued to hold those shares together with all stock splits and dividends since, your original investment of $675 would have grown to a value of $169,301 as of June 30, 2016! IN 2016, THE WALL STREET JOURNAL RANKED JKHY STOCK NO. 9 AMONG THE TOP 30 STOCKS DURING THE LAST 30 YEARS. QUARTERLY DIVIDENDS PAID BY FISCAL YEAR | DIVIDENDS ADJUSTED FOR STOCK SPLITS D N E D I V I D $1.200 $1.000 $0.800 $0.600 $0.400 $0.200 $0.000 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 FISCAL YEAR FISCAL YEAR END STOCK PRICE | PRICE ADJUSTED FOR STOCK SPLITS E S O L C . J D A $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 3 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 FISCAL YEAR END 2016 ANNUAL REPORT F E L L O W S H A R E H O L D E R S As we commemorate 40 years in business, now is an opportune time to reflect on our early days and take pride in the foundational principles that have molded JHA’s culture. The financial services industry has changed dramatically since our company’s inception in 1976, and we’ve prospered through it all because of our dedication to providing high-quality business solutions backed by exceptional customer care. WHILE IT’S REWARDING TO CELEBRATE HOW FAR WE’VE COME, WE REMAIN FOCUSED ON WHERE WE’RE GOING. WITH A STABLE ECONOMY AND FINANCIAL INDUSTRY HEALTH REMAINING STRONG, JHA IS WELL- POSITIONED FOR THE FUTURE. We remain committed to effectively navigating and of Executive Chairman. Effective with the executive innovating in our rapidly evolving market, providing leadership transition, other organizational changes the technology that drives our clients’ success and were made to streamline our business and bolster empowers their customers’ financial experiences. We the effectiveness of our collective sales and believe that if we provide a culture of opportunity to marketing strategy. our associates and exceptional technology and service to our clients, we will continue to generate consistent above-market returns for you, our shareholders. This has proven to be true for four decades. Fiscal year 2016 (ended June 30) marked another year During fiscal 2016, we also successfully integrated Bayside Business Solutions into our business. Bayside’s industry-leading commercial lending technology has enhanced our presence and potential in the lending arena. of progress and solid financial results. All three of our In May of 2016, we sold our Alogent business to a marketed brand sales teams exceeded their assigned private equity investor. We acquired Alogent as part of quotas and we achieved record financial performance the Goldleaf acquisition in fiscal 2010, but as the only and profitable organic revenue growth in both of our product line in our portfolio specifically targeted at the reporting segments. On July 1, 2016, we experienced a seamless management transition as Jack Prim, formerly CEO and Chairman of the Board, assumed the new role $510M ANNUAL REVENUE IN ELECTRONIC PAYMENTS largest tier one banks in the U.S. and internationally, it was never a solid fit with the rest of our strategy. We believe this divestiture allows us to further sharpen our focus on our target markets in the United States. Today, 49% of our core clients have chosen software delivered in a hosted environment which is also referred to as outsourcing, in-the-cloud, or Software- as-a Service (SaaS). We continue to see a preference for the hosted model, and this shift has been a significant contributor to our recurring revenue composition which reached 79% in fiscal year 2016. 4 2016 ANNUAL REPORTOur electronic payments businesses continues to grow. In fiscal 2016 it generated more than $510 million in annual revenue, or 38% of our total revenue. This revenue is generated primarily by fees for each transaction processed, and with the increasing trend toward electronic payment alternatives (including 8% REVENUE GROWTH DURING THE YEAR online and mobile), this component is expected to be Recurring revenue, which consists of software a significant part of our business well into the future. maintenance fees, outsourcing services, and electronic payment processing, was 79% of total revenue in fiscal In fiscal year 2016, we delivered a number of exciting new solutions to our clients. We introduced year 2016. several digital offerings including a fully integrated As consumer demand for ease and convenience platform that enables financial institutions to launch continues to accelerate, client expectations rise, modern, mobile-first functionality, and a backend regulatory directives persist, technology rapidly administrative app that provides financial institutions evolves, and new competition surfaces, Jack Henry & with a comprehensive view of mobile users’ profiles, Associates remains strong and steadfast. accounts, and activities. We also announced the availability of an online storefront where banks can access and exchange apps with their peers. Our commitment to quality and our high service standards foster customer relationships that have stood the test of time – and have enabled us to We generated 8% revenue growth during the year, capture substantial market share for decades. We’d like with nearly 100% being organic growth. We returned to thank our shareholders for your confidence in JHA, $260 million to our shareholders as we increased our more than 10,500 loyal clients for your partnership, our quarterly dividend by 13% and repurchased 2.4 and our nearly 6,000 outstanding associates for your million shares of JHA stock in the market. This reflects daily efforts. We have 40 prosperous years behind us, our confidence in our ability to use our cash flow and but because of you, we firmly believe that the best is balance sheet to continue generating solid returns for yet to come. our shareholders. During fiscal year 2016, revenue and earnings reached record highs. Total revenue increased to a record $1.355 billion. Net income was $249 million or $3.12 per diluted share, as compared to net income of $211 million or $2.59 per diluted share reported for fiscal year 2015. We generated strong cash flow from operating activities of $365 million, as compared to $374 million in fiscal year 2015. Our return on assets was 14%, and return on equity was 25%. We generated strong profitability with a 27% operating margin. 5 D AV I D B . F O S S PRESIDENT AND CHIEF EXECUTIVE OFFICER K E V I N D . W I L L I A M S CHIEF FINANCIAL OFFICER AND TREASURER 2016 ANNUAL REPORTO U R G U I D I N G P R I N C I P L E S DO WHATEVER IT TAKES DO THE RIGHT THING HAVE FUN OUR COMPANY PHILOSOPHY www.jackhenry.com 6 2016 ANNUAL REPORTF U T U R E - F O C U S E D G R O W T H D R I V E R S 01 Maintain our high levels of customer satisfaction and retention by delivering high-quality business solutions and exceptional service. Continue to foster employee satisfaction by providing a work environment that is both personally and professionally rewarding. 02 03 Expand our existing customer relationships by cross selling additional products and services. Introduce new products and services that capitalize on advancing technologies and enhance our customers’ existing technology platforms. 04 05 Increase recurring revenue by optimizing outsourcing opportunities, transaction- based processing fees, and ongoing software maintenance and support fees. 7 2016 ANNUAL REPORTC O M PA N Y H I S T O R Y T I M E L I N E Four decades in business, and we continue to gain momentum in the industry thanks to our strong foundation, innovative technology, and exceptional people. In 1976, the plan for the formation of Jack Henry & Associates was carefully conceived on the back of a napkin. The company opened for business in space rented from an engine repair shop for $40 a month. In 1981, the first building – J1 – was built on the 52-acre Monett campus. The campus, now 154 acres, still houses the company’s headquarters. In 1992, JHA began to aggressively acquire companies that expanded its product offering and its client base. 1976 1980 1984 1988 1992 1996 1978 1982 1986 1990 1994 In 1977, JHA was incorporated and generated $115,222 in revenue. On November 20, 1985, an Initial Public Offering made JHA a public company trading 3,125,000 common shares on the NASDAQ exchange under the symbol JKHY. In 1991, JHA’s Associate roster officially reached 100 employees. In 1995, JHA added the core outsourced delivery option to its offering through an acquisition. 8 2016 ANNUAL REPORTIn 2000, JHA completed a secondary public offering of 1.5 million additional shares of JKHY. In 2012, JHA announced $1 billion in annual revenue. In 2000, JHA also expanded its presence in the credit union marketplace by acquiring San Diego-based Symitar®. In 2000, JHA employs more than 1,500 Associates. In 2007, John W. “Jack” Henry died at the age of 71. Also in 2007, Symitar signed its 500th Episys client, positioning the company with the largest organic user base in the industry. 2016: JHA celebrates 40 years in business. In 2015, JKHY market value reached $6 billion in market capitalization. 2000 2004 2008 2012 2016 1998 2002 2006 2010 2014 In 1998, JKHY market value closed above $1 billion in market capitalization. In 2004, JHA began its focused diversification acquisition strategy which resulted in the acquisition of a number of companies and products. On February 11, 2013, JHA co-founder, Jerry Hall, passed away. In 2006, JHA launched its third primary brand – ProfitStars® – to encompass the specialized products and services assembled through its focused diversification acquisition strategy. In early 2013, JHA reached another employee milestone as it hired its 5,000th Associate. In 2014, our co-founders Jack Henry and Jerry Hall were named as recipients of the Missourian Award. 9 2016 ANNUAL REPORTJ H A T O D AY ~6,000 employees 40+ offices nationwide 5 core processing systems 300+ products and services $1.355 BILLION in revenue 30years as a public company 10 2016 ANNUAL REPORToutsourced delivery model 49% of our core clients use the 50+ 3 distinct ~10,500 JHA Payment Solutions™ processes more than acquisitions brands clients 380 million monthly transactions representing over $90 billion per month 40years in business 11 2016 ANNUAL REPORTT H E 4 0 T H A N N I V E R S A R Y C U LT U R E P R O J E C T In early 2016, we initiated a campaign where we asked our associates, clients, and partners: What does the Jack Henry & Associates culture mean to you? Hundreds responded, and each submission is included in our JHA Culture Book which we printed and digitally published at www.jackhenry.com/jha40years. Among the entries submitted by our associates, our executive team selected the Top 5 that best exemplified the JHA culture. Those submissions are featured on the following pages. Keeping true to our company’s benevolent spirit, we pledged that for each submission received, we would donate to the American Cancer Society. The monies raised from the submissions – combined with funds raised from onsite charitable events held at JHA offices around the country – will be tallied at the end of calendar year 2016 and announced on the commemorative website referenced above and on our social media channels. 12 2016 ANNUAL REPORTWHAT DOES THE JACK HENRY & ASSOCIATES CULTURE MEAN TO YOU? A C U LT U R E O F V I S I O N A N D V A L U E S “How does something stand the test of time and still evolve as needed to survive, and even thrive? How can a company retain its identity and yet grow the staff from 500 to 5,000 by adding disparate parts from all over the country? When I think about the culture of JHA I can’t help but first think of the challenges that poses. As a member of a very small acquisition called Vertex more years ago than I like to admit, I had a hard time just retaining the culture of a single group. The farther you get from the core, the harder it is to retain the core values. I think what has allowed JHA to successfully do it is by focusing a few very key elements that truly define us. Customer empathy, integrity, genuine caring for associates. Many years ago Jack and Jerry decided the things that were most important, and they lived it out and modeled it so that for the next generation it wasn’t just words. They had a picture of how it looked. Over the years, I’ve been privileged to observe a lot of talented people chart the direction for our company, each with their own view of the vision, and each with their own personality but they’ve continued the tradition of modeling those basic tenets that allow us to be the company that we are. So the JHA Culture to me means that I go to work every day and try and uphold the same principled values that Jack and Jerry did: care about the customer, care about the staff, and always act with integrity.” TERRY RANDALL Florence, Alabama Managing Director ProfitStars Web Solutions Associate Since 1997 13 2016 ANNUAL REPORTA C U LT U R E O F D O I N G W H AT ’ S R I G H T “When I think about the Jack Henry culture, the old adage ‘when the going gets tough, the tough get going’ comes to mind. It’s easy for companies to stand behind their employees when times are good and things are going well, but it takes an extraordinary company to stand with their employees when times are challenging and the future is uncertain. I am referring to the recession, a time when almost all of our competitors were conducting massive layoffs. Here at JHA, our executives stood with every employee by choosing not to lay off people. Instead, we all (everyone from executive to entry level) took a modest pay cut for a short period of time, until the economy started turning around. JHA did that to not only support its employees, but also to ensure our customers could continue to receive the support they needed. Now that’s a company that truly believes in doing the right thing and it demonstrates it through both word and deed.” DEBORAH MATTHEWS PHILLIPS Allen, Texas Managing Director Payment Strategy Associate Since 2007 14 2016 ANNUAL REPORTA C U LT U R E O F S U P P O R T “‘Supportive’ is what JHA culture means to me. Before coming to JHA, I had moved to Charlotte from New York City in August of 2006. My job search was difficult, while trying to learn a new city. I had only one family member here for support. I applied online to JHA in February of 2007 and was offered the position about a week later. I was so excited to land a job where they seemed interested in who I was. I started work two days before Valentine’s Day. I was presented with a handwritten “WELCOME VICKY” sign on my desk. It was heartfelt – I literally got emotional. Since working here, I have met so many interesting people from athletes to musicians to bakers. I have fallen into a culture of support and diversity. At JHA, employees are encouraged to take action on their health, exercise and can compete for fun. That kind of support can make a better person. My family is envious of the celebrations that are acknowledged: the birthdays, anniversaries, sports-kickoffs and holiday luncheons. The culture is welcoming to new and existing employees that may encounter difficult times in their lives. JHA employees are always giving back to each other and others through charity events, catastrophic reliefs, etc. I love the selflessness. It is this family environment of support that kept me strong. I continue to be encouraged to learn new things with the support of JHA applications, trainings, schooling and the business environment itself. Happy 40th anniversary, JHA. Thanks for the opportunity and nine years of continuous employment.” VICTORIA STROMAN Charlotte, North Carolina Administrative Assistant II Facilities Associate Since 2007 15 2016 ANNUAL REPORTA C U LT U R E O F L I V E L I H O O D “For me, JHA Culture means livelihood. When I joined the company four years ago, I was a single mom doing hair for a living. I enjoyed what I did but I had bigger dreams and working with websites was one of them. I imagine my profession back then didn’t make sense transitionally but it was JHA who took a chance on me. It was JHA who opened a door for me. It was JHA who believed in me. I had no idea when joining this company, that I would not only be welcomed but embraced over the years. Like any job, some days are harder than others BUT unlike every other job I have had, I WANT to be here each day. I love our customers. I love my peers. I love working for my manager and quite frankly, that is huge to me! JHA takes care of its own and I would literally recruit everyone I know to work here if I could. When I talk about work to my friends and family, they hear passion and love and appreciation. So many people lack that in their own careers and I sincerely know that am more than blessed to be somewhere that I can confidently say – I feel valued here. I am valued here. I love the company I work for. And I can’t imagine being anywhere else. I am looking forward to the next four years – thank you JHA for empowering me to be greater!” ANGELINA DAVIS Lenexa, Kansas Advanced Technical Support Representative ProfitStars Web Solutions Associate Since 2012 16 2016 ANNUAL REPORTA C U LT U R E O F A P P R E C I AT I O N “Speaking from personal experience, large companies tend to have a disconnect with their associates. I’ve worked for companies where I not only felt invisible, but where my best was never good enough. Five days a week, I dragged myself into a culture built on oppression and fear. It’s terrible and it’s common. I’ve also worked with small companies and start-up companies. Some of them were wonderful, making me feel valued as a member of the team, giving out Christmas bonuses, saying ‘James, you did awesome on this! We are so glad to have you!’ But then, the dark clouds roll in and the business has no choice but to close up shop. Stability was always the issue with small companies. When I first came to JHA, I had a deep worry for what I was getting into. I was so concerned that I would be subjecting myself to another company culture I couldn’t stand, despite all the rumors I’d heard of it being a wonderful place to work. It didn’t take long for my worries to subside. JHA is the best of both worlds. It’s a strong company with a small company attitude. Cares about their associates: check! Shows their associates appreciation continuously: check! Offers everything required to succeed and grow: check! Gives their associates a better work-life balance than any other company in the world: check! Promotes a culture built on happy associates being successful: check! My only complaint is the passage of time. It feels like months have turned to weeks and weeks to days. Time flies while you are having fun.” JAMES HALL Monett, Missouri Advanced Programming Analyst Core Integration Associate Since 2014 17 2016 ANNUAL REPORTA C U LT U R E O F S T R O N G C L I E N T R E L AT I O N S H I P S “Jack Henry & Associates has always been a great partner to work with. Through the many conversions, acquisitions, upgrades, installations, and migrations we have gone through, each and every Jack Henry contact has always been willing to do whatever it takes to get the job done. Every Jack Henry employee that I have worked with, whether in person, via phone or e-mail, has always seemed to truly enjoy their job and helping others get the right answer and get the job done. Many of the Jack Henry employees that I have met throughout the years have become good friends and trusted resources. The fact that the company culture promotes such positive outlooks, reactions, and results is one of the cornerstones of the company's continuing success and a tribute to the legacy that Jack Henry and Jerry Hall ingrained into the company. I, too, am celebrating my 40th anniversary in banking this year and for half of those years I have been working with Jack Henry & Associates and I feel that this association/partnership has enhanced my career in banking.” DIANE PELCHAT | NORTHWAY BANK | BERLIN, NEW HAMPSHIRE CLIENT SINCE 1997 “JHA culture has always meant customer service to us. As an in-house bank in March 1998, when a tornado went through our town, we experienced the expertise of JHA personnel to get us up and processing the next day ... which of course was month-end, quarter-end. The help and support we received was above and beyond. We were able to process work at the St. Paul Data Center and complete daily work with minimal impact to our customer base. After five days of processing at the Data Center we were back in-house, the JHA personnel continued to support us and transitioned us back into our daily routine. An event never to be forgotten and made much easier by JHA. Not every ‘crisis’ we face is as traumatic as a tornado, but we can always count on the support and knowledge of JHA staff. Thank you!” JEAN GANSEN | NICOLLET COUNTY BANK | ST. PETER, MINNESOTA CLIENT SINCE 1998 “The JHA culture to us has always been about pushing forward, overcoming challenges, and working together. From the days of our first AS400 to our new Power 8, from proof machines and reader sorters to 4|sight scanning and Check 21, from dial up to broadband we have worked together to meet many challenges and found support staff that have become friends after over 20 years of working together. While nothing is without struggle at times, working together has always made our relationship sound.” REBECCA PALMER | PROGRESSIVE BANK, N.A. | WHEELING, WEST VIRGINIA CLIENT SINCE 1995 18 2016 ANNUAL REPORT“Thanks for being a great partner!” BRIAN BENNETT | WILSON BANK & TRUST | LEBANON, TENNESSEE CLIENT SINCE 1986 “In 1983, the State Bank of Medford made the bold decision to Brady National Bank’s acclamation for Jack Henry partner with Jack Henry & Associates and bring its core processing & Associates. Congratulations on 40 years: in-house. A small group of us jumped into a car and traveled to the small city of Rock Valley, Iowa for a week of training. Life was never the same after that! Our IBM System 34 computer and noisy reader/ sorter took up almost the entire room! Our data was saved on big JUDICIOUS ADAPTABILITY CONSIDERATE eight-inch floppy disks and end-of-day processing took four hours on KNOWLEDGEABLE a good night. When we encountered a problem during processing, we called a JHA programmer for assistance. There was no such thing as WebEx, so the programmer would have to talk us through trouble- shooting and often times, would give us instructions on how to key in program changes and restart processing where we left off. We learned so much from those programmers! Over the years, we added one new JHA product after another. We always looked forward to the folks from JHA coming to our bank for installs. In fact, Jack Henry himself visited our bank on a couple of occasions and Jerry Hall installed our first IBM teller machines! A lot has changed in banking over the years, but some things have not— JHA still provides exceptional customer service!” GAIL THIEME | COMMUNITY FINANCIAL BANK | PRENTICE, WISCONSIN CLIENT SINCE 1983 HELPFUL EDUCATOR NOBLE RELIABLE YOUR TRUE FRIEND & ACCESSIBLE SUPPORTING STABILITY OUTSTANDING CONFIDENT INNOVATIVE ACCOMMODATING TRUSTING EXCELLENCE STRENGTH JULIE LEDEZMA-RODRIGUEZ | BRADY NATIONAL BANK | BRADY, TEXAS CLIENT SINCE 1994 “Jack Henry and Associates has provided a culture of business, friendships, and excellence. They strive to be the best in the industry in the way they develop, involve, and evolve the banking industry. Congratulations to 40 years of success.” PAULA BODKIN | EVABANK | EVA, ALABAMA CLIENT SINCE 1986 19 2016 ANNUAL REPORT2 0 1 6 F I N A N C I A L S MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company's common stock is quoted on the NASDAQ Global Select Market (“NASDAQ”), formerly known as the NASDAQ National Market, under the symbol “JKHY”. The following table sets forth, for the periods indicated, the high and low sales price per share of the common stock as reported by NASDAQ. Fourth Quarter Third Quarter Second Quarter First Quarter Fiscal 2016 Fiscal 2015 $ High 87.27 86.23 79.92 71.75 $ Low 80.44 73.19 68.31 63.84 $ High 70.25 70.18 63.85 60.84 $ Low 60.10 60.60 51.86 54.78 The Company established a practice of paying quarterly dividends at the end of fiscal 1990 and has paid dividends with respect to every quarter since that time. Quarterly dividends per share paid on the common stock for the two most recent fiscal years ended 2016 and 2015 are as follows: Fourth Quarter Third Quarter Second Quarter First Quarter Fiscal 2016 Fiscal 2015 $ 0.280 0.280 0.250 0.250 $ 0.250 0.250 0.220 0.220 The declaration and payment of any future dividends will continue to be at the discretion of our Board of Directors and will depend upon, among other factors, our earnings, capital requirements, contractual restrictions, and operating and financial condition. The Company does not currently foresee any changes in its dividend practices. Information regarding the Company's equity compensation plans is set forth under the caption "Equity Compensation Plan Information" in the Company's definitive Proxy Statement and is incorporated herein by reference. On August 24, 2016, there were approximately 92,900 holders of the Company’s common stock. On that same date the last sale price of the common shares as reported on NASDAQ was $87.82 per share. Issuer Purchases of Equity Securities The following shares of the Company were repurchased during the quarter ended June 30, 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) April 1- April 30, 2016 May 1- May 31, 2016 June 1- June 30 2016 Total — — 246,746 246,746 83.36 83.36 — — 246,400 246,400 6,028,499 6,028,499 5,782,099 5,782,099 (1) 246,400 shares were purchased through a publicly announced repurchase plan. There were 346 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. 21 WWW.JACKHENRY.COM PERFORMANCE GRAPH The following chart presents a comparison for the five-year period ended June 30, 2016, of the market performance of the Company’s common stock with the S&P 500 Index and an index of peer companies selected by the Company: COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN Among Jack Henry & Associates, Inc., the S&P 500 Index, and a Peer Group The following information depicts a line graph with the following values: JKHY Peer Group S&P 500 2011 100.00 100.00 100.00 2012 116.62 107.65 105.45 2013 161.33 126.89 127.17 2014 206.53 174.28 158.46 2015 228.24 219.46 170.22 2016 312.11 251.24 177.02 This comparison assumes $100 was invested on June 30, 2011, and assumes reinvestments of dividends. Total returns are calculated according to market capitalization of peer group members at the beginning of each period. Peer companies selected are in the business of providing specialized computer software, hardware and related services to financial institutions and other businesses. Companies in the Peer Group are ACI Worldwide, Inc., Bottomline Technology, Inc., Broadridge Financial Solutions, Cardtronics, Inc., Convergys Corp., Corelogic, Inc., DST Systems, Inc., Euronet Worldwide, Inc., Fair Isaac Corp., Fidelity National Information Services, Inc., Fiserv, Inc., Global Payments, Inc., Moneygram International, Inc., SS&C Technologies Holdings, Inc., Total Systems Services, Inc., Tyler Technologies, Inc., Verifone Systems, Inc., and WEX, Inc.. Heartland Payment Systems, Inc. was removed from the peer group as it merged with Global Payments, Inc. in April 2016. 22 2016 ANNUAL REPORTSELECTED FINANCIAL DATA Selected Financial Data (In Thousands, Except Per Share Data) Income Statement Data Revenue(1) Income from continuing operations Basic net income per share, continuing operations Diluted net income per share, continuing operations Dividends declared per share Balance Sheet Data Total deferred revenue Total assets Long-term debt Stockholders’ equity YEAR ENDED JUNE 30, 2016 2015 2014 2013 2012 $ 1,354,646 248,867 $ $ 1,256,190 211,221 $ $ 1,173,173 186,715 $ $ 1,107,524 167,610 $ $ 1,017,667 152,040 $ $ $ $ $ 3.13 3.12 1.06 521,054 $ $ $ $ 2.60 2.59 0.94 531,987 $ $ $ $ 2.20 2.19 0.84 492,868 $ $ $ $ 1.95 1.94 0.56 439,596 $ $ $ $ 1.76 1.74 0.44 409,139 $ 1,815,512 $ 1,836,835 $ 1,680,703 $ 1,672,386 $ 1,655,652 $ $ — $ $ 996,210 50,102 991,534 $ $ 3,729 $ 7,366 967,387 $ 1,015,816 $ $ 106,166 935,738 (1) Revenue includes license sales, support and service revenues, and hardware sales, less returns and allowances. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following section provides management's view of the financial condition and results of operations and should be read in conjunction with the Selected Financial Data, the audited Consolidated Financial Statements, and related notes included elsewhere in this report. OVERVIEW Jack Henry & Associates, Inc. (JHA) is headquartered in Monett, Missouri, employs approximately 6,000 associates nationwide, and is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Its solutions serve over 10,500 customers and are marketed and supported through three primary brands. Jack Henry Banking® supports banks ranging from community banks to multi-billion dollar institutions with assets up to $30 billion, 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 highly specialized products and services that enable financial institutions of every asset size and charter, and diverse corporate entities outside the financial services industry, to mitigate and control risks, optimize revenue and growth opportunities, and contain costs. JHA's integrated solutions are available for in-house, outsourced, or hosted delivery. Each of our brands share the fundamental commitment to provide high quality business solutions, service levels that consistently exceed customer expectations, integration of solutions and practical new technologies. The quality of our solutions, our high service standards, and the fundamental way we do business typically foster long-term customer relationships, attract prospective customers, and have enabled us to capture substantial market share. Through internal product development, disciplined acquisitions, and alliances with companies offering niche solutions that complement our proprietary solutions, we regularly introduce new products and services and generate new cross-sales opportunities across our three business brands. We provide compatible computer hardware for our in-house installations and secure processing environments for our outsourced and hosted solutions. We perform data conversions, software implementations, initial and ongoing customer training, and ongoing customer support services. Our primary competitive advantage is customer service. Our support infrastructure and strict standards provide service levels we believe to be the highest in the markets we serve and generate high levels of customer satisfaction and retention. We consistently measure customer satisfaction using comprehensive annual surveys and randomly generated daily surveys we receive in our everyday business. Dedicated surveys are also used to grade specific aspects of our customer experience, including product implementation, education, and consulting services. A significant proportion 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. During the last five fiscal years, our revenues have grown from $1,017,667 in fiscal 2012 to $1,354,646 in fiscal 2016. Income from continuing operations has grown from $152,040 in fiscal 2012 to $248,867 in fiscal 2016. This growth has resulted primarily from internal expansion. 23 WWW.JACKHENRY.COMWe have two reportable segments: bank systems and services and credit union systems and services. The respective segments include all related license, support and service, and hardware sales along with the related cost of sales. We continue to focus on our objective of providing the best integrated solutions, products and customer service to our clients. We are cautiously optimistic regarding ongoing economic improvement and expect our clients to continue investing in our products and services to improve their operating efficiencies and performance. We anticipate that consolidation within the financial services industry will continue. Regulatory conditions and legislation such as the Dodd-Frank Wall Street Reform and Consumer Protection Act will continue to impact the financial services industry and could motivate some financial institutions to postpone discretionary spending. A detailed discussion of the major components of the results of operations follows. All dollar and share amounts are in thousands and discussions compare fiscal 2016 to fiscal 2015 and compare fiscal 2015 to fiscal 2014. RESULTS OF OPERATIONS FISCAL 2016 COMPARED TO FISCAL 2015 In fiscal 2016, revenues increased 8% or $98,456 compared to the fiscal 2015, with strong growth continuing in our support and service revenues, particularly our outsourcing services, bundled services, and electronic payment services. Cost of sales increased just 7%, contributing to an 8% increase in gross profit. Net operating expenses increased 1%, and the provision for income taxes increased 6% compared to the prior year. The increased revenue and above changes resulted in a combined 18% increase in net income for fiscal 2016. We move into fiscal 2017 following a strong performance in fiscal 2016. 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 fiscal year ended June 30, 2016 follows. All dollar amounts are in thousands and discussions compare the current fiscal year ended June 30, 2016 to the prior fiscal year ended June 30, 2015. REVENUE License Revenue License Percentage of total revenue Year Ended June 30, % Change $ 2016 3,041 <1% $ 2015 2,635 <1% 15% License revenue represents the sale and delivery of application software systems contracted with us by the customer, which are not part of a bundled arrangement. We license our proprietary software products under standard license agreements that typically provide the customer with a non-exclusive, non-transferable right to use the software on a single computer and for a single financial institution. Non-bundled license revenue increased due mainly to an increase in standalone license sales in our Banking segment. Such license fees will fluctuate as non-bundled license sales are sporadic in nature. Support and Service Revenue Support and service Percentage of total revenue In-House Support & Other Services Electronic Payment Services Outsourcing Services Implementation Services Bundled Products & Services Total Increase 24 Year Ended June 30, % Change 2016 2015 $ 1,300,978 $ 1,200,652 8% 96% 96% Year over Year $ Change % Change $ $ 17,846 28,325 33,941 (11,289) 31,503 100,326 6% 6% 13% (15)% 50% 2016 ANNUAL REPORTSupport and service revenues are generated from supporting our customers in operating their systems and to enhance and update the software, electronic payment services, outsourced data processing services, implementation services (including conversion, installation, configuration and training) and revenue from our bundled software multi-element agreements. There was growth in most support and service revenue components in fiscal 2016. In-house support and other services revenue increased due to annual maintenance renewal fee increases for both core and complementary products as our customers’ assets grow and new customers began renewing their annual maintenance. Increased software usage revenue from Alogent mobile remote deposits also contributed to the increase. Electronic payment services continued to show growth over the prior year, although that growth slowed due to some of our large customers being acquired and price compression on contract renewals in our card services offerings. The revenue increases are mainly attributable to strong performance across debit/credit card transaction processing services, online bill payment services and ACH processing. Deconversion revenue for electronic payment services increased $9,617 over the prior year. Excluding these fees, we had a 4% increase in electronic payment services revenue. 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. Implementation services include implementation services 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 decreased due to a decrease in stand-alone implementations in the banking segment. Revenue from these standalone services has decreased as implementation services related to our bundled arrangements have increased. 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 over last year mainly due to increased revenues from our core and complementary credit union arrangements. $26,567 of the increase was due to terminations of minor pending products and services on certain contracts that have allowed for the release of revenue that was being deferred until contract completion in both our credit union and banking core and complementary arrangements. Hardware Revenue Hardware Percentage of total revenue Year Ended June 30, % Change 2016 2015 $ 50,627 $ 52,903 (4)% 4% 4% The Company has entered into remarketing agreements with several hardware manufacturers and suppliers under which we sell computer hardware, hardware maintenance and related services to our customers. Revenue related to hardware sales is recognized when the hardware is shipped to our customers. Hardware revenue decreased due to a decrease in complementary hardware products delivered. Although there will be quarterly fluctuations, we expect an overall decreasing trend in hardware sales 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 prices. COST OF SALES AND GROSS PROFIT Cost of license represented the cost of software from third party vendors associated with non-bundled application software licenses. These costs were recognized when license revenue was recognized. Cost of support and service represented costs associated with conversion and implementation efforts, ongoing support for our customers, operation of our data and item centers providing services for our outsourced customers, electronic payment services and direct operating costs. These costs were recognized as they were incurred or, for direct costs associated with obtaining and implementing our bundled arrangements, they were deferred and recognized ratably as the related revenues for these arrangements are recognized, typically beginning when Post Contract Support ("PCS") is the only remaining undelivered element, and ending at the end of the initial bundled PCS term. Cost of hardware consisted of the direct and indirect costs of purchasing the equipment from the manufacturers and delivery to our customers. These costs were recognized at the same time as the related hardware revenue was recognized. Ongoing operating costs to provide support to our customers were recognized as they were incurred. 25 WWW.JACKHENRY.COMCost of License Percentage of total revenue License Gross Profit Gross Profit Margin Cost of support and service Percentage of total revenue Support and Service Gross Profit Gross Profit Margin Cost of hardware Percentage of total revenue Hardware Gross Profit Gross Profit Margin TOTAL COST OF SALES Percentage of total revenue TOTAL GROSS PROFIT Gross Profit Margin Year Ended June 30, % Change 2016 2015 $ $ $ $ $ $ $ $ 1,197 <1% 1,844 61% 737,108 54% 563,870 43% 35,346 3% 15,281 30% 773,651 57% 580,995 43% $ $ $ $ $ $ $ $ 1,187 <1% 1,448 55% 680,750 54% 519,902 43% 38,399 3% 14,504 27% 720,336 57% 535,854 43% 1% 27% 8% 8% (8)% 5% 7% 8% Cost of license consists of the direct costs of third party software that are a part of a non-bundled arrangement. Sales of these third party software products increased slightly compared to the last year. Shifts in sales mix between the products that make up these costs cause fluctuations in the margins from period to period. Gross profit margins in support and service remained consistent with the prior year. In general, changes in cost of hardware trend consistently with hardware revenue. For the current period, margins were slightly higher due to increased sales of higher margin hardware upgrade products compared to the prior year. OPERATING EXPENSES Selling and Marketing Selling and marketing Percentage of total revenue Year Ended June 30, % Change 2016 2015 $ 90,079 $ 89,004 1% 7% 7% Dedicated sales forces, inside sales teams, technical sales support teams and channel partners conduct our sales efforts for our two reportable segments, and are overseen by regional and national sales managers. Our sales executives are responsible for pursuing lead generation activities for new core customers. Our account executives nurture long-term relationships with our client base and cross sell our many complementary products and services. Selling and marketing expenses increased slightly compared to fiscal 2015 due to increased salary expense, but remained a consistent percentage of total revenue in both periods. Research and Development Research and development Percentage of total revenue 26 Year Ended June 30, % Change 2016 $ 81,234 6% 2015 71,495 $ 6% 14% 2016 ANNUAL REPORTWe devote significant effort and expense to develop new software, service products and continually upgrade and enhance our existing offerings. We believe our research and development efforts are highly efficient because of the extensive experience of our research and development staff and because our product development is highly customer-driven. Research and development expenses increased primarily due to increased headcount and related personnel costs, but were consistent with the prior year as a percentage of total revenue. General and Administrative General and administrative Percentage of total revenue Year Ended June 30, % Change 2016 2015 $ 67,514 $ 64,364 5% 5% 5% General and administrative costs included all expenses related to finance, legal, and human resources, plus all administrative costs. These expenses increased primarily due to increased headcount and related salaries, but were a consistent percentage of revenue in each year. Gain on Disposal of Business In fiscal 2016, we sold our Alogent business ("Alogent") to Antelope Acquisition Co., an affiliate of Battery Ventures, resulting in a gain totaling $19,491. In fiscal 2015, we had a gain totaling $6,874 due to the sale of the TeleWeb™ suite of Internet and mobile banking software products to Data Center Inc. (DCI). INTEREST INCOME AND EXPENSE Interest Income Interest Expense Year Ended June 30, % Change 2016 2015 $ $ 307 $ 169 (1,430) $ (1,594) 82% (10)% Interest income fluctuated due to changes in invested balances and yields on invested balances. Interest expense remained low for both the current and prior years, in line with our debt balances in both years. PROVISION FOR INCOME TAXES Provision For Income Taxes Effective Rate Year Ended June 30, % Change 2016 2015 $ 111,669 $ 105,219 6% 31.0% 33.3% The decrease in the effective tax rate was primarily due a significant difference in the book versus tax basis in Alogent stock, as well as the retroactive permanent extension of the Research and Experimentation Credit ("R&E Credit") to January 1, 2015 during fiscal 2016. NET INCOME Net income increased from $211,221, or $2.59 per diluted share, in fiscal 2015 to $248,867, or $3.12 per diluted share, in fiscal 2016. This translates to an increase of 18% in net income. FISCAL 2015 COMPARED TO FISCAL 2014 In fiscal 2015, revenues increased 7% or $83,017 compared to the prior year due primarily to growth in all components of support and service revenues, particularly our electronic payment services and our outsourcing services. Cost of sales increased 6%, in line with revenue. The growth in revenue and the Company's continued focus on cost management continued to drive up gross margins, which has resulted in a 9% increase in gross profit. Operating expenses increased 6% and the provision for income taxes increased 4% compared to the prior year-to-date period. The increased revenue and above changes resulted in a combined 13% increase in net income for fiscal 2015. 27 WWW.JACKHENRY.COMREVENUE License Revenue License Percentage of total revenue Year Ended June 30, % Change 2015 2014 $ 2,635 <1% $ 2,184 <1% 21% License revenue represents the sale and delivery of application software systems contracted with us by the customer, which are not part of a bundled arrangement. We license our proprietary software products under standard license agreements that typically provide the customer with a non-exclusive, non-transferable right to use the software on a single computer and for a single financial institution. Non-bundled license revenue increased due mainly to an increase in standalone license sales in our Credit Union segment. Such license fees will fluctuate as non-bundled license sales are sporadic in nature. Support and Service Revenue Support and service Percentage of total revenue In-House Support & Other Services Electronic Payment Services Outsourcing Services Implementation Services Bundled Products & Services Total Increase Year Ended June 30, % Change 2015 2014 $ 1,200,652 $ 1,112,331 8% 96% 95% Year over Year Change $ Change % Change $ 3,603 38,321 35,490 8,704 2,203 $ 88,321 1% 9% 15% 13% 4% Support and service revenues are generated from annual support to assist the customer in operating their systems and to enhance and update the software, electronic payment services, outsourced data processing services, implementation services (including conversion, installation, configuration and training) and revenue from our bundled software multi-element agreements. There was growth in all components of support and service revenue in fiscal 2015. In-house support and other services revenue increased due to annual maintenance renewal fee increases for both core and complementary products as our customers’ assets grow. Electronic payment services continue to experience the largest dollar growth. The revenue increases are attributable to strong performance across debit/credit card transaction processing services, online bill payment services and ACH processing. 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. We expect the trend towards outsourced product delivery to benefit outsourcing services revenue for the foreseeable future. Revenues from outsourcing services are typically earned under multi-year service contracts and therefore provide a long-term stream of recurring revenues. Implementation services include implementation services for our outsourcing and electronic payment services customers as well as standalone customization services, merger conversion services, image conversion services and network monitoring services. Implementation services revenue increased due mainly to increased implementations across our core, online banking, imaging solutions and payments products. 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 slightly from last year mainly due to increased revenues from our core and complementary banking products, furthered by an increase in core credit union products. The increase was partially offset by reduced revenues from our Alogent suite of remote deposit capture products. Hardware Revenue Hardware Percentage of total revenue 28 Year Ended June 30, % Change 2015 2014 $ 52,903 $ 58,658 (10)% 4% 5% 2016 ANNUAL REPORTThe Company has entered into remarketing agreements with several hardware manufacturers under which we sell computer hardware, hardware maintenance and related services to our customers. Revenue related to hardware sales is recognized when the hardware is shipped to our customers. Hardware revenue decreased due to a decrease in complementary hardware products delivered. Although there will be quarterly fluctuations, we expect an overall decreasing trend in hardware sales 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 prices. COST OF SALES AND GROSS PROFIT Cost of license represented the cost of software from third party vendors through remarketing agreements associated with non-bundled application software licenses. These costs were recognized when license revenue was recognized. Cost of support and service represented costs associated with conversion and implementation efforts, ongoing support for our in-house customers, operation of our data and item centers providing services for our outsourced customers, electronic payment services and direct operating costs. These costs were recognized as they were incurred or, for direct costs associated with obtaining and implementing our bundled arrangements, they are deferred and recognized ratably as the related revenues for these arrangements are recognized, typically beginning when PCS is the only remaining undelivered element, and ending at the end of the initial bundled PCS term. Cost of hardware consisted of the direct and indirect costs of purchasing the equipment from the manufacturers and delivery to our customers. These costs were recognized at the same time as the related hardware revenue was recognized. Ongoing operating costs to provide support to our customers were recognized as they were incurred. Year Ended June 30, % Change Cost of License Percentage of total revenue License Gross Profit Gross Profit Margin Cost of support and service Percentage of total revenue Support and Service Gross Profit Gross Profit Margin Cost of hardware Percentage of total revenue Hardware Gross Profit Gross Profit Margin TOTAL COST OF SALES Percentage of total revenue TOTAL GROSS PROFIT Gross Profit Margin 2015 2014 $ $ 1,187 <1% 1,448 55% $ $ 908 <1% 1,276 58% $ 680,750 $ 634,756 54% 54% $ 519,902 $ 477,575 $ $ 43% 38,399 3% 14,504 27% $ $ 43% 43,708 4% 14,950 25% $ 720,336 $ 679,372 57% 58% $ 535,854 $ 493,801 43% 42% 31% 13% 7% 9% (12)% (3)% 6% 9% Cost of license consisted of the direct costs of third party software that was part of a non-bundled arrangement. Sales of these third party software products increased compared to last year, causing a decrease in gross profit margins. Shifts in sales mix between the products that make up these costs cause fluctuations in the margins from period to period. Gross profit margins in support and service remained consistent with the prior year. In general, changes in cost of hardware trended consistently with hardware revenue. For the fiscal year, margins were slightly higher due to increased sales of higher margin hardware upgrade products. OPERATING EXPENSES Selling and Marketing Selling and marketing Percentage of total revenue Year Ended June 30, % Change 2015 2014 $ 89,004 $ 85,443 4% 7% 7% 29 WWW.JACKHENRY.COMDedicated sales forces, inside sales teams, technical sales support teams and channel partners conducted our sales efforts for our two reportable segments, and were overseen by regional sales managers. Our sales executives were responsible for pursuing lead generation activities for new core customers. Our account executives nurtured long-term relationships with our client base and cross sold our many complementary products and services. Selling and marketing expenses for the year increased mainly due to higher commission expenses and a general increase in sales headcount and related personnel salaries. This is in line with increased sales volume of long term service contracts on which commissions were paid as a percentage of total revenue. Research and Development Research and development Percentage of total revenue Year Ended June 30, % Change 2015 2014 $ 71,495 $ 66,748 7% 6% 6% We devote significant effort and expense to develop new software, service products and continually upgrade and enhance our existing offerings. Typically, we upgrade our various core and complementary software applications once per year. We believe our research and development efforts are highly efficient because of the extensive experience of our research and development staff and because our product development is highly customer-driven. Research and development expenses increased primarily due to increased headcount and related personnel costs, but were consistent with the prior year as a percentage of total revenue. General and Administrative General and administrative Percentage of total revenue Year Ended June 30, % Change 2015 2014 $ 64,364 $ 53,312 21% 5% 5% General and administrative costs included all expenses related to finance, legal, human resources, plus all administrative costs. General and administrative expenses in the current year were higher due to the impact of a Lyndhurst related insurance recovery in the prior year coupled with increased headcount and related personnel costs. These costs were consistent with the prior year as a percentage of total revenue. Gain on Disposal of Business In fiscal 2015, we had a gain totaling $6,874 due to the sale of the TeleWeb™ suite of Internet and mobile banking software products to Data Center Inc. (DCI). No businesses were disposed of in fiscal 2014. INTEREST INCOME AND EXPENSE Interest Income Interest Expense Year Ended June 30, % Change 2015 2014 $ $ 169 (1,594) $ $ 377 (1,105) (55)% 44% Interest income fluctuated due to changes in invested balances and yields on invested balances. Interest expense increased due to interest on the borrowing from our revolving credit facility in the second quarter. PROVISION FOR INCOME TAXES Provision For Income Taxes Effective Rate Year Ended June 30, % Change 2015 2014 $ 105,219 $ 100,855 4% 33.3% 35.1% The decrease in the effective tax rate was primarily due to favorable state tax law changes, as well as the retroactive extension of the Research & Experimentation Credit for the period January 1, 2014 to December 31, 2014 during fiscal 2015. NET INCOME Net income increased from $186,715, or $2.19 per diluted share in fiscal 2014 to $211,221 or $2.59 per diluted share in fiscal 2015. 30 2016 ANNUAL REPORT REPORTABLE SEGMENT DISCUSSION 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. Bank Systems and Services Revenue Gross profit Gross profit margin 2016 % Change 2015 % Change 2014 $ $ 996,668 407,600 41% 4% $ 2% $ 962,729 400,659 42% 7% $ 8% $ 897,671 372,473 41% In fiscal 2016, revenue in the Bank segment increased 4% compared to the prior fiscal year. The increase was due mainly to a 12% increase in outsourcing services. Gross profit margin decreased only slightly compared to the last fiscal year. In fiscal 2015, revenue increased 7% overall in the Bank segment compared to the prior year. The increase was due mainly to 9% growth in electronic transaction processing services and a 14% increase in outsourcing services. Gross profit margins increased 1% over fiscal 2014. Credit Union Systems and Services Revenue Gross profit Gross profit margin 2016 % Change 2015 % Change 2014 $ $ 357,978 173,395 48% 22% $ 28% $ 293,461 135,195 46% 7% $ 11% $ 275,502 121,328 44% In fiscal 2016, revenue in the Credit Union segment increased 22% due to increases in support & service revenue. Support & service revenues grew 22% through increases in electronic payment services, in-house maintenance renewals, and bundled services. Gross profit margins for the Credit Union segment increased 2% mainly due to economies of scale realized from growing transaction volume in our payment processing services. In fiscal 2015, revenue in the Credit Union segment increased 7% due to increases in support & service revenue. Support & service revenues grew 7% through increases in electronic payment services, in-house maintenance renewals, and outsourcing services. Gross profit margins for the Credit Union segment increased mainly due economies of scale realized from growing transaction volume in our payment processing services. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents decreased to $70,310 at June 30, 2016 from $148,313 at June 30, 2015. The decrease from June 30, 2015 is primarily due to repayments on our revolving credit facility and repurchases of treasury stock during fiscal 2016, partially offset by increased net income and proceeds from the disposal of a business. The following table summarizes net cash from operating activities in the statement of cash flows: Net income Non-cash expenses Change in receivables Change in deferred revenue Change in other assets and liabilities Net cash provided by operating activities $ Year Ended June 30, 2016 2015 $ 248,867 159,698 (13,735 ) 4,364 (34,078 ) 211,221 149,162 (21,346 ) 40,565 (5,812 ) $ 365,116 $ 373,790 Cash provided by operating activities decreased 2% compared to this fiscal 2015 due mainly to increased income tax payments. Cash from operations is primarily used to repay debt, pay dividends, repurchase stock, and for capital expenditures. Cash used in investing activities for fiscal 2016 totaled $135,963 and included: capital expenditures on facilities and equipment of $56,325, which was mainly for the purchase of computer equipment and aircraft; $96,411 for the ongoing enhancements and development of existing and new product offerings; $8,275 for the acquisition of Bayside Business Solutions, net of cash acquired; and $11,826 for the purchase 31 WWW.JACKHENRY.COMand development of internal use software. This was partially offset by $34,030 of proceeds from the sale of our Alogent division and $2,844 of proceeds from the sale of assets. Cash used in investing activities for fiscal 2015 totaled $136,984 and included capital expenditures on facilities and equipment of $54,409, which mainly included the purchase of aircraft and computer equipment, $76,872 for the development of software, and $14,020 for the purchase and development of internal use software. These expenditures were partially offset by $8,135 of proceeds related to the TeleWeb™ suite of Internet and mobile banking software products and $182 of proceeds from the sale of assets. Financing activities used cash of $307,156 for fiscal 2016. Cash used was $175,662 for the purchase of treasury shares, repayment of the revolving credit facility and capital leases of $152,500, and dividends paid to stockholders of $84,118. This was partially offset by borrowings of $100,000 against our revolving credit facility and $5,124 net cash inflow from the issuance of stock and tax related to stock-based compensation. Financing activities used cash in fiscal 2015 of $158,870. Cash used was $122,691 for the purchase of treasury shares, dividends paid to stockholders of $76,410, repayments of the revolving credit facility and capital leases totaling $50,783, and debt acquisition cost of $901. This was partially offset by borrowings of $90,000 and $1,915 net cash inflow from the issuance of stock and tax related to stock-based compensation. At June 30, 2016, the Company had negative working capital of $11,803 however, the largest component of current liabilities was deferred revenue of $343,525, 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 $300,000. 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 $56,325 and $54,409 for the twelve months ending June 30, 2016 and June 30, 2015, respectively, were made primarily for additional equipment and the improvement of existing facilities. These additions were funded from cash generated by operations. At June 30, 2016, the Company had $16,058 of purchase commitments related to property and equipment, all of which we anticipate 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 short-term borrowings on its existing credit facilities. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At June 30, 2016, there were 24,209 shares in treasury stock and the Company had the remaining authority to repurchase up to 5,782 additional shares. The total cost of treasury shares at June 30, 2016 is $876,134. During fiscal 2016, the Company repurchased 2,366 treasury shares for $175,662. At June 30, 2015, there were 21,843 shares in treasury stock and the Company had authority to repurchase up to 8,148 additional shares. Capital leases The Company has entered into various capital lease obligations for the use of certain computer equipment. The Company currently has short term capital lease obligations totaling $200 at June 30, 2016. Included in property and equipment are assets under capital leases totaling $2,329, which have accumulated depreciation totaling $898. Revolving credit facility The revolving credit facility allows for borrowings of up to $300,000, which may be increased by the Company at any time until maturity to $600,000. The credit facility bears interest at a variable rate equal to (a) a rate based on LIBOR or (b) an alternate base rate (the highest of (i) the Prime Rate for such day, (ii) the sum of the Federal Funds Effective Rate for such day plus 0.50% and (iii) the Eurocurrency Rate for a one month Interest Period on such day for dollars plus 1.0%), plus an applicable percentage in each case determined by the Company's leverage ratio. The credit facility is guaranteed by certain subsidiaries of the Company. The credit facility is subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the agreement. As of June 30, 2016, the Company was in compliance with all such covenants. The revolving loan terminates February 20, 2020 and at June 30, 2016 there was no outstanding balance. Other lines of credit The Company renewed an unsecured bank credit line on March 3, 2014 which provides for funding of up to $5,000 and bears interest at the prime rate less 1%. The credit line was renewed through April 30, 2017. At June 30, 2016, no amount was outstanding. OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS At June 30, 2016, the Company’s total off balance sheet contractual obligations were $65,432. This balance consists of $49,374 of long- term operating leases for various facilities and equipment which expire from 2017 to 2030 and $16,058 of purchase commitments related mainly to open purchase orders. The contractual obligations table below excludes $8,390 of liabilities for uncertain tax positions as we are unable to reasonably estimate the ultimate amount or timing of settlement. 32 2016 ANNUAL REPORTContractual obligations by period as of June 30, 2016 Less than 1 year 1-3 years 3-5 years More than 5 years Operating lease obligations Capital lease obligations Purchase obligations Total $ $ 9,515 $ 200 16,058 25,773 $ 14,486 $ — — 14,486 $ 8,452 $ — — 8,452 $ 16,921 $ — — 16,921 $ TOTAL 49,374 200 16,058 65,632 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 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. 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. Along with the deferral of the effective date, ASU No. 2015-14 allows early application as of the original effective date. 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. 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 issued in April and May 2016 also address specific aspects of the new standard. The Company is currently evaluating the newly issued guidance, including which transition approach will be applied and the estimated impact it will have on our consolidated financial statements. 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 will be effective for the Company in its fiscal year ended June 30, 2017. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company currently classifies debt issuance costs as an asset, and will adopt these changes beginning July 1, 2016. ASU No. 2015-17 was issued by the FASB in November 2015 as part of the Simplification Initiative. This ASU eliminates the requirement to separate deferred income tax liabilities and assets into non-current and current amounts. ASU No. 2015-17 is effective for the Company for its annual reporting period beginning July 1, 2017 and early adoption is permitted. In the third quarter of fiscal 2016, management elected to early adopt and all deferred income tax assets and liabilities are reported as non-current. At March 31, 2016, the current portion of our deferred income tax liability was $7,034. Prior periods were not retrospectively adjusted. 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 Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting in March 2016. The new standard will simplify several aspects of the accounting for share-based payment transactions, including reporting of excess tax benefits and shortfalls, application of forfeiture rates, statutory minimum withholding considerations, and classification within the statement of cash flows. ASU No. 2016-09 is effective for the Company’s annual reporting period beginning July 1, 2017 and early adoption is permitted. The Company is currently evaluating the newly issued guidance, including the estimated impact it will have on our consolidated financial statements. The Company currently anticipates the changes will be adopted in the first quarter of the annual reporting period beginning July 1, 2016. CRITICAL ACCOUNTING POLICIES We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The significant accounting policies are discussed in Note 1 to the consolidated financial statements. The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, as well as disclosure of contingent assets and liabilities. We base our estimates and judgments upon historical experience and other factors believed to be reasonable under the circumstances. Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements. We have identified several critical accounting estimates. An accounting estimate is considered critical if both: (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b) the impact of changes in the estimates and assumptions would have a material effect on the consolidated financial statements. 33 WWW.JACKHENRY.COMRevenue Recognition We recognize revenue net of any applicable discounts in accordance with generally accepted accounting principles and with guidance provided within Staff Accounting Bulletins issued by the Securities and Exchange Commission. The application of these pronouncements requires judgment, including whether a software arrangement includes multiple elements, whether any elements are essential to the functionality of any other elements, and whether vendor-specific objective evidence (“VSOE”) of fair value exists for those elements. Customers receive certain elements of our products and services over time. Changes to the elements in a software arrangement or in our ability to identify VSOE for those elements could materially impact the amount of earned and deferred revenue reflected in the financial statements. License Arrangements: For software license agreements, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, the fee is fixed or determinable and collection is probable. For arrangements where the fee is not fixed or determinable, revenue is deferred until payments become due. The Company’s software license agreements generally include multiple products and services or “elements.” Generally, none of these elements are deemed to be essential to the functionality of the other elements. For multiple element arrangements, which contain software elements and non-software elements, we allocate revenue to the software deliverables and the non-software deliverables as a group based on the relative selling prices of all of the deliverables in the arrangement. For our non-software deliverables, we allocate the arrangement consideration based on the relative selling price of the deliverables using estimated selling price ("ESP"). For our software elements, we use VSOE for this allocation when it can be established and ESP when VSOE cannot be established. The selling price for each element is based upon the following selling price hierarchy: VSOE if available, third party evidence ("TPE") if VSOE is not available, or ESP if neither VSOE or TPE are available. Generally, we are not able to determine TPE because our go-to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. ESP is determined after considering both market conditions (such as the sale of similar products in the market place) and entity-specific factors (such as pricing practices and the specifics of each transaction). For our non-software deliverables, a delivered item is accounted for as a separate unit of accounting if the delivered item has standalone value and if the customer has a general right of return relative to the delivered item, delivery or performance of the undelivered item is probable and substantially within our control. For our software licenses and related services, including the software elements of multiple-element software and non-software arrangements, U.S. GAAP generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on VSOE of fair value. VSOE of fair value is determined for implementation services based on a rate per hour for stand-alone professional services and the estimated hours for the bundled implementation, if the hours can be reasonably estimated. VSOE of fair value is determined for post-contract support ("PCS") based upon the price charged when sold separately. For a majority of the elements within our software arrangements, we have determined that VSOE cannot be established; therefore, revenue on our software arrangements is generally deferred until the only remaining element is PCS. At that point, the entire arrangement fee is recognized ratably over the remaining PCS period, assuming that all other criteria for revenue recognition have been met. The amounts deferred are included in the balance sheet as deferred revenue and recognized as Bundled Products & Services revenue within Support & Service revenue in the consolidated statements of income. For arrangements that include specified upgrades, such upgrades are accounted for as a separate element of the arrangement. For those specified upgrades for which VSOE of fair value cannot be determined, revenue related to the software elements within the arrangement is deferred until such specified upgrades have been delivered. Support and Service Fee Revenue (Non-software): Maintenance support revenue contracted for outside of a license arrangement is recognized pro-rata over the contract period, typically one year. Outsourced data processing and ATM, debit card, and other transaction processing services revenue is recognized in the month the transactions are processed or the services are rendered. Hardware Revenue: Hardware revenue is recognized upon delivery to the customer, when title and risk of loss are transferred. In most cases, we do not stock in inventory the hardware products we sell, but arrange for third-party suppliers to drop-ship the products to our customers on our behalf. The revenue related to these hardware sales is recorded gross. The Company also remarkets maintenance contracts on hardware to our customers. Gross hardware maintenance revenue is recognized ratably over the agreement period. Revenue-based taxes collected from customers and remitted to governmental authorities are presented on a net basis (i.e. excluded from revenues). Deferred Costs Costs for certain software and hardware maintenance contracts with third parties, which are prepaid, are recognized ratably over the life of the maintenance contract, generally one to five years, with the related revenue amortized from deferred revenues. Direct and incremental costs associated with arrangements subject to Accounting Standards Codification ("ASC") 985-605 (for which VSOE of fair value cannot be established) are deferred until the only remaining element in the revenue arrangement is PCS at which point the costs are recognized ratably over the remaining PCS period with the related revenue. Deferred direct and incremental costs associated with arrangements not subject to ASC 985-605 consist primarily of certain up-front costs incurred in connection with our 34 2016 ANNUAL REPORTsoftware hosting arrangements and are recognized ratably over the contract period which typically ranges from 5-7 years. These costs include commissions, costs of third-party licenses and the direct costs of our implementation services, consisting of payroll and other fringe benefits. Depreciation and Amortization Expense The calculation of depreciation and amortization expense is based on the estimated economic lives of the underlying property, plant and equipment and intangible assets, which have been examined for their useful life and determined that no impairment exists. We believe it is unlikely that any significant changes to the useful lives of our tangible and intangible assets will occur in the near term, but rapid changes in technology or changes in market conditions could result in revisions to such estimates that could materially affect the carrying value of these assets and the Company’s future consolidated operating results. We consider whether there is potential for impairment of any long-lived assets, and perform testing for valuation if it is determined that there is a triggering event causing risk of impairment. Capitalization of software development costs We capitalize certain costs incurred to develop commercial software products. For software that is to be sold, significant estimates and assumptions include: establishing when technological feasibility has been met and costs should be capitalized, determining the appropriate period over which to amortize the capitalized costs based on the estimated useful lives, estimating the marketability of the commercial software products and related future revenues, and assessing the unamortized cost balances for impairment. Cost incurred prior to establishing technological feasibility are expensed as incurred. Amortization begins on the date of general release and the appropriate amortization period is based on estimates of future revenues from sales of the products. We consider various factors to project marketability and future revenues, including an assessment of alternative solutions or products, current and historical demand for the product, and anticipated changes in technology that may make the product obsolete. For internal use software, capitalization begins at the beginning of application development. Costs incurred prior to this are expensed as incurred. Significant estimates and assumptions include determining the appropriate amortization period based on the estimated useful life and assessing the unamortized cost balances for impairment. Amortization begins on the date the software is placed in service and the amortization period is based on estimated useful life. A significant change in an estimate related to one or more software products could result in a material change to our results of operations. Estimates used to determine current and deferred income taxes We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We also must determine the likelihood of recoverability of deferred tax assets, and adjust any valuation allowances accordingly. Considerations include the period of expiration of the tax asset, planned use of the tax asset, and historical and projected taxable income as well as tax liabilities for the tax jurisdiction to which the tax asset relates. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in one or more of these factors. Also, liabilities for uncertain tax positions require significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect our financial results. Assumptions related to purchase accounting and goodwill We account for our acquisitions using the purchase method of accounting. This method requires estimates to determine the fair values of assets and liabilities acquired, including judgments to determine any acquired intangible assets such as customer-related intangibles, as well as assessments of the fair value of existing assets such as property and equipment. Liabilities acquired can include balances for litigation and other contingency reserves established prior to or at the time of acquisition, and require judgment in ascertaining a reasonable value. Third party valuation firms may be used to assist in the appraisal of certain assets and liabilities, but even those determinations would be based on significant estimates provided by us, such as forecast revenues or profits on contract-related intangibles. Numerous factors are typically considered in the purchase accounting assessments, which are conducted by Company professionals from legal, finance, human resources, information systems, program management and other disciplines. Changes in assumptions and estimates of the acquired assets and liabilities would result in changes to the fair values, resulting in an offsetting change to the goodwill balance associated with the business acquired. As goodwill is not amortized, goodwill balances are regularly assessed for potential impairment. Such assessments require an analysis of future cash flow projections as well as a determination of an appropriate discount rate to calculate present values. Cash flow projections are based on management-approved estimates, which involve the input of numerous Company professionals from finance, operations and program management. Key factors used in estimating future cash flows include assessments of labor and other direct costs on existing contracts, estimates of overhead costs and other indirect costs, and assessments of new business prospects and projected win rates. The Company's most recent assessment indicates that no reporting units are currently at risk of impairment as the fair value of each reporting unit is significantly in excess of the carrying value. However, significant changes in the estimates and assumptions used in purchase accounting and goodwill impairment testing could have a material effect on the consolidated financial statements. 35 WWW.JACKHENRY.COM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 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. We have no outstanding debt with variable interest rates as of June 30, 2016 and are therefore not currently exposed to interest risk. 36 2016 ANNUAL REPORTFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements Reports of Independent Registered Public Accounting Firm Management's Annual Report on Internal Control over Financial Reporting Financial Statements Consolidated Statements of Income, Years Ended June 30, 2016, 2015, and 2014 Consolidated Balance Sheets, June 30, 2016 and 2015 Consolidated Statements of Changes in Stockholders' Equity, Years Ended June 30, 2016, 2015, and 2014 Consolidated Statements of Cash Flows, Years Ended June 30, 2016, 2015, and 2014 Notes to Consolidated Financial Statements 38 40 41 42 43 44 45 Financial Statement Schedules There are no schedules included because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 37 WWW.JACKHENRY.COMREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Jack Henry & Associates, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, changes in stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Jack Henry & Associates, Inc. and its subsidiaries at June 30, 2016, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP Kansas City, Missouri August 29, 2016 38 2016 ANNUAL REPORTREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Jack Henry & Associates, Inc. Monett, Missouri We have audited the accompanying consolidated balance sheet of Jack Henry & Associates, Inc. and subsidiaries (the "Company") as of June 30, 2015, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the two years in the period ended June 30, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Jack Henry & Associates, Inc. and subsidiaries as of June 30, 2015, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2015, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Kansas City, Missouri September 11, 2015 39 WWW.JACKHENRY.COMMANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Jack Henry & Associates, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes policies and procedures pertaining to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the Company; provide reasonable assurance transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements. All internal controls, no matter how well designed, have inherent limitations. Therefore, even where internal control over financial reporting is determined to be effective, it can provide only reasonable assurance. Projections of any evaluation of effectiveness to future periods are subject to the risk controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. As of June 30, 2016, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded the Company’s internal control over financial reporting as of June 30, 2016 was effective. The Company’s internal control over financial reporting as of June 30, 2016 has been audited by the Company’s independent registered public accounting firm, as stated in their report on the previous page. 40 2016 ANNUAL REPORTJACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Data) REVENUE License Support and service Hardware Total revenue COST OF SALES Cost of license Cost of support and service Cost of hardware Total cost of sales GROSS PROFIT OPERATING EXPENSES Selling and marketing Research and development General and administrative Gain on disposal of a business Total operating expenses Year Ended June 30, 2015 2014 2016 $ 3,041 $ 2,635 $ 2,184 1,300,978 50,627 1,354,646 1,200,652 52,903 1,256,190 1,112,331 58,658 1,173,173 1,197 737,108 35,346 773,651 1,187 680,750 38,399 720,336 908 634,756 43,708 679,372 580,995 535,854 493,801 90,079 81,234 67,514 (19,491 ) 219,336 89,004 71,495 64,364 (6,874 ) 217,989 85,443 66,748 53,312 — 205,503 OPERATING INCOME 361,659 317,865 288,298 INTEREST INCOME (EXPENSE) Interest income Interest expense Total interest income (expense) 307 (1,430 ) (1,123 ) 169 (1,594 ) (1,425 ) 377 (1,105 ) (728 ) INCOME BEFORE INCOME TAXES 360,536 316,440 287,570 PROVISION FOR INCOME TAXES 111,669 105,219 100,855 NET INCOME Basic earnings per share Basic weighted average shares outstanding Diluted earnings per share Diluted weighted average shares outstanding See notes to consolidated financial statements. $ $ $ 248,867 3.13 79,416 3.12 79,734 $ $ $ 211,221 2.60 81,353 $ $ 2.59 $ 81,601 186,715 2.20 84,866 2.19 85,396 41 WWW.JACKHENRY.COMJACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Data) June 30, 2016 June 30, 2015 ASSETS CURRENT ASSETS: Cash and cash equivalents Receivables, net Income tax receivable Prepaid expenses and other Deferred costs Total current assets PROPERTY AND EQUIPMENT, net OTHER ASSETS: Non-current deferred costs Computer software, net of amortization Other non-current assets Customer relationships, net of amortization Other intangible assets, net of amortization Goodwill Total other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable Accrued expenses Accrued income taxes Deferred income tax liability Notes payable and current maturities of long term debt Deferred revenues Total current liabilities LONG TERM LIABILITIES: Non-current deferred revenues Non-current deferred income tax liability Debt, net of current maturities Other long-term liabilities Total long term liabilities Total liabilities STOCKHOLDERS' EQUITY Preferred stock - $1 par value; 500,000 shares authorized, none issued Common stock - $0.01 par value; 250,000,000 shares authorized; 102,903,971 shares issued at June 30, 2016; 102,695,214 shares issued at June 30, 2015 Additional paid-in capital Retained earnings Less treasury stock at cost 24,208,517 shares at June 30, 2016; 21,842,632 shares at June 30, 2015 Total stockholders' equity Total liabilities and equity See notes to consolidated financial statements. 42 $ $ $ 70,310 253,923 15,636 56,588 35,472 431,929 298,564 99,799 222,115 70,461 104,085 35,706 552,853 1,085,019 1,815,512 14,596 85,411 — — 200 343,525 443,732 177,529 188,601 — 9,440 375,570 819,302 — 1,029 $ $ $ 148,313 245,387 2,753 69,096 27,950 493,499 296,332 96,423 191,541 52,432 122,204 34,038 550,366 1,047,004 1,836,835 9,933 78,962 5,543 7,034 2,595 339,544 443,611 192,443 150,223 50,102 8,922 401,690 845,301 — 1,027 440,123 1,431,192 424,536 1,266,443 (876,134 ) (700,472 ) 996,210 1,815,512 $ 991,534 1,836,835 $ 2016 ANNUAL REPORTJACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In Thousands, Except Share and Per Share Data) PREFERRED SHARES: COMMON SHARES: Year Ended June 30, 2016 2015 2014 — — — Shares, beginning of year Shares issued for equity-based payment arrangements Shares issued for Employee Stock Purchase Plan Shares, end of year 102,695,214 121,348 87,409 102,903,971 102,429,926 172,661 92,627 102,695,214 101,993,808 344,372 91,746 102,429,926 COMMON STOCK - PAR VALUE $0.01 PER SHARE: Balance, beginning of year Shares issued for equity-based payment arrangements Shares issued for Employee Stock Purchase Plan Balance, end of year ADDITIONAL PAID-IN CAPITAL: Balance, beginning of year Shares issued upon exercise of stock options Tax withholding related to share based compensation Shares issued for Employee Stock Purchase Plan Tax benefits from share-based compensation Stock-based compensation expense Balance, end of year RETAINED EARNINGS: Balance, beginning of year Net income Dividends Balance, end of year TREASURY STOCK: Balance, beginning of year Purchase of treasury shares Balance, end of year TOTAL STOCKHOLDERS' EQUITY Dividends declared per share See notes to consolidated financial statements. $ $ $ $ $ $ $ $ $ $ 1,027 1 1 1,029 424,536 696 (2,590 ) 5,710 1,051 10,720 440,123 1,266,443 248,867 (84,118 ) 1,431,192 (700,472 ) (175,662 ) (876,134 ) 996,210 1.06 $ $ $ $ $ $ $ $ $ $ 1,024 2 1 1,027 412,512 640 (7,951 ) 4,880 4,343 10,112 424,536 1,131,632 211,221 (76,410 ) 1,266,443 (577,781 ) (122,691 ) (700,472 ) 991,534 0.94 $ $ $ $ $ $ $ $ $ $ 1,020 3 1 1,024 400,710 606 (6,598 ) 4,283 3,420 10,091 412,512 1,016,168 186,715 (71,251 ) 1,131,632 (402,082 ) (175,699 ) (577,781 ) 967,387 0.84 43 WWW.JACKHENRY.COMJACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Year Ended June 30, 2016 2015 2014 $ 248,867 $ 211,221 $ 186,715 50,571 79,077 37,524 (1,306 ) 10,720 (16,888 ) (13,735 ) (29,577 ) 4,663 7,460 (16,624 ) 4,364 365,116 (8,275 ) (56,325 ) 34,030 2,844 (11,826 ) (96,411 ) 54,155 64,841 29,443 (4,343 ) 10,112 (5,046 ) (21,346 ) (33,858 ) (583 ) 14,483 14,146 40,565 373,790 — (54,409 ) 8,135 182 (14,020 ) (76,872 ) 52,935 54,836 12,752 (3,406 ) 10,091 (784 ) 7,498 (28,565 ) (1,252 ) (6,364 ) 5,251 51,952 341,659 (27,894 ) (33,185 ) — 7,781 (16,288 ) (62,194 ) (135,963 ) (136,984 ) (131,780 ) 100,000 (152,500 ) — (175,662 ) (84,118 ) 1,306 697 (2,590 ) 5,711 (307,156 ) (78,003 ) 148,313 70,310 $ $ $ 90,000 (50,783 ) (901 ) (122,691 ) (76,410 ) 4,343 642 (7,951 ) 4,881 (158,870 ) 77,936 70,377 148,313 $ $ $ 25,000 (47,158 ) — (175,699 ) (71,251 ) 3,406 609 (6,598 ) 4,284 (267,407 ) (57,528 ) 127,905 70,377 $ $ $ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income Adjustments to reconcile net income from operations to net cash from operating activities: Depreciation Amortization Change in deferred income taxes Excess tax benefits from stock-based compensation Expense for stock-based compensation (Gain)/loss on disposal of assets and businesses Changes in operating assets and liabilities: Change in receivables Change in prepaid expenses, deferred costs and other Change in accounts payable Change in accrued expenses Change in income taxes Change in deferred revenues Net cash from operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Payment for acquisitions, net of cash acquired Capital expenditures Proceeds from the sale of businesses Proceeds from the sale of assets Internal use software Computer software developed Net cash from investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on credit facilities Repayments on credit facilities Debt acquisition costs Purchase of treasury stock Dividends paid Excess tax benefits from stock-based compensation Proceeds from issuance of common stock upon exercise of stock options Minimum tax withholding payments related to share based compensation Proceeds from sale of common stock Net cash from financing activities NET CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD CASH AND CASH EQUIVALENTS, END OF PERIOD See notes to consolidated financial statements. 44 2016 ANNUAL REPORTJACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Per Share Amounts) 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 software implementation services for financial institutions to utilize JHA software systems, and by providing other related services. JHA also provides continuing support and services to customers using in-house or outsourced systems. CONSOLIDATION The 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. PRIOR PERIOD RECLASSIFICATION Certain amounts included within the consolidated statements of income and the consolidated statement of cash flows for the year ended June 30, 2015 have been reclassified to separately disclose the gain on disposal of businesses and proceeds from the sale of businesses. This adjustment resulted in disclosures on disposal of a business as a separate line to the consolidated statements of income and increased general and administrative operating expense by $6,874 for June 30, 2015. This new line only included gains on the sales of businesses. All other gains and losses on assets are still included in the line items to which they relate. There was no change in total operating expenses. The adjustment also resulted in a separate line on the consolidated statements of cash flows for proceeds from the sale of businesses and decreased proceeds from sale of assets by $8,135 for June 30, 2015. There was no change to net cash from investing activities or total cash flows. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION The Company derives revenue from the following sources: license arrangements, support and service fees (non-software) and hardware sales. There are no rights of return, condition of acceptance or price protection in the Company’s sales contracts. License Arrangements: For software license agreements, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, the fee is fixed or determinable and collection is probable. For arrangements where the fee is not fixed or determinable, revenue is deferred until payments become due. The Company’s software license agreements generally include multiple products and services or “elements.” Generally, none of these elements are deemed to be essential to the functionality of the other elements. For multiple element arrangements, which contain software elements and non-software elements, we allocate revenue to the software deliverables and the non-software deliverables as a group based on the relative selling prices of all of the deliverables in the arrangement. For our non-software deliverables, we allocate the arrangement consideration based on the relative selling price of the deliverables using estimated selling price ("ESP"). For our software elements, we use vendor-specific objective evidence ("VSOE") for this allocation when it can be established and ESP when VSOE cannot be established. The selling price for each element is based upon the following selling price hierarchy: VSOE if available, third party evidence ("TPE") if VSOE is not available, or ESP if neither VSOE or TPE are available. Generally, we are not able to determine TPE because our go- to-market strategy differs from that of our peers and our offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. ESP is determined after considering both market conditions (such as the sale of similar products in the market place) and entity-specific factors (such as pricing practices and the specifics of each transaction). For our non-software deliverables, a delivered item is accounted for as a separate unit of accounting if the delivered item has standalone value and if the customer has a general right of return relative to the delivered item, delivery or performance of the undelivered item is probable and substantially within our control. For our software licenses and related services, including the software elements of multiple-element software and non-software arrangements, U.S. GAAP generally require revenue earned on software arrangements involving multiple elements to be allocated to each element based on vendor-specific objective evidence (“VSOE”) of fair value. VSOE of fair value is determined for implementation services based on a rate per hour for stand-alone professional services and the estimated hours for the bundled implementation, if the hours can be reasonably estimated. VSOE of fair value is determined for post-contract support ("PCS") based upon the price charged when sold 45 WWW.JACKHENRY.COMseparately. For a majority of the elements within our software arrangements, we have determined that VSOE cannot be established; therefore, revenue on our software arrangements is generally deferred until the only remaining element is post-contract support ("PCS"). At that point, the entire arrangement fee is recognized ratably over the remaining PCS period, assuming that all other criteria for revenue recognition have been met. The amounts deferred are included in the balance sheet as deferred revenue and recognized as Bundled Products & Services revenue within Support & Service revenue in the consolidated statements of income. For arrangements that include specified upgrades, such upgrades are accounted for as a separate element of the arrangement. For those specified upgrades for which VSOE of fair value cannot be determined, revenue related to the software elements within the arrangement is deferred until such specified upgrades have been delivered. Total revenue recognized ratably related to our Bundled Products & Services was $94,391, $62,888, and $60,685 for the years ended June 30, 2016, 2015, and 2014, respectively. Support and Service Fee Revenue (Non-software): Maintenance support revenue contracted for outside of a license arrangement is recognized pro-rata over the contract period, typically one year. Outsourced data processing and ATM, debit card, and other transaction processing services revenue is recognized in the month the transactions are processed or the services are rendered. Hardware Revenue: Hardware revenue is recognized upon delivery to the customer, when title and risk of loss are transferred. In most cases, we do not stock in inventory the hardware products we sell, but arrange for third-party suppliers to drop-ship the products to our customers on our behalf. The revenue related to these hardware sales is recorded gross. The Company also remarkets maintenance contracts on hardware to our customers. Hardware maintenance revenue is recognized ratably over the agreement period. Revenue-based taxes collected from customers and remitted to governmental authorities are presented on a net basis (i.e. excluded from revenues). DEFERRED COSTS Costs for certain software and hardware maintenance contracts with third parties, which are prepaid, are recognized ratably over the life of the maintenance contract, generally one to five years, with the related revenue amortized from deferred revenues. Direct and incremental costs associated with arrangements subject to Accounting Standards Codification ("ASC") 985-605 (for which VSOE of fair value cannot be established) are deferred until the only remaining element in the revenue arrangement is PCS at which point the costs are recognized ratably over the remaining PCS period with the related revenue. Deferred direct and incremental costs associated with arrangements not subject to ASC 985-605 consist primarily of certain up-front costs incurred in connection with our software hosting arrangements and are recognized ratably over the contract period which typically ranges from 5-7 years. These costs include commissions, costs of third-party licenses and the direct costs of our implementation services, consisting of payroll and other fringe benefits. DEFERRED REVENUES Deferred revenues consist primarily of prepaid annual software support fees, deferred bundled software arrangements revenue, and prepaid hardware maintenance fees. Deferred bundled software arrangements revenue and hardware maintenance contracts may be recognized over multiple years; therefore, the related deferred revenue and maintenance are classified as current or non-current in accordance with the terms of the contract. Software and hardware deposits received are also reflected as deferred revenues. The vast majority of our maintenance (PCS) renews annually and runs from July 1 to June 30. Renewal billings are submitted to customers each June and the Company has the right to bill at that date; therefore we include those billings as gross in deferred revenue and as a receivable on our balance sheet at the end of each fiscal year. COMPUTER SOFTWARE DEVELOPMENT The Company capitalizes new product development costs incurred for software to be sold from the point at which technological feasibility has been established through the point at which the product is ready for general availability. Software development costs that are capitalized are evaluated on a product-by-product basis annually and are assigned an estimated economic life based on the type of product, market characteristics, and maturity of the market for that particular product. These costs are amortized based on current and estimated future revenue from the product or on a straight-line basis, whichever yields greater amortization expense. All of this amortization expense is included within Cost of support and service. The Company capitalizes development costs for internal use software beginning at the start of application development. Amortization begins on the date the software is placed in service and the amortization period is based on estimated useful life. CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less at the time of acquisition to be cash equivalents. ACCOUNTS RECEIVABLE Receivables are recorded at the time of billing. A reasonable estimate the realizability of customer receivables is made through the establishment of an allowance for doubtful accounts, which is estimated based on a combination of write-off history, aging analysis, and any specifically known collection issues. 46 2016 ANNUAL REPORT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. 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. The Company reviews its long-lived assets and identifiable intangible assets with finite lives for impairment whenever events or changes in circumstances have indicated that the carrying amount of its assets might not be recoverable. The Company evaluates goodwill and other indefinite-lived intangible assets for impairment of value on an annual basis as of January 1 and between annual tests if events or changes in circumstances indicate that the asset might be impaired. COMPREHENSIVE INCOME Comprehensive income for each of the years ending June 30, 2016, 2015, and 2014 equals the Company’s net income. REPORTABLE SEGMENT INFORMATION In accordance with U.S. GAAP, the Company's operations are classified as two reportable segments: bank systems and services and credit union systems and services (see Note 13). Revenue by type of product and service is presented on the face of the consolidated statements of income. Substantially all the Company’s revenues are derived from operations and assets located within the United States of America. 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 short-term borrowings on its existing credit facilities. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At June 30, 2016, there were 24,209 shares in treasury stock and the Company had the remaining authority to repurchase up to 5,782 additional shares. The total cost of treasury shares at June 30, 2016 is $876,134. During fiscal 2016, the Company repurchased 2,366 treasury shares for $175,662. At June 30, 2015, there were 21,843 shares in treasury stock and the Company had authority to repurchase up to 8,148 additional shares. Dividends declared per share were $1.06, $0.94, and $0.84 for the years ended June 30, 2016, 2015, and 2014, respectively. EARNINGS PER SHARE Per share information is based on the weighted average number of common shares outstanding during the year. Stock options have been included in the calculation of income per diluted share to the extent they are dilutive. The difference between basic and diluted weighted average shares outstanding is the dilutive effect of outstanding stock options and restricted stock (see Note 10). INCOME TAXES Deferred tax liabilities and assets are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance would be established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based upon the technical merits of the position. The tax benefit recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Also, interest and penalties expense are recognized on the full amount of deferred benefits for uncertain tax positions. Our policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. 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 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. 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. Along with the deferral of the effective date, ASU No. 2015-14 allows early application as of the original effective date. 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. 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 issued in April and May 2016 also address specific aspects of the new standard. The Company is currently evaluating the newly issued guidance, including which transition approach will be applied and the estimated impact it will have on our consolidated financial statements. 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 will be effective for the Company in its fiscal year ended June 30, 2017. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company currently classifies debt issuance costs as an asset, and will adopt these changes beginning July 1, 2016. 47 WWW.JACKHENRY.COMASU No. 2015-17 was issued by the FASB in November 2015 as part of the Simplification Initiative. This ASU eliminates the requirement to separate deferred income tax liabilities and assets into non-current and current amounts. ASU No. 2015-17 is effective for the Company for its annual reporting period beginning July 1, 2017 and early adoption is permitted. In the third quarter of fiscal 2016, management elected to early adopt and all deferred income tax assets and liabilities are reported as non-current. At March 31, 2016, the current portion of our deferred income tax liability was $7,034. Prior periods were not retrospectively adjusted. 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 Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting in March 2016. The new standard will simplify several aspects of the accounting for share-based payment transactions, including reporting of excess tax benefits and shortfalls, application of forfeiture rates, statutory minimum withholding considerations, and classification within the statement of cash flows. ASU No. 2016-09 is effective for the Company’s annual reporting period beginning July 1, 2017 and early adoption is permitted. The Company is currently evaluating the newly issued guidance, including the estimated impact it will have on our consolidated financial statements. The Company currently anticipates the changes will be adopted in the first quarter of the annual reporting period beginning July 1, 2016. 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 fair value of long term debt also approximates carrying value as estimated using discounted cash flows based on the Company’s current incremental borrowing rates. 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 Level 1 Level 2 Level 3 Total Fair Value $ $ $ $ 35,782 $ — $ 98,888 $ — — — — $ 50,000 $ $ $ $ — — — — $ $ $ $ 35,782 — 98,888 50,000 June 30, 2016 Financial Assets: Money market funds Financial Liabilities: Revolving credit facility June 30, 2015 Financial Assets: Money market funds Financial Liabilities: Revolving credit facility 48 2016 ANNUAL REPORTNOTE 3. PROPERTY AND EQUIPMENT The classification of property and equipment, together with their estimated useful lives is as follows: Land Land improvements Buildings Leasehold improvements Equipment and furniture Aircraft and equipment Construction in progress Less accumulated depreciation Property and equipment, net (1) Lesser of lease term or estimated useful life June 30, 2016 2015 Estimated Useful Life $ $ 24,987 25,470 146,464 46,897 337,565 37,967 7,373 626,723 328,159 298,564 $ 24,987 25,428 144,414 32,169 327,949 37,695 23,563 616,205 319,873 $ 296,332 5 - 20 years 20 - 30 years 5 - 30 years (1) 3 - 10 years 5 - 10 years Property and equipment included $651 and $1,343 that was in accrued liabilities at June 30, 2016 and 2015, respectively. Also, the Company acquired $4,344 of computer equipment through capital leases for the year ended June 30, 2015. There were no acquisitions through capital leases in fiscal 2016. These amounts were excluded from capital expenditures on the statements of cash flows. NOTE 4. OTHER ASSETS Goodwill The carrying amount of goodwill for the years ended June 30, 2016 and 2015, by reportable segments, is as follows: Bank systems and services Beginning balance Goodwill, acquired during the year Goodwill, written off related to sale Ending balance Credit Union systems and services Beginning balance Goodwill, acquired during the year Ending balance June 30, $ 2016 420,795 6,099 (3,612 ) $ 2015 423,190 — (2,395 ) $ 423,282 $ 420,795 $ $ 129,571 — 129,571 $ $ 129,571 — 129,571 The Goodwill acquired during the year was a result of our purchase of Bayside Business Solutions, Inc. 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 has been allocated to our banking segment. During the year the Company sold its Alogent business (Alogent) to Antelope Acquisition Co., an affiliate of Battery Ventures. Alogent was included in our banking segment. Goodwill allocated to the carrying amount of the net assets sold was calculated based on the relative fair values of the business disposed and the portion of the reporting unit that was retained. 49 WWW.JACKHENRY.COMOther Intangible Assets Information regarding other identifiable intangible assets is as follows: Customer relationships Computer software Other intangible assets: Purchased software Trade names Other intangible assets, total Customer relationships Computer software Other intangible assets: Purchased software Trade names Total Gross Carrying Amount June 30, 2016 Accumulated Amortization 266,545 474,738 43,692 12,802 56,494 (162,460 ) (252,623 ) $ $ (17,475 ) (3,313 ) (20,788 ) $ Gross Carrying Amount June 30, 2015 Accumulated Amortization 276,337 416,674 32,192 12,498 44,690 (154,133 ) (225,133 ) $ $ (7,818 ) (2,834 ) (10,652 ) $ $ $ $ $ $ $ Net 104,085 222,115 26,217 9,489 35,706 Net 122,204 191,541 24,374 9,664 34,038 Customer relationships have lives ranging from 5 to 20 years. Computer software includes cost of software to be sold, leased, or marketed of $108,991 and costs of internal-use software of $113,124 at June 30, 2016. Computer software includes the unamortized cost of commercial software products developed or acquired by the Company, which are capitalized and amortized over useful lives ranging from 5 to 10 years. Amortization expense for computer software totaled $54,810, $43,798, and $37,720 for the fiscal years ended June 30, 2016, 2015, and 2014, respectively. There were no material impairments in any of the fiscal years presented. Our other intangible assets have useful lives ranging from 3 to 20 years. Amortization expense for all intangible assets was $79,077, $64,841, and $54,836 for the fiscal years ended June 30, 2016, 2015, and 2014, respectively. The estimated aggregate future amortization expense for each of the next five years for all intangible assets remaining as of June 30, 2016, is as follows: Years Ending June 30, Computer Software Customer Relationships Other Intangible Assets Total $ $ 53,326 46,062 37,781 27,091 11,742 13,097 12,509 12,244 10,074 8,430 $ 10,968 $ 7,400 3,660 939 642 77,391 65,971 53,685 38,104 20,814 2017 2018 2019 2020 2021 50 2016 ANNUAL REPORTNOTE 5. DEBT The Company’s outstanding long and short term debt is as follows: LONG TERM DEBT Revolving credit facility Capital leases Less current maturities Debt, net of current maturities SHORT TERM DEBT Capital leases Current maturities of long-term debt Notes payable and current maturities of long term debt The following table summarizes the annual principal payments required as of June 30, 2016: Years ended June 30, 2017 Capital leases June 30, 2016 June 30, 2015 $ $ $ $ — $ — — — — $ 200 — 200 $ $ $ $ 50,000 816 50,816 714 50,102 1,881 714 2,595 200 200 The Company has entered into various capital lease obligations for the use of certain computer equipment. The Company currently has short term capital lease obligations totaling $200 at June 30, 2016. Included in property and equipment are assets under capital leases totaling $2,329, which have accumulated depreciation totaling $898. Revolving credit facility The revolving credit facility provides for borrowings of up to $300,000, which may be increased by the Company at any time until maturity to $600,000. The credit facility bears interest at a variable rate equal to (a) a rate based on LIBOR or (b) an alternate base rate (the highest of (i) the Prime Rate for such day, (ii) the sum of the Federal Funds Effective Rate for such day plus 0.50% and (iii) the Eurocurrency Rate for a one month Interest Period on such day for dollars plus 1.0%), plus an applicable percentage in each case determined by the Company's leverage ratio. The credit facility is guaranteed by certain subsidiaries of the Company. The credit facility is subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the agreement. As of June 30, 2016, the Company was in compliance with all such covenants. The revolving loan terminates February 20, 2020 and at June 30, 2016 there was no outstanding balance. Other lines of credit The Company renewed an unsecured bank credit line on March 3, 2014 which provides for funding of up to $5,000 and bears interest at the prime rate less 1%. The credit line was renewed through April 30, 2017. At June 30, 2016, no amount was outstanding. Interest The Company paid interest of $1,320, $1,111, and $620 during the years ended June 30, 2016, 2015, and 2014, respectively. 51 WWW.JACKHENRY.COMNOTE 6. COMMITMENTS AND CONTINGENCIES 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. On April 29 and July 8, and September 1, 2015, the PTAB issued decisions holding that all relevant claims of the plaintiff's patents are unpatentable and invalid. DataTreasury has appealed the PTAB decisions to the U.S. Court of Appeals for the Federal Circuit. At this stage, we cannot make a reasonable estimate of possible loss or range of loss, if any, arising from this lawsuit. Property and Equipment The Company had no material commitments at June 30, 2016 to purchase property and equipment. There were $13,089 material commitments at June 30, 2015, mainly related to the purchase of aircraft. Leases The Company leases certain property under operating leases which expire over the next 14 years, but certain of the leases contain options to extend the lease term. All lease payments are based on the lapse of time but include, in some cases, payments for operating expenses and property taxes. There are no purchase options on real estate leases at this time. Certain leases on real estate are subject to annual escalations for increases in operating expenses and property taxes. As of June 30, 2016, net future minimum lease payments are as follows: Years Ending June 30, Lease Payments 2017 2018 2019 2020 2021 Thereafter Total Rent expense was $10,167, $9,547, and $8,609 in 2016, 2015, and 2014 respectively. $ $ 9,515 8,519 5,967 4,865 3,587 16,921 49,374 52 2016 ANNUAL REPORTNOTE 7. INCOME TAXES The provision for income taxes from continuing operations consists of the following: Current: Federal State Deferred: Federal State Year Ended June 30, 2016 2015 2014 $ $ 66,574 7,571 34,355 3,169 $ 70,555 5,221 28,018 1,425 77,937 10,166 10,636 2,116 $ 111,669 $ 105,219 $ 100,855 The tax effects of temporary differences related to deferred taxes shown on the balance sheets were: Deferred tax assets: Contract and service revenues and costs Expense reserves (bad debts, insurance, franchise tax and vacation) Net operating loss carryforwards Other, net Total gross deferred tax assets Valuation allowance Net deferred tax assets Deferred tax liabilities: Accelerated tax depreciation Accelerated tax amortization Contract and service revenues and costs Total gross deferred liabilities Net deferred tax liability June 30, 2016 2015 $ 69,597 14,770 3,543 2,090 90,000 (608 ) 89,392 $ 68,503 14,612 3,682 1,493 88,290 (650 ) 87,640 (40,857 ) (160,719 ) (76,417 ) (277,993 ) (32,331 ) (142,776 ) (69,790 ) (244,897 ) $ (188,601 ) $ (157,257 ) The following analysis reconciles the statutory federal income tax rate to the effective income tax rates reflected above: Computed "expected" tax expense Increase (reduction) in taxes resulting from: State income taxes, net of federal income tax benefits Research and development credit Domestic production activities deduction Tax over book basis in subsidiary stock Other (net) Year Ended June 30, 2016 35.0 % 2015 35.0 % 2014 35.0 % 1.9 % (2.5 )% (1.9 )% (1.7 )% 0.2 % 31.0 % 1.4 % (1.5 )% (2.0 )% — % 0.4 % 33.3 % 2.8 % (0.8 )% (2.2 )% — % 0.3 % 35.1 % As of June 30, 2016, we have $6,048 of gross net operating loss (“NOL”) carryforwards pertaining to the acquisition of Goldleaf Financial Solutions, Inc., which are expected to be utilized after the application of IRC Section 382. Separately, as of June 30, 2016, we have state NOL carryforwards with a tax-effected value of $1,470. The federal and state losses have varying expiration dates, ranging from 2016 to 2035. Based on state tax rules which restrict our utilization of these losses, we believe it is more likely than not that $608 of these losses will expire unutilized. Accordingly, a valuation allowance of $608 and $650 has been recorded against these assets as of June 30, 2016 and 2015, respectively. 53 WWW.JACKHENRY.COMThe Company paid income taxes of $90,307, $61,885, and $83,014 in 2016, 2015, and 2014 respectively. At June 30, 2016, the Company had $7,421 of gross unrecognized tax benefits, $5,986 of which, if recognized, would affect our effective tax rate. At June 30, 2015, the Company had $7,104 of unrecognized tax benefits, $5,193 of which, if recognized, would affect our effective tax rate. We had accrued interest and penalties of $1,178 and $1,120 related to uncertain tax positions at June 30, 2016 and 2015, respectively. The income tax provision included interest expense and penalties (or benefits) on unrecognized tax benefits of $47, $(155), and $582 in the years ending June 30, 2016, 2015, and 2014, respectively. A reconciliation of the unrecognized tax benefits for the years ended June 30, 2016 and 2015 follows: Balance at July 1, 2014 Additions for current year tax positions Reductions for current year tax positions Additions for prior year tax positions Reductions for prior year tax positions Reductions related to expirations of statute of limitations Balance at June 30, 2015 Additions for current year tax positions Reductions for current year tax positions Additions for prior year tax positions Reductions for prior year tax positions Reductions related to expirations of statute of limitations Balance at June 30, 2016 Unrecognized Tax Benefits $ $ 7,834 1,351 (56 ) 483 (998 ) (1,510 ) 7,104 1,581 (56 ) 507 (38 ) (1,677 ) 7,421 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 fiscal years ended June 30, 2014 and 2015. The examination is ongoing. At this time, it is anticipated that the examination will not result in a material change to the Company’s financial statements. The U.S. federal and state income tax returns for June 30, 2013 and all subsequent years remain subject to examination as of June 30, 2016 under statute of limitations rules. We anticipate that potential changes due to lapsing statutes of limitations and examination closures could reduce the unrecognized tax benefits balance by $1,500 - $3,000 within twelve months of June 30, 2016. NOTE 8. INDUSTRY AND SUPPLIER CONCENTRATIONS The Company sells its products to banks, credit unions, and financial institutions throughout the United States and generally does not require collateral. All billings to customers are due 30 days from date of billing. Reserves (which are insignificant at June 30, 2016, 2015, and 2014) are maintained for potential credit losses. In addition, the Company purchases most of its computer hardware and related maintenance for resale in relation to installation of JHA software systems from two suppliers. There are a limited number of hardware suppliers for these required items. If these relationships were terminated, it could have a negative impact on the operations of the Company. 54 2016 ANNUAL REPORT NOTE 9. STOCK-BASED COMPENSATION Our pre-tax operating income for the years ended June 30, 2016, 2015, and 2014 includes $10,720, $10,112, and $10,091 of equity-based compensation costs, respectively, of which $9,712, $9,251, and $9,335 relates to the restricted stock plans, respectively. The income tax benefits from stock option exercises and restricted stock vests totaled $1,051, $4,343, and $3,420 for the years ended June 30, 2016, 2015, and 2014, respectively. 2005 NSOP and 1996 SOP The Company previously issued options to employees under the 1996 Stock Option Plan (“1996 SOP”) and to outside directors under the 2005 Non-Qualified Stock Option Plan (“2005 NSOP”). The 1996 SOP was adopted by the Company on October 29, 1996, for its employees. Terms and vesting periods of the options were determined by the Compensation Committee of the Board of Directors when granted and for options outstanding include vesting periods up to four years. Shares of common stock were reserved for issuance under this plan at the time of each grant, which must be at or above fair market value of the stock at the grant date. The options terminate 30 days after termination of employment, 3 months after retirement, one year after death or 10 years after the date of grant. The plan terminated by its terms on October 29, 2006. No options previously granted under the 1996 SOP remain outstanding and vested at June 30, 2016. The 2005 NSOP was adopted by the Company on September 23, 2005, for its outside directors. Generally, options are exercisable beginning 6 months after grant at an exercise price equal to the fair market value of the stock at the grant date. For individuals who have served less than four continuous years, 25% of all options will vest after one year of service, 50% shall vest after two years, and 75% shall vest after three years of service on the Board. 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. 700 shares of common stock have been reserved for issuance under this plan with a maximum of 100 for each director. A summary of option plan activity under the plan is as follows: Outstanding July 1, 2013 Granted Forfeited Exercised Outstanding July 1, 2014 Granted Forfeited Exercised Outstanding July 1, 2015 Granted Forfeited Exercised Outstanding June 30, 2016 Vested June 30, 2016 Exercisable June 30, 2016 Number of Shares Weighted Average Exercise Price Aggregate Intrinsic Value 144 — — (19 ) 125 — — (25 ) 100 — — (50 ) 50 50 50 $ $ $ 21.79 — — 18.42 22.29 — — 19.17 23.07 — — 23.99 22.14 22.14 22.14 $ $ $ 3,256 3,256 3,256 There were no options granted during any period presented. Compensation cost related to outstanding options has now been fully recognized. The weighted average remaining contractual term on options currently exercisable as of June 30, 2016 was 2.57 years. The total intrinsic value of options exercised was $3,011, $1,044, and $704 for the fiscal years ended June 30, 2016, 2015, and 2014, respectively. Restricted Stock Plan and 2015 Equity Incentive Plan The Restricted Stock Plan was adopted by the Company on November 1, 2005, for its employees. The plan expired on November 1, 2015. Up to 3,000 shares of common stock were available for issuance under the plan. The 2015 Equity Incentive Plan was adopted by the company on November 10, 2015 for its employees. Up to 3,000 shares of common stock are available for issuance under the 2015 Equity Incentive Plan. Upon issuance, shares of restricted stock are subject to forfeiture and to restrictions which limit the sale or transfer of the shares during the restriction period. The restrictions will be lifted over periods ranging from 3 years to 7 years from grant date. 55 WWW.JACKHENRY.COMThe following table summarizes non-vested share awards activity: Share awards Outstanding July 1, 2013 Granted Vested Forfeited Outstanding July 1, 2014 Granted Vested Forfeited Outstanding July 1, 2015 Granted Vested Forfeited Outstanding June 30, 2016 Weighted Average Grant Date Fair Value Shares 252 30 (143 ) (1 ) 138 12 (71 ) (7 ) 72 22 (24 ) (12 ) 58 $ 25.92 54.13 24.41 22.17 33.56 57.77 35.69 46.39 34.28 66.31 43.45 23.82 44.95 The non-vested share awards do not participate in dividends during the restriction period. As a result, the weighted-average fair value of the non-vested share awards was based on the fair market value of the Company’s equity shares on the grant date, less the present value of the expected future dividends to be declared during the restriction period, consistent with the methodology for calculating compensation expense on such awards. At June 30, 2016, there was $913 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 0.69 years. An amendment to the Restricted Stock Plan was adopted by the Company on August 20, 2010. Unit awards were made to employees remaining in continuous employment throughout the performance period and vary based on the Company’s percentile ranking in Total Shareholder Return (“TSR”) over the performance period compared to a peer group of companies. TSR is defined as the change in the stock price through the performance period plus dividends per share paid during the performance period, all divided by the stock price at the beginning of the performance period. It is the intention of the Company to settle the unit awards in shares of the Company’s stock. Certain Restricted Stock Unit awards are not tied to performance goals, and for such awards, vesting occurs over a period of 1 to 3 years. The following table summarizes non-vested unit awards as of June 30, 2016, as well as activity for the year then ended: Unit awards Outstanding July 1, 2013 Granted Vested Forfeited Outstanding July 1, 2014 Granted Vested Forfeited Outstanding July 1, 2015 Granted Vested Forfeited Outstanding June 30, 2016 56 Shares Weighted Average Grant Date Fair Value Aggregate Intrinsic Value 814 164 (168 ) (101 ) 709 178 (277 ) (111 ) 499 130 (99 ) (101 ) 429 23.08 48.21 15.77 15.77 31.66 53.62 19.69 22.74 48.13 75.99 44.09 45.89 $58.06 $37,415 2016 ANNUAL REPORT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 grant dates are as follows: Volatility Risk free interest rate Dividend yield Stock Beta Year Ended June 30, 2016 15.6 % 1.06 % 1.5 % 0.741 2015 17.8 % 1.06 % 1.5 % 0.765 2014 21.6 % 0.91 % 1.6 % 0.837 For the year ended June 30, 2016, 118 unit awards were granted and measured using the above assumptions. The remaining 12 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 award grants. At June 30, 2016, there was $9,822 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 1.09 years. The fair value of restricted shares at vest date totaled $8,677, $20,275, and $16,070 for the years ended June 30, 2016, 2015, and 2014, respectively. NOTE 10. EARNINGS PER SHARE The following table reflects the reconciliation between basic and diluted earnings per share. Net Income Common share information: Weighted average shares outstanding for basic earnings per share Dilutive effect of stock options and restricted stock Weighted average shares outstanding for diluted earnings per share Basic earnings per share Diluted earnings per share Year Ended June 30, 2016 2015 2014 $ 248,867 $ 211,221 $ 186,715 79,416 318 79,734 3.13 3.12 81,353 248 81,601 2.60 2.59 $ $ 84,866 530 85,396 2.20 2.19 $ $ $ $ Per share information is based on the weighted average number of common shares outstanding for each of the fiscal years. Stock options and restricted stock have been included in the calculation of earnings per share to the extent they are dilutive. The two-class method for computing EPS has not been applied because no outstanding awards participate in dividends. There were no anti-dilutive stock options and restricted stock excluded for fiscal 2016, no shares excluded for fiscal 2015, and 24 shares excluded for fiscal 2014. NOTE 11. EMPLOYEE BENEFIT PLANS The Company established an employee stock purchase plan in 2006. The plan allows the majority of employees the opportunity to directly purchase shares of the Company at a 15% discount. The plan does not meet the criteria as a non-compensatory plan. As a result, the Company records the total dollar value of the stock discount given to employees under the plan as expense. Total expense recorded by the Company under the plan for the year ended June 30, 2016, 2015 and 2014 was $1,008, $861 and $756, respectively. The Company has a defined contribution plan for its employees: the 401(k) Retirement Savings Plan (the “Plan”). The Plan is subject to the Employee Retirement Income Security Act of 1975 (“ERISA”) as amended. Under the Plan, the Company matches 100% of full time employee contributions up to 5% of compensation subject to a maximum of $5 per year. In order to receive matching contributions, employees must be 18 years of age and be employed for at least six months. The Company has the option of making a discretionary contribution; however, none has been made for any of the three most recent fiscal years. The total matching contributions for the Plan were $16,794, $15,378, and $13,617 for fiscal 2016, 2015 and 2014, respectively. 57 WWW.JACKHENRY.COMNOTE 12. 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 Long-term assets Identifiable intangible assets Total liabilities assumed Total identifiable net assets Goodwill Net assets acquired $ $ 1,922 253 5,005 (3,279 ) 3,901 6,099 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 has been allocated to our Banking Systems and Services segment. The goodwill is not expected to be deductible for income tax purposes. 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 included within general and administrative expenses. The results of Bayside Business Solutions’ operations included in the Company’s consolidated statement of income for the twelve months ended June 30, 2016 included revenue of $4,273 and after-tax net income of $303. The accompanying consolidated statements of income for the fiscal year ended June 30, 2016 do not include any revenues and expenses related to this acquisition prior to the acquisition date. 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. Banno, LLC Effective March 1, 2014, the Company acquired all of the equity interests of Banno, an Iowa-based company that provides Web and transaction marketing services with a focus on the mobile medium, for $27,910 paid in cash. This acquisition was funded using existing operating cash. The acquisition of Banno expanded the Company’s presence in online and mobile technologies within the industry. During fiscal year 2014, the Company incurred $30 in costs related to the acquisition of Banno. These costs included fees for legal, valuation and other fees. These costs were included within general and administrative expenses. The results of Banno's operations included in the Company's consolidated statements of income for the year ended June 30, 2016 included revenue of $6,393 and after-tax net loss of $1,289. For the year ended June 30, 2015, our consolidated statements of income included revenue of $4,175 and after-tax net loss of $1,784 attributable to Banno. The results of Banno’s operations included in the Company’s consolidated statement of operations from the acquisition date to June 30, 2014 included revenue of $848 and after-tax net loss of $1,121. The accompanying consolidated statements of income for the twelve month period ended June 30, 2016 do not include any revenues and expenses related to this acquisition prior to the acquisition date. 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. 58 2016 ANNUAL REPORTNOTE 13. 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. REVENUE License Support and service Hardware Total revenue COST OF SALES Cost of license Cost of support and service Cost of hardware Total cost of sales GROSS PROFIT OPERATING EXPENSES INTEREST INCOME (EXPENSE) INCOME BEFORE INCOME TAXES REVENUE License Support and service Hardware Total revenue COST OF SALES Cost of license Cost of support and service Cost of hardware Total cost of sales GROSS PROFIT OPERATING EXPENSES INTEREST INCOME (EXPENSE) INCOME BEFORE INCOME TAXES Year Ended June 30, 2016 Bank Credit Union Total $ 2,536 $ 505 $ 960,738 33,394 996,668 1,058 564,851 23,159 589,068 407,600 $ 340,240 17,233 357,978 139 172,257 12,187 184,583 173,395 $ 3,041 1,300,978 50,627 1,354,646 1,197 737,108 35,346 773,651 580,995 219,336 (1,123 ) $ 360,536 Year Ended June 30, 2015 Bank Credit Union Total $ 1,727 $ 908 $ 922,545 38,457 962,729 832 533,407 27,831 562,070 400,659 $ 278,107 14,446 293,461 355 147,343 10,568 158,266 135,195 $ 2,635 1,200,652 52,903 1,256,190 1,187 680,750 38,399 720,336 535,854 217,989 (1,425 ) $ 316,440 59 WWW.JACKHENRY.COM REVENUE License Support and service Hardware Total revenue COST OF SALES Cost of license Cost of support and service Cost of hardware Total cost of sales GROSS PROFIT OPERATING EXPENSES INTEREST INCOME (EXPENSE) INCOME BEFORE INCOME TAXES Depreciation expense Bank systems and services Credit Unions systems and services Total Amortization expense Bank systems and services Credit Unions systems and services Total Capital expenditures Bank systems and services Credit Unions systems and services Total Property and equipment, net Bank systems and services Credit Union systems and services Total Intangible assets, net Bank systems and services Credit Union systems and services Total Year Ended June 30, 2014 Bank Credit Union Total $ 1,514 $ 670 $ 2,184 853,500 42,657 897,671 555 492,777 31,866 525,198 372,473 $ 258,831 16,001 275,502 353 141,979 11,842 154,174 121,328 $ 1,112,331 58,658 1,173,173 908 634,756 43,708 679,372 493,801 205,503 (728 ) $ 287,570 Year Ended June 30, 2016 2015 2014 $ $ $ $ $ $ 47,076 3,495 50,571 58,914 20,163 79,077 54,529 1,796 56,325 $ $ $ $ $ $ 50,154 4,001 54,155 47,502 17,339 64,841 53,730 679 54,409 $ $ $ $ $ $ 48,382 4,553 52,935 39,152 15,684 54,836 32,736 449 33,185 June 30, 2016 June 30, 2015 $ $ $ $ 269,020 29,544 298,564 682,229 232,530 914,759 $ $ $ $ 263,231 33,101 296,332 664,231 233,918 898,149 The Company has not disclosed any additional asset information by segment, as the information is not produced internally and its preparation is impracticable. 60 2016 ANNUAL REPORT NOTE 14: SUBSEQUENT EVENTS Dividends On August 19, 2016, the Company's Board of Directors declared a cash dividend of $0.28 per share on its common stock, payable on September 27, 2016 to shareholders of record on September 7, 2016. 61 WWW.JACKHENRY.COMQUARTERLY FINANCIAL INFORMATION (unaudited) Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total For the Year Ended June 30, 2016 $ 1,604 $ 634 $ 292 $ 511 $ 3,041 307,746 12,268 321,618 181 174,714 8,768 183,663 137,955 21,751 18,554 17,113 — 57,418 80,537 113 (220 ) (107 ) 80,430 29,064 51,366 0.64 80,545 0.64 80,735 $ $ $ 320,219 12,019 332,872 498 181,989 7,958 190,445 142,427 22,231 18,862 16,547 — 57,640 84,787 91 (276 ) (185 ) 84,602 25,254 59,348 0.75 79,473 0.74 79,770 $ $ $ 319,649 13,245 333,186 193 184,527 9,553 194,273 138,913 22,732 19,854 16,497 — 59,083 79,830 54 (486 ) (432 ) 79,398 25,515 53,883 0.68 78,805 0.68 79,167 $ $ $ 353,364 13,095 366,970 325 195,878 9,067 205,270 161,700 23,365 23,964 17,357 (19,491 ) 45,195 116,505 49 (448 ) (399 ) 116,106 31,836 84,270 1.07 78,841 1.06 79,261 1,300,978 50,627 1,354,646 1,197 737,108 35,346 773,651 580,995 90,079 81,234 67,514 (19,491 ) 219,336 361,659 307 (1,430 ) (1,123 ) 360,536 111,669 248,867 3.13 79,416 3.12 79,734 $ $ $ REVENUE License Support and service Hardware Total revenue COST OF SALES Cost of license Cost of support and service Cost of hardware Total cost of sales GROSS PROFIT OPERATING EXPENSES Selling and marketing Research and development General and administrative Gain on disposal of a business Total operating expenses OPERATING INCOME INTEREST INCOME (EXPENSE) Interest income Interest expense Total interest income (expense) INCOME BEFORE INCOME TAXES PROVISION FOR INCOME TAXES NET INCOME Basic earnings per share Basic weighted average shares outstanding Diluted earnings per share Diluted weighted average shares outstanding $ $ $ 62 2016 ANNUAL REPORTREVENUE License Support and service Hardware Total revenue COST OF SALES Cost of license Cost of support and service Cost of hardware Total cost of sales GROSS PROFIT OPERATING EXPENSES Selling and marketing Research and development General and administrative Gain on disposal of a business Total operating expenses OPERATING INCOME INTEREST INCOME (EXPENSE) Interest income Interest expense Total interest income (expense) INCOME BEFORE INCOME TAXES PROVISION FOR INCOME TAXES NET INCOME Basic net income per share Basic weighted average shares outstanding Diluted net income per share $ $ $ Diluted weighted average shares outstanding 82,589 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total For the Year Ended June 30, 2015 $ 503 $ 491 $ 569 $ 1,072 $ 2,635 288,216 12,755 301,474 409 165,090 9,385 174,884 126,590 21,663 16,791 16,510 — 54,964 71,626 57 (266 ) (209 ) 71,417 25,329 46,088 0.56 82,195 $ $ 0.56 $ 296,905 13,898 311,294 308 170,377 9,574 180,259 131,035 22,175 17,681 18,388 (6,874 ) 51,370 79,665 28 (337 ) (309 ) 79,356 25,474 53,882 0.66 81,432 0.66 81,634 $ $ $ 296,896 12,244 309,709 285 168,457 9,152 177,894 131,815 21,674 17,522 15,417 — 54,613 77,202 33 (669 ) (636 ) 76,566 25,854 50,712 0.63 80,880 0.63 81,094 $ $ $ 318,635 14,006 333,713 185 176,826 10,288 187,299 146,414 23,492 19,501 14,049 — 57,042 89,372 51 (322 ) (271 ) 89,101 28,562 60,539 0.75 80,904 $ $ 0.75 $ 81,086 1,200,652 52,903 1,256,190 1,187 680,750 38,399 720,336 535,854 89,004 71,495 64,364 (6,874 ) 217,989 317,865 169 (1,594 ) (1,425 ) 316,440 105,219 211,221 2.60 81,353 2.59 81,601 63 WWW.JACKHENRY.COMB O A R D O F D I R E C T O R S J O H N F. “ J A C K ” P R I M EXECUTIVE CHAIRMAN Jack Henry & Associates, Inc. Monett, Missouri M AT T H E W C . F L A N I G A N VICE CHAIRMAN AND LEAD DIRECTOR, JACK HENRY & ASSOCIATES, INC. EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Leggett & Platt, Incorporated Carthage, Missouri T O M H . W I L S O N , J R . MANAGING PARTNER DecisionPoint Advisors, LLC Charlotte, North Carolina J A C Q U E R . F I E G E L CHAIRMAN/CENTRAL OKLAHOMA AREA Prosperity Bank Oklahoma City, Oklahoma T H O M A S A . W I M S E T T CHAIRMAN AND MANAGING PARTNER Wimsett & Company, LLC Louisville, Kentucky L A U R A G . K E L LY MANAGING DIRECTOR, VALUATION SOLUTIONS GROUP CoreLogic Irvine, California S H R U T I S . M I YA S H I R O PRESIDENT AND CHIEF EXECUTIVE OFFICER Orange County’s Credit Union Santa Ana, California W E S L E Y A . B R O W N PRESIDENT Bent St. Vrain & Company, LLC Denver, Colorado » » » » » » » » 64 2016 ANNUAL REPORTE X E C U T I V E O F F I C E R S J O H N F. “ J A C K ” P R I M E XE CUT IVE CHAIRMAN OF THE B OARD D A V I D B . F O S S P RE S ID E NT AND CHIEF EXECUTIVE OFFICER K E V I N D . W I L L I A M S CH IE F FI NANCIAL OFFICER AND TREASURER M A R K S . F O R B I S V IC E P RE SID ENT AND CHIEF TECHNOLOGY OFFICER A N N U A L M E E T I N G The annual meeting of shareholders will be held on Thursday, November 10, 2016 at 11 a.m. CT at Jack Henry & Associates’ Corporate Headquarters, Monett, Missouri. F O R M 1 0 - K A copy of the company’s Form 10-K is available upon request to the Chief Financial Officer at the corporate headquarters address or from our website at www.jackhenry.com. T R A N S F E R A G E N T A N D R E G I S T R A R Computershare Trust Company, N.A. P.O. Box 30170 College Station, TX 77842-3170 663 HIGHWAY 60, P.O . BO X 807 , MO NE T T, MO 6 5 708 417-23 5-6652 | 417-235- 4281 FA X www.jackhenry.com 

Continue reading text version or see original annual report in PDF format above