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
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D
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V
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$1.200
$1.000
$0.800
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$0.200
$0.000
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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
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$10
$0
3
‘90
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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
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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