Jack Henry & Associates Annual Report 2017

Plain-text annual report

T H E Elements O F J H A A N N U A L R E P O R T 2 0 1 7 Success Payments Service Solutions Driven Co-opetition Fun Value Singular Core Elements They’re the ultimate building blocks of who we are and the foundation of everything we experience. We at Jack Henry & Associates, Inc.® have uncovered many reasons to appreciate the successes of our past. And reflecting on our traditions of quality and service always inspires a sense of excitement for our future. As we chart the journey ahead, we do so with strength, optimism, and a renewed focus on what truly makes us who we are. What drives us? What is the framework by which we define ourselves as individuals? As an organization? How do we take the components of who we are, what we do, and why we do it, and blend them with our time-tested philosophy and core values in a way that resonates with our Associates in a tangible way? On the following pages, you’ll experience our new internal campaign that defines the elements of who we are. These elements are a testament to the decades- long truth that Jack Henry & Associates is an extraordinary company for our employees, customers, business partners, and shareholders. 1 jackhenry.com2 0 1 7 S T R E N G T H . O P T I M I S M . F O C U S . 2 2017 Annual ReportTable of Contents 04 | Shareholders’ Letter 07 | Financial Highlights 08 | We are Driven by the Most Engaged, Empowered, and Exceptional People in Our Industry 10 | We Define Amazing Service for Our Customers 11 | We Make Payment Processing Less Complex 12 | We Do the Right Thing and Whatever it Takes to Ensure the Success of Our Customers 14 | We Build, Buy, and Sell Industry-Leading Solutions 16 | We are Passionate About Delivering Competitive, Integrated Core Platforms 17 | We Consistently Deliver Remarkable Shareholder Value 18 | We Embrace Co-Opetition for the Betterment of Our Industry 19 | We Strive to be Singular in the Eyes of the Customer 20 | We Know How to Have Fun 23 | Market for Registrant’s Common Equity 24 | Performance Graph 25 | Selected Financial Data 25 | Management’s Discussion and Analysis 38 | Quantitative and Qualitative Disclosures About Market Risk 39 | Financial Statements and Supplementary Data 62 | Quarterly Financial Information 66 | Board of Directors and Executive Officers 3 jackhenry.comFellow Shareholders Fiscal year 2017 marked another year of very solid performance across all three of our brands with our combined sales team exceeding quota again this year. Financial industry health remains strong, de novo financial institutions are re-emerging, and our company continues to thrive. Additionally, our employee engagement scores remain very high and our Associates continue to represent our company with the utmost care for our customers. Speaking of our Associates, we’re proud to have been During fiscal year 2017, we continued to seek out recognized in May, 2017 by Forbes magazine as one of opportunities to run our business more efficiently. America’s Best Large Employers. JHA ranked No. 95 On May 1, 2017, we divested our Regulatory Filing out of 500 overall and an unprecedented No. 7 in the product line to a small independent company more IT, Internet, Software, and Services category among focused in this area. Additionally, we are working on other large companies including Google, Microsoft, a number of Continuous Process Improvement (CPI) SAS, and Intuit. Now more than 6,000 Associates strong, initiatives designed to help us revamp processes our company is burgeoning with exceptional talent throughout the organization. nationwide, and it means a great deal to us that they so openly share how happy they are to work here. Our R&D investments in the recent past enabled us to introduce several new solutions in fiscal year 2017. We continue to invest in career development for our These include, but are not limited to, a new treasury Associates at every level of the organization, based on management solution, an enterprise risk mitigation our belief that a truly strong company is built from offering, an electronic invoice presentment and the inside out. In fiscal year 2017, we began several payment solution for billers, several key enhancements initiatives aimed at improving how we position our to our core solutions, and enhanced commercial company for the future. We rolled out a new talent lending products. management program to focus on the next generation of top talent, and initiated several training programs to build stronger leaders within our organization. ONE O F AMERICA’S BEST LARGE EMP LOYERS Forbes Magazine, May 2017 We celebrated 48 new core wins this year which includes the signing of six de novo institutions. The re-emergence of new banks is an encouraging sign of economic confidence and offers expanded opportunities for our business. Our customers continue to realize the many benefits of the outsourced delivery model, which is also referred to as hosted delivery, in-the-cloud, or Software-as-a Service (SaaS). Today, 52% of our core customers have chosen software delivered in a hosted environment. This shift has been a significant contributor to our recurring revenue composition which reached 79% in fiscal year 2017. 4 2017 Annual ReportF Y1 7 L E A D E R S H I P H E A D L I N E S We welcomed a new General Counsel in November 2016. In January, 2017, we named a new General Manager of Human Resources. David Foss was appointed to the Board of Directors effective July 1, 2017, expanding the board to nine members, including seven independent outside directors and two non- independent directors. As in previous years, our electronic payments business was a large part of our total revenue, primarily due to transaction fees and the trend toward electronic payment alternatives. Payments generated approximately $537 million in annual revenue, or 38% of our total revenue. We made significant strides this fiscal year in the area of faster payments. In March 2016, we announced a partnership with The Clearing House (TCH), and in November, 2016 we teamed up with Early Warning to resell their ZelleSM Network. We were also excited to report in May that we entered into a strategic services agreement with First Data® and PSCU® to further expand the credit and debit card products offered to financial institutions by our JHA Card Processing Solutions™ group. You can read more about this on page 11. $1.4 BILLION total revenue We continue to use our strong balance sheet and cash flow to generate value for our shareholders. In fiscal year 2017, we generated 6% revenue growth during the year, with 100% being organic growth. We returned $222 million to our shareholders as we increased our quarterly dividend by 11% and repurchased over 1.4 million shares of JHA stock in the market for the treasury. Total revenue increased to a record $1.4 billion. Net income was $246 million or $3.14 per diluted share, as compared to net income of $249 million or $3.12 per diluted share reported for fiscal year 2016. Net income (continued on next page) » 5 jackhenry.comand earnings per share were also records excluding the impact of the divestiture of Alogent in fiscal 2016, as net income was $229 million or $2.87 per diluted share. We generated strong cash flow from operating activities of $357 million, as compared to $366 million in fiscal year 2016. Our return on assets was 13%, and return on equity was 24%. We generated strong profitability with a 26% operating margin. DAVID B. FOSS President and Chief Executive Officer 48 new core wins As we look forward to the future, there are many reasons to be energized. With the expertise we have in place, the strong company we have built, and the solid direction we have defined for ourselves, we are optimistic about what lies ahead. On behalf of the board of directors and the entire leadership team, we would like to thank our Associates for their passion and dedication to our fundamental values and strategic direction. We thank our more than 9,000 customers for their business and loyalty. And we thank you for your investment in our company. KEVIN D. WILLIAMS Chief Financial Officer and Treasurer 6 2017 Annual ReportFinancial Highlights IN MILLIONS EXCEPT PER SHARE DATA Revenue Net Income 2015 2016 2017 $1,256 2015 $1,355 2016 $1,431 2017 Diluted Earnings Per Share Total Assets $2.59 2015 $3.12 2016 $3.14 2017 $211 $249 $246 $1,837 $1,816 $1,909 Stockholders’ Equity Dividends Declared Per Share $992 2015 $996 2016 $1,032 2017 $0.94 $1.06 $1.18 7 2015 2016 2017 2015 2016 2017 jackhenry.comDriven WE ARE DRIVEN BY THE MOST ENGAGED, EMPOWERED, AND EXCEPTIONAL PEOPLE IN OUR INDUSTRY Jack Henry & Associates employs more than 6,000 other year general managers do skip-a-level meetings dedicated Associates – the true foundation of our with Associates deeper in their organization to discuss organization. They are passionate, devoted, self- what the company is doing right and opportunities motivated, and committed to achieving success for we have to improve. Then, we act on this information. our company and customers. “Drive for Results” is Because we care and listen, we win numerous top one of our five organizational core values, and our workplace awards each year, and, as mentioned Associates prove day-in and day-out that they embody previously in this report, we were recognized by Forbes this element of JHA. this year among many other outstanding companies in Our Associates regularly share good things about our IT services. company. This year, they had the opportunity to share Our employee engagement surveys also continually their feedback with our CEO and General Manager of show that we exceed the benchmark scores when it Human Resources during the CEO Roadshows and comes to employee satisfaction – which we believe HR Listening Tours – two events designed to answer translates to happy customers and, as noted below, employee questions and garner feedback on how to happy shareholders. improve our business and workplace environment. We also have a formal documented process where every Driven Dv We are driven by the most engaged, empowered, and exceptional people in our industry. OUR WORKPLACE AWARDS INCLUDE: 8 2017 Annual ReportM I S S I O N S TAT E M E N T To protect and increase the value of our stockholders’ investment by providing quality products and services to our customers. In accomplishing this we feel it is important to: Concentrate our activities on what we know best – information systems and services for financial institutions. Provide outstanding commitment and service to our customers so that the perceived value of our products and services is consistent with the real value. Maintain a work environment that is personally, professionally, and financially rewarding for our employees. “I love working for JHA and want to make sure I represent the company in a very passionate and positive manner to customers. I’m onsite all the time and I’m able to get really involved in their questions and how they will pertain to their live system and what to expect. I genuinely care about our customers and I want them to love my product and feel much better and more confident by the time I leave. Customer satisfaction is truly what drives me to succeed.” MELODIE STOCKTON JHA Associate Applications Trainer, Advanced | Yukon, Oklahoma “I am the most rewarded when I feel like I am making a difference for people. When someone tells me that I have made their job easier, or a financial institution appreciates a change we have made, it makes me want to continue pushing for better solutions.” JESSICA MATTHEWS JHA Associate Technical Business Analyst, Senior | Lenexa, Kansas 9 jackhenry.comService WE DEFINE AMAZING SERVICE FOR OUR CUSTOMERS At JHA, we understand and appreciate that our ability to provide outstanding customer service is, and always has “JHA has been fantastic to work with over the been, paramount to our success. We don’t just “deliver few months we have been on our new system. good service,” we are passionate about truly going The conversion team was awesome and helped above and beyond to provide exceptional service. And it shows. make it successful for our members and our staff. After our conversion, we needed to add some additional functionality to our indirect lending We send random surveys to our customers following program. The JHA team jumped into action and service events throughout the year, asking them to rate made that happen for us.” the quality of their service experience. Receiving a 4 rating is considered exceeding expectations, and we CHAD MERRIHEW consistently rank closer to the 5, or far exceeded, mark. Senior Vice President and Chief Operating Officer Our customer service representatives must practically Security Credit Union | Flint, Michigan receive all 5s on the survey in order to get an overall rating above 4.5, yet they consistently perform at a level that far exceeds customer expectations. “We have been extremely happy with the service we have received from JHA. Everyone goes over and above to be helpful. The project management that JHA provides is very organized, items are prioritized and addressed in a functional order, and the expertise and helpfulness of the team are great! But in our eyes, the number one most important thing is the exceptional service we receive from our Client Relationship Manager who always goes the extra mile for us. She addresses items immediately, her follow-ups are exceptional, and she always keeps us up-to-date on the latest news and product updates at JHA.” THERESA TAGGART Vice President, Information Technology Sun East FCU | Aston, Pennsylvania DAILY CUSTOMER SATISFACTION SURVEYS Questions asked of our customers 4.66 OUT OF 5 rating* What is your overall rating of the Customer Service Representative? 10 Service Sr We deﬁne amazing service for our customers. 4.57 OUT OF 5 rating* What is your rating for this customer service experience? *As of June 2017 2017 Annual ReportPayments WE MAKE PAYMENT PROCESSING LESS COMPLEX Payments continues to be one of JHA’s fastest growing around-the-clock through our core and complementary business lines. From debit card and online bill payments solutions, enabling financial institutions of all sizes to to emerging payment channels like person-to-person remain at the forefront of faster payments. In November (P2P) and mobile remote deposit capture, we offer a dynamic suite of solutions that quickly, accurately, and 2016, JHA also announced a partnership with Early Warning to resell their ZelleSM Network and enable securely move money through virtually all payment our financial institution customers to send faster P2P channels and support all remittance types. payments to nearly anyone with a U.S. bank or credit In fiscal year 2017, we made significant strides in bringing union account. faster payments to our customers. In March 2016, our In May 2017, we entered into a strategic services JHA Payment Solutions™ group announced a partnership agreement with First Data® − the global leader in with The Clearing House (TCH). TCH is building a new payment technology and services solutions − and real-time payment system, which they will own and PSCU® − a leading credit union service organization − operate. In partnering with JHA Payment Solutions, TCH to further expand the credit and debit card products will greatly expand the new system’s reach and advance offered to financial institutions by our JHA Card the goal of real-time payment ubiquity. Processing Solutions™ group. The new, combined We are also building a payments hub that will help ensure our financial institution customers remain at the center of payment innovation. The JHA faster payments hub provides streamlined, secure payment capabilities for sending and receiving transactions in real time and services will allow us to provide full-service credit and debit card processing to all existing core bank and credit union customers on a single platform, as well as expand our card processing platform to financial institutions outside the JHA core customer base. Payments Pt We make payment processing less complex. JHA PAYMENT SOLUTIONS™ Impact at JHA 9% Annual same-store transaction growth $110B+ monthly processed volume 38% YTD FY17 JHA revenue ~6,300 FI customers 408M+ monthly transactions 19% of JHA employee base 11 jackhenry.comSuccess WE DO THE RIGHT THING AND WHATEVER IT TAKES TO ENSURE THE SUCCESS OF OUR CUSTOMERS We know that success isn’t a given. It takes hard work, dedication, and follow-through to truly stand out and succeed in our competitive industry. In 1976 when our co-founders, Jack Henry and Jerry Hall, established our guiding principles, they expressed the important notions to always do the right thing and to do whatever it takes – even when living up to those standards may not be the easiest thing to do. This strong work ethic was instilled in our culture then, “Extraco Banks has been a customer of Jack Henry and Associates for more than 25 years. Recently, we had a vision to develop direct integration to our core system for our video tellers, also known as ExtraBankers, allowing additional efficiencies by removing the unnecessary duplication of entry in transactions. Thankfully, Jack Henry listened and certified us as the beta bank to assist and help lead the change with the integration process. and it remains engrained in each facet of our business We are pleased to report that Jack Henry did whatever it took to support our project and we now offer ExtraBanker support to our customers via full-service and self-service channels, both inside and outside of our branches, allowing transactions and service to be delivered to the customer by an off premises Relationship Banker via video technology. The Jack Henry team showed persistence, courtesy, and superior support throughout the extensive project from beginning to end. We are continuously pleased with the vision Jack Henry shares to support and facilitate the innovation aspirations of their customers.” JAMES GEESLIN Vice Chairman and Chief Consumer Banking Officer Extraco Banks | Waco, Texas today. It means we act with integrity. It means we work tirelessly to ensure that our customers are satisfied. And ultimately, it means that no matter what, our customers can depend on us. Success Se We do the right thing and whatever it takes to ensure the success of our customers. CO-FOUNDERS: Jack Henry and Jerry Hall 12 2017 Annual ReportOUR GUIDING PRINCIPLES do the right thing do whatever it takes have fun “A great example of Symitar going above and beyond to ensure our success occurred a couple of years ago when another vendor experienced a technical problem that caused significant risk and potential financial liability to our CU. We were working with the vendor for a couple of days to try and resolve an out-of-balance condition as a result of the technical problem. Symitar proactively contacted me to inquire if we were experiencing a balancing problem with our vendor. They promptly provided a customized batch routine to allow us to identify the financial and transaction outage and bulk post thousands of transactions to make us whole, while the vendor that caused the issue was still trying to determine how they would identify the transactions to produce a report with no viable solution to provide a batch posting process. Symitar proactively helped us resolve an issue caused by another vendor. Now that is exceptional service!” GARY LINDSEY Vice President, Information Systems – Chief Information Officer American Airlines Credit Union | Fort Worth, Texas 13 jackhenry.comSolutions WE BUILD, BUY, AND SELL INDUSTRY-LEADING SOLUTIONS Our company was originally founded to support BUY | We keep an eye out for acquisition opportunities community banks with in-house data processing or innovators in our industry who have niche products systems. Today, we sell and support more than 300 that could complement our own. Our approach is products and services in both in-house and hosted extremely disciplined. We strive to ensure that the environments that enable financial institutions and companies we acquire fill a strategic business need, are diverse businesses outside the financial industry competitively priced, and culturally align with our values. to process financial transactions, automate their businesses, and succeed in a competitive and evolving industry landscape. SELL | Through developing our own solutions and forging alliances with other companies that complement our proprietary offerings, we are able to BUILD | We are keenly focused on identifying the regularly introduce new products and services that technology needs of our customers and developing the generate extensive cross-sale opportunities among our integrated solutions that best serve those needs. We three brands and offer both best-of-breed and best-of- are passionate about keeping our solutions competitive suite solutions to our customers. and responsive to constantly evolving customer and consumer demands. Solutions Sl We build, buy, and sell industry-leading solutions. INDUSTRY-LEADING SOLUTIONS BUILD BUY SELL 14 2017 Annual Report“I became CEO of FNB, Vinita about 5 years ago. The first vendor meeting I took was with ProfitStars to discuss Business Manager. To this day, it is still the best and most profitable vendor meeting I’ve ever had. The ProfitStars team was very helpful in the implementation and training, which set the stage for other products like Commercial Lending Center and Healthcare Lending. JHA has allowed this community bank to compete within the ever- changing arena of the financial industry.” H. DEE ROBISON Chief Executive Officer First National Bank of Vinita | Vinita, Oklahoma 20 17 T E C H N O LO GY S P OT L I G H T The Banno™ suite gained more momentum as we integrated Banno Mobile™ into our Jack Henry Banking® and Symitar® core systems. We announced our CECL DataStore and ValidationSM solution which enables our customers to better position themselves for current expected credit loss (CECL) regulations. We partnered with SAS® to develop our Enterprise Risk Mitigation Solutions™, empowering our customers to complete more thorough risk assessments. We integrated sophisticated treasury management tools into our Jack Henry Banking core platforms. We continue to see more and more JHA customers move their IT infrastructure to our secure cloud computing environment with our Gladiator® Hosted Network Solutions™ offering. “I believe in what Banno is building. We have an opportunity to make digital banking personal and that excites me. It’s a huge challenge, but the journey is fun. I’m helping build products that I want to use and when you work on something that you’re excited to tell all your friends about, well, that’s the sweet spot. It’s addicting.” BRYAN McCARTY JHA Associate Technical Product Manager, Senior | Minneapolis, Minnesota 15 jackhenry.comCore WE ARE PASSIONATE ABOUT DELIVERING COMPETITIVE, INTEGRATED CORE PLATFORMS Core processing was JHA’s primary focus when our company was founded in 1976, and today we remain passionate about ensuring our core platforms evolve for the modern banker. We know that a financial institution’s core becomes the nucleus of an anytime, anywhere, constantly changing infrastructure; flexibility, scalability, and integration are vital. Our core platforms continue to be industry-leading, illustrated by the fact that we win a significant amount of core takeaways from our competitors each year. In fiscal year 2017, we secured 48 new core footprints. C O R E H E A D L I N E S I N F I S C A L Y E A R 2017 JULY 2016 We refreshed our SilverLake System® core platform, which offered many updates and enhancements to the already dynamic core including real-time processing, enhanced customization capabilities, and impressive updates to the visuals and mobility of the branch experience. AUGUST 2016 Aite Group recognized JHA for two awards in the firm’s July 2016 report, Leading U.S. Core Banking Vendors: Entering the Era of Plug-and-Play Banking. AUGUST 2016 SilverLake System was acknowledged by Celent with two XCelent Awards in the Core Banking Systems for Midsize Banks: North American Version, 2016 report. APRIL 2017 We announced that our Symitar® brand broke a company record when it forged six new billion- dollar Episys® credit union core relationships in one fiscal year. MAY 2017 SilverLake System was recognized as the leader of new core system footprints for calendar year 2016 by the IBS Intelligence Sales League Table 2017. SilverLake System led the United States in completed contracts for sales to new core customers on a single platform, with 22 for the year. 16 “The rate of core replacements will remain consistent over the next few years as banks and credit unions seek technology that enables them to perform against the pressures of competitors, consumers as well as regulators. In response, their appetite for hosted, open solutions will continue growing. Jack Henry & Associates’ core banking strategy is aligned with these trends.” CHRISTINE BARRY Research Director Aite Group IN-TO-OUT STRATEGY 19 in-house banking customers Core Cr We deliver competitive core platforms. 33 in-house credit union customers MORE AND MORE FINANCIAL INSTITUTIONS ARE DISCOVERING THE BENEFITS OF THE OUTSOURCED DELIVERY MODEL. DURING THE LAST FISCAL YEAR, 19 OF OUR IN-HOUSE BANKING CUSTOMERS AND 33 OF OUR IN- HOUSE CREDIT UNION CUSTOMERS MADE THE SWITCH TO OUTSOURCING. 2017 Annual ReportValue Vl We consistently deliver remarkable shareholder value. Value WE CONSISTENTLY DELIVER REMARKABLE SHAREHOLDER VALUE JHA leadership rings the NASDAQ opening bell on November 30, 2016. Since 1990, the number of financial institutions in the United States has decreased by approximately 60% due to many events such as the Resolution Trust Corporation (RTC) takeovers in the early 90s, the bank failures during the 2008 financial crisis, and the course of normal merger and acquisition activity in the industry. However, through a combination of organic growth and strategic acquisitions, JHA has steadily maintained a compound annual revenue growth of 18% during that same time period, offering consistent returns to our shareholders year-over-year – something quite remarkable in our industry. FISCAL YEAR-END STOCK PRICE Price adjusted for stock splits e s o l C . j d A $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 Fiscal Year End GROWTH IN A CONSOLIDATING INDUSTRY Revenue in thousands 30,000 25,000 20,000 15,000 10,000 5,000 0 Total FIs Total JHA Revenue CAGR 18% ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 17 jackhenry.com Co-opetition WE EMBRACE CO-OPETITION FOR THE BETTERMENT OF OUR INDUSTRY A blend of cooperation and competition, co-opetition means that JHA teams up with other companies that might otherwise be our competitors to create new business solutions for our customers. Sometimes it simply makes good sense to work alongside other companies to enhance our offerings, rather than building technology from the ground up on our own. These competitive, yet mutually beneficial, relationships are golden opportunities that ultimately translate to better service and a wider technology footprint for our customers. They allow our customers to improve speed-to-market with competitive solutions, run their businesses better, keep up with consumer demands, and oftentimes save money in the process. Executive Chairman of the Board, Jack Prim, and Symitar President, Ted Bilke, with MDT President and CEO Larry Nichols. Co-opetition Co We embrace “co-opetition” for the betterment of our industry. BENEFITS OF CO-OPETITION Improve speed-to- market Improve operational efficiencies Keep up with consumer demands Save money “Jack Henry & Associates, its Symitar division, and Member Driven Technologies all share the same passion for offering continuously evolving and innovative products and excellent client service. This passion has never wavered, from the time MDT was founded in 2003 by seven credit unions, to the more than 110 credit unions we serve today. Our strong partnership is a testament to our like-minded vision and goals. It is exciting to see industry experts from all three of our organizations jointly roll up their sleeves and deliver on all of our initiatives. Because we share the passion, we also share the successes we achieve.” LARRY NICHOLS President and Chief Executive Officer Member Driven Technologies 18 2017 Annual ReportSingular WE STRIVE TO BE SINGULAR IN THE EYES OF THE CUSTOMER To provide the best possible service, we believe that all customers should receive a consistent experience “JHA provides exceptional customer service. Their across all JHA departments, regardless of which division callbacks are timely, representatives are courteous or brand serves them or how they choose to interact with us. We are devoted to training our Associates to put themselves in the customer’s shoes and be cognizant of exceptional service behaviors. It’s the little things that truly make a difference – like transferring a call only one time, staying with customers through service events, following up on issues, acting as their intermediary, and displaying a passion for providing exemplary service. Even though we have more than 9,000 customers, over 6,000 employees, three distinct brands, and more than 300 products and services, we are committed to breaking down silos within our company so the only thing visible to our customers is a seamless and enjoyable service experience. and well prepared for the call, they take ownership of the process, thoroughly document the case, and take appropriate and immediate steps to promptly resolve problems. We very much like the option to open cases telephonically or online through the For Clients site.” PAMELA L. WENDEL Senior Vice President and Chief Operations Manager Pacific National Bank | Miami, Florida THE JHA BRAND Singular Sg We strive to be singular in the eyes of the customer. » Community and Multi- Billion Dollar Banks » Core Processing Systems » » Integrated Complementary Products In-House or Outsourced Services » Credit Unions of All Sizes » Financial Institutions » Core Processing Systems » » Integrated Complementary Products In-House or Outsourced Services of All Sizes » Corporate Entities and Strategic Partnerships » Core Processor Agnostic » Best-of-Breed Niche Solutions 19 jackhenry.comFun WE KNOW HOW TO HAVE FUN Having fun is a tenet in our foundational philosophy and a prevalent part of our everyday culture. HAVING FUN AND GIVING BACK Fun Fn We know how to have fun. One of the largest, most fun events held at JHA each year is the Annual Jack and Jerry Memorial Charity Golf Classic which occurs each June. This event began in the 1980s as a way to bring Associates together to enjoy each other’s company while raising money for charitable organizations. Over the years, JHA has raised more than $450,000 for a variety of causes including Folds of Honor and Angels for Children. We strive to keep fun top-of-mind for our Associates throughout the year with the help of our internal FUNdamentals team whose sole purpose is to dream up new events and contests. In fiscal year 2017, the team sponsored numerous events including a Take Me Out to the Ballgame challenge which encouraged Associates to attend local baseball games, a March Madness contest during the NCAA tournament, and Office Olympics activities. And who says you can’t have fun while helping a good cause? Our Community Stewardship Initiative (CSI) committees located in offices across the country sponsor events that raise awareness and money for charity while giving Associates the opportunity to have fun along the way. From serving local needs at convalescent homes and homeless shelters, to helping larger national charities such as United Way and Toys for Tots, JHA Associates are passionate about building relationships while giving back to their communities. The Charlotte, North Carolina office makes a not-so- fashionable (but fun!) statement on Ugly Sweater/Ugly Pajama Day in December 2016. The Annual Jack & Jerry Memorial Charity Golf Classic is a yearly opportunity for Associates to gather on the green in Monett, Missouri to have fun while supporting a variety of charitable causes. Our toy drive in San Diego, California collected 1,136 toys in December 2016. Pictured here is JHA Associate Pete Major shaking hands with a United States Marine who collected 13 full boxes and delivered them to Toys for Tots. 20 2017 Annual Report2 0 1 7 F I N A N C I A L S 21 jackhenry.comT H I S P A G E L E F T B L A N K 22 2017 Annual ReportMARKET 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”) 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 2017 Fiscal 2016 High $ 106.46 $ 95.64 91.06 89.89 Low 91.50 88.11 79.00 85.00 $ High 87.27 86.23 79.92 71.75 $ Low 80.44 73.19 68.31 63.84 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 2017 and 2016 are as follows: Fourth Quarter Third Quarter Second Quarter First Quarter Fiscal 2017 Fiscal 2016 $ 0.310 0.310 0.280 0.280 $ 0.280 0.280 0.250 0.250 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. On August 16, 2017, there were approximately 94,800 holders of the Company’s common stock, including individual participants in security position listings. On that same date the last sale price of the common shares as reported on NASDAQ was $101.59 per share. Issuer Purchases of Equity Securities The following shares of the Company were repurchased during the quarter ended June 30, 2017: April 1- April 30, 2017 May 1- May 31, 2017 June 1- June 30, 2017 Total Total Number of Shares Purchased (1) — — 250,345 250,345 Average Price of Share — — $ $ $ 105.02 $ 105.02 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) 4,580,404 — 250,000 250,000 4,580,404 4,330,404 4,330,404 (1) 250,000 shares were purchased through a publicly announced repurchase plan. There were 345 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. 23 jackhenry.com PERFORMANCE GRAPH The following chart presents a comparison for the five-year period ended June 30, 2017, 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 2012 100.00 100.00 100.00 2013 138.34 117.87 120.60 2014 177.10 161.90 150.27 2015 195.72 203.87 161.43 2016 267.64 233.39 167.87 2017 322.60 271.10 197.92 This comparison assumes $100 was invested on June 30, 2012, 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.. 24 2017 Annual ReportSELECTED FINANCIAL DATA Selected Financial Data (In Thousands, Except Per Share Data) Income Statement Data Revenue (1) Net Income Basic earnings per share Diluted earnings per share Dividends declared per share Balance Sheet Data Total deferred revenue Total assets Long-term debt Stockholders’ equity 2017 2016 2015 2014 2013 YEAR ENDED JUNE 30, $ $ $ $ $ $ $ $ $ 1,431,117 $ 245,793 $ 3.16 $ 3.14 $ 1.18 $ 511,384 $ 1,908,945 $ 50,000 $ 1,032,051 $ 1,354,646 $ 1,256,190 $ 1,173,173 $ 1,107,524 248,867 $ 211,221 $ 186,715 $ 167,610 3.13 $ 3.12 $ 1.06 $ 2.60 $ 2.59 $ 0.94 $ 2.20 $ 2.19 $ 0.84 $ 1.95 1.94 0.56 521,054 $ 531,987 $ 492,868 $ 439,596 1,815,512 $ 1,836,835 $ 1,680,703 $ 1,672,386 — $ 50,102 $ 3,729 $ 7,366 996,210 $ 991,534 $ 967,387 $ 1,015,816 (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 nearly 6,100 associates nationwide, and is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Its solutions serve over 9,000 customers and are marketed and supported through three primary brands. Jack Henry Banking® supports banks ranging from community banks to multi-billion dollar institutions with assets up to $50 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. We believe our primary competitive advantage is customer service. Our support infrastructure and strict standards provide service levels we believe to be the highest in the markets we serve and generate high levels of customer satisfaction and retention. We consistently measure customer satisfaction using comprehensive annual surveys and randomly generated daily surveys we receive in our everyday business. Dedicated surveys are also used to grade specific aspects of our customer experience, including product implementation, education, and consulting services. 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 $1,107,524 in fiscal 2013 to $1,431,117 in fiscal 2017. Net income has grown from $167,610 in fiscal 2013 to $245,793 in fiscal 2017. This growth has resulted primarily from internal expansion. 25 jackhenry.comWe 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 will continue to impact financial institutions’ 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 2017 to fiscal 2016 and compare fiscal 2016 to fiscal 2015. RESULTS OF OPERATIONS FISCAL 2017 COMPARED TO FISCAL 2016 In fiscal 2017, revenues increased 6% or $76,471 compared to fiscal 2016, with strong growth continuing in our support and service revenues, particularly our outsourcing services, electronic payment services, and bundled services. Cost of sales increased 6%, in line with revenue, and gross profit increased 5%. The company continues to focus on cost management. Net operating expenses increased 11% year over year, due mainly to the gain on the sale of our Alogent business (“Alogent”) to Antelope Acquisition Co., an affiliate of Battery Ventures, in the prior year, which is discussed below in the operating expenses section. Provision for income taxes increased 9% compared to the prior year, due a lower prior year effective tax rate, which is described in the following discussion. The above changes resulted in a 1% decrease in net income for fiscal 2017. We move into fiscal 2018 following a strong performance in fiscal 2017. Significant portions of our business continue to provide recurring revenue and our healthy sales pipeline is also encouraging. Our customers continue to face regulatory and operational challenges which our products and services address, and in these times they have an even greater need for our solutions that directly address institutional profitability, efficiency, and security. 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, 2017 follows. All dollar amounts are in thousands and discussions compare the current fiscal year ended June 30, 2017 to the prior fiscal year ended June 30, 2016. REVENUE License Revenue License Percentage of total revenue Year Ended June 30, % Change 2017 2016 $ 2,385 $ 3,041 (22 )% <1% <1% 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 decreased due mainly to a reduction in standalone license sales in our Bank segment, with Alogent headwinds accounting for $570 of that decrease. Excluding the Alogent headwind, license revenue decreased 3%. Such license fees will fluctuate as non-bundled license sales are sporadic in nature. Support and Service Revenue Year Ended June 30, % Change Support and service Percentage of total revenue In-House Support & Other Services Electronic Payment Services Outsourcing Services Implementation Services Bundled Products & Services Total Increase 26 6 % 2017 2016 $ 1,384,338 $ 1,300,978 96% 97% Year over Year $ Change % Change $ 2,790 26,930 39,822 (8,837) 22,655 $ 83,360 1% 5% 13% (14)% 24% 2017 Annual ReportSupport and service revenues are generated from supporting our in-house 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 2017, despite Alogent revenue of $27,673 included in the prior year. Excluding that headwind, support and services grew 9%. In-house support and other services revenue increased despite headwinds of $13,062 created from the Alogent sale. Excluding the Alogent headwind, in-house support and other services revenue increased 5%. The increase was due mainly to increased revenue from work orders and from customers consulting with our Client Services Consulting group. The group’s operational assessments help banks and credit unions maximize their operating efficiency and productivity, identify new revenue and market opportunities, and reduce costs. Electronic payment services continued to show growth over the prior year. The revenue increases are mainly attributable to strong performance across debit/credit card risk management and transaction processing services, remote capture and ACH processing, and online bill payment services. Deconversion fees (fees charged when customer agreements are terminated prior to the end of their contracted term) for electronic payment services decreased $2,901 compared to the prior year. Excluding these fees from both years, electronic payment services revenue increased 6%. Outsourcing services for banks and credit unions continue to drive revenue growth as customers continue to show a preference for outsourced delivery of our solutions. Revenues from outsourcing services are typically earned under multi-year service contracts and therefore provide a long-term stream of recurring revenues. We expect the trend towards outsourced product delivery to benefit outsourcing services revenue for the foreseeable future. The increase in outsourcing revenue was mainly due to data processing. Deconversion fees within outsourcing services increased $4,736. Excluding these fees from both years, outsourcing services revenue increased 12%. 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 partly to Alogent headwinds of $4,465, with the remainder of the decrease due mainly to a decline in stand-alone implementations in the Bank 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, despite $10,145 of Alogent headwinds, mostly due to terminations of pending products and services on certain contracts that have allowed for the release of revenue that was being deferred until contract completion in both our Bank and Credit Union core and complementary arrangements, as well as increased revenue being released due to completion of final installations and services on our Bank multiple element arrangements. Hardware Revenue Hardware Percentage of total revenue Year Ended June 30, % Change 2017 2016 $ 44,394 $ 50,627 (12)% 3% 4% The Company has entered into re-marketing 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 decreases in revenue from power systems, servers, and other 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. 27 jackhenry.comCost 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 2017 2016 $ $ 730 <1% 1,655 69% $ $ 1,197 <1% 1,844 61% $ 786,143 $ 737,108 55% 54% $ 598,195 $ 563,870 43% 43% $ $ 32,161 2% 12,233 28% $ $ 35,346 3% 15,281 30% $ 819,034 $ 773,651 57% 57% $ 612,083 $ 580,995 43% 43% (39)% (10)% 7% 6% (9)% (20)% 6% 5% 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 decreased 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. Cost of support and service for fiscal 2016 includes $12,332 related to Alogent sales. Excluding those costs, our cost of support and service increased 8%. 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 lower due to decreased 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 2017 2016 $ 93,297 $ 90,079 4% 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 compared to fiscal 2016 due mainly to increased commission expense, but remained a consistent percentage of total revenue in both periods. Research and Development Research and development Percentage of total revenue Year Ended June 30, % Change 2017 2016 $ 84,753 $ 81,234 4% 6% 6% We devote significant effort and expense to develop new software, service products and continually upgrade and enhance our existing offerings. We believe our research and development efforts are highly efficient because of the extensive experience of our research and development staff and because our product development is highly customer-driven. 28 2017 Annual ReportResearch and development expenses increased primarily due to a 4% increase in headcount, but were consistent with the prior year as a percentage of total revenue. General and Administrative General and administrative Percentage of total revenue Year Ended June 30, % Change 2017 2016 $ 69,601 $ 67,514 3% 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 a 4% increase in headcount, but were a consistent percentage of revenue in each year. Gains on Disposal of Businesses In fiscal 2017, we recognized gains on the disposals of businesses totaling $3,270. $2,136 was related to last year’s sale of Alogent, and $1,134 related to the sale of our Regulatory Filing products to Fed Reporter on May 1, 2017. In fiscal 2016, we had a gain totaling $19,491, due to the sale of Alogent. INTEREST INCOME AND EXPENSE Interest Income Interest Expense Year Ended June 30, % Change 2017 2016 $ $ 248 (996) $ $ 307 (1,430) (19)% (30)% 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 average debt balances in both years. PROVISION FOR INCOME TAXES Provision For Income Taxes Effective Rate Year Ended June 30, 2017 2016 % Change $ 121,161 $ 111,669 9% 33.0% 31.0% The increase in the effective tax rate was primarily due the prior year’s rate being reduced by the tax basis in excess of book basis in Alogent stock at disposal. NET INCOME Net income decreased 1% to $245,793, or $3.14 per diluted share, in fiscal 2017 from $248,867, or $3.12 per diluted share, in fiscal 2016. This decrease was due to factors discussed above, including the prior year Alogent gain and lower effective tax rate in fiscal 2016. FISCAL 2016 COMPARED TO FISCAL 2015 In fiscal 2016, revenues increased 8% or $98,456 compared to fiscal 2015 due primarily to strong growth in our support and service revenues, particularly 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 fiscal 2015. The increased revenue and above changes resulted in a combined 18% increase in net income for fiscal 2016 compared to the prior fiscal year. REVENUE License Revenue License Percentage of total revenue Year Ended June 30, % Change 2016 2015 $ 3,041 $ <1% 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. 29 jackhenry.comNon-bundled license revenue increased due mainly to an increase in standalone license sales in our Bank 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 Year Ended June 30, % Change 2016 2015 $ 1,300,978 $ 1,200,652 8% 96% 96% In-House Support & Other Services $ Electronic Payment Services Outsourcing Services Implementation Services Bundled Products & Services Total Increase Year over Year Change $ Change % Change 17,846 28,325 33,941 (11,289) 31,503 6% 6% 13% (15)% 50% $ 100,326 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 service (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 $9,616 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 Bank 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 Bank 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 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. 30 2017 Annual ReportCOST 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 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. 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 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 slightly in fiscal 2016 compared to fiscal 2015. 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 fiscal year 2016, margins were slightly higher due to increased sales of higher margin hardware upgrade products than in 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 conducted our sales efforts for our two reportable segments, and were overseen by regional and national 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. 31 jackhenry.comSelling and marketing expenses for fiscal 2016 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 Year Ended June 30, % Change 2016 2015 $ 81,234 $ 71,495 14% 6% 6% We devote significant effort and expense to develop new software, service products and continually upgrade and enhance our existing offerings. Research and development expenses increased in fiscal 2016 over the prior fiscal year, 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, human resources, plus all administrative costs. These costs increased in fiscal 2016 primarily due to increased headcount and related salaries, but were consistent with the prior year as a percentage of total revenue. Gain on Disposal of Businesses In fiscal 2016, we had a gain totaling $19,491 due to the sale of our Alogent business to Antelope Acquisition Co., an affiliate of Battery Ventures. In fiscal 2015, we sold the TeleWeb™ suite of Internet and mobile banking software products to Data Center Inc. (DCI), resulting in a gain of $6,874. INTEREST INCOME AND EXPENSE Interest Income Interest Expense Year Ended June 30, % Change 2016 2015 $ $ 307 (1,430) $ $ 169 (1,594) 82% (10)% Interest income fluctuated due to changes in invested balances and yields on invested balances. Interest expense remained low for 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. REPORTABLE SEGMENT DISCUSSION The Company is a leading provider of technology solutions and payment processing services primarily for financial services organizations. The Company’s operations are classified into two reportable segments: bank systems and services (“Bank”) and credit union systems and services (“Credit Union”). The Company evaluates the performance of its segments and allocates resources to them based on various factors, including prospects for growth, return on investment, and return on revenue. 32 2017 Annual ReportBank Systems and Services Revenue Gross profit Gross profit margin 2017 % Change 2016 % Change 2015 $ 1,055,763 $ 429,441 41% 6% $ 996,668 5% $ 407,600 41% 4% $ 962,729 2% $ 400,659 42% In fiscal 2017, revenue in the Bank segment increased 6% compared to the prior fiscal year, despite revenue headwinds of $28,422 due to the sale of Alogent. The increase was due to a 7% increase in support and service revenue, partially offset by decreased hardware and stand-alone license sales. The increase in support and service revenue was driven by increases in the outsourcing services, electronic payment services, and bundled products and services revenue streams. Those increases were partly offset by decreased revenue from in-house support and other services and implementation services, due mainly to the Alogent headwinds. Gross profit margin remained consistent with fiscal 2016. In fiscal 2016, revenue in the Bank segment increased 4% compared to the prior year. The increase was due mainly to a 12% increase in outsourcing services. Gross profit margins decreased only slightly compared to fiscal 2015. Credit Union Systems and Services Revenue Gross profit Gross profit margin 2017 % Change 2016 % Change 2015 $ $ 375,354 182,642 49% 5% $ 357,978 5% $ 173,395 48% 22% $ 293,461 28% $ 135,195 46% In fiscal 2017, revenue in the Credit Union segment increased 5% due to increases in support & service revenue totaling 6%, partially offset by decreased hardware and stand-alone license revenue. Support & service revenues grew through increases in bundled services, in-house maintenance renewals and outsourcing services, partly offset by decreased electronic payment services and implementation services revenue. The increase in bundled services was due to an increase in terminations of pending products and service obligations on certain contracts allowing for earlier recognition of revenue on our bundled arrangements. The decrease in electronic payment services revenue was mainly due to decreased deconversion fees and decreased revenue from card manufacturing. Gross profit margin for the Credit Union segment increased 1%. 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. LIQUIDITY AND CAPITAL RESOURCES The Company’s cash and cash equivalents increased to $114,765 at June 30, 2017 from $70,310 at June 30, 2016. The increase from June 30, 2016 is primarily due to cash generated from operations. 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, 2017 2016 $ $ 245,793 186,626 (22,499) (8,800) (43,798) $ 357,322 $ 248,867 161,004 (13,735) 4,364 (34,078) 366,422 Cash provided by operating activities decreased 2% compared to fiscal 2016. Cash from operations is primarily used to repay debt, pay dividends, repurchase stock, and for capital expenditures. Cash used in investing activities for fiscal 2017 totaled $141,586 and included: capital expenditures on facilities and equipment of $41,947, which was mainly for the purchase of computer equipment; $89,631 for the ongoing enhancements and development of existing and new product offerings; and $16,608 for the purchase and development of internal use software. This was partially offset by $5,632 of proceeds from the sale of businesses and $968 of proceeds from the sale of assets. Cash used in investing activities for fiscal 2016 totaled $135,963 and included: capital expenditures on facilities and equipment of $56,325, which mainly included the purchase of computer equipment and aircraft, $96,411 for the development of software, $11,826 for the purchase and development of internal use 33 jackhenry.comsoftware, and $8,275, net of cash acquired, for the acquisition of Bayside Business Solutions. These expenditures were partially offset by $34,030 of proceeds from the sale of our Alogent division and $2,844 of proceeds from the sale of assets. Financing activities used cash of $171,281 for fiscal 2017. Cash used was $130,140 for the purchase of treasury shares, repayment of the revolving credit facility and capital leases of $30,200, and dividends paid to stockholders of $91,707. This was partially offset by borrowings of $80,000 against our revolving credit facility and $766 net cash inflow from the issuance of stock and tax related to stock-based compensation. Financing activities used cash in fiscal 2016 of $308,462. Cash used was $175,662 for the purchase of treasury shares, repayments of the revolving credit facility and capital leases totaling $152,500, and dividends paid to stockholders of $84,118. This was partially offset by borrowings of $100,000 and $3,818 net cash inflow from the issuance of stock and tax related to stock-based compensation. Capital Requirements and Resources The Company generally uses existing resources and funds generated from operations to meet its capital requirements. Capital expenditures totaling $41,947 and $56,325 for the twelve months ending June 30, 2017 and June 30, 2016, 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, 2017, the Company had no material outstanding purchase commitments related to property and equipment. The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves or short-term borrowings on its existing credit facilities. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At June 30, 2017, there were 25,660 shares in treasury stock and the Company had the remaining authority to repurchase up to 4,330 additional shares. The total cost of treasury shares at June 30, 2017 is $1,006,274. During fiscal 2017, the Company repurchased 1,452 treasury shares for $130,140. At June 30, 2016, there were 24,209 shares in treasury stock and the Company had authority to repurchase up to 5,782 additional shares. Capital leases The Company had previously entered into various capital lease obligations for the use of certain computer equipment, but has no capital lease obligations at June 30, 2017. At June 30, 2016, the Company had capital lease obligations totaling $200 and property and equipment included assets under capital leases totaling $2,329, with 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, 2017, the Company was in compliance with all such covenants. The revolving loan terminates February 20, 2020 and at June 30, 2017 there was a $50,000 outstanding balance. Other lines of credit The Company renewed an unsecured bank credit line on April 24, 2017 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, 2019. At June 30, 2017, no amount was outstanding. OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS At June 30, 2017, the Company’s total off balance sheet contractual obligations were $633,547. This balance consists of $47,991 of long- term operating leases for various facilities and equipment which expire from 2018 to 2030 and $585,556 of purchase commitments. JHA entered a strategic services agreement with First Data® and PSCU® to provide full-service debit and credit card processing on a single platform to all existing core bank and credit union customers, as well as expand its card processing platform to financial institutions outside our core customer base. This agreement includes a purchase commitment of $559,354 over the term of the contract. The remainder of the purchase commitments relate to open purchase orders. The contractual obligations table below excludes $6,445 of liabilities for uncertain tax positions as we are unable to reasonably estimate the ultimate amount or timing of settlement. Contractual obligations by period as of June 30, 2017 Less than 1 year 1-3 years 3-5 years More than 5 years Operating lease obligations $ 10,945 $ 14,847 $ 7,895 $ 14,304 $ Capital lease obligations Revolving credit facility, including accrued interest Purchase obligations Total 34 — — 26,202 — 50,048 28,518 — — — — 86,875 443,961 $ 37,147 $ 93,413 $ 94,770 $ 458,265 $ TOTAL 47,991 — 50,048 585,556 683,595 2017 Annual ReportRECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers in May 2014. This standard is part of an effort to create a common revenue standard for U.S. generally accepted accounting principles (U.S. GAAP) and International Financial Reporting Standards (IFRS). The new standard will supersede much of the existing authoritative literature for revenue recognition. The new model enacts a five-step process for achieving the core principle, which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB also issued ASU No. 2015-14 which deferred the effective date of the new standard by one year, but allows early application as of the original effective date. We do not intend to adopt the provisions of the new standard early, so the standard and related amendments will be effective for the Company for its annual reporting period beginning July 1, 2018, including interim periods within that reporting period. In March 2016, the FASB issued ASU No. 2016-08, which addresses principal versus agent considerations under the new revenue standard. ASU No. 2016-10, ASU No. 2016-12, and ASU No. 2016-20 also address specific aspects of the new standard. Entities are allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect as of the beginning of the period of adoption. The Company is currently evaluating the newly issued guidance, including which transition approach will be applied, and continuing to assess all potential impacts of the standard. We expect the adoption of this standard to have a significant impact on our revenue recognition currently subject to Accounting Standards Codification (ASC) Topic 985. We are currently in the process of implementing and testing new software to assist in applying the five-step model to our various revenue streams and comparing the results to our current accounting practices. One of the most significant expected impacts relates to the recognition of license and implementation revenue on our multi-element arrangements. We expect to recognize license and install revenue at the time of the install completion, rather than over the maintenance period of the software on our multi-element agreements. We expect revenue related to hardware, Outlink contracts, payment processing, and professional services to remain substantially unchanged. The FASB issued ASU No. 2016-02, Leases, in February 2016. This ASU aims to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and requiring disclosure of key information regarding leasing arrangements. ASU No. 2016-02 will be effective for Jack Henry’s annual reporting period beginning July 1, 2019 and early adoption is permitted. The Company is currently assessing the impact this new standard will have on our consolidated financial statements. The FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, in March 2016. The new standard is intended to simplify several aspects of the accounting and presentation of share-based payment transactions, including reporting of excess tax benefits and shortfalls, statutory minimum withholding considerations, and classification within the statement of cash flows. The standard allows a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate them. ASU No. 2016-09 is effective for the Company’s annual reporting period beginning July 1, 2017. Management elected to early adopt this standard as of July 1, 2016 and has elected to continue our current practice of estimating forfeitures. The adoption of this standard had the following impacts on our condensed consolidated financial statements. • Condensed consolidated statements of income- The new standard requires that the tax effects of share-based compensation be recognized in the provision for income taxes. Previously, these amounts were recognized in additional paid-in capital. Net tax benefits related to share-based compensation awards of $2,638 for the year ended June 30, 2017 were recognized as reductions of income tax expense. These tax benefits reduced our effective income tax rate for the year-to-date period by 0.72%, and caused an increase in basic and diluted earnings per share of $0.03 for the year ended June 30, 2017. In addition, in calculating potential common shares used to determine diluted earnings per share, generally accepted accounting principles require us to use the treasury stock method. The new standard requires that assumed proceeds under the treasury stock method be modified to exclude the amount of excess tax benefits that would have been recognized in additional paid-in capital. These changes were applied on a prospective basis. • Condensed consolidated statements of cash flows- The Company elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively; however, fiscal 2015 was not restated due to immateriality. The restatement for fiscal 2016 resulted in an increase to both net cash provided by operations and net cash used in financing of $1,306 for the year ended June 30, 2016. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented on our consolidated cash flows statements since such cash flows have historically been presented as a financing activity. CRITICAL ACCOUNTING POLICIES We prepare our consolidated financial statements in accordance with U.S. GAAP. The significant accounting policies are discussed in Note 1 to the consolidated financial statements. The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, as well as disclosure of contingent assets and liabilities. We base our estimates and judgments upon historical experience and other factors believed to be reasonable under the circumstances. Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements. We have identified several critical accounting estimates. An accounting estimate is considered critical if both: (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b) the impact of changes in the estimates and assumptions would have a material effect on the consolidated financial statements. 35 jackhenry.comRevenue 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 as a group 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, as we are the primary obligor in the contract with the customer. The Company also re-markets 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 fulfillment 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. 36 2017 Annual ReportDepreciation 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. Costs incurred prior to establishing technological feasibility are expensed as incurred. Amortization begins on the date of general release and the appropriate amortization period is based on estimates of future revenues from sales of the products. We consider various factors to project marketability and future revenues, including an assessment of alternative solutions or products, current and historical demand for the product, and anticipated changes in technology that may make the product obsolete. For internal use software, capitalization begins at the beginning of application development. Costs incurred prior to this are expensed as incurred. Significant estimates and assumptions include determining the appropriate amortization period based on the estimated useful life and assessing the unamortized cost balances for impairment. Amortization begins on the date the software is placed in service and the amortization period is based on estimated useful life. A significant change in an estimate related to one or more software products could result in a material change to our results of operations. Estimates used to determine current and deferred income taxes We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. We also must determine the likelihood of recoverability of deferred tax assets, and adjust any valuation allowances accordingly. Considerations include the period of expiration of the tax asset, planned use of the tax asset, and historical and projected taxable income as well as tax liabilities for the tax jurisdiction to which the tax asset relates. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in one or more of these factors. Also, liabilities for uncertain tax positions require significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect our financial results. Assumptions related to purchase accounting and goodwill We account for our acquisitions using the purchase method of accounting. This method requires estimates to determine the fair values of assets and liabilities acquired, including judgments to determine any acquired intangible assets such as customer-related intangibles, as well as assessments of the fair value of existing assets such as property and equipment. Liabilities acquired can include balances for litigation and other contingency reserves established prior to or at the time of acquisition, and require judgment in ascertaining a reasonable value. Third-party valuation firms may be used to assist in the appraisal of certain assets and liabilities, but even those determinations would be based on significant estimates provided by us, such as forecast revenues or profits on contract-related intangibles. Numerous factors are typically considered in the purchase accounting assessments, which are conducted by Company professionals from legal, finance, human resources, information systems, program management and other disciplines. Changes in assumptions and estimates of the acquired assets and liabilities would result in changes to the fair values, resulting in an offsetting change to the goodwill balance associated with the business acquired. As goodwill is not amortized, goodwill balances are regularly assessed for potential impairment. Such assessments 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. 37 jackhenry.comQUANTITATIVE 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. Based on our outstanding debt with variable interest rates as of June 30, 2017, a 1% increase in our borrowing rate would increase interest expense by $500 on an annual basis. 38 2017 Annual ReportFINANCIAL 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, 2017, 2016, and 2015 Consolidated Balance Sheets, June 30, 2017 and 2016 Consolidated Statements of Changes in Stockholders' Equity, Years Ended June 30, 2017, 2016, and 2015 Consolidated Statements of Cash Flows, Years Ended June 30, 2017, 2016, and 2015 Notes to Consolidated Financial Statements Financial Statement Schedules 40 42 43 44 45 46 47 There are no schedules included because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 39 jackhenry.comREPORT 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 sheets 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, 2017 and 2016, and the results of their operations and their cash flows for each of the two years in the period ended June 30, 2017 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, 2017, 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 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 audits 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 audits 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 audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide 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 25, 2017 40 2017 Annual ReportREPORT 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 statements of income, changes in stockholders’ equity, and cash flows of Jack Henry and Associates, Inc. and subsidiaries (the “Company”) for the year 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 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. 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 audit provides a reasonable basis for our opinion. In our opinion, such 2015 consolidated financial statements present fairly, in all material respects, the results of the operations and the cash flows of Jack Henry & Associates, Inc. and subsidiaries for the year 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 41 jackhenry.comMANAGEMENT’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, 2017, 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, 2017 was effective. The Company’s internal control over financial reporting as of June 30, 2017 has been audited by the Company’s independent registered public accounting firm, as stated in their report on page 40. 42 2017 Annual ReportJACK 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 businesses Total operating expenses Year Ended June 30, 2016 2015 2017 $ 2,385 $ 3,041 $ 2,635 1,384,338 44,394 1,431,117 1,300,978 50,627 1,354,646 1,200,652 52,903 1,256,190 730 786,143 32,161 819,034 1,197 737,108 35,346 773,651 1,187 680,750 38,399 720,336 612,083 580,995 535,854 93,297 84,753 69,601 (3,270) 244,381 90,079 81,234 67,514 (19,491) 219,336 89,004 71,495 64,364 (6,874) 217,989 OPERATING INCOME 367,702 361,659 317,865 INTEREST INCOME (EXPENSE) Interest income Interest expense Total interest income (expense) 248 (996) (748) 307 (1,430) (1,123) 169 (1,594) (1,425) INCOME BEFORE INCOME TAXES 366,954 360,536 316,440 PROVISION FOR INCOME TAXES 121,161 111,669 105,219 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. $ $ $ $ $ 245,793 3.16 77,856 248,867 3.13 79,416 $ $ 3.14 $ 3.12 $ 78,255 79,734 211,221 2.60 81,353 2.59 81,601 43 jackhenry.comJACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share and Per Share Data) 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 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; 103,083,299 shares issued at June 30, 2017; 102,903,971 shares issued at June 30, 2016 Additional paid-in capital Retained earnings Less treasury stock at cost 25,660,212 shares at June 30, 2017; 24,208,517 shares at June 30, 2016 Total stockholders' equity Total liabilities and equity See notes to consolidated financial statements. 44 $ $ $ June 30, 2017 June 30, 2016 $ $ $ 114,765 276,923 20,135 66,894 41,314 520,031 282,934 96,847 247,317 82,525 90,433 36,393 552,465 1,105,980 1,908,945 6,841 81,574 — 382,777 471,192 128,607 219,541 50,000 7,554 405,702 876,894 — 1,031 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 — 1,029 452,016 1,585,278 440,123 1,431,192 (1,006,274) (876,134) 1,032,051 1,908,945 $ 996,210 1,815,512 $ 2017 Annual ReportJACK 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, 2017 2016 2015 — — — Shares, beginning of year Shares issued for equity-based payment arrangements Shares issued for Employee Stock Purchase Plan Shares, end of year 102,903,971 98,781 80,547 103,083,299 102,695,214 121,348 87,409 102,903,971 102,429,926 172,661 92,627 102,695,214 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 for equity-based payment arrangements 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. $ $ $ $ $ $ $ $ $ $ 1,029 $ 1 1 1,031 $ 440,123 $ (1) (5,479) 6,244 — 11,129 452,016 $ 1,027 $ 1 1 1,029 $ 424,536 $ 696 (2,590) 5,710 1,051 10,720 440,123 $ 1,024 2 1 1,027 412,512 640 (7,951) 4,880 4,343 10,112 424,536 1,431,192 $ 245,793 (91,707) 1,585,278 $ 1,266,443 $ 248,867 (84,118) 1,431,192 $ 1,131,632 211,221 (76,410) 1,266,443 (876,134) $ (130,140) (1,006,274) $ (700,472) $ (175,662) (876,134) $ (577,781) (122,691) (700,472) 1,032,051 $ 996,210 $ 991,534 1.18 $ 1.06 $ 0.94 45 jackhenry.comJACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Year Ended June 30, 2017 2016 2015 $ 245,793 $ 248,867 $ 211,221 49,677 90,109 30,940 — 11,129 4,771 (22,499) (25,088) (7,812) (4,454) (6,444) (8,800) 357,322 — (41,947) 5,632 968 (16,608) (89,631) 50,571 79,077 37,524 — 10,720 (16,888) (13,735) (29,577) 4,663 7,460 (16,624) 4,364 366,422 (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) (141,586) (135,963) (136,984) 80,000 (30,200) — (130,140) (91,707) — 1 (5,480) 6,245 (171,281) 44,455 70,310 114,765 100,000 (152,500) — (175,662) (84,118) — 697 (2,590) 5,711 (308,462) $ $ $ (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 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 Other 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 Other 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. 46 2017 Annual ReportJACK 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. 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 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 related to our Bundled Products & Services was $117,046, $94,391, and $62,888 for the years ended June 30, 2017, 2016, and 2015, respectively. 47 jackhenry.comSupport 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, as we are the primary obligor in the contract with the customer. 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 of 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. 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, 2017, 2016, and 2015 equals the Company’s net income. 48 2017 Annual ReportREPORTABLE 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, 2017, there were 25,660 shares in treasury stock and the Company had the remaining authority to repurchase up to 4,330 additional shares. The total cost of treasury shares at June 30, 2017 is $1,006,274. During fiscal 2017, the Company repurchased 1,452 treasury shares for $130,140. At June 30, 2016, there were 24,209 shares in treasury stock and the Company had authority to repurchase up to 5,782 additional shares. EARNINGS PER SHARE Per share information is based on the weighted average number of common shares outstanding during the year. Stock options and restricted stock 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. This standard is part of an effort to create a common revenue standard for U.S. generally accepted accounting principles (U.S. GAAP) and International Financial Reporting Standards (IFRS). The new standard will supersede much of the existing authoritative literature for revenue recognition. The new model enacts a five-step process for achieving the core principle, which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB also issued ASU No. 2015-14 which deferred the effective date of the new standard by one year, but allows early application as of the original effective date. We do not intend to adopt the provisions of the new standard early, so the standard and related amendments will be effective for the Company for its annual reporting period beginning July 1, 2018, including interim periods within that reporting period. In March 2016, the FASB issued ASU No. 2016-08, which addresses principal versus agent considerations under the new revenue standard. ASU No. 2016-10, ASU No. 2016-12, and ASU No. 2016-20 also address specific aspects of the new standard. Entities are allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect as of the beginning of the period of adoption. The Company is currently evaluating the newly issued guidance, including which transition approach will be applied, and continuing to assess all potential impacts of the standard. We expect the adoption of this standard to have a significant impact on our revenue recognition currently subject to Accounting Standards Codification (ASC) Topic 985. We are currently in the process of implementing and testing new software to assist in applying the five-step model to our various revenue streams and comparing the results to our current accounting practices. One of the most significant expected impacts relates to the recognition of license and implementation revenue on our multi-element arrangements. We expect to recognize license and install revenue at the time of the install completion, rather than over the maintenance period of the software on our multi-element agreements. We expect revenue related to hardware, Outlink contracts, payment processing, and professional services to remain substantially unchanged. The FASB issued ASU No. 2016-02, Leases, in February 2016. This ASU aims to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and requiring disclosure of key information regarding leasing arrangements. ASU No. 2016-02 will be effective for Jack Henry’s annual reporting period beginning July 1, 2019 and early adoption is permitted. The Company is currently assessing the impact this new standard will have on our consolidated financial statements. The FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, in March 2016. The new standard is intended to simplify several aspects of the accounting and presentation of share-based payment transactions, including reporting of excess tax benefits and shortfalls, statutory minimum withholding considerations, and classification within the statement of cash flows. The standard allows a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate them. ASU No. 2016-09 is effective for the Company’s annual reporting period beginning July 1, 2017. Management elected to early adopt this standard as of July 1, 2016 and has elected to continue our current practice of estimating forfeitures. The adoption of this standard had the following impacts on our condensed consolidated financial statements. • Condensed consolidated statements of income- The new standard requires that the tax effects of share-based compensation be recognized in the provision for income taxes. Previously, these amounts were recognized in additional paid-in capital. Net tax benefits related to share-based compensation awards of $2,638 for the year ended June 30, 2017 were recognized 49 jackhenry.comas reductions of income tax expense. These tax benefits reduced our effective income tax rate for the year-to-date period by 0.72%, and caused an increase in basic and diluted earnings per share of $0.03 for the year ended June 30, 2017. In addition, in calculating potential common shares used to determine diluted earnings per share, generally accepted accounting principles require us to use the treasury stock method. The new standard requires that assumed proceeds under the treasury stock method be modified to exclude the amount of excess tax benefits that would have been recognized in additional paid-in capital. These changes were applied on a prospective basis. • Condensed consolidated statements of cash flows- The Company elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively; however, fiscal 2015 was not restated due to immateriality. The restatement for fiscal 2016 resulted in an increase to both net cash provided by operations and net cash used in financing of $1,306 for the year ended June 30, 2016. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented on our consolidated cash flows statements since such cash flows have historically been presented as a financing activity. 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: Recurring Fair Value Measurements Level 1 Level 2 Level 3 Estimated Fair Value Measurements Total Fair Value June 30, 2017 Financial Assets: Money market funds Certificate of Deposit Financial Liabilities: Revolving credit facility June 30, 2016 Financial Assets: Money market funds Certificate of Deposit Financial Liabilities: Revolving credit facility Non-Recurring Fair Value Measurements June 30, 2017 Long-lived assets held for sale (a) $ $ $ $ $ $ $ 68,474 $ — $ — $ 2,001 — $ 50,000 $ $ — $ — $ 68,474 2,001 — $ 50,000 35,782 $ — $ — $ 1,000 $ — $ — $ 35,782 1,000 — $ — $ — $ — — $ 1,300 $ — $ 1,300 a) In accordance with ASC Subtopic 360-10, long-lived assets held for sale with a carrying value of $4,575 were written down to their fair value of $1,300, resulting in an impairment totaling $3,275, which was included in earnings for the period. These assets are expected to be disposed of by sale within the twelve months of June 30, 2017. 50 2017 Annual ReportNOTE 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, 2017 2016 Estimated Useful Life $ $ 24,987 25,362 143,350 47,291 332,465 38,522 15,971 627,948 345,014 282,934 $ $ 24,987 25,470 146,464 46,897 337,565 37,967 7,373 626,723 328,159 298,564 5 - 20 years 20 - 30 years 5 - 30 years(1) 3 - 10 years 4 - 10 years Property and equipment included $534 and $651 that was in accrued liabilities at June 30, 2017 and 2016, respectively. These amounts were excluded from capital expenditures on the statements of cash flows. In fiscal 2017, we recorded an impairment loss on one of our facilities of $3,275 due to damage caused by water intrusion around the facility’s windows and roof. The impairment loss is included in the caption “Cost of support and service” in our consolidated statements of income and is included in our Bank segment. NOTE 4. OTHER ASSETS Goodwill The carrying amount of goodwill for the years ended June 30, 2017 and 2016, 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, 2017 2016 423,282 $ 420,795 — (388) 6,099 (3,612) 422,894 $ 423,282 129,571 — 129,571 $ $ 129,571 — 129,571 $ $ $ $ The Goodwill written-off during fiscal 2017 was a result of our sale of our Regulatory Filing products to Fed Reporter on May 1, 2017. Goodwill allocated to the carrying amount of the net assets sold (mainly computer software) was calculated based on the relative fair values of the business disposed and the portion of the reporting unit that was retained. The goodwill acquired during fiscal 2016 of $6,099 was a result of our purchase of Bayside Business Solutions, Inc. The goodwill 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 Bank segment. During fiscal 2016 the Company sold its Alogent business (Alogent) to Antelope Acquisition Co., an affiliate of Battery Ventures. Alogent was included in our Bank 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. 51 jackhenry.comOther Intangible Assets Information regarding other identifiable intangible assets is as follows: Customer relationships Computer software Other intangible assets: Customer relationships Computer software Other intangible assets: Gross Carrying Amount $ $ $ $ $ $ 262,693 543,913 71,190 Gross Carrying Amount 266,545 474,738 56,494 June 30, 2017 Accumulated Amortization (172,260) (296,596) (34,797) June 30, 2016 Accumulated Amortization (162,460) (252,623) (20,788) $ $ $ $ $ $ $ $ $ $ $ $ Net 90,433 247,317 36,393 Net 104,085 222,115 35,706 Customer relationships have lives ranging from 5 to 20 years. Computer software includes cost of software to be sold, leased, or marketed of $117,065 and costs of internal-use software of $130,252 at June 30, 2017. At June 30, 2016, costs of software to be sold, leased, or marketed totaled $108,991, and costs of internal-use software totaled $113,124. Computer software includes the unamortized cost of commercial software products developed or acquired by the Company, which are capitalized and amortized over useful lives generally ranging from 5 to 10 years. Amortization expense for computer software totaled $60,880, $54,810, and $43,798 for the fiscal years ended June 30, 2017, 2016, and 2015, 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 $90,109, $79,077, and $64,841 for the fiscal years ended June 30, 2017, 2016, and 2015, respectively. The estimated aggregate future amortization expense for each of the next five years for all intangible assets remaining as of June 30, 2017, is as follows: Years Ending June 30, 2018 2019 2020 2021 2022 Computer Software Customer Relationships Other Intangible Assets Total $ 60,412 $ 12,220 $ 12,779 $ 52,157 41,555 24,874 9,522 11,978 10,074 8,430 7,811 8,462 2,962 641 613 85,411 72,597 54,591 33,945 17,946 NOTE 5. DEBT The Company’s outstanding long and short-term debt is as follows: LONG-TERM DEBT Revolving credit facility SHORT-TERM DEBT Capital leases 52 June 30, 2017 June 30, 2016 50,000 $ — — $ 200 $ $ 2017 Annual ReportThe following table summarizes the future annual principal payments required for all outstanding debt as of June 30, 2017: Fiscal years ended June 30, 2020 Capital leases $ 50,000 50,000 The Company had previously entered into various capital lease obligations for the use of certain computer equipment, but has no capital lease obligations at June 30, 2017. At June 30, 2016, the Company had capital lease obligations totaling $200 and property and equipment included assets under capital leases totaling $2,329, with 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, 2017, the Company was in compliance with all such covenants. The revolving loan terminates February 20, 2020 and at June 30, 2017 there was a $50,000 outstanding balance. Other lines of credit The Company renewed an unsecured bank credit line on April 24, 2017 which provides for funding of up to $5,000 and bears interest at the prime rate less 1.0%. The credit line was renewed through April 30, 2019. At June 30, 2017, no amount was outstanding. Interest The Company paid interest of $767, $1,320, and $1,111 during the years ended June 30, 2017, 2016, and 2015, respectively. NOTE 6. COMMITMENTS AND CONTINGENCIES Property and Equipment The Company had no material commitments at June 30, 2017 to purchase property and equipment. There were also no material commitments at June 30, 2016. Leases The Company leases certain property under operating leases which expire over the next 13 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, 2017, net future minimum lease payments are as follows: Years Ending June 30, Lease Payments 2018 2019 2020 2021 2022 Thereafter Total Rent expense was $10,195, $10,167, and $9,547 in 2017, 2016, and 2015 respectively. $ $ 10,945 8,172 6,675 4,578 3,317 14,304 47,991 53 jackhenry.comNOTE 7. INCOME TAXES The provision for income taxes consists of the following: Current: Federal State Deferred: Federal State Year Ended June 30, 2017 2016 2015 $ $ 80,752 $ 66,574 $ 9,469 25,756 5,184 7,571 34,355 3,169 121,161 $ 111,669 $ 70,555 5,221 28,018 1,425 105,219 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 June 30, 2017 2016 $ $ 54,908 14,648 3,547 2,119 75,222 (357) 74,865 (36,994) (178,999) (78,413) (294,406) 69,597 14,770 3,543 2,090 90,000 (608) 89,392 (40,857) (160,719) (76,417) (277,993) Net deferred tax liability $ (219,541) $ (188,601) 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 Tax effects of share-based payments Other (net) Year Ended June 30, 2017 2016 2015 35.0% 2.6% (2.0)% (2.1)% —% (0.7)% 0.2% 33.0% 35.0% 35.0% 1.9% (2.5)% (1.9)% (1.7)% —% 0.2% 31.0% 1.4% (1.5)% (2.0)% —% —% 0.4% 33.3% As of June 30, 2017, we have $5,193 of gross federal 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, 2017, we have state NOL carryforwards with a tax-effected value of $1,731. The federal and state losses have varying expiration dates, ranging from fiscal year 2017 to 2036. Based on state tax rules which restrict our utilization of these losses, we believe it is more likely than not 54 2017 Annual Reportthat $357 of these losses will expire unutilized. Accordingly, a valuation allowance of $357 and $608 has been recorded against these assets as of June 30, 2017 and 2016, respectively. The Company paid income taxes, net of refunds, of $96,074, $90,307, and $61,885 in 2017, 2016, and 2015 respectively. At June 30, 2017, the Company had $5,449 of gross unrecognized tax benefits, $3,990 of which, if recognized, would affect our effective tax rate. At June 30, 2016, the Company had $7,421 of unrecognized tax benefits, $5,986 of which, if recognized, would affect our effective tax rate. We had accrued interest and penalties of $995 and $1,178 related to uncertain tax positions at June 30, 2017 and 2016, respectively. The income tax provision included interest expense and penalties (or benefits) on unrecognized tax benefits of $(105), $47, and $(155) in the years ending June 30, 2017, 2016, and 2015, respectively. A reconciliation of the unrecognized tax benefits for the years ended June 30, 2017 and 2016 follows: Balance at July 1, 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 Additions for current year tax positions Reductions for current year tax positions Additions for prior year tax positions Reductions for prior year tax positions Settlements Reductions related to expirations of statute of limitations Balance at June 30, 2017 Unrecognized Tax Benefits 7,104 1,581 (56) 507 (38) (1,677) 7,421 1,457 — 23 (766) (1,040) (1,646) 5,449 $ $ 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 was completed during the quarter ending December 31, 2016. The closing of the examination did not result in a material change to the Company’s financial statements. The U.S. federal and state income tax returns for June 30, 2014 and all subsequent years remain subject to examination as of June 30, 2017 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 $500 - $1,500 within twelve months of June 30, 2017. 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, 2017 and 2016) are maintained for potential credit losses. In addition, some of the Company’s key solutions are dependent on technology manufactured by IBM Corporation and Microsoft. Termination of the Company’s relationship with either IBM or Microsoft could have a negative impact on the operations of the Company. NOTE 9. STOCK-BASED COMPENSATION Our pre-tax operating income for the years ended June 30, 2017, 2016, and 2015 includes $11,129, $10,720, and $10,112 of equity-based compensation costs, respectively, of which $9,861, $9,712, and $9,251 relates to the restricted stock plans, respectively. The income tax benefits from stock option exercises and restricted stock vests totaled $2,638, $1,051, and $4,343 for the years ended June 30, 2017, 2016, and 2015, respectively. 2015 Equity Incentive Plan and 2005 Non-Qualified Stock Option Plan On November 10, 2015, the Company adopted the 2015 Equity Incentive Plan (“2015 EIP”) for its employees and non-employee directors. The plan allows for grants of stock options, stock appreciation rights, restricted stock shares or units, and performance shares or units. The maximum number of shares authorized for issuance under the plan is 3,000. For stock options, terms and vesting periods of the options were determined by the Compensation Committee of the Board of Directors when granted. The option period must expire not more than ten years from the options grant date. The options granted under this plan are exercisable beginning three years after grant at an exercise price equal to 100% of the fair market value of the stock at the grant date. The options terminate upon surrender of the 55 jackhenry.comoption, ninety days after termination of employment, upon the expiration of one year following notification of a deceased optionee, or 10 years after grant. The Company previously issued options to outside directors under the 2005 Non-Qualified Stock Option Plan (“2005 NSOP”). No additional stock options may be issued under this plan. The 2005 NSOP was adopted by the Company on September 23, 2005, for its outside directors. Generally, options were 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 were reserved for issuance under this plan with a maximum of 100 for each director. A summary of option plan activity under the plans is as follows: Outstanding July 1, 2014 Granted Forfeited Exercised Outstanding July 1, 2015 Granted Forfeited Exercised Outstanding July 1, 2016 Granted Forfeited Exercised Outstanding June 30, 2017 Vested and Expected to Vest June 30, 2017 Exercisable June 30, 2017 Number of Shares Weighted Average Exercise Price Aggregate Intrinsic Value 125 $ 22.29 — — (25) 100 — — (50) 50 32 — (10) 72 72 40 $ $ $ — — 19.17 23.07 — — 23.99 22.14 87.27 — 28.52 50.04 50.04 20.55 $ $ $ 3,859 3,859 3,333 There were 32 options granted in fiscal 2017, and no options granted during either of the two prior years presented. The weighted- average fair value at the grant date of options granted during fiscal 2017 was $15.78. The Company utilized a Black-Scholes option pricing model to estimate fair value of the stock option grants at the grant date. All 32 options granted during fiscal 2017 were granted on July 1, 2016. Assumptions such as expected life, volatility, risk-free interest rate, and dividend yield impact the fair value estimate. These assumptions are subjective and generally require significant analysis and judgment to develop. The risk free interest rate used in our estimate was determined from external data, while volatility, expected life, and dividend yield assumptions were derived from our historical experience with share-based payment arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances. The assumptions used in estimating fair value and resulting compensation expenses at the grant dates are as follows: Expected Life (years) Volatility Risk free interest rate Dividend yield 6.50 19.60% 1.24% 1.28% At June 30, 2017, there was $334 of compensation cost yet to be recognized related to outstanding options. The weighted average remaining contractual term on options currently exercisable as of June 30, 2017 was 1.88 years. The total intrinsic value of options exercised was $747, $3,011, and $1,044 for the fiscal years ended June 30, 2017, 2016, and 2015, 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 EIP 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 5 years from grant date. 56 2017 Annual ReportThe following table summarizes non-vested share awards activity: Share awards Outstanding July 1, 2014 Granted Vested Forfeited Outstanding July 1, 2015 Granted Vested Forfeited Outstanding July 1, 2016 Granted Vested Forfeited Outstanding June 30, 2017 Weighted Average Grant Date Fair Value Shares 138 12 (71) (7) 72 22 (24) (12) 58 17 (38) (1) 36 $ 33.56 57.77 35.69 46.39 34.28 66.31 43.45 23.82 44.95 87.27 37.00 65.52 73.66 The non-vested share awards granted prior to July 1, 2016 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. The 17 non-vested share awards granted during the year ending June 30, 2017 do participate in dividends during the restriction period. The weighted-average fair value of such participating awards was based on the fair market value on the grant date. At June 30, 2017, there was $1,094 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 0.96 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, 2017, as well as activity for the year then ended: Unit awards Outstanding July 1, 2014 Granted Vested Forfeited Outstanding July 1, 2015 Granted Vested Forfeited Outstanding July 1, 2016 Granted Vested Forfeited Outstanding June 30, 2017 Shares Weighted Average Grant Date Fair Value Aggregate Intrinsic Value 709 178 (277) (111) 499 130 (99) (101) 429 130 (136) (37) 386 31.66 53.62 19.69 22.74 48.13 75.99 44.09 45.89 58.06 77.75 50.12 54.30 $67.84 $40,043 57 jackhenry.comThe 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, 2017 16.0% 0.93% 1.3% 0.684 2016 15.6% 1.06% 1.5% 0.741 2015 17.8% 1.06% 1.5% 0.765 For the year ended June 30, 2017, 85 unit awards were granted and measured using the above assumptions. The remaining 45 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, 2017, there was $9,887 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 1.04 years. The fair value of restricted shares and units at vest date totaled $15,085, $8,677, and $20,275 for the years ended June 30, 2017, 2016, and 2015, 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, 2017 2016 2015 $ 245,793 $ 248,867 $ 211,221 77,856 399 78,255 79,416 81,353 318 248 79,734 81,601 $ $ 3.16 3.14 $ $ 3.13 3.12 $ $ 2.60 2.59 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 contain non-forfeitable rights to participate in dividends. There were 32 anti-dilutive stock options and restricted stock excluded for fiscal 2017, 0 shares excluded for fiscal 2016, and 0 shares excluded for fiscal 2015. 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, 2017, 2016 and 2015 was $1,102, $1,008 and $861, 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 eligible 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 $17,550, $16,794, and $15,378 for fiscal 2017, 2016 and 2015, respectively. 58 2017 Annual ReportNOTE 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 Bank 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, 2017 included revenue of $6,536 and after-tax net income of $1,307. For the twelve months ended June 30, 2016, Bayside Business Solutions’ contributed $4,273 to revenue, and after-tax net income of $303. The accompanying consolidated statements of income 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. 59 jackhenry.comNOTE 13. REPORTABLE SEGMENT INFORMATION The Company is a leading provider of technology solutions and payment processing services primarily for financial services organizations. The Company’s operations are classified into two reportable segments: bank systems and services (“Bank”) and credit union systems and services (“Credit Union”). The Company evaluates the performance of its segments and allocates resources to them based on various factors, including prospects for growth, return on investment, and return on revenue. Year Ended June 30, 2017 Bank Credit Union Total 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 60 $ 1,928 $ 457 $ 1,025,378 28,457 1,055,763 627 605,414 20,281 626,322 429,441 $ $ 358,960 15,937 375,354 103 180,729 11,880 192,712 182,642 2,385 1,384,338 44,394 1,431,117 730 786,143 32,161 819,034 612,083 244,381 (748) $ 366,954 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 2017 Annual ReportREVENUE 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, 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 The Company has not disclosed any additional asset information by segment, as the information is not produced internally and its preparation is impracticable. NOTE 14: SUBSEQUENT EVENTS Dividends On August 18, 2017, the Company’s Board of Directors declared a cash dividend of $0.31 per share on its common stock, payable on September 28, 2017 to shareholders of record on September 8, 2017. Change in Reportable Segments Beginning in the first quarter of fiscal 2018, JHA intends to make a change to the reportable segment structure. The current Bank and Credit Union segments will be replaced by four new segments: Payments, Core Software, Complementary Software, and Corporate/ Other. The proposed change is being made based on the view of our new Chief Operating Decision Maker, David Foss, that the Company could be more effectively managed using a product-centric approach as opposed to the customer-centric approach that had been previously used. 61 jackhenry.comQUARTERLY FINANCIAL INFORMATION (unaudited) 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 businesses* 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 $ $ $ For the Year Ended June 30, 2017 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total $ 694 $ 849 $ 516 $ 326 $ 2,385 333,046 11,288 345,028 252 185,892 8,619 194,763 150,265 22,127 19,739 16,982 — 58,848 91,417 108 (142) (34) 91,383 29,139 62,244 0.79 78,413 $ $ 337,515 10,189 348,553 59 191,269 6,818 198,146 150,407 21,903 20,873 18,989 36 61,801 88,606 60 (184) (124) 88,482 29,668 58,814 0.76 77,814 $ $ 342,769 10,482 353,767 280 198,844 7,603 206,727 147,040 23,571 20,801 16,223 (2,286) 58,309 88,731 42 (278) (236) 88,495 28,451 60,044 0.77 77,597 $ $ 371,008 12,435 383,769 139 210,138 9,121 219,398 164,371 25,696 23,340 17,407 (1,020) 65,423 98,948 38 (392) (354) 98,594 33,903 64,691 0.83 77,602 $ $ 0.79 $ 0.75 $ 0.77 $ 0.83 $ 1,384,338 44,394 1,431,117 730 786,143 32,161 819,034 612,083 93,297 84,753 69,601 (3,270) 244,381 367,702 248 (996) (748) 366,954 121,161 245,793 3.16 77,856 3.14 78,255 Diluted weighted average shares outstanding 78,844 78,180 77,932 78,064 *Gain on disposal of business was included in general and administrative expenses within the financial statements previously filed in the Company’s Quarterly Reports on Form 10-Q. 62 2017 Annual ReportFor the Year Ended June 30, 2016 Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total $ 1,604 $ 634 $ 292 $ 511 $ 3,041 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 businesses 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 $ $ $ 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 $ $ 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 $ $ 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 $ $ 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 $ $ 0.64 $ 0.74 $ 0.68 $ 1.06 $ Diluted weighted average shares outstanding 80,735 79,770 79,167 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 63 jackhenry.comT H I S P A G E L E F T B L A N K 64 2017 Annual ReportT H I S P A G E L E F T B L A N K 65 jackhenry.comBoard of Directors Jo hn F. “Jack” P rim EXECUTIVE CHAIRMAN Jack Henry & Associates, Inc. Monett, Missouri Davi d B. Foss PRESIDENT AND CHIEF EXECUTIVE OFFICER Jack Henry & Associates, Inc. Monett, Missouri Matth ew C. Flani gan VICE CHAIRMAN AND LEAD DIRECTOR, JACK HENRY & ASSOCIATES, INC. EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Leggett & Platt, Incorporated Carthage, Missouri To m H. Wil son , Jr. MANAGING PARTNER DecisionPoint Advisors, LLC Charlotte, North Carolina Jac q u el in e R . Fi egel CHAIRMAN/CENTRAL OKLAHOMA AREA Prosperity Bank Oklahoma City, Oklahoma Thom as A. Wi ms ett CHAIRMAN AND MANAGING PARTNER Wimsett & Company, LLC Louisville, Kentucky Laura G. Kelly MANAGING DIRECTOR, VALUATION SOLUTIONS GROUP CoreLogic Irvine, CA Sh ruti S. Mi yashi ro PRESIDENT AND CHIEF EXECUTIVE OFFICER Orange County’s Credit Union Santa Ana, California We s l ey A. Brow n PRESIDENT Bent St. Vrain & Company, LLC Denver, Colorado 66 2017 Annual ReportExecutive Officers JOH N F. “ JA CK” PR IM Executive Chairman of the Board DAVI D B. FOSS President and Chief Executive Officer KE VIN D. WILLIAM S Chief Financial Officer and Treasurer MAR K S . FOR BI S Vice President and Chief Technology Officer CRAI G K. MO R GAN General Counsel and Secretary A N N U A L M E E T I N G The annual meeting of shareholders will be held on Thursday, November 9, 2017 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 6 6 3 H I G H WAY 6 0 P. O . B O X 8 0 7 M O N E T T , M O 6 5 7 0 8 [ phone] 4 1 7 - 2 3 5 - 6 6 5 2 | [ fax] 4 1 7 - 2 3 5 - 4 2 8 1 J A C K H E N R Y. C O M

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