Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(X)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the fiscal year ended June 30, 2017
OR
 
 
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to ________________

Commission file number 0-14112

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

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

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock ($0.01 par value)
 
NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:   None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ X ]  No [ ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes [  ]  No [ X ]

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

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




Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” ”accelerated filer,” “smaller reporting company,” and "emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[X]
Accelerated filer
[ ]
 
 
 
 
Non-accelerated filer
[  ]
(Do not check if a smaller reporting company)
 
 
 
 
 
 
 
Smaller reporting company
[ ]
 
 
 
 
 
 
Emerging Growth Company
[ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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

On December 31, 2016, the aggregate market value of the Common Stock held by persons other than those who may be deemed affiliates of Registrant was $6,851,199,964 (based on the average of the reported high and low sales prices on NASDAQ on December 31, 2016).

As of August 16, 2017, the Registrant had 77,438,286 shares of Common Stock outstanding ($0.01 par value).


DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's Notice of Annual Meeting of Stockholders and Proxy Statement for its 2017 Annual Meeting of Stockholders (the "Proxy Statement") are incorporated by reference into Part II, Item 5 and into Part III of this Report.  




TABLE OF CONTENTS
 
 
Page Reference
 
 
 
PART I
 
 
 
 
 
ITEM 1.
BUSINESS
 
 
 
ITEM 1A.
RISK FACTORS
 
 
 
ITEM 1B.
UNRESOLVED STAFF COMMENTS
 
 
 
ITEM 2.
PROPERTIES
 
 
 
ITEM 3.
LEGAL PROCEEDINGS
 
 
 
ITEM 4.
MINE SAFETY DISCLOSURES
 
 
 
PART II
 
 
 
 
 
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
 
 
ITEM 6.
SELECTED FINANCIAL DATA
 
 
 
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
 
 
ITEM 9A.
CONTROLS AND PROCEDURES
 
 
 
ITEM 9B.
OTHER INFORMATION
 
 
 
PART III
 
 
 
 
 
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 
 
ITEM 11.
EXECUTIVE COMPENSATION
 
 
 
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 
 
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
 
 
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 
 
PART IV
 
 
 
 
 
ITEM 15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 
 
ITEM 16
FORM 10-K SUMMARY


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

FORWARD LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, in Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section titled “Risk Factors” (Part I, Item 1A of this Form 10-K). We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.
 

 


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PART I
ITEM 1.  BUSINESS
Jack Henry & Associates, Inc. (JHA) was founded in 1976 as a provider of core information processing solutions for community banks. Today, the Company’s extensive array of products and services includes processing transactions, automating business processes, and managing information for over 9,000 financial institutions and diverse corporate entities.
JHA provides its products and services through three business brands:
Jack Henry Banking is a leading provider of integrated data processing systems to approximately 1,080 banks ranging from community banks to multi-billion dollar institutions with assets of up to $50 billion. Our banking solutions support both in-house and outsourced operating environments with three functionally distinct core processing platforms and more than 100 integrated complementary solutions.
Symitar is a leading provider of core data processing solutions for credit unions of all sizes, with approximately 820 credit union customers. Symitar markets two functionally distinct core processing platforms and more than 50 integrated complementary solutions that support both in-house and outsourced operating environments.
ProfitStars is a leading provider of highly specialized core agnostic products and services to financial institutions that are primarily not core customers of the Company. ProfitStars offers highly specialized financial performance, imaging and payments processing, information security and risk management, retail delivery, and online and mobile solutions. ProfitStars’ products and services enhance the performance of financial services organizations of all asset sizes and charters, and diverse corporate entities with over 9,000 domestic and international customers.
Our products and services enable our customers to implement technology solutions that can be tailored to support their unique growth, service, operational, and performance goals. Our solutions also enable financial institutions to offer the high-demand products and services required to compete more successfully, and to capitalize on evolving trends shaping the financial services industry.
We are committed to exceeding our customers’ service-related expectations. We measure and monitor customer satisfaction using formal annual surveys and online surveys initiated each day randomly by routine support requests. The results of this extensive survey process confirm that our service consistently exceeds our customers’ expectations and generates excellent customer retention rates.
We also focus on establishing long-term customer relationships, continually expanding and strengthening those relationships with cross sales of additional products and services, earning new traditional and nontraditional clients, and ensuring each product offering is highly competitive.
The majority of our revenue is derived from recurring electronic payment solutions and outsourcing services that both generally have contract terms of five years or greater, and support and services provided to our in-house customers that are typically on a one year contract. Less predictable software license fees, paid by customers implementing our software solutions in-house, and hardware sales, including all non-software products that we re-market in order to support our software systems, complement our primary revenue sources.
JHA ended fiscal 2017 with $1,431.1 million in revenue. This has increased from $1,017.7 million at the end of fiscal 2012, representing a compound annual growth rate during this five-year period of 7%. Net income has grown from $152.0 million to $245.8 million during this same five-year period, representing a compound annual growth rate of 10%. Information regarding the classification of our business into separate segments serving the banking and credit union industries is set forth in Note 13 to the Consolidated Financial Statements (see Item 8).
JHA’s progress and performance have been guided by the focused work ethic and fundamental ideals fostered by the Company’s founders 41 years ago:
Do the right thing,
Do whatever it takes, and
Have fun.
We recognize that our associates and their collective contribution are ultimately responsible for JHA’s past, present, and future success. Recruiting and retaining high-quality employees is essential to our ongoing growth and financial performance, and we have established a corporate culture that sustains high levels of employee satisfaction.
Industry Background    
Jack Henry Banking primarily serves commercial banks and savings institutions with up to $50 billion in assets. According to the Federal Deposit Insurance Corporation (“FDIC”), there were more than 5,870 commercial banks and

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savings institutions in this asset range as of December 31, 2016. Jack Henry Banking currently supports approximately 1,080 of these banks with its core information processing platforms and complementary products and services.  
Symitar serves credit unions of all asset sizes. According to the Credit Union National Association (“CUNA”), there were more than 6,000 domestic credit unions as of December 31, 2016. Symitar currently supports approximately 820 of these credit unions with core information processing platforms and complementary products and services.
ProfitStars serves financial services organizations of all asset sizes and charters and other diverse corporate entities. ProfitStars currently supports over 9,000 institutions with specialized solutions for generating additional revenue and growth, increasing security, mitigating operational risks, and controlling operating costs.
The FDIC reports the number of commercial banks and savings institutions declined 20% from the beginning of calendar year 2012 to the end of calendar year 2016, due mainly to mergers. Although the number of banks declined at a 4% compound annual rate during this period, aggregate assets increased at a compound annual rate of 4% and totaled $15.6 trillion as of December 31, 2016. There were no new bank charters issued in calendar year 2016, compared to one in the 2015 calendar year. Comparing calendar years 2016 to 2015, mergers decreased 17%.
CUNA reports the number of credit unions declined 18% from the beginning of calendar year 2012 to the end of calendar year 2016. Although the number of credit unions declined at a 4% compound annual rate during this period, aggregate assets increased at a compound annual rate of 6% and totaled $1.3 trillion as of December 31, 2016.
Community and mid-tier banks and credit unions are important in the communities and to the consumers they serve. Bank customers and credit union members rely on these institutions to provide personalized, relationship-based service and competitive financial products and services available through the customer’s delivery channel of choice. Institutions are recognizing that attracting and retaining customers/members in today’s highly competitive financial industry and realizing near and long term performance goals are often technology-dependent. Financial institutions must implement technological solutions that enable them to:
Maximize performance with accessible, accurate, and timely business intelligence information;
Offer the high-demand products and services needed to successfully compete with traditional competitors and non-traditional competitors created by convergence within the financial services industry;
Enhance the customer/member experience at varied points of contact;
Expand existing customer/member relationships and strengthen exit barriers by cross selling additional products and services;
Capitalize on new revenue and deposit growth opportunities;
Increase operating efficiencies and reduce operating costs;
Implement e-commerce, mobile, and digital strategies that provide the convenience-driven services required in today’s financial services industry;
Protect mission-critical information assets and operational infrastructure;
Protect customers/members with various security tools from fraud and related financial losses;
Maximize the day-to-day use of technology and return on technology investments; and
Ensure full regulatory compliance.
JHA’s extensive product and service offering enables diverse financial institutions to capitalize on these business opportunities and respond to these business challenges. We strive to establish a long-term, value-added technology partnership with each customer, and to continually expand our offering with the specific solutions our customers need to prosper in the evolving financial services industry.
Mission Statement
JHA’s mission is to protect and increase the value of its stockholders' investment by providing quality products and services to our customers. We perform this mission by:
Concentrating our activities on what we know best - information systems and services for financial institutions;
Providing outstanding commitment and service to our customers so that the perceived value of our products and services is consistent with the real value; and
Maintaining a work environment that is personally, professionally, and financially rewarding to our employees.
Business Strategy
Our fundamental business strategy is to generate organic revenue and earnings growth supplemented by strategic acquisitions. We execute this strategy by:

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Providing commercial banks and credit unions with core operating systems that provide excellent functionality, and support in-house and outsourced delivery environments with identical functionality.
Expanding each core customer relationship by cross-selling complementary products and services that enhance the functionality provided by our core information processing systems.
Maintaining a company-wide commitment to customer service that consistently exceeds our customers’ expectations and generates high levels of customer retention.
Capitalizing on our acquisition strategy.
Acquisition Strategy
We have a disciplined approach to acquisitions and have been successful in supplementing our organic growth with strategic acquisitions, including 29 acquisitions since the end of fiscal 1999. We continue to explore acquisitions that have the potential to:
Expand our suite of complementary products and services;
Provide products and services that can be sold to both existing core and non-core customers and outside our base to new customers; and /or
Provide selective opportunities to sell outside our traditional markets in the financial services industry.
We have completed one acquisition in the last 3 years. After 41 years in business we have very few gaps in our product line, so it is increasingly difficult to find proven products or services that would enable our clients and prospects to better optimize their business opportunities or solve specific operational issues. In addition, we see few acquisition opportunities that would expand our market or enable our entry into adjacent markets within the financial services industry that are fairly priced or that we could assimilate into our company without material distractions.
We have a solid track record of executing acquisitions from both a financial and operational standpoint and we will continue to pursue acquisition opportunities that support our strategic direction, complement and accelerate our organic growth, and generate long-term profitable growth for our shareholders. Until we identify appropriate acquisition opportunities, we will continue to find alternative ways to leverage our cash position and balance sheet to the benefit of our shareholders, such as continued investment in new products and services for our customers, repurchases of our stock, and continued payment of dividends.
Our five most recent acquisitions were:
Fiscal Year
Company or Product Name
Products and Services
2016
Bayside Business Solutions
Portfolio management systems and factoring software
2014
Banno
Mobile banking, web development and data-enriched marketing technology
2010
iPay Technologies
Electronic bill payment and P2P services
2010
PEMCO Technology Services
Payment transaction processing solutions for credit unions
2010
Goldleaf Financial Solutions
Integrated technology and payment processing solutions
Solutions
Our proprietary solutions are marketed through three business brands:  
Jack Henry Banking supports commercial banks with information and transaction processing platforms that provide enterprise-wide automation. We have three functionally distinct core bank processing systems and more than 100 complementary solutions, including business intelligence and bank management, retail and business banking, digital and mobile internet banking and electronic payment solutions, risk management and protection, and item and document imaging solutions. Our banking solutions have state-of-the-art functional capabilities, and we can re-market the hardware required by each software system. Our banking solutions can be delivered in-house or through outsourced delivery model, and are backed by a company-wide commitment to provide exceptional personal service. Jack Henry Banking is a recognized market leader, currently supporting approximately 1,080 banks with its technology platforms.
Symitar supports credit unions of all sizes with information and transaction processing platforms that provide enterprise-wide automation. Its solutions include two functionally distinct core processing systems and more than 50 complementary solutions, including business intelligence and credit union management, member and member business services, digital and mobile internet banking and electronic payment solutions, risk management and protection, and item and document imaging solutions. Our credit union solutions also have state-of-the-art functional capabilities, and we can re-market the hardware required by each software system. Our credit union solutions can

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be delivered in-house or through outsourced delivery model, and are also backed by our company-wide commitment to provide exceptional personal service.  Symitar currently supports approximately 820 credit union customers.
ProfitStars is a leading provider of specialized products and services assembled through our focused diversification acquisition strategy. These core agnostic solutions are compatible with a wide variety of information technology platforms and operating environments, and include proven solutions for generating additional revenue and growth, increasing security and mitigating operational risks, and/or controlling operating costs. ProfitStars’ products and services enhance the performance of financial services organizations of all asset sizes and charters, and diverse corporate entities with over 9,000 domestic and international customers. These distinct products and services can be implemented individually or as solution suites to address specific business problems or needs and enable effective responses to dynamic industry trends.
We will continue to develop and maintain functionally robust, integrated solutions that are supported with high service levels, regularly updating and improving those solutions using an interactive customer enhancement process; ensuring compliance with relevant regulations; updated with proven advances in technology; and consistent with JHA’s reputation as a premium product and service provider.
Core Software Systems
Core software systems primarily consist of the integrated applications required to process deposit, loan, and general ledger transactions, and to maintain centralized customer/member information.
Jack Henry Banking markets three core software systems to banks and Symitar markets two core software systems to credit unions. These core systems are available for in-house installation at customer sites, or financial institutions can outsource ongoing information processing to JHA.
Jack Henry Banking’s three core banking platforms are:  
SilverLake®, a robust IBM Power System™ (i/OS) based system primarily designed for commercial-focused banks with assets ranging from $500 million to $50 billion. However, some progressive smaller banks and start-up banks also select SilverLake. This system is in use by over 390 banks, and now automates approximately 6.7% of the domestic banks with assets less than $50 billion.
CIF 20/20®, a parameter-driven, easy-to-use system that now supports over 490 banks ranging from de novo institutions to those with assets exceeding $2 billion. CIF 20/20 is the most widely used IBM Power System™ (i/OS) core processing system in the community bank market.
Core Director®, a Windows®-based, client/server system that now supports nearly 200 banks ranging from de novo institutions to those with assets exceeding $1 billion. Core Director is a cost-efficient operating platform and provides intuitive point-and-click operation.
Symitar’s two core credit union platforms are:  
Episys®, a robust IBM Power System™ (AIX®) based system primarily designed for credit unions with more than $50 million in assets. It has been implemented by nearly 660 credit unions and is ranked as the system implemented by more credit unions with assets exceeding $25 million than any other alternative system.
CruiseNet®, a Windows-based, client/server system designed primarily for credit unions with less than $50 million in assets. It has been implemented by nearly 160 credit unions, is cost-efficient, and provides intuitive point-and-click, drag-and-drop operation.
Customers electing to install our solutions in-house license the proprietary software systems. The large majority of these customers pay ongoing annual software maintenance fees. We also re-market the hardware and peripheral equipment that is required by our software solutions; and we contract to perform software implementation, data conversion, training, ongoing support, and other related services. In-house customers generally license our core software systems under a standard license agreement that provides a fully-paid, nonexclusive, nontransferable right to use the software on a single computer at a single location.
Customers can eliminate the significant up-front capital expenditures required by in-house installations and the responsibility for operating information and transaction processing infrastructures by outsourcing these functions to JHA. Our core outsourcing services are provided through a national network of four data centers located in three physical locations. We also provide image item processing services from two host/archive sites and several key entry and balancing locations throughout the country. We print and mail customer statements for financial institutions from three regional printing and rendering centers. Customers electing to outsource their core processing typically sign contracts for five or more years that include transaction-based processing fees and minimum guaranteed payments during the contract period.

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We support the dynamic business requirements of our core bank and credit union clients with ongoing enhancements to each core system, the regular introduction of new integrated complementary products, the ongoing integration of practical new technologies, and regulatory compliance initiatives. JHA also serves each core customer as a single point of contact, support, and accountability.
Complementary Products and Services  
We provide more than 100 complementary products and services that are sold to our core bank and credit union customers, and selectively sold by our ProfitStars division to financial services organizations that use other core processing systems.
These complementary solutions enable core bank and credit union clients to respond to evolving customer/member demands, expedite speed-to-market with competitive offerings, increase operating efficiency, address specific operational issues, and generate new revenue streams. The highly specialized solutions sold by ProfitStars enable diverse financial services organizations and corporate entities to generate additional revenue and growth opportunities, increase security and mitigate operational risks, and control operating costs.
JHA regularly introduces new products and services based on demand for integrated complementary solutions from our existing core clients, and based on the growing demand among financial services organizations and corporate entities for specialized solutions capable of increasing revenue and growth opportunities, mitigating and controlling operational risks, and containing costs. The Company’s Industry Research department solicits customer guidance on the business solutions they need, evaluates available solutions and competitive offerings, and manages the introduction of new product offerings. JHA’s new complementary products and services are developed internally, acquired, or provided through strategic alliances.
Electronic Payment Solutions
Electronic payment solutions provides our customers with the tools necessary to be at the forefront of payment innovations with secure payment processing designed to simplify complex payment processing, attract profitable retail and commercial accounts, increase operating efficiencies, comply with regulatory mandates, and proactively mitigate and manage payments-related risk.
Jack Henry identifies three components of Electronic Payment Solutions:
Card Services provides a comprehensive suite of Automated Teller Machine ("ATM"), debit, and credit card transaction processing and fraud management solutions. Our card processing solutions, which include loyalty/ rewards, multiple fraud detection programs, and cardholder alert and controls, as well as other key components that are fully integrated with JHA's core and complementary solutions, facilitate seamless transaction processing.
Bill Pay and Mobile banking platforms are offered through our iPay and Banno product offerings. iPay offers iPay Business Bill Pay™, a full suite of online financial management solutions designed to meet the distinct needs of small businesses, as well as iPay Consumer Bill Pay™, a solution that supports single or recurring payments, allows customers to receive full bills electronically, and easily integrates with any internet banking provider. Banno Mobile™ offers a native mobile banking application for both iOS and Android that offers innovative and cost-effective mobile services that can be marketed with customer's own brand identity. It allows customers to aggregate all of their account balances and transactional data from multiple financial institutions and empowers them with the convenience of anytime, anywhere account access.
Processing/ Other includes Enterprise Payment Solutions (EPS), a comprehensive payments engine and the leading total payments solution on the market today. EPS offers an integrated suite of remote deposit capture, ACH and card transaction processing solutions, risk management tools, reporting capabilities, and more for financial institutions of all sizes. EPS helps financial institutions succeed in today’s competitive market to increase revenue, improve efficiencies, better manage compliance, and enhance customer relationships. Furthermore, Commercial Lending Solutions help financial institutions securely transition from a traditional lending portfolio (focused on real estate-based consumer lending) to a more fully-diversified portfolio developed via commercial and industrial lending. Our solutions also provide reliable ways to retain creditworthy business customers facing financial hurdles, without the risk of loan loss.
Hardware Systems
Our software systems operate on a variety of hardware platforms. We have established remarketing agreements with IBM Corporation (fulfilled directly and through IBM distributors), and many other hardware providers that allow JHA to purchase hardware and related maintenance services at a discount and resell them directly to our customers. We currently sell IBM Power Systems; Lenovo, Dell, and HP servers and workstations; Canon, Digital Check, Epson, and Panini check scanners; and other devices that complement our software solutions.

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Implementation and Training
The majority of our core bank and credit union customers contract with us for implementation and training services in connection with their systems and additional complementary products.
A complete core system implementation typically includes detailed planning, project management, data conversion, and testing. Our experienced implementation teams travel to customer facilities to help manage the process and ensure that all data is transferred from the legacy system to the JHA system. Our implementation fees are fixed or hourly based on the core system being installed.
We also provide extensive initial and ongoing education to our customers. Know-It-All Education is a comprehensive training program that supports new customers with basic training and longtime customers with continuing education. The curricula provide the ongoing training financial institutions need to maximize the use of JHA’s core and complementary products, to optimize ongoing system enhancements, and to fully understand dynamic year-end legislative and regulatory requirements. Each basic, intermediate, and advanced course is delivered by system experts, supported by professional materials and training tools, and incorporates different educational media in a blended learning approach. Know-It-All Education supports distinct learning preferences with a variety of delivery channels, including classroom-based courses offered in JHA’s regional training centers, Internet-based live instruction, eLearning courses, on-site training, and train-the-trainer programs.
Support and Services
We serve our customers as a single point of contact and support for the complex solutions we provide. The Company’s comprehensive support infrastructure incorporates:
Exacting service standards;
Trained support staff available 24 hours-a-day, 365 days-a-year;
Assigned account managers;
Sophisticated support tools, resources, and technology;
Broad experience converting diverse banks and credit unions to our core platforms from every competitive platform;
Highly effective change management and control processes; and
A best practices methodology developed and refined through the company-wide, day-to-day experience supporting over 9,000 diverse clients.
Most in-house customers contract for annual software support services, and this represents a significant source of recurring revenue for JHA. These support services are typically priced at approximately 18% to 20% of the respective product’s software license fee. The subsequent years' service fees generally increase as customer assets increase and as additional complementary products are purchased. Annual software support fees are typically billed during June and are paid in advance for the entire fiscal year, with pro-ration for new product implementations that occur during the year. Hardware support fees also are usually paid in advance for entire contract periods which typically range from one to five years. Most support contracts automatically renew unless the customer or JHA gives notice of termination at least 30 days prior to contract expiration.
High levels of support are provided to our outsourced customers by the same support infrastructure utilized for in-house customers. However, these support fees are included as part of monthly outsourcing fees.
JHA regularly measures customer satisfaction using formal annual surveys and more frequent online surveys initiated randomly by routine support requests. This process shows that we consistently exceed our customers’ service-related expectations.
Backlog
Backlog consists of contracted in-house products and services that have not been delivered. Backlog also includes the minimum monthly payments for the remaining portion of multi-year outsourcing contracts, and typically includes the minimum payments guaranteed for the remainder of the contract period.
Backlog as of June 30, 2017 totaled $630.3 million, consisting of contracts signed for future delivery of software, hardware, and implementation services (in-house backlog) of approximately $78.9 million, and $551.4 million for outsourcing services. Approximately $426.0 million of the outsourcing services backlog as of June 30, 2017 is not expected to be realized during fiscal 2018 due to the long-term nature of our outsourcing contracts. Backlog as of June 30, 2016 totaled $620.6 million, consisting of $95.6 million for future delivery of in-house software, hardware, and implementation services (in-house backlog), and $525.0 million for outsourcing services.

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The in-house backlog does not include amounts related to items that have been delivered but cannot be recognized as revenue due to accounting rules for software revenue recognition; those amounts are included in deferred revenue on the balance sheet to the extent that they have been billed to the customer as of June 30, 2017 and 2016.
Our outsourcing backlog continues to experience growth based on new contracting activities and renewals of multi-year contracts, and although the appropriate portion of this revenue will be recognized during fiscal 2018, the backlog is expected to trend up gradually for the foreseeable future due to renewals of existing relationships and new contracting activities.
Research and Development
We invest significant resources in ongoing research and development to develop new software solutions and services, and enhance existing solutions with additional functionality and features required to ensure regulatory compliance. Our core and the majority of our complementary systems are typically enhanced once each year. Product-specific enhancements are largely customer-driven with recommended enhancements formally gathered through focus groups, change control boards, strategic initiatives meetings, annual user group meetings, and ongoing customer contact. We also continually evaluate and implement process improvements that expedite the delivery of new products and enhancements to our customers, and reduce related costs.
Research and development expenses for fiscal years 2017, 2016, and 2015 were $84.8 million, $81.2 million, and $71.5 million, respectively. Capitalized software for fiscal years 2017, 2016, and 2015 was $89.6 million, $96.4 million, and $76.9 million, respectively.
Sales and Marketing
JHA serves established, well defined markets that provide ongoing sales and cross-sales opportunities.
The marketing and sales initiatives within the Jack Henry Banking and Symitar business lines are primarily focused on identifying banks and credit unions evaluating alternative core information and transaction processing solutions. ProfitStars sells specialized core agnostic niche solutions that complement existing technology platforms to domestic financial services organizations of all asset sizes and charters.
Dedicated sales forces support each of JHA’s three marketed brands. Sales executives are responsible for the activities required to earn new customers in assigned territories, and regional account executives are responsible for nurturing customer relationships and cross selling additional products and services. Our sales professionals receive base salaries and performance-based commission compensation. Brand-specific sales support staff provide a variety of services, including product and service demonstrations, responses to prospect-issued requests-for-proposals, and proposal and contract generation. Our marketing department supports all three brands with lead generation and brand-building activities, including participation in state-specific, regional, and national trade shows; print and online advertising; telemarketing; customer newsletters; ongoing promotional campaigns; and media relations. JHA also hosts annual national education conferences which provide opportunities to network with existing clients and demonstrate new products and services.
JHA has sold select products and services in the Caribbean, Canada, Europe, and South America. International sales account for less than 1% of JHA’s total revenue in the year ended June 30, 2017, and were approximately 1% of total revenue in fiscal years 2016 and 2015.
Competition
The market for companies providing technology solutions to financial services organizations is competitive, and we expect that competition from both existing competitors and companies entering our existing or future markets will remain strong. Some of JHA’s current competitors have longer operating histories, larger customer bases, and greater financial resources. The principal competitive factors affecting the market for technology solutions include product/service functionality, price, operating flexibility and ease-of-use, customer support, and existing customer references. For more than a decade there has been significant consolidation among providers of products and services designed for financial institutions, and this consolidation is expected to continue in the future.
Jack Henry Banking and Symitar compete with large vendors that provide information and transaction processing solutions to banks and credit unions, including Fidelity National Information Services, Inc.; Fiserv, Inc.; and Finastra. ProfitStars competes with an array of disparate vendors that provide niche solutions to financial services organizations and corporate entities.
Intellectual Property, Patents, and Trademarks  
Although we believe our success depends upon our technical expertise more than our proprietary rights, our future success and ability to compete depend in part upon our proprietary technology. We have registered or filed applications for our primary trademarks. Most of our technology is not patented. Instead, we rely on a combination of contractual

11


rights, copyrights, trademarks, and trade secrets to establish and protect our proprietary technology. We generally enter into confidentiality agreements with our employees, consultants, resellers, customers, and potential customers. Access to and distribution of our Company’s source code is restricted, and the disclosure and use of other proprietary information is further limited. Despite our efforts to protect our proprietary rights, unauthorized parties can attempt to copy or otherwise obtain, or use our products or technology. We cannot be certain that the steps taken in this regard will be adequate to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology.
Regulatory Compliance
JHA maintains a corporate commitment to address compliance issues and implement requirements imposed by the federal regulators prior to the effective date of such requirements when adequate prior notice is given. JHA’s compliance program is provided by a team of compliance analysts and auditors that possess extensive regulatory agency and financial institution experience, and a thorough working knowledge of JHA and our solutions. These compliance professionals leverage multiple channels to remain informed about potential and recently enacted regulatory requirements, including regular discussions on emerging topics with the Federal Financial Institutions Examination Council (“FFIEC”) examination team and training sessions sponsored by various professional associations.
JHA has a process to inform internal departments of new and revised regulatory requirements. Upcoming regulatory changes also are presented to the Company’s development teams through monthly regulatory compliance meetings and the necessary product changes are included in the ongoing product development cycle. JHA publishes newsletters to keep our customers informed of regulatory changes that could impact their operations. Periodically, customer advisory groups are assembled to discuss significant regulatory changes.
Internal audits of our systems, networks, operations, business recovery plans, and applications are conducted and specialized outside firms are periodically engaged to perform testing and validation of our systems, processes, plans and security. Ensuring that confidential information remains private is a high priority, and JHA’s initiatives to protect confidential information include regular third-party application reviews intended to better secure information access. Additional third-party reviews are performed throughout the organization, such as vulnerability tests, intrusion tests, and System and Organizations Controls (SOC) 1 or SOC 2 reports. The FFIEC conducts annual reviews throughout the Company and issues reports that are reviewed by the JHA Risk and Compliance Committee of the Board of Directors.
Government Regulation
The financial services industry is subject to extensive and complex federal and state regulation. All financial institutions are subject to substantial regulatory oversight and supervision. Our products and services must comply with the extensive and evolving regulatory requirements applicable to our customers, including but not limited to those mandated by federal truth-in-lending and truth-in-savings rules, the Privacy of Consumer Financial Information regulations, usury laws, the Equal Credit Opportunity Act, the Fair Housing Act, the Electronic Funds Transfer Act, the Fair Credit Reporting Act, the Bank Secrecy Act, the USA Patriot Act, the Gramm-Leach-Bliley Act, the Community Reinvestment Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act. The compliance of JHA’s products and services with these requirements depends on a variety of factors, including the particular functionality, the interactive design, the classification of customers, and the manner in which the customer utilizes the products and services. Our customers are contractually responsible for assessing and determining what is required of them under these regulations and then we assist them in meeting their regulatory needs through our products and services. The impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act continues to evolve as the regulations are written to implement the various provisions of the law. We cannot predict the impact these regulations, any future amendments to these regulations or any newly implemented regulations will have on our business in the future.
JHA is not chartered by the Office of the Comptroller of Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration or other federal or state agencies that regulate or supervise depository institutions. However, operating as a service provider to financial institutions, JHA’s operations are governed by the same regulatory requirements as those imposed on financial institutions, and subject to periodic reviews by FFIEC regulators who have broad supervisory authority to remedy any shortcomings identified in such reviews.
JHA provides outsourced services through OutLink Data Centers, electronic transaction processing through Card Processing Solutions, Internet banking through NetTeller, Banno online solutions, bill payment through iPay, network security monitoring and Hosted Network Solutions (HNS) through our Gladiator unit, and Cloud Services and business recovery services through Centurion Disaster Recovery.
The outsourcing services provided by JHA are subject to examination by FFIEC regulators under the Bank Service Company Act. These examinations cover a wide variety of subjects, including system development, functionality,

12


reliability, and security, as well as disaster preparedness and business recovery planning. Our outsourcing services are also subject to examination by state banking authorities on occasion.
Employees
As of June 30, 2017 and 2016, JHA had 5,972 and 5,861 full-time employees, respectively. Of our full-time employees, approximately 983 are employed in the Credit Union segment of our business, with the remainder employed in the Bank segment or in general and administrative functions that serve both segments. Our employees are not covered by a collective bargaining agreement and there have been no labor-related work stoppages.
Available Information
JHA’s Website is easily accessible to the public at www.jackhenry.com. The “For Investors" portion of the Website provides key corporate governance documents, the code of conduct, an archive of press releases, and other relevant Company information. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other filings and amendments thereto that are made with the U.S. Securities and Exchange Commission (SEC) also are available free of charge on our Website as soon as reasonably practical after these reports have been filed with or furnished to the SEC. The SEC also maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at https://www.sec.gov.

ITEM 1A.  RISK FACTORS
The Company's business and the results of its operations are affected by numerous factors and uncertainties, some of which are beyond our control. The following is a description of some of the important risks and uncertainties that may cause our actual results of operations in future periods to differ from those expected or desired.
Security problems could damage our reputation and business. We rely on industry-standard encryption, network and Internet security systems, most of which we license from third parties, to provide the security and authentication necessary to effect secure transmission of data. Our services and infrastructure are increasingly reliant on the Internet. Computer networks and the Internet are vulnerable to unauthorized access, computer viruses and other disruptive problems such as denial of service attacks and other forms of cyber-terrorism. Individual personal computers can be stolen, and customer data media can be lost in shipment. Under state and federal laws requiring consumer notification of security breaches, the costs to remediate security breaches can be substantial. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may render our security measures inadequate. Security risks may result in liability to our customers, damage to our reputation, and may deter financial institutions from purchasing our products. We will continue to expend significant capital and other resources protecting against the threat of security breaches, and, in the event of a breach, we may need to expend resources alleviating problems caused by such breach. Addressing security problems may result in interruptions, delays or cessation of service to users, any of which could harm our business.
Operational failure in our outsourcing facilities could expose us to damage claims, increase regulatory scrutiny and cause us to lose customers. Damage or destruction that interrupts our outsourcing operations could cause delays and failures in customer processing which could hurt our relationship with customers, damage our reputation, expose us to damage claims, and cause us to incur substantial additional expense to relocate operations and repair or replace damaged equipment. Our back-up systems and procedures may not prevent disruption, such as a prolonged interruption of our transaction processing services. In the event that an interruption extends for more than several hours, we may experience data loss or a reduction in revenues by reason of such interruption. Any significant interruption of service could reduce revenue, have a negative impact on our reputation, result in damage claims, lead our present and potential customers to choose other service providers, and lead to increased regulatory scrutiny of the critical services we provide to financial institutions, with resulting increases in compliance burdens and costs.
Failures associated with payment transactions could result in financial loss. The volume and dollar amount of payment transactions that we process is significant and continues to grow. We settle funds on behalf of financial institutions, other businesses and consumers and receive funds from clients, card issuers, payment networks and consumers on a daily basis for a variety of transaction types. Transactions facilitated by us include debit card, credit card, electronic bill payment transactions, Automated Clearing House (“ACH”) payments and check clearing that support consumers, financial institutions and other businesses. If the continuity of operations, integrity of processing, or ability to detect or prevent fraudulent payments were compromised in connection with payments transactions, this could result in financial as well as reputational loss to us. In addition, we rely on various third parties to provide services in support of the processing of transactions and funds settlement for certain of our products. If we are unable to obtain such services in the future, that could have a material adverse effect on our business, financial position and results of operations. In addition, we may issue credit to consumers, financial institutions or other businesses as part of the funds settlement. A default on this credit by a counterparty could result in a financial loss to us.

13


The services we provide to our customers are subject to government regulation that could hinder the development of our business, increase costs, or impose constraints on the way we conduct our operations. The financial services industry is subject to extensive and complex federal and state regulation. As a supplier of services to financial institutions, portions of our operations are examined by the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the National Credit Union Association, among other regulatory agencies. These agencies regulate services we provide and the manner in which we operate, and we are required to comply with a broad range of applicable laws and regulations.
In addition, existing laws, regulations, and policies could be amended or interpreted differently by regulators in a manner that imposes additional costs and has a negative impact on our existing operations or that limits our future growth or expansion. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, significantly changed the regulation of the financial services industry, producing new regulatory agencies and voluminous new regulations, some of which are still being written. The Consumer Financial Protection Bureau was established, which is implementing numerous new regulations applicable to “supervised service providers” such as the Company. These new regulations may require additional programming or other costly changes in our processes or personnel. Our customers are also regulated entities, and actions by regulatory authorities could determine both the decisions they make concerning the purchase of data processing and other services and the timing and implementation of these decisions. Concerns are growing with respect to the use, confidentiality, and security of private customer information. Regulatory agencies, Congress and state legislatures are considering numerous regulatory and statutory proposals to protect the interests of consumers and to require compliance with standards and policies that have not been defined.
The software we provide to our customers is also affected by government regulation. We are generally obligated to our customers to provide software solutions that comply with applicable federal and state regulations. In particular, numerous new regulations have been proposed and are still being written to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Substantial software research and development and other corporate resources have been and will continue to be applied to adapt our software products to this evolving, complex and often unpredictable regulatory environment. Our failure to provide compliant solutions could result in significant fines or consumer liability on our customers, for which we may bear ultimate liability.
A material weakness in our internal controls could have a material adverse effect on us. Effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports and to mitigate risk of fraud. If additional material weaknesses in our internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results, which could materially and adversely affect our business and results of operations or financial condition, restrict our ability to access the capital markets, require us to expend significant resources to correct the weaknesses or deficiencies, subject us to fines, penalties or judgments, harm our reputation or otherwise cause a decline in investor confidence.
Our business may be adversely impacted by U.S. and global market and economic conditions. We derive most of our revenue from products and services we provide to the financial services industry. If the economic environment worsens, we could face a reduction in demand from current and potential clients for our products and services, which could have a material adverse effect on our business, results of operations and financial condition. In addition, a growing portion of our revenue is derived from transaction processing fees, which depend heavily on levels of consumer and business spending. Deterioration in general economic conditions could reduce transaction volumes and the Company's related revenues.
Changes in the banking and credit union industry could reduce demand for our products. Cyclical fluctuations in economic conditions affect profitability and revenue growth at commercial banks and credit unions. Because our business is concentrated in financial institutions, unfavorable economic conditions negatively affect the spending of banks and credit unions, including spending on computer software and hardware. Such conditions could reduce both our sales to new customers and upgrade/complementary product sales to existing customers. The Company could also experience the loss of customers due to their acquisition or financial failure.
Competition or general economic conditions may result in decreased demand or require price reductions or other concessions to customers which could result in lower margins and reduce income. We vigorously compete with a variety of software vendors and service providers in all of our major product lines. We compete on the basis of product quality, reliability, performance, ease of use, quality of support and services, integration with other products and pricing. Some of our competitors may have advantages over us due to their size, product lines, greater marketing resources, or exclusive intellectual property rights. New competitors regularly appear with new products, services and technology for financial institutions. If competitors offer more favorable pricing, payment or other contractual terms, warranties, or functionality, or if general economic conditions decline such that customers are less willing or able to pay the cost of our products and services, we may need to lower prices or offer favorable terms in order to successfully compete.

14


The loss of key employees could adversely affect our business. We depend on the contributions and abilities of our senior management and other key employees. Our Company has grown significantly in recent years and our management remains concentrated in a small number of highly qualified individuals. If we lose one or more of our key employees, we could suffer a loss of managerial experience, and management resources would have to be diverted from other activities to compensate for this loss. We do not have employment agreements with any of our executive officers.
Our failure to comply with regulations or to meet regulatory expectations could adversely affect our business and results of operations. While much of our operations are not directly subject to regulations applicable to financial institutions, as a provider of processing services to such institutions, we are examined on a regular basis by various regulatory authorities. If we fail to comply with applicable regulations or guidelines, we could be subject to regulatory actions or rating changes and suffer harm to our customer relationships and reputation. Such failures could require significant expenditures to correct and could negatively affect our ability to retain customers and obtain new customers.
Our failure to comply with the rules of the payment card networks could adversely affect our business. We are subject to card association and network rules governing Visa, MasterCard and similar organizations, including the Payment Card Data Security Standards. If we fail to comply with these rules we could be fined or our certifications could be suspended or terminated, which could limit our ability to service our customers and result in reductions in revenues and increased costs of operations.
If we fail to adapt our products and services to changes in technology and the markets we serve, we could lose existing customers and be unable to attract new business. The markets for our software and hardware products and services are characterized by changing customer and regulatory requirements and rapid technological changes. These factors and new product introductions by our existing competitors or by new market entrants could reduce the demand for our existing products and services and we may be required to develop or acquire new products and services. Our future success is dependent on our ability to enhance our existing products and services in a timely manner and to develop or acquire new products and services. If we are unable to develop or acquire new products and services as planned, or if we fail to sell our new or enhanced products and services, we may incur unanticipated expenses or fail to achieve anticipated revenues, as well as lose prospective sales.
Our growth may be affected if we are unable to find or complete suitable acquisitions. We have augmented the growth of our business with a number of acquisitions and we plan to continue to acquire appropriate businesses, products and services. This strategy depends on our ability to identify, negotiate and finance suitable acquisitions. Merger and acquisition activity in our industry has affected the availability and pricing of such acquisitions. If we are unable to acquire suitable acquisition candidates, we may experience slower growth.
If others claim that we have infringed their intellectual property rights, we could be liable for significant damages or could be required to change our processes. We have agreed to indemnify many of our customers against claims that our products and services infringe on the proprietary rights of others. Infringement claims have been and will in the future be asserted with regard to our software solutions and services. Such claims, whether with or without merit, are time-consuming, may result in costly litigation and may not be resolved on terms favorable to us. If our defense of such claims is not successful, we could be forced to pay damages or could be subject to injunctions that would cause us to cease making or selling certain applications or force us to redesign applications.
Consolidation and failures of financial institutions will continue to reduce the number of our customers and potential customers. Our primary market consists of more than 5,870 commercial and savings banks and more than 6,000 credit unions. The number of commercial banks and credit unions has decreased because of failures and mergers and acquisitions and is expected to continue to decrease as more consolidation occurs.
Acquisitions may be costly and difficult to integrate. We have acquired a number of businesses in the past and will continue to explore acquisitions in the future. We may not be able to successfully integrate acquired companies. We may encounter problems with the integration of new businesses including: financial control and computer system compatibility; unanticipated costs; unanticipated quality or customer problems with acquired products or services; differing regulatory  and industry standards; diversion of management's attention; adverse effects on existing business relationships with suppliers and customers; loss of key employees; and significant amortization expenses related to acquired assets. To finance future acquisitions, we may have to increase our borrowing or sell equity or debt securities to the public. If we fail to integrate our acquisitions, our business, financial condition and results of operations could be materially and adversely affected. Failed acquisitions could also produce material and unpredictable impairment charges as we periodically review our acquired assets.
We may not be able to manage growth. We have grown both internally and through acquisitions. Our expansion has and will continue to place significant demands on our administrative, operational, financial and management personnel

15


and systems. We may not be able to enhance and expand our product lines, manage costs, adapt our infrastructure and modify our systems to accommodate future growth.
Expansion of services to non-traditional customers could expose us to new risks. We have expanded our services to business lines that are marketed outside our traditional, regulated, and litigation-averse base of financial institution customers. These non-regulated customers may entail greater operational, credit and litigation risks than we have faced before and could result in increases in bad debts and litigation costs.
Failure to achieve favorable renewals of service contracts could negatively affect our outsourcing business. Our contracts with our customers for outsourced data processing services generally run for a period of five or more years. We will continue to experience greater numbers of these contracts coming up for renewal each year. Renewal time presents our customers with the opportunity to consider other providers or to renegotiate their contracts with us. If we are not successful in achieving high renewal rates upon favorable terms, our outsourcing revenues and profit margins will suffer.
The impairment of a significant portion of our goodwill and intangible assets would adversely affect our results of operations. Our balance sheet includes goodwill and intangible assets that represent a significant portion of our total assets at June 30, 2017. On an annual basis, and whenever circumstances require, we review our intangible assets for impairment. If the carrying value of a material asset is determined to be impaired, it will be written down to fair value by a charge to operating earnings. An impairment of a significant portion of these intangible assets could have a material negative effect on our operating results.

ITEM 1B.   UNRESOLVED STAFF COMMENTS
None.

ITEM 2.   PROPERTIES
We own 154 acres located in Monett, Missouri on which we maintain nine office buildings, plus shipping & receiving and maintenance buildings. We also own buildings in Houston, Texas; Allen, Texas; Albuquerque, New Mexico; Birmingham, Alabama; Lenexa, Kansas; Angola, Indiana; Shawnee Mission, Kansas; Rogers, Arkansas; Oklahoma City, Oklahoma; Elizabethtown, Kentucky; Springfield, Missouri and San Diego, California. Our owned facilities represent approximately 1,000,000 square feet of office space in ten states. We have 35 leased office facilities in 20 states, which total approximately 653,000 square feet. All of our owned and leased office facilities are for normal business purposes.
Of our facilities, the Credit Union segment uses office space totaling approximately 195,500 square feet in fifteen facilities. The majority of our San Diego, California offices are used in the Credit Union segment, as are portions of fourteen other office facilities. The remainder of our leased and owned facilities, approximately 1,457,500 square feet of office space, is primarily devoted to serving our Bank segment or supports our whole business.
We own four aircraft. Many of our customers are located in communities that do not have an easily accessible commercial airline service. We primarily use our airplanes in connection with implementation, sales of systems and internal requirements for day-to-day operations. Transportation costs for implementation and other customer services are billed to our customers. We lease property, including real estate and related facilities, at the Monett, Missouri regional airport.

ITEM 3.  LEGAL PROCEEDINGS
We are subject to various routine legal proceedings and claims arising in the ordinary course of our business. In the opinion of management, any liabilities resulting from current lawsuits are not expected, either individually or in the aggregate, to have a material adverse effect on our consolidated financial statements. In accordance with U.S. GAAP, we record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These liabilities are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case or proceeding.

ITEM 4.  MINE SAFETY DISCLOSURES
None.


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Table of Contents

PART II
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is quoted on the NASDAQ Global Select Market (“NASDAQ”) 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.
 
 
Fiscal 2017
 
Fiscal 2016
 
 
High
 
Low
 
High
 
Low
Fourth Quarter
 
$
106.46

 
$
91.50

 
$
87.27

 
$
80.44

Third Quarter
 
95.64

 
88.11

 
86.23

 
73.19

Second Quarter
 
91.06

 
79.00

 
79.92

 
68.31

First Quarter
 
89.89

 
85.00

 
71.75

 
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:
 
 
Fiscal 2017
 
Fiscal 2016
Fourth Quarter
 
$
0.310

 
$
0.280

Third Quarter
 
0.310

 
0.280

Second Quarter
 
0.280

 
0.250

First Quarter
 
0.280

 
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:
 
Total Number of Shares Purchased (1)
 
Average Price of Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans (1)
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans (2)
April 1- April 30, 2017

 
$

 

 
4,580,404

May 1- May 31, 2017

 
$

 

 
4,580,404

June 1- June 30, 2017
250,345

 
$
105.02

 
250,000

 
4,330,404

Total
250,345

 
$
105.02

 
250,000

 
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.

17

Table of Contents

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
jkhy-201706_chartx46650.jpg
The following information depicts a line graph with the following values:
 
2012

2013

2014

2015

2016

2017

JKHY
100.00

138.34

177.10

195.72

267.64

322.60

Peer Group
100.00

117.87

161.90

203.87

233.39

271.10

S&P 500
100.00

120.60

150.27

161.43

167.87

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..


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Table of Contents

ITEM 6.   SELECTED FINANCIAL DATA
Selected Financial Data
(In Thousands, Except Per Share Data)
 
 
YEAR ENDED JUNE 30,
Income Statement Data
 
2017
 
2016
 
2015
 
2014
 
2013
Revenue (1)
 
$
1,431,117

 
$
1,354,646

 
$
1,256,190

 
$
1,173,173

 
$
1,107,524

Net Income
 
$
245,793

 
$
248,867

 
$
211,221

 
$
186,715

 
$
167,610

Basic earnings per share
 
$
3.16

 
$
3.13

 
$
2.60

 
$
2.20

 
$
1.95

Diluted earnings per share
 
$
3.14

 
$
3.12

 
$
2.59

 
$
2.19

 
$
1.94

Dividends declared per share
 
$
1.18

 
$
1.06

 
$
0.94

 
$
0.84

 
$
0.56

Balance Sheet Data
 
 
 
 
 
 
 
 
 
 
Total deferred revenue
 
$
511,384

 
$
521,054

 
$
531,987

 
$
492,868

 
$
439,596

Total assets
 
$
1,908,945

 
$
1,815,512

 
$
1,836,835

 
$
1,680,703

 
$
1,672,386

Long-term debt
 
$
50,000

 
$

 
$
50,102

 
$
3,729

 
$
7,366

Stockholders’ equity
 
$
1,032,051

 
$
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.

ITEM 7.   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

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Table of Contents

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.
We have two reportable segments: bank systems and services and credit union systems and services. The respective segments include all related license, support and service, and hardware sales along with the related cost of sales.
We continue to focus on our objective of providing the best integrated solutions, products and customer service to our clients. We are cautiously optimistic regarding ongoing economic improvement and expect our clients to continue investing in our products and services to improve their operating efficiencies and performance. We anticipate that consolidation within the financial services industry will continue. Regulatory conditions and legislation 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
Year Ended June 30,
 
% Change
 
2017
 
2016
 
 
License
$
2,385

 
$
3,041

 
(22
)%
Percentage of total revenue
<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.


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Support and Service Revenue
Year Ended June 30,
 
%
Change
 
2017
 
2016
 
 
Support and service
$
1,384,338

 
$
1,300,978

 
6
%
Percentage of total revenue
97
%
 
96
 %
 
 
 
 
 
 
 
 
 
Year over Year
 
 
 
$ Change
 
% Change
 
 
In-House Support & Other Services
$
2,790

 
1
 %
 
 
Electronic Payment Services
26,930

 
5
 %
 
 
Outsourcing Services
39,822

 
13
 %
 
 
Implementation Services
(8,837
)
 
(14
)%
 
 
Bundled Products & Services
22,655

 
24
 %
 
 
Total Increase
$
83,360

 
 
 
 
Support 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
Year Ended June 30,
 
%
Change
 
2017
 
2016
 
 
Hardware
$
44,394

 
$
50,627

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

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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.
 
Year Ended June 30,
 
%
Change
 
2017
 
2016
 
 
Cost of License
$
730

 
$
1,197

 
(39
)%
Percentage of total revenue
<1%

 
<1%

 
 
License Gross Profit
$
1,655

 
$
1,844

 
(10
)%
Gross Profit Margin

69
%
 
61
%
 
 
Cost of support and service
$
786,143

 
$
737,108

 
7
 %
Percentage of total revenue
55
%
 
54
%
 
 
Support and Service Gross Profit
$
598,195

 
$
563,870

 
6
 %
Gross Profit Margin

43
%
 
43
%
 
 
Cost of hardware
$
32,161

 
$
35,346

 
(9
)%
Percentage of total revenue
2
%
 
3
%
 
 
Hardware Gross Profit
$
12,233

 
$
15,281

 
(20
)%
Gross Profit Margin

28
%
 
30
%
 
 
TOTAL COST OF SALES
$
819,034

 
$
773,651

 
6
 %
Percentage of total revenue
57
%
 
57
%
 
 
TOTAL GROSS PROFIT
$
612,083

 
$
580,995

 
5
 %
Gross Profit Margin
43
%
 
43
%
 
 
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.

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OPERATING EXPENSES
Selling and Marketing
Year Ended June 30,
 
%
Change
 
2017
 
2016
 
 
Selling and marketing
$
93,297

 
$
90,079

 
4
%
Percentage of total revenue
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
Year Ended June 30,
 
%
Change
 
2017
 
2016
 
 
Research and development
$
84,753

 
$
81,234

 
4
%
Percentage of total revenue
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.
Research 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
Year Ended June 30,
 
%
Change
 
2017
 
2016
 
 
General and administrative
$
69,601

 
$
67,514

 
3
%
Percentage of total revenue
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
Year Ended June 30,
 
%
Change
 
2017
 
2016
 
 
Interest Income
$
248

 
$
307

 
(19
)%
Interest Expense
$
(996
)
 
$
(1,430
)
 
(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
Year Ended June 30,
 
%
Change
 
2017
 
2016
 
 
Provision For Income Taxes
$
121,161

 
$
111,669

 
9
%
Effective Rate
33.0
%
 
31.0
%
 
 

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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
Year Ended June 30,
 
% Change
 
2016
 
2015
 
 
License
$
3,041

 
$
2,635

 
15
%
Percentage of total revenue
<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 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
Year Ended June 30,
 
% Change
 
2016
 
2015
 
 
Support and service
$
1,300,978

 
$
1,200,652

 
8
%
Percentage of total revenue
96
%
 
96
%
 
 
 
Year over Year Change
 
 
 
$ Change
 
% Change
 
 
In-House Support & Other Services
$
17,846

 
6
 %
 
 
Electronic Payment Services
28,325

 
6
 %
 
 
Outsourcing Services
33,941

 
13
 %
 
 
Implementation Services
(11,289
)
 
(15
)%
 
 
Bundled Products & Services
31,503

 
50
 %
 
 
Total Increase
$
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

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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
Year Ended June 30,
 
% Change
 
2016
 
2015
 
 
Hardware
$
50,627

 
$
52,903

 
(4
)%
Percentage of total revenue
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.
COST OF SALES AND GROSS PROFIT
Cost of license represented the cost of software from third-party vendors through remarketing agreements associated with non-bundled application software licenses. These costs were recognized when license revenue was recognized.
Cost of support and service represented costs associated with conversion and implementation efforts, ongoing support for our 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.

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Table of Contents

 
Year Ended June 30,
 
% Change
 
2016
 
2015
 
 
 
 
 
 
 
 
Cost of License
$
1,197

 
$
1,187

 
1
 %
Percentage of total revenue
<1%

 
<1%

 
 
License Gross Profit
$
1,844

 
$
1,448

 
27
 %
Gross Profit Margin
61
%
 
55
%
 
 
Cost of support and service
$
737,108

 
$
680,750

 
8
 %
Percentage of total revenue
54
%
 
54
%
 
 
Support and Service Gross Profit
$
563,870

 
$
519,902

 
8
 %
Gross Profit Margin
43
%
 
43
%
 
 
Cost of hardware
$
35,346

 
$
38,399

 
(8
)%
Percentage of total revenue
3
%
 
3
%
 
 
Hardware Gross Profit
$
15,281

 
$
14,504

 
5
 %
Gross Profit Margin
30
%
 
27
%
 
 
TOTAL COST OF SALES
$
773,651

 
$
720,336

 
7
 %
Percentage of total revenue
57
%
 
57
%
 
 
TOTAL GROSS PROFIT
$
580,995

 
$
535,854

 
8
 %
Gross Profit Margin
43
%
 
43
%
 
 
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
Year Ended June 30,
 
% Change
 
2016
 
2015
 
 
Selling and marketing
$
90,079

 
$
89,004

 
1
%
Percentage of total revenue
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.
Selling 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
Year Ended June 30,
 
% Change
 
2016
 
2015
 
 
Research and development
$
81,234

 
$
71,495

 
14
%
Percentage of total revenue
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.

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Table of Contents

General and Administrative
Year Ended June 30,
 
% Change
 
2016
 
2015
 
 
General and administrative
$
67,514

 
$
64,364

 
5
%
Percentage of total revenue
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
Year Ended June 30,
 
% Change
 
2016
 
2015
 
 
Interest Income
$
307

 
$
169

 
82
 %
Interest Expense
$
(1,430
)
 
$
(1,594
)
 
(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
Year Ended June 30,
 
%
Change
 
2016
 
2015
 
 
Provision For Income Taxes
$
111,669

 
$
105,219

 
6
%
Effective Rate
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.
Bank Systems and Services
 
 
 
 
 
 
 
 
 
 
2017
 
% Change
 
2016
 
% Change
 
2015
Revenue
$
1,055,763

 
6
%
 
$
996,668

 
4
%
 
$
962,729

Gross profit
$
429,441

 
5
%
 
$
407,600

 
2
%
 
$
400,659

Gross profit margin
41
%
 
 
 
41
%
 
 
 
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

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Table of Contents

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
 
 
 
 
 
 
 
 
 
 
2017
 
% Change
 
2016
 
% Change
 
2015
Revenue
$
375,354

 
5
%
 
$
357,978

 
22
%
 
$
293,461

Gross profit
$
182,642

 
5
%
 
$
173,395

 
28
%
 
$
135,195

Gross profit margin
49
%
 
 
 
48
%
 
 
 
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:
 
Year Ended
 
June 30,
 
2017
 
2016
Net income
$
245,793

 
$
248,867

Non-cash expenses
186,626

 
161,004

Change in receivables
(22,499
)
 
(13,735
)
Change in deferred revenue
(8,800
)
 
4,364

Change in other assets and liabilities
(43,798
)
 
(34,078
)
Net cash provided by operating activities
$
357,322

 
$
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 software, 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

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$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.

29


Contractual obligations by period as of June 30, 2017
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than
5 years
 
TOTAL

Operating lease obligations
 
$
10,945

 
$
14,847

 
$
7,895

 
$
14,304

 
$
47,991

Capital lease obligations
 

 

 

 

 

Revolving credit facility, including accrued interest
 

 
50,048

 

 

 
50,048

Purchase obligations
 
26,202

 
28,518

 
86,875

 
443,961

 
585,556

Total
 
$
37,147

 
$
93,413

 
$
94,770

 
$
458,265

 
$
683,595


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 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

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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.
Revenue Recognition
We recognize revenue net of any applicable discounts in accordance with generally accepted accounting principles and with guidance provided within Staff Accounting Bulletins issued by the Securities and Exchange Commission. The application of these pronouncements requires judgment, including whether a software arrangement includes multiple elements, whether any elements are essential to the functionality of any other elements, and whether vendor-specific objective evidence (“VSOE”) of fair value exists for those elements. Customers receive certain elements of our products and services over time. Changes to the elements in a software arrangement or in our ability to identify VSOE for those elements could materially impact the amount of earned and deferred revenue reflected in the financial statements.
License Arrangements:  For software license agreements, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery of the product or service has occurred, the fee is fixed or determinable and collection is probable. For arrangements where the fee is not fixed or determinable, revenue is deferred until payments become due. The Company’s software license agreements generally include multiple products and services or “elements.”  Generally, none of these elements are deemed to be essential to the functionality of the other elements.
For multiple element arrangements, which contain software elements and non-software elements, we allocate revenue to the software deliverables 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-

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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.
Depreciation and Amortization Expense
The calculation of depreciation and amortization expense is based on the estimated economic lives of the underlying property, plant and equipment and intangible assets, which have been examined for their useful life and determined that no impairment exists. We believe it is unlikely that any significant changes to the useful lives of our tangible and intangible assets will occur in the near term, but rapid changes in technology or changes in market conditions could result in revisions to such estimates that could materially affect the carrying value of these assets and the Company’s future consolidated operating results. We consider whether there is potential for impairment of any long-lived assets, and perform testing for valuation if it is determined that there is a triggering event causing risk of impairment.
Capitalization of software development costs
We capitalize certain costs incurred to develop commercial software products. For software that is to be sold, significant estimates and assumptions include: establishing when technological feasibility has been met and costs should be capitalized, determining the appropriate period over which to amortize the capitalized costs based on the estimated useful lives, estimating the marketability of the commercial software products and related future revenues, and assessing the unamortized cost balances for impairment. 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

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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.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the risk that a change in the level of one or more market prices, interest rates, indices, volatilities, correlations or other market factors such as liquidity, will result in losses for a certain financial instrument or group of financial instruments. We are currently exposed to credit risk on credit extended to customers and interest risk on outstanding debt. We do not currently use any derivative financial instruments. We actively monitor these risks through a variety of controlled procedures involving senior management.
Based on the controls in place and the credit worthiness of the customer base, we believe the credit risk associated with the extension of credit to our customers will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
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.

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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
 
 
 
 
 
 
 
 
 
Financial Statements
 
 
 
 
 
 
 
Years Ended June 30, 2017, 2016, and 2015
 
 
 
 
 
 
June 30, 2017 and 2016
 
 
 
 
 
 
Years Ended June 30, 2017, 2016, and 2015
 
 
 
 
 
 
Years Ended June 30, 2017, 2016, and 2015
 
 
 
 

Financial Statement Schedules
There are no schedules included because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Jack Henry & Associates, Inc.

In our opinion, the accompanying consolidated balance 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

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Jack Henry & Associates, Inc.
Monett, Missouri


We have audited the accompanying consolidated 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


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MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Jack Henry & Associates, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes policies and procedures pertaining to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the Company; provide reasonable assurance transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements. All internal controls, no matter how well designed, have inherent limitations. Therefore, even where internal control over financial reporting is determined to be effective, it can provide only reasonable assurance. Projections of any evaluation of effectiveness to future periods are subject to the risk controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
As of June 30, 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 appearing in this Item 8.

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JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
 
 
 
 
 
 
 
Year Ended
 
June 30,
 
2017
 
2016
 
2015
REVENUE
 
 
 
 
 
License
$
2,385

 
$
3,041

 
$
2,635

Support and service
1,384,338

 
1,300,978

 
1,200,652

Hardware
44,394

 
50,627

 
52,903

Total revenue
1,431,117

 
1,354,646

 
1,256,190

 
 
 
 
 
 
COST OF SALES
 
 
 
 
 
Cost of license
730

 
1,197

 
1,187

Cost of support and service
786,143

 
737,108

 
680,750

Cost of hardware
32,161

 
35,346

 
38,399

Total cost of sales
819,034

 
773,651

 
720,336

 
 
 
 
 
 
GROSS PROFIT
612,083

 
580,995

 
535,854

 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
Selling and marketing
93,297

 
90,079

 
89,004

Research and development
84,753

 
81,234

 
71,495

General and administrative
69,601

 
67,514

 
64,364

Gain on disposal of businesses
(3,270
)
 
(19,491
)
 
(6,874
)
Total operating expenses
244,381

 
219,336

 
217,989

 
 
 
 
 
 
OPERATING INCOME
367,702

 
361,659

 
317,865

 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
 
Interest income
248

 
307

 
169

Interest expense
(996
)
 
(1,430
)
 
(1,594
)
Total interest income (expense)
(748
)
 
(1,123
)
 
(1,425
)
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
366,954

 
360,536

 
316,440

 
 
 
 
 
 
PROVISION FOR INCOME TAXES
121,161

 
111,669

 
105,219

 
 
 
 
 
 
NET INCOME
$
245,793

 
$
248,867

 
$
211,221

 
 
 
 
 
 
Basic earnings per share
$
3.16

 
$
3.13

 
$
2.60

Basic weighted average shares outstanding
77,856

 
79,416

 
81,353

 
 
 
 
 
 
Diluted earnings per share
$
3.14

 
$
3.12

 
$
2.59

Diluted weighted average shares outstanding
78,255

 
79,734

 
81,601


See notes to consolidated financial statements

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JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
 
 
 
 
 
June 30,
2017
 
June 30,
2016
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
114,765

 
$
70,310

Receivables, net
276,923

 
253,923

Income tax receivable
20,135

 
15,636

Prepaid expenses and other
66,894

 
56,588

Deferred costs
41,314

 
35,472

Total current assets
520,031

 
431,929

PROPERTY AND EQUIPMENT, net
282,934

 
298,564

OTHER ASSETS:
 
 
 
Non-current deferred costs
96,847

 
99,799

Computer software, net of amortization
247,317

 
222,115

Other non-current assets
82,525

 
70,461

Customer relationships, net of amortization
90,433

 
104,085

Other intangible assets, net of amortization
36,393

 
35,706

Goodwill
552,465

 
552,853

Total other assets
1,105,980

 
1,085,019

Total assets
$
1,908,945

 
$
1,815,512

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
6,841

 
$
14,596

Accrued expenses
81,574

 
85,411

Notes payable and current maturities of long-term debt

 
200

Deferred revenues
382,777

 
343,525

Total current liabilities
471,192

 
443,732

LONG-TERM LIABILITIES:
 
 
 
Non-current deferred revenues
128,607

 
177,529

Non-current deferred income tax liability
219,541

 
188,601

Debt, net of current maturities
50,000

 

Other long-term liabilities
7,554

 
9,440

Total long-term liabilities
405,702

 
375,570

Total liabilities
876,894

 
819,302

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

 

Common stock - $0.01 par value; 250,000,000 shares authorized;
103,083,299 shares issued at June 30, 2017;
102,903,971 shares issued at June 30, 2016
1,031

 
1,029

Additional paid-in capital
452,016

 
440,123

Retained earnings
1,585,278

 
1,431,192

Less treasury stock at cost
25,660,212 shares at June 30, 2017;
24,208,517 shares at June 30, 2016
(1,006,274
)
 
(876,134
)
Total stockholders' equity
1,032,051

 
996,210

Total liabilities and equity
$
1,908,945

 
$
1,815,512

See notes to consolidated financial statements

39

Table of Contents

JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands, Except Share and Per Share Data)
 
 
 
 
 
 
 
Year Ended June 30,
 
2017
 
2016
 
2015
 
 
 
 
 
 
PREFERRED SHARES:

 

 

 
 
 
 
 
 
COMMON SHARES:
 
 
 
 
 
Shares, beginning of year
102,903,971

 
102,695,214

 
102,429,926

Shares issued for equity-based payment arrangements
98,781

 
121,348

 
172,661

Shares issued for Employee Stock Purchase Plan
80,547

 
87,409

 
92,627

Shares, end of year
103,083,299

 
102,903,971

 
102,695,214

 
 
 
 
 
 
COMMON STOCK - PAR VALUE  $0.01 PER SHARE:
 
 
 
 
 
Balance, beginning of year
$
1,029

 
$
1,027

 
$
1,024

Shares issued for equity-based payment arrangements
1

 
1

 
2

Shares issued for Employee Stock Purchase Plan
1

 
1

 
1

Balance, end of year
$
1,031

 
$
1,029

 
$
1,027

 
 
 
 
 
 
ADDITIONAL PAID-IN CAPITAL:
 
 
 
 
 
Balance, beginning of year
$
440,123

 
$
424,536

 
$
412,512

Shares issued for equity-based payment arrangements
(1
)
 
696

 
640

Tax withholding related to share based compensation
(5,479
)
 
(2,590
)
 
(7,951
)
Shares issued for Employee Stock Purchase Plan
6,244

 
5,710

 
4,880

Tax benefits from share-based compensation

 
1,051

 
4,343

Stock-based compensation expense
11,129

 
10,720

 
10,112

Balance, end of year
$
452,016

 
$
440,123

 
$
424,536

 
 
 
 
 
 
RETAINED EARNINGS:
 
 
 
 
 
Balance, beginning of year
$
1,431,192

 
$
1,266,443

 
$
1,131,632

Net income
245,793

 
248,867

 
211,221

Dividends
(91,707
)
 
(84,118
)
 
(76,410
)
Balance, end of year
$
1,585,278

 
$
1,431,192

 
$
1,266,443

 
 
 
 
 
 
TREASURY STOCK:
 
 
 
 
 
Balance, beginning of year
$
(876,134
)
 
$
(700,472
)
 
$
(577,781
)
Purchase of treasury shares
(130,140
)
 
(175,662
)
 
(122,691
)
Balance, end of year
$
(1,006,274
)
 
$
(876,134
)
 
$
(700,472
)
 
 
 
 
 
 
TOTAL STOCKHOLDERS' EQUITY
$
1,032,051

 
$
996,210

 
$
991,534

 
 
 
 
 
 
Dividends declared per share
$
1.18

 
$
1.06

 
$
0.94

See notes to consolidated financial statements.

40

Table of Contents

JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 
 
 
 
 
 
 
Year Ended
 
June 30,
 
2017
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net Income
$
245,793

 
$
248,867

 
$
211,221

Adjustments to reconcile net income from operations
     to net cash from operating activities:
 
 
 
 
 
Depreciation
49,677

 
50,571

 
54,155

Amortization
90,109

 
79,077

 
64,841

Change in deferred income taxes
30,940

 
37,524

 
29,443

Other

 

 
(4,343
)
Expense for stock-based compensation
11,129

 
10,720

 
10,112

(Gain)/loss on disposal of assets and businesses
4,771

 
(16,888
)
 
(5,046
)
Changes in operating assets and liabilities:
 
 
 
 
 
Change in receivables  
(22,499
)
 
(13,735
)
 
(21,346
)
Change in prepaid expenses, deferred costs and other
(25,088
)
 
(29,577
)
 
(33,858
)
Change in accounts payable
(7,812
)
 
4,663

 
(583
)
Change in accrued expenses
(4,454
)
 
7,460

 
14,483

Change in income taxes
(6,444
)
 
(16,624
)
 
14,146

Change in deferred revenues
(8,800
)
 
4,364

 
40,565

Net cash from operating activities
357,322

 
366,422

 
373,790

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

 
(8,275
)
 

Capital expenditures
(41,947
)
 
(56,325
)
 
(54,409
)
Proceeds from the sale of businesses
5,632

 
34,030

 
8,135

Proceeds from the sale of assets
968

 
2,844

 
182

Internal use software
(16,608
)
 
(11,826
)
 
(14,020
)
Computer software developed
(89,631
)
 
(96,411
)
 
(76,872
)
Net cash from investing activities
(141,586
)
 
(135,963
)
 
(136,984
)
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
Borrowings on credit facilities
80,000

 
100,000

 
90,000

Repayments on credit facilities
(30,200
)
 
(152,500
)
 
(50,783
)
Debt acquisition costs

 

 
(901
)
Purchase of treasury stock
(130,140
)
 
(175,662
)
 
(122,691
)
Dividends paid
(91,707
)
 
(84,118
)
 
(76,410
)
Other

 

 
4,343

Proceeds from issuance of common stock upon exercise of stock options
1

 
697

 
642

Minimum tax withholding payments related to share based compensation
(5,480
)
 
(2,590
)
 
(7,951
)
Proceeds from sale of common stock
6,245

 
5,711