Henry Jack & Associates Inc (JKHY) SEC Quarterly Report (10-Q) for Q1 2015

Commission file number 0-14112

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

As of June 22, 2015 , Registrant had 80,992,682 shares of Common Stock outstanding ($0.01 par value).

JACK HENRY & ASSOCIATES, INC.

TABLE OF CONTENTS

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

FORWARD LOOKING STATEMENTS

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, in Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements are identified at "Risk Factors" in the Company's Annual Report on Form 10-K/A for the year ended June 30, 2014. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

PART I. FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

See notes to condensed consolidated financial statements

See notes to condensed consolidated financial statements

See notes to condensed consolidated financial statements

JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Per Share Amounts)

(Unaudited)

NOTE 1.    NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF THE COMPANY

Jack Henry & Associates, Inc. and subsidiaries ("JHA" or the "Company") is a provider of integrated computer systems and services that has developed and acquired a number of banking and credit union software systems. The Company's revenues are predominately earned by marketing those systems to financial institutions nationwide together with computer equipment (hardware), by providing the conversion and software implementation services for financial institutions to utilize JHA software systems, and by providing other related services. JHA also provides continuing support and services to customers using in-house or outsourced systems.

CONSOLIDATION

The condensed consolidated financial statements include the accounts of JHA and all of its subsidiaries, which are wholly-owned, and all intercompany accounts and transactions have been eliminated.

COMPREHENSIVE INCOME

Comprehensive income for the three and nine months ended March 31, 2015 and 2014 equals the Company's net income.

COMMON STOCK

The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves or short-term borrowings on its existing credit facilities. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At March 31, 2015 , there were 21,693 shares in treasury stock and the Company had the remaining authority to repurchase up to 8,298 additional shares. The total cost of treasury shares at March 31, 2015 is $690,584 . During the first nine months of fiscal 2015 , the Company repurchased 1,898 treasury shares for $112,803 . At June 30, 2014 , there were 19,795 shares in treasury stock and the Company had authority to repurchase up to 5,196 additional shares.

Dividends declared per share were $0.25 and $0.22 for the three months ended March 31, 2015 and 2014 , respectively. Dividends declared per share were $0.69 and $0.62 for the nine months ended March 31, 2015 and 2014 , respectively.

INTERIM FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America applicable to interim condensed consolidated financial statements, and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and accompanying notes, which are included in its Annual Report on Form 10-K/A  ("Form 10-K/A") for the fiscal year ended June 30, 2014 . The accounting policies followed by the Company are set forth in Note 1 to the Company's consolidated financial statements included in its Form 10-K/A for the fiscal year ended June 30, 2014 .

In the opinion of the management of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to present fairly the financial position of the Company as of March 31, 2015 , the results of its operations for the three and nine months ended March 31, 2015 and 2014 , and its cash flows for the nine months ended March 31, 2015 and 2014 .

The results of operations for the period ended March 31, 2015 are not necessarily indicative of the results to be expected for the entire year.

LITIGATION

We are subject to various routine legal proceedings and claims, including the following:

In May 2013 a patent infringement lawsuit entitled DataTreasury Corporation v. Jack Henry & Associates, Inc. et. al . was filed against the Company, several subsidiaries and a number of customer financial institutions in the US District Court for the Eastern District of Texas.  The complaint seeks damages, interest, injunctive relief, and attorneys' fees for the alleged infringement of two patents, as well as trebling of damage awards for alleged willful infringement.  We

believe we have strong defenses and have defended the lawsuit vigorously. A part of that defense has been the filing of challenges to the validity of plaintiff's patents in post-grant proceedings at the Patent Trial and Appeal Board ("PTAB") of the U.S. Patent and Trademark Office. On April 29, 2015, the PTAB issued decisions holding that all claims of the plaintiff's patents at issue in the lawsuit are unpatentable and invalid.  DataTreasury has moved for rehearing of the PTAB decision.  At this stage, we cannot make a reasonable estimate of possible loss or range of loss, if any, arising from this lawsuit.

NOTE 2.    FAIR VALUE OF FINANCIAL INSTRUMENTS

For cash equivalents, amounts receivable or payable and short-term borrowings, fair values approximate carrying value, based on the short-term nature of the assets and liabilities. The fair value of long term debt also approximates carrying value as estimated using discounted cash flows based on the Company's current incremental borrowing rates or quoted prices in active markets.

The Company's estimates of the fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets, and requires that observable inputs be used in the valuations when available. The three levels of the hierarchy are as follows:

Level 1: inputs to the valuation are quoted prices in an active market for identical assets

Level 2: inputs to the valuation include quoted prices for similar assets in active markets that are observable either directly or indirectly

Level 3: valuation is based on significant inputs that are unobservable in the market and the Company's own estimates of assumptions that we believe market participants would use in pricing the asset

Fair value of financial assets, included in cash and cash equivalents, is as follows:

NOTE 3.    RECENT ACCOUNTING PRONOUNCEMENT

The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers in May 2014. The new standard will supersede much of the existing authoritative literature for revenue recognition. On April 1, 2015, the FASB voted to defer the effective date of the new standard by one year. If a final standard is issued and remains consistent with the FASB's April 1, 2015 vote, the standard and related amendments will be effective for the Company for its annual reporting period beginning July 1, 2018, including interim periods within that reporting period. Along with the deferral of the effective date, the FASB also voted to allow early application as of the original effective date. Entities are allowed to transition to the new standard by either recasting prior periods or recognizing the cumulative effect. The Company is currently evaluating the newly issued guidance, including which transition approach will be applied and the estimated impact it will have on our consolidated financial statements.

In April 2015, the FASB also issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability (same treatment as debt discounts). ASU 2015-3 is effective for the company in fiscal year ended June 30, 2017. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company will adopt these changes for the fiscal year ended June 30, 2017.

NOTE 4.    DEBT

The Company's outstanding long and short term debt is as follows:

Capital leases

The Company has entered into various capital lease obligations for the use of certain computer equipment. $1,012 of long term capital lease obligations remains outstanding at March 31, 2015 , of which $812 will be maturing within the next twelve months. The Company also has short term capital lease obligations totaling $6,435 at March 31, 2015 .

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 1.00% , plus an applicable percentage in each case determined by the Company's leverage ratio. The credit facility is subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the agreement.  Among those covenants is a requirement to provide unaudited, quarterly financial statements within 45 days of the end of the quarter, the Company has received an extension on this requirement related to the first and second quarters of fiscal 2015 until June 30, 2015.  The revolving loan terminates February 20, 2020 and at March 31, 2015 , the outstanding revolving loan balance was $70,000 .

Other lines of credit

The Company renewed an unsecured bank credit line on March 3, 2014 which provides for funding of up to $5,000 and bears interest at the prime rate less 1% . The credit line was renewed through April 30, 2017 . At March 31, 2015 , no amount was outstanding.

Interest

The Company paid interest of $817 and $586 during the nine months ended March 31, 2015 and 2014 , respectively.

Property and Equipment

Property and equipment included $5,444 and $16,084 in accrued liabilities or acquired via capital lease at March 31, 2015 and 2014 , respectively. These amounts were excluded from capital expenditures on the statement of cash flows.

NOTE 5.    INCOME TAXES

The effective tax rate of  33.8%  of income before income taxes for the quarter ended  March 31, 2015 , which is equal to 33.8%  for the same quarter in fiscal  2014 primarily due to the effect of the Research and Experimentation Credit ("R&E Credit") which was retroactively extended in December 2014.

The Company paid income taxes of $60,164 and $64,323 in the nine months ended March 31, 2015 and 2014 , respectively.

At March 31, 2015 , the Company had $7,423 of gross unrecognized tax benefits, $5,705 of which, if recognized, would affect our effective tax rate. We had accrued interest and penalties of $1,388 and $758 related to uncertain tax positions at March 31, 2015 and 2014 , respectively.

The U.S. federal and state income tax returns for June 30, 2011 and all subsequent years remain subject to examination as of March 31, 2015 under statute of limitations rules. We anticipate potential changes could reduce the unrecognized tax benefits balance by $2,000 - $3,000 within twelve months of March 31, 2015 .

NOTE 6.    STOCK-BASED COMPENSATION

For the three months ended  March 31, 2015  and  2014 , there was  $2,759  and  $2,761  of equity-based compensation costs, respectively. Our pre-tax operating income for the nine months ended March 31, 2015 and 2014 , includes $7,342 and $7,303 of equity-based compensation costs, respectively.

2005 NSOP and 1996 SOP

The Company previously issued options to employees under the 1996 Stock Option Plan ("1996 SOP") and to outside directors under the 2005 Non-Qualified Stock Option Plan ("2005 NSOP"). No stock options were issued under the 1996 SOP or the 2005 NSOP during the nine months ended March 31, 2015 .

A summary of option plan activity under the plan is as follows:

Compensation cost related to outstanding options has been fully recognized. The weighted average remaining contractual term on options currently exercisable as of March 31, 2015 was 3.16 years .

Restricted Stock Plan

The Company issues both share awards and unit awards under the Restricted Stock Plan. The following table summarizes non-vested share awards as of March 31, 2015 , as well as activity for the nine months then ended:

At March 31, 2015 , there was $1,347 of compensation expense that has yet to be recognized related to non-vested restricted stock share awards, which will be recognized over a weighted-average period of 1.22 years .

The following table summarizes non-vested unit awards as of March 31, 2015 , as well as activity for the nine months then ended:

The weighted average assumptions used in this model to estimate fair value at the measurement date and resulting values for 164 unit awards granted are as follows:

The remaining 14 unit awards granted are not subject to performance targets, and therefore the estimated fair value at measurement date is valued in the same manner as restricted stock award grants.

At March 31, 2015 , there was $11,149 of compensation expense that has yet to be recognized related to non-vested restricted stock unit awards, which will be recognized over a weighted-average period of 1.41 years .

NOTE 7.    EARNINGS PER SHARE

The following table reflects the reconciliation between basic and diluted earnings per share:

Per share information is based on the weighted average number of common shares outstanding for the three and nine months ended March 31, 2015 and 2014 . Stock options and restricted stock have been included in the calculation of earnings per share to the extent they are dilutive. There were  112  anti-dilutive stock options or restricted stock excluded for the three month period ended  March 31, 2015  ( no   shares were excluded for the three month period ended  March 31, 2014 ).  There were  83  anti-dilutive restricted shares excluded for the  nine months ended March 31, 2015  ( 6  restricted shares were excluded for the  nine months ended March 31, 2014 ).

NOTE 8.    BUSINESS ACQUISITION

Banno, LLC

Effective March 1, 2014 , the Company acquired all of the equity interests of Banno, an Iowa-based company that provides Web hosting, mobile banking, and transaction marketing services with a focus on the mobile medium, for $27,910 paid in cash. This acquisition was funded using existing operating cash. The acquisition of Banno expanded the Company's presence in online and mobile technologies within the industry.

Management has completed a purchase price allocation of Banno and its assessment of the fair value of acquired assets and liabilities assumed. The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their fair values as of March 1, 2014 are set forth below:

The goodwill of $19,470 arising from this acquisition consists largely of the growth potential, synergies and economies of scale expected from combining the operations of the Company with those of Banno, together with the value of Banno's assembled workforce. Goodwill from this acquisition has been allocated to our Banking Systems and Services segment. Approximately 95% of the goodwill is expected to be deductible for income tax purposes.

Identifiable intangible assets from this acquisition consists of customer relationships of $3,946 , $3,546 of computer software and other intangible assets of $1,763 . The weighted average amortization period for acquired customer relationships, acquired computer software, and other intangible assets is 15 years , 8 years , and 20 years , respectively.

Current assets is inclusive of cash acquired of $16 . The fair value of current assets acquired included accounts receivable of $476 . The gross amount receivable is $501 , of which $25 is expected to be uncollectible.

The accompanying consolidated statements of income for the three and nine months ended March 31, 2014 do not include any revenues and expenses related to this acquisition prior to the closing date of the acquisition. The impact of this acquisition was considered immaterial to both the current and prior periods of our consolidated financial statements and pro forma financial information has not been provided.

NOTE 9.    REPORTABLE SEGMENT INFORMATION

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

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

NOTE 10.    SUBSEQUENT EVENTS

Dividends

On  May 11, 2015 , the Company's Board of Directors declared a cash dividend of  $0.25  per share on its common stock, payable on  June 9, 2015 to shareholders of record on  May 26, 2015 .

NOTE 11.    RESTATEMENT OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Correction of Accounting Errors

During the current fiscal year, management identified historical accounting errors relating to its accounting for certain software license, maintenance and service agreements. The prior period errors primarily relate to the Company's accounting for its bundled software multi-element arrangements.

More specifically, the Company concluded it had improperly accounted for contracts containing multiple software products delivered at different points in time as separate arrangements within a contract versus as a single arrangement with multiple elements, resulting in revenue being recognized on these contracts before all licenses, for which no vendor-specific objective evidence ("VSOE") of fair value exists, had been delivered. Furthermore, the Company concluded that its mechanisms for tracking and estimating implementation hours was not capable of producing reliable estimates in support of its assertion of VSOE for its implementation services and that its pricing for stand-alone sales of post-contract support ("PCS") was not consistent enough to support its assertion of VSOE for PCS during prior periods.

Our previous accounting resulted in revenue being recognized earlier than would be appropriate for bundled software multi-element arrangements where VSOE does not exist for any of the software elements.  Our current conclusions result in the deferral of revenue on such arrangements until the only undelivered element is PCS.  The total arrangement revenue is then recognized ratably over the remaining initial bundled PCS period provided all other revenue recognition criteria have been met.  Direct and incremental costs, including direct labor and sales commissions, related to obtaining and implementing these contracts have also been deferred until the only undelivered element is PCS and are recognized ratably over the remaining initial bundled PCS period.

Due to the above errors, including the related tax impact, net income for the fiscal quarter ended March 31, 2014 was overstated by $4,150 and net income for the nine months ended March 31, 2014 was overstated by $16,339 . On the balance sheet, total assets as of June 30, 2014 increased $56,411 , total liabilities increased $127,185 , and stockholders' equity decreased $70,774 .

The following tables present the effects of the restatement on each line of the Company's previously issued condensed consolidated financial statements as of June 30, 2014 and for the fiscal quarter and nine-month period ended March 31, 2014.