JKHY-2014.12.31-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended December 31, 2014
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)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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 [ ]  No [ X ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 [ ]  No [ X ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting 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
[ ]

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

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
 
 
Page Reference
 
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
Condensed Consolidated Balance Sheets as of December 31, 2014 and June 30, 2014 (As Restated) (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Six Months Ended December 31, 2014 and 2013 (As Restated) (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2014 and 2013 (As Restated) (Unaudited)
 
 
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
ITEM 4.
Controls and Procedures
 
 
 
PART II
OTHER INFORMATION
 
 
 
ITEM 1.
Legal Proceedings
 
 
 
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
ITEM 6.
Exhibits
 
 
 
 
Signatures

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.


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PART I. FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
 
December 31,
2014
 
June 30,
2014
 
 
 
As Restated, See Note 11
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
49,332

 
$
70,377

Receivables, net
147,890

 
224,041

Income tax receivable
2,106

 
7,937

Prepaid expenses and other
73,691

 
61,074

Deferred costs
33,762

 
27,077

Total current assets
306,781

 
390,506

PROPERTY AND EQUIPMENT, net
295,483

 
291,675

OTHER ASSETS:
 
 
 
Non-current deferred costs
88,834

 
78,458

Computer software, net of amortization
173,694

 
160,391

Other non-current assets
46,411

 
44,657

Customer relationships, net of amortization
129,183

 
136,602

Other intangible assets, net of amortization
30,219

 
25,653

Goodwill
550,366

 
552,761

Total other assets
1,018,707

 
998,522

Total assets
$
1,620,971

 
$
1,680,703

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
7,889

 
$
10,516

Accrued expenses
63,882

 
63,299

Accrued income taxes
438

 

Deferred income tax liability
20,223

 
30,094

Notes payable and current maturities of long term debt
77,888

 
5,407

Deferred revenues
234,939

 
337,493

Total current liabilities
405,259

 
446,809

LONG TERM LIABILITIES:
 
 
 
Non-current deferred revenues
178,142

 
155,375

Non-current deferred income tax liability
103,066

 
97,720

Debt, net of current maturities
923

 
3,729

Other long-term liabilities
11,519

 
9,683

Total long term liabilities
293,650

 
266,507

Total liabilities
698,909

 
713,316

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

 

Common stock - $0.01 par value; 250,000,000 shares authorized;
102,635,606 shares issued at December 31, 2014;
102,429,926 shares issued at June 30, 2014
1,026

 
1,024

Additional paid-in capital
415,982

 
412,512

Retained earnings
1,195,638

 
1,131,632


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Less treasury stock at cost;
21,692,532 shares at December 31, 2014;
19,794,559 shares at June 30, 2014
(690,584
)
 
(577,781
)
Total stockholders' equity
922,062

 
967,387

Total liabilities and equity
$
1,620,971

 
$
1,680,703

See notes to condensed consolidated financial statements

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JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share and Per Share Data)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2014
 
2013
 
2014
 
2013
 
 
 
As Restated, See Note 11
 
 
 
As Restated, See Note 11
REVENUE
 
 
 
 
 
 
 
License
$
491

 
$
246

 
$
994

 
$
1,007

Support and service
296,905

 
273,242

 
585,121

 
535,872

Hardware
13,898

 
15,356

 
26,652

 
29,694

Total revenue
311,294

 
288,844

 
612,767

 
566,573

 
 
 
 
 
 
 
 
COST OF SALES
 
 
 
 
 
 
 
Cost of license
308

 
188

 
717

 
533

Cost of support and service
170,377

 
154,769

 
335,467

 
303,925

Cost of hardware
9,574

 
10,867

 
18,959

 
21,808

Total cost of sales
180,259

 
165,824

 
355,143

 
326,266

 
 
 
 
 
 
 
 
GROSS PROFIT
131,035

 
123,020

 
257,624

 
240,307

 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
Selling and marketing
22,175

 
20,503

 
43,838

 
41,240

Research and development
17,681

 
16,142

 
34,472

 
31,814

General and administrative
11,514

 
12,132

 
28,025

 
26,382

Total operating expenses
51,370

 
48,777

 
106,335

 
99,436

 
 
 
 
 
 
 
 
OPERATING INCOME
79,665

 
74,243

 
151,289

 
140,871

 
 
 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest income
28

 
129

 
85

 
260

Interest expense
(337
)
 
(267
)
 
(603
)
 
(546
)
Total interest income (expense)
(309
)
 
(138
)
 
(518
)
 
(286
)
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
79,356

 
74,105

 
150,771

 
140,585

 
 
 
 
 
 
 
 
PROVISION FOR INCOME TAXES
25,474

 
25,744

 
50,802

 
49,002

 
 
 
 
 
 
 
 
NET INCOME
$
53,882

 
$
48,361

 
$
99,969

 
$
91,583

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.66

 
$
0.56

 
$
1.22

 
$
1.07

Diluted weighted average shares outstanding
81,634

 
85,986

 
82,112

 
85,920

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.66

 
$
0.57

 
$
1.22

 
$
1.07

Basic weighted average shares outstanding
81,432

 
85,450

 
81,813

 
85,372


See notes to condensed consolidated financial statements

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JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
Six Months Ended
 
December 31,
 
2014
 
2013
 
 
 
As Restated, See Note 11
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
99,969

 
$
91,583

Adjustments to reconcile net income from operations
     to net cash from operating activities:
 
 
 
Depreciation
27,471

 
26,153

Amortization
31,945

 
25,969

Change in deferred income taxes
(4,527
)
 
(3,889
)
Excess tax benefits from stock-based compensation
(4,006
)
 
(3,152
)
Expense for stock-based compensation
4,583

 
4,541

(Gain)/loss on disposal of assets
(5,315
)
 
(52
)
Changes in operating assets and liabilities:
 
 
 
Change in receivables  
76,151

 
94,694

Change in prepaid expenses, deferred costs and other
(31,555
)
 
(26,340
)
Change in accounts payable
(2,627
)
 
(970
)
Change in accrued expenses
1,263

 
(16,200
)
Change in income taxes
11,878

 
11,660

Change in deferred revenues
(78,332
)
 
(72,681
)
Net cash from operating activities
126,898

 
131,316

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(27,389
)
 
(21,866
)
Proceeds from sale of assets
8,242

 
2,809

Internal use software
(7,432
)
 
(6,980
)
Computer software developed
(36,820
)
 
(29,015
)
Net cash from investing activities
(63,399
)
 
(55,052
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings on credit facilities
70,000

 

Repayments on credit facilities
(4,669
)
 
(13,630
)
Purchase of treasury stock
(112,803
)
 

Dividends paid
(35,961
)
 
(34,146
)
Excess tax benefits from stock-based compensation
4,006

 
3,152

Proceeds from issuance of common stock upon exercise of stock options
402

 
221

Minimum tax withholding payments related to share based compensation
(7,680
)
 
(6,239
)
Proceeds from sale of common stock, net
2,161

 
1,974

Net cash from financing activities
(84,544
)
 
(48,668
)
 
 
 
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
$
(21,045
)
 
$
27,596

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
$
70,377

 
$
127,905

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
49,332

 
$
155,501


See notes to condensed consolidated financial statements

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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 six months ended December 31, 2014 and 2013 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 December 31, 2014, there were 21,693 shares in treasury stock and the Company had the remaining authority to repurchase up to 3,298 additional shares. The total cost of treasury shares at December 31, 2014 is $690,584. During the first six 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 $0.22 and $0.20 for the three months ended December 31, 2014 and 2013, respectively. Dividends declared per share were $0.44 and $0.40 for the six months ended December 31, 2014 and 2013, 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 December 31, 2014, the results of its operations for the three and six months ended December 31, 2014 and 2013, and its cash flows for the six months ended December 31, 2014 and 2013.
The results of operations for the period ended December 31, 2014 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

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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:
 
 
Estimated Fair Value Measurements
 
Total Fair
 
 
Level 1
 
Level 2
 
Level 3
 
Value
December 31, 2014
 
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
 
Money market funds
 
$
20,923

 
$

 
$

 
$
20,923

June 30, 2014
 
 

 
 
 
 
 
 

Financial Assets:
 
 
 
 
 
 
 
 
Money market funds
 
$
28,877

 
$

 
$

 
$
28,877


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.


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NOTE 4.    DEBT
The Company’s outstanding long and short term debt is as follows:
 
December 31,
 
June 30,
 
2014
 
2014
LONG TERM DEBT
 
 
 
Capital leases
$
6,524

 
$
7,757

 
6,524

 
7,757

Less current maturities
5,601

 
4,028

Debt, net of current maturities
$
923

 
$
3,729

SHORT TERM DEBT
 
 
 
Revolving credit facility
$
70,000

 
$

Capital leases
2,287

 
1,379

Current maturities of long-term debt
5,601

 
4,028

Notes payable and current maturities of long term debt
$
77,888

 
$
5,407

Capital leases
The Company has entered into various capital lease obligations for the use of certain computer equipment. $6,524 of long term capital lease obligations remains outstanding at December 31, 2014, of which $5,601 will be maturing within the next twelve months. The Company also has short term capital lease obligations totaling $2,287 at December 31, 2014.
Revolving credit facility
The revolving credit facility in effect at December 31, 2014 allowed for borrowings of up to $150,000, which could be increased by the Company at any time until maturity to $250,000. The credit facility bore interest at a variable rate equal to (a) a rate based on LIBOR or (b) an alternate base rate (the greater of (a) the Federal Funds Rate plus 0.5%, (b) the Prime Rate or (c) LIBOR plus 1.0%), plus an applicable percentage in each case determined by the Company's leverage ratio. The credit facility was secured by pledges of capital stock of certain subsidiaries of the Company and also guaranteed by certain subsidiaries of the Company. The credit facility was subject to various financial covenants that require the Company to maintain certain financial ratios as defined in the agreement. As of December 31, 2014, the Company was in compliance with all such covenants. The revolving loan was due to terminate June 4, 2015. At December 31, 2014, the outstanding revolving loan balance was $70,000.
This revolving credit facility was subsequently replaced by a new revolving credit facility (See Note 10).
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 December 31, 2014, no amount was outstanding.
Interest
The Company paid interest of $415 and $301 during the six months ended December 31, 2014 and 2013, respectively.
Property and Equipment
Property and equipment included $3,897 and $7,198 in accrued liabilities or acquired via capital lease at December 31, 2014 and 2013, respectively. These amounts were excluded from capital expenditures on the statement of cash flows.

NOTE 5.    INCOME TAXES
The effective tax rate of 32.1% of income before income taxes for the quarter ended December 31, 2014 is lower than 34.7% 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 $43,450 and $41,233 in the six months ended December 31, 2014 and 2013, respectively.

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At December 31, 2014, the Company had $9,099 of gross unrecognized tax benefits, $6,405 of which, if recognized, would affect our effective tax rate. We had accrued interest and penalties of $1,652 and $722 related to uncertain tax positions at December 31, 2014 and 2013, respectively.
The U.S. federal and state income tax returns for June 30, 2011 and all subsequent years remain subject to examination as of December 31, 2014 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 December 31, 2014.

NOTE 6.    STOCK-BASED COMPENSATION
For the three months ended December 31, 2014 and 2013, there was $2,516 and $2,619 of equity-based compensation costs, respectively. Our pre-tax operating income for the six months ended December 31, 2014 and 2013, includes $4,583 and $4,541 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 six months ended December 31, 2014.
A summary of option plan activity under the plan is as follows:
 
Number of Shares
 
Weighted Average Exercise Price
 
Aggregate
 Intrinsic
 Value
Outstanding July 1, 2014
125

 
$
22.29

 
 
Granted

 

 
 
Forfeited

 

 
 
Exercised
(13
)
 
19.54

 
 
Outstanding December 31, 2014
112

 
$
22.62

 
$
4,412

Vested December 31, 2014
112

 
$
22.62

 
$
4,412

Exercisable December 31, 2014
112

 
$
22.62

 
$
4,412

Compensation cost related to outstanding options has been fully recognized. The weighted average remaining contractual term on options currently exercisable as of December 31, 2014 was 3.36 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 December 31, 2014, as well as activity for the six months then ended:
Share awards
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding July 1, 2014
138

 
$
33.56

Granted
9

 
56.06

Vested
(58
)
 
35.53

Forfeited
(7
)
 
46.39

Outstanding December 31, 2014
82

 
$
33.56

At December 31, 2014, there was $1,075 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 1.26 years.

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The following table summarizes non-vested unit awards as of December 31, 2014, as well as activity for the six months then ended:
Unit awards
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding July 1, 2014
709

 
$
31.66

Granted
178

 
53.52

Vested
(277
)
 
19.69

Forfeited
(101
)
 
19.69

Outstanding December 31, 2014
509

 
$
48.13

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:
Volatility
17.8
%
Risk free interest rate
1.06
%
Dividend yield
1.5
%
Stock Beta
0.765

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 December 31, 2014, there was $13,939 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 1.66 years.

NOTE 7.    EARNINGS PER SHARE
The following table reflects the reconciliation between basic and diluted earnings per share:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2014
 
2013
 
2014
 
2013
Net Income
$
53,882

 
$
48,361

 
$
99,969

 
$
91,583

Common share information:
 
 
 
 
 
 
 
Weighted average shares outstanding for basic earnings per share
81,432

 
85,450

 
81,813

 
85,372

Dilutive effect of stock options and restricted stock
202

 
536

 
299

 
548

Weighted average shares outstanding for diluted earnings per share
81,634

 
85,986

 
82,112

 
85,920

Basic earnings per share
$
0.66

 
$
0.57

 
$
1.22

 
$
1.07

Diluted earnings per share
$
0.66

 
$
0.56

 
$
1.22

 
$
1.07

Per share information is based on the weighted average number of common shares outstanding for the three and six months ended December 31, 2014 and 2013. Stock options and restricted stock have been included in the calculation of earnings per share to the extent they are dilutive. There were 170 anti-dilutive stock options or restricted stock excluded for the three month period ended December 31, 2014 (no  shares were excluded for the three month period ended December 31, 2013).  There were 134 anti-dilutive restricted shares excluded for the six months ended December 31, 2014 (9 restricted shares were excluded for the six months ended December 31, 2013).

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.

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Management has completed a preliminary 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 preliminary fair values as of March 1, 2014 are set forth below:
Current assets
$
610

Long-term assets
87

Identifiable intangible assets
9,255

Total liabilities assumed
(1,512
)
Total identifiable net assets
8,440

Goodwill
19,470

Net assets acquired
$
27,910

The amounts shown above may change in the near term as management continues to assess the fair value of acquired assets and liabilities and evaluate the income tax implications of this business combination.
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 six months ended December 31, 2013 do not include any revenues and expenses related to this 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.


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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.
 
Three Months Ended
 
Three Months Ended
 
December 31, 2014
 
December 31, 2013
 
Bank
 
Credit Union
 
Total
 
Bank
 
Credit Union
 
Total
REVENUE
 
 
 
 
 
 
 
 
 
 
 
License
$
288

 
$
203

 
$
491

 
$
143

 
$
103

 
$
246

Support and service
229,107

 
67,798

 
296,905

 
210,689

 
62,553

 
273,242

Hardware
10,130

 
3,768

 
13,898

 
11,482

 
3,874

 
15,356

Total revenue
239,525

 
71,769

 
311,294

 
222,314

 
66,530

 
288,844

COST OF SALES
 
 
 
 
 
 
 
 
 
 
 
Cost of license
184

 
124

 
308

 
108

 
80

 
188

Cost of support and service
134,034

 
36,343

 
170,377

 
119,931

 
34,838

 
154,769

Cost of hardware
6,887

 
2,687

 
9,574

 
7,968

 
2,899

 
10,867

Total cost of sales
141,105

 
39,154

 
180,259

 
128,007

 
37,817

 
165,824

GROSS PROFIT
$
98,420

 
$
32,615

 
131,035

 
$
94,307

 
$
28,713

 
123,020

 
 
 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
51,370

 
 
 
 
 
48,777

 
 
 
 
 
 
 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
(309
)
 
 
 
 
 
(138
)
 
 
 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
 
 
 
$
79,356

 
 
 
 
 
$
74,105



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Six Months Ended
 
Six Months Ended
 
December 31, 2014
 
December 31, 2013
 
Bank
 
Credit Union
 
Total
 
Bank
 
Credit Union
 
Total
REVENUE
 
 
 
 
 
 
 
 
 
 
 
License
$
729

 
$
265

 
$
994

 
$
676

 
$
331

 
$
1,007

Support and service
450,322

 
134,799

 
585,121

 
411,124

 
124,748

 
535,872

Hardware
19,874

 
6,778

 
26,652

 
22,066

 
7,628

 
29,694

Total revenue
470,925

 
141,842

 
612,767

 
433,866

 
132,707

 
566,573

COST OF SALES
 
 
 
 
 
 
 
 
 
 
 
Cost of license
550

 
167

 
717

 
271

 
262

 
533

Cost of support and service
262,920

 
72,547

 
335,467

 
235,621

 
68,304

 
303,925

Cost of hardware
14,058

 
4,901

 
18,959

 
16,149

 
5,659

 
21,808

Total cost of sales
277,528

 
77,615

 
355,143

 
252,041

 
74,225

 
326,266

GROSS PROFIT
$
193,397

 
$
64,227

 
257,624

 
$
181,825

 
$
58,482

 
240,307

 
 
 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
106,335

 
 
 
 
 
99,436

 
 
 
 
 
 
 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
(518
)
 
 
 
 
 
(286
)
 
 
 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
 
 
 
$
150,771

 
 
 
 
 
$
140,585


 
December 31,
 
June 30,
 
2014
 
2014
Property and equipment, net
 
 
 
Bank systems and services
$
260,704

 
$
258,437

Credit Union systems and services
34,779

 
33,238

Total
$
295,483

 
$
291,675

Intangible assets, net
 
 
 
Bank systems and services
$
652,856

 
$
643,972

Credit Union systems and services
230,606

 
231,435

Total
$
883,462

 
$
875,407

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 February 17, 2015, the Company's Board of Directors declared a cash dividend of $0.25 per share on its common stock, payable on March 18, 2015 to shareholders of record on March 3, 2015.
Revolving credit facility
On February 20, 2015, the Company replaced its existing revolving credit facility with a new revolving credit facility. Outstanding balances under the previous revolving credit facility were repaid with proceeds from the new facility. The new facility has a borrowing limit of $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 new facility has a termination date of February 20, 2020.

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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 December 31, 2013 was overstated by $5,621 and net income for the six months ended December 31, 2013 was overstated by $12,187. 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 six-month period ended December 31, 2013.



15

Table of Contents

Condensed Consolidated Statements of Income:
 
 
 
 
 
(In Thousands, Except Per Share Data)
 
 
 
 
 
 
 
Quarter Ended
 
December 31, 2013
 
As Previously Reported
 
Effect of Restatement
 
As Restated
REVENUE
 
 
 
 
 
License
$
12,893

 
$
(12,647
)
 
$
246

Support and service
274,276

 
(1,034
)
 
273,242

Hardware
15,356

 

 
15,356

Total revenue
302,525

 
(13,681
)
 
288,844

 
 
 
 
 
 
COST OF SALES
 
 
 
 
 
Cost of license
947

 
(759
)
 
188

Cost of support and service
157,893

 
(3,124
)
 
154,769

Cost of hardware
10,867

 

 
10,867

Total cost of sales
169,707

 
(3,883
)
 
165,824

 
 
 
 
 
 
GROSS PROFIT
132,818

 
(9,798
)
 
123,020

 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
Selling and marketing
21,071

 
(568
)
 
20,503

Research and development
16,142

 

 
16,142

General and administrative
12,132

 

 
12,132

Total operating expenses
49,345

 
(568
)
 
48,777

 
 
 
 
 
 
OPERATING INCOME
83,473

 
(9,230
)
 
74,243

 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
 
Interest income
129

 

 
129

Interest expense
(267
)
 

 
(267
)
Total interest income (expense)
(138
)
 

 
(138
)
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
83,335

 
(9,230
)
 
74,105

 
 
 
 
 
 
PROVISION FOR INCOME TAXES
29,353

 
(3,609
)
 
25,744

 
 
 
 
 
 
NET INCOME
$
53,982

 
$
(5,621
)
 
$
48,361

 
 
 
 
 
 
Diluted earnings per share
$
0.63

 
$
(0.07
)
 
$
0.56

Diluted weighted average shares outstanding
85,986

 
85,986

 
85,986

 
 
 
 
 
 
Basic earnings per share
$
0.63

 
$
(0.06
)
 
$
0.57

Basic weighted average shares outstanding
85,450

 
85,450

 
85,450



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Table of Contents

Condensed Consolidated Statements of Income:
 
 
 
 
 
(In Thousands, Except Per Share Data)
 
 
 
 
 
 
 
Six-Month Period Ended
 
December 31, 2013
 
As Previously Reported
 
Effect of Restatement
 
As Restated
REVENUE
 
 
 
 
 
License
$
24,671

 
$
(23,664
)
 
$
1,007

Support and service
543,820

 
(7,948
)
 
535,872

Hardware
29,694

 

 
29,694

Total revenue
598,185

 
(31,612
)
 
566,573

 
 
 
 
 
 
COST OF SALES
 
 
 
 
 
Cost of license
2,359

 
(1,826
)
 
533

Cost of support and service
312,477

 
(8,552
)
 
303,925

Cost of hardware
21,808

 

 
21,808

Total cost of sales
336,644

 
(10,378
)
 
326,266

 
 
 
 
 
 
GROSS PROFIT
261,541

 
(21,234
)
 
240,307

 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
Selling and marketing
42,529

 
(1,289
)
 
41,240

Research and development
31,814

 

 
31,814

General and administrative
26,382

 

 
26,382

Total operating expenses
100,725

 
(1,289
)
 
99,436

 
 
 
 
 
 
OPERATING INCOME
160,816

 
(19,945
)
 
140,871

 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
 
Interest income
260

 

 
260

Interest expense
(546
)
 

 
(546
)
Total interest income (expense)
(286
)
 

 
(286
)
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
160,530

 
(19,945
)
 
140,585

 
 
 
 
 
 
PROVISION FOR INCOME TAXES
56,760

 
(7,758
)
 
49,002

 
 
 
 
 
 
NET INCOME
$
103,770

 
$
(12,187
)
 
$
91,583

 
 
 
 
 
 
Diluted earnings per share
$
1.21

 
$
(0.14
)
 
$
1.07

Diluted weighted average shares outstanding
85,920

 
85,920

 
85,920

 
 
 
 
 
 
Basic earnings per share
$
1.22

 
$
(0.15
)
 
$
1.07

Basic weighted average shares outstanding
85,372

 

 
85,372



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Table of Contents

Condensed Consolidated Balance Sheets:
 
 
 
 
 
(In Thousands, Except Share and Per Share Data)
 
 
 
 
 
 
June 30, 2014
 
As Previously Reported
 
Effect of Restatement
 
As Restated
ASSETS
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
Cash and cash equivalents
$
70,377

 
$

 
$
70,377

Receivables, net
224,041

 

 
224,041

Income tax receivable
7,937

 

 
7,937

Prepaid expenses and other
59,824

 
1,250

 
61,074

Deferred costs
22,202

 
4,875

 
27,077

Total current assets
384,381

 
6,125

 
390,506

PROPERTY AND EQUIPMENT, net
291,675

 

 
291,675

OTHER ASSETS:
 
 
 
 
 
Non-current deferred costs
34,708

 
43,750

 
78,458

Computer software, net of amortization
160,391

 

 
160,391

Other non-current assets
38,121

 
6,536

 
44,657

Customer relationships, net of amortization
136,602

 

 
136,602

Other intangible assets, net of amortization
25,653

 

 
25,653

Goodwill
552,761

 

 
552,761

Total other assets
948,236

 
50,286

 
998,522

Total assets
$
1,624,292

 
$
56,411

 
$
1,680,703

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
Accounts payable
$
10,516

 
$

 
$
10,516

Accrued expenses
63,299

 

 
63,299

Deferred income tax liability
37,592

 
(7,498
)
 
30,094

Notes payable and current maturities of long term debt
5,407

 

 
5,407

Deferred revenues
312,002

 
25,491

 
337,493

Total current liabilities
428,816

 
17,993

 
446,809

LONG TERM LIABILITIES:
 
 
 
 
 
Non-current deferred revenues
8,985

 
146,390

 
155,375

Non-current deferred income tax liability
134,918

 
(37,198
)
 
97,720

Debt, net of current maturities
3,729

 

 
3,729

Other long-term liabilities
9,683

 

 
9,683

Total long term liabilities
157,315

 
109,192

 
266,507

Total liabilities
586,131

 
127,185

 
713,316

STOCKHOLDERS' EQUITY
 

 
 
 
 

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

 

 

Common stock - $0.01 par value; 250,000,000 shares authorized;
102,429,926 shares issued at June 30, 2014
1,024

 

 
1,024

Additional paid-in capital
412,512

 

 
412,512

Retained earnings
1,202,406

 
(70,774
)
 
1,131,632

Less treasury stock at cost;
19,794,559 shares at June 30, 2014
(577,781
)
 

 
(577,781
)
Total stockholders' equity
1,038,161

 
(70,774
)
 
967,387

Total liabilities and equity
$
1,624,292

 
$
56,411

 
$
1,680,703



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Table of Contents

Condensed Consolidated Statements of Cash Flows:
 
 
 
 
 
(In Thousands)
 
 
 
 
 
 
 
 
 
Six-Month Period Ended
 
December 31, 2013
 
As Previously Reported
 
Effect of Restatement
 
As Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net Income
$
103,770

 
$
(12,187
)
 
$
91,583

Adjustments to reconcile net income from operations
     to net cash from operating activities:
 
 
 
 
 
Depreciation
26,153

 

 
26,153

Amortization
25,969

 

 
25,969

Change in deferred income taxes
3,868

 
(7,757
)
 
(3,889
)
Excess tax benefits from stock-based compensation
(3,152
)
 

 
(3,152
)
Expense for stock-based compensation
4,541

 

 
4,541

(Gain)/loss on disposal of assets
(52
)
 

 
(52
)
Changes in operating assets and liabilities:
 
 
 
 
 
Change in receivables  
94,694

 

 
94,694

Change in prepaid expenses, deferred costs and other
(14,672
)
 
(11,668
)
 
(26,340
)
Change in accounts payable
(970
)
 

 
(970
)
Change in accrued expenses
(16,200
)
 

 
(16,200
)
Change in income taxes
11,660

 

 
11,660

Change in deferred revenues
(104,293
)
 
31,612

 
(72,681
)
Net cash from operating activities
131,316

 

 
131,316

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
Capital expenditures
(21,866
)
 

 
(21,866
)
Proceeds from sale of assets
2,809

 

 
2,809

Internal use software
(6,980
)
 

 
(6,980
)
Computer software developed
(29,015
)
 

 
(29,015
)
Net cash from investing activities
(55,052
)
 

 
(55,052
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
Borrowings on credit facilities

 

 

Repayments on credit facilities
(13,630
)
 

 
(13,630
)
Purchase of treasury stock

 

 

Dividends paid
(34,146
)
 

 
(34,146
)
Excess tax benefits from stock-based compensation
3,152

 

 
3,152

Proceeds from issuance of common stock upon exercise of stock options
221

 

 
221

Minimum tax withholding payments related to share based compensation
(6,239
)
 

 
(6,239
)
Proceeds from sale of common stock, net
1,974

 

 
1,974

Net cash from financing activities
(48,668
)
 

 
(48,668
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
27,596

 

 
27,596

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
127,905

 

 
127,905

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
155,501

 
$

 
$
155,501


Prior Period Reclassification
Certain amounts included within the condensed consolidated statement of cash flows for the six months ended December 31, 2013 have been restated to correct an error related to the presentation of excess tax benefits from stock based compensation within cash flows from operating activities. Such correction adjusted the cash flow statement for the six months ended December 31, 2013 by presenting excess tax benefits from stock based compensation as a

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separate line item and increasing the change in income taxes by $3,152. There was no change in total cash flows from operating, investing or financing activities.

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements included in this Form 10-Q for the quarter ended December 31, 2014.
All of the financial information presented in this Item 2 has been revised to reflect the restatement of our condensed consolidated financial statements more fully described in Note 11 - Restatement of Consolidated Financial Statements which is included in "Financial Statements" in Item 1 of this Form 10-Q.

OVERVIEW
Jack Henry & Associates, Inc. (JHA) is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Our solutions are marketed and supported through three primary brands. Jack Henry Banking® supports banks ranging from community to multi-billion dollar institutions 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 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 installation, outsourced services and hosted delivery.
A significant proportion of our revenue is derived from recurring outsourcing fees and 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 on primarily annual contract terms. 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.
RESULTS OF OPERATIONS
In the second quarter of fiscal 2015, revenues increased 8% or $22,450 compared to the same period in the prior year, with strong growth continuing in our support & service revenue component. Cost of sales increased 9%, in line with revenue, and operating expenses increased 5% for the quarter due mainly to increased headcount and related salaries. Provision for income taxes decreased slightly compared to the prior year second quarter. The increased revenue and above changes resulted in a 11% increase in net income for the quarter.
In the six months ending December 31, 2014, revenues increased 8% or $46,194 compared to the same six months last year, with strong growth continuing in all components of our support & service revenues, particularly electronic payment services. Cost of sales increased 9%, in line with revenue, and operating expenses increased 7% for the six month period ended December 31, 2014. Provision for income taxes increased 4% compared to the prior year-to-date period. The increased revenue and above changes resulted in an 9% increase in net income for the six months ending December 31, 2014.
We move into the third quarter of fiscal 2015 following strong performance in the first half of the fiscal year. Significant portions of our business continue to come from recurring revenue and our healthy sales pipeline is also encouraging. Our customers continue to face regulatory and operational challenges which our products and services address, and in these times they have an even greater need for our solutions that directly address institutional profitability, efficiency and security. Our strong balance sheet, access to extensive lines of credit, the strength of our existing product line and an unwavering commitment to superior customer service position us well to address current and future opportunities.
A detailed discussion of the major components of the results of operations for the three and six months ended December 31, 2014 follows. All dollar amounts are in thousands and discussions compare the current three and six months ended December 31, 2014 to the prior year three and six months ended December 31, 2013.

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Table of Contents

REVENUE
License Revenue
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
% Change
 
2014
 
2013
 
 
 
2014
 
2013
 
 
License
$
491

 
$
246

 
100
%
 
$
994

 
$
1,007

 
(1
)%
Percentage of total revenue
<1%

 
<1%

 
 
 
<1%

 
<1%

 
 

License revenue represents the sale and delivery of application software systems contracted with us by the customer, that are not part of a bundled arrangement. Non-bundled license revenue increased for the quarter due mainly to small increases in standalone license sales in both our banking and credit union segments. Such license fees will fluctuate as non-bundled license sales are sporadic in nature.
Support and Service Revenue
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
%
Change
 
2014
 
2013
 
 
 
2014
 
2013
 
 
Support and service
$
296,905

 
$
273,242

 
9
%
 
$
585,121

 
$
535,872

 
9
%
Percentage of total revenue
95
%
 
95
 %
 
 
 
95
%
 
95
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Qtr over Qtr
 
 
 
Year over Year
 
 
 
$ Change
 
% Change
 
 
 
$ Change
 
% Change
 
 
In-House Support & Other Services
$
508

 
1
 %
 
 
 
$
1,781

 
1
%
 
 
Electronic Payment Services
10,889

 
10
 %
 
 
 
20,809

 
9
%
 
 
Outsourcing Services
8,927

 
15
 %
 
 
 
16,171

 
14
%
 
 
Implementation Services
3,561

 
23
 %
 
 
 
8,026

 
27
%
 
 
Bundled Products & Services
(223
)
 
(2
)%
 
 
 
2,461

 
18
%
 
 
Total Increase
$
23,662

 
 
 
 
 
$
49,248

 
 

 
 
There was growth in nearly all support and service revenue components in the both the quarterly and year-to-date periods of fiscal 2015.
In-house support and other services revenue increased due to annual maintenance renewal fee increases for both core and complementary products as our customers’ assets grow.
Electronic payment services continue to experience the largest dollar growth in both the quarter and year-to-date periods. The revenue increases are attributable to strong performance across debit/credit card transaction processing services, online bill payment services and ACH processing.
Outsourcing services for banks and credit unions continue to drive revenue growth as customers continue to show a preference for outsourced delivery of our solutions. We expect the trend towards outsourced product delivery to benefit outsourcing services revenue for the foreseeable future. Revenues from outsourcing services are typically earned under multi-year service contracts and therefore provide a long-term stream of recurring revenues.
Implementation services include implementation services for our outsourcing and electronic payment services customers as well as standalone customization services, merger conversion services, image conversion services and network monitoring services. Implementation services revenue increased in both the quarter and year-to-date periods, with increasing implementations across our core, online banking, imaging solutions and payments products.
Bundled products and services revenue is combined revenue from the multiple elements in our bundled arrangements, including license, implementation services and maintenance, which cannot be recognized separately due to a lack of vendor-specific objective evidence of fair value. Bundled products and services remained level compared to last year's quarter and increased year-to-date mainly due to increased installations of our Alogent suite of products in the first quarter.
Hardware Revenue
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
%
Change
 
2014
 
2013
 
 
 
2014
 
2013
 
 
Hardware
$
13,898

 
$
15,356

 
(9
)%
 
$
26,652

 
$
29,694

 
(10
)%
Percentage of total revenue
4
%
 
5
%
 
 

 
4
%
 
5
%
 
 

21

Table of Contents

Hardware revenue decreased for both the quarter and year-to-date periods due to a decrease in complementary hardware products delivered.
Although there will be continuing quarterly fluctuations, we expect there to be an overall decreasing trend in hardware sales 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
 
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
%
Change
 
2014
 
2013
 
 
 
2014
 
2013
 
 
Cost of License
$
308

 
$
188

 
64
 %
 
$
717

 
$
533

 
35
 %
Percentage of total revenue
<1%

 
<1%

 
 
 
<1%

 
<1%

 
 
License Gross Profit
$
183

 
$
58

 
216
 %
 
$
277

 
$
474

 
(42
)%
Gross Profit Margin

37
%
 
24
%
 
 
 
28
%
 
47
%
 
 
Cost of support and service
$
170,377

 
$
154,769

 
10
 %
 
$
335,467

 
$
303,925

 
10
 %
Percentage of total revenue
55
%
 
54
%
 
 
 
55
%
 
54
%
 
 
Support and Service Gross Profit