Document
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, 2018
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 [ X ]  No [  ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes [ X ]  No [  ]

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
[  ]
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 ]



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 February 4, 2019, the Registrant had 77,176,611 shares of Common Stock outstanding ($0.01 par value).



TABLE OF CONTENTS
 
 
Page Reference
 
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
Condensed Consolidated Balance Sheets as of December 31, 2018 and June 30, 2018 (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Six Months Ended December 31, 2018 and 2017 (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2018 and 2017 (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
 
 
 
ITEM1.
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 for the year ended June 30, 2018. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.


3


PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS

4

Table of Contents

JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
(Unaudited)
 
December 31,
2018
 
June 30,
2018
 
 
 
*As Adjusted
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
26,156

 
$
31,440

Receivables, net
184,737

 
297,271

Income tax receivable
9,488

 
21,671

Prepaid expenses and other
99,053

 
96,141

Deferred costs
43,205

 
27,069

Total current assets
362,639

 
473,592

PROPERTY AND EQUIPMENT, net
283,454

 
286,850

OTHER ASSETS:
 
 
 
Non-current deferred costs
82,328

 
74,865

Computer software, net of amortization
303,516

 
288,172

Other non-current assets
129,562

 
110,299

Customer relationships, net of amortization
109,263

 
115,034

Other intangible assets, net of amortization
34,245

 
38,467

Goodwill
666,770

 
649,929

Total other assets
1,325,684

 
1,276,766

Total assets
$
1,971,777

 
$
2,037,208

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
6,597

 
$
34,510

Accrued expenses
92,614

 
88,764

Deferred revenues
240,863

 
352,431

Total current liabilities
340,074

 
475,705

LONG-TERM LIABILITIES:
 
 
 
Non-current deferred revenues
14,773

 
17,484

Non-current deferred income tax liability
210,489

 
208,303

Other long-term liabilities
14,486

 
12,872

Total long-term liabilities
239,748

 
238,659

Total liabilities
579,822

 
714,364

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

 

Common stock - $0.01 par value; 250,000,000 shares authorized;
103,428,416 shares issued at December 31, 2018;
103,278,562 shares issued at June 30, 2018
1,034

 
1,033

Additional paid-in capital
459,988

 
464,138

Retained earnings
2,007,469

 
1,912,933

Less treasury stock at cost
26,257,903 shares at December 31, 2018;
26,107,903 shares at June 30, 2018
(1,076,536
)
 
(1,055,260
)
Total stockholders' equity
1,391,955

 
1,322,844

Total liabilities and equity
$
1,971,777

 
$
2,037,208

See notes to condensed consolidated financial statements
*Refer to Note 2 for the impact to previously presented financial statements as a result of the adoption of ASC 606

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JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2018
 
2017
 
2018
 
2017
 
 
 
*As Adjusted

 
 
 
*As Adjusted
REVENUE
$
386,275

 
$
357,209

 
$
778,818

 
$
718,493

 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
Cost of Revenue
227,284

 
207,100

 
447,396

 
411,016

Research and Development
23,990

 
22,414

 
48,016

 
43,343

Selling, General, and Administrative
46,797

 
43,094

 
91,979

 
84,181

Gain on Disposal of a Business

 
(189
)
 

 
(1,894
)
Total Expenses
298,071

 
272,419

 
587,391

 
536,646

 
 
 
 
 
 
 
 
OPERATING INCOME
88,204

 
84,790

 
191,427

 
181,847

 
 
 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest Income
252

 
146

 
542

 
293

Interest Expense
(148
)
 
(250
)
 
(295
)
 
(439
)
Total Interest Income (Expense)
104

 
(104
)
 
247

 
(146
)
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
88,308

 
84,686

 
191,674

 
181,701

 
 
 
 
 
 
 
 
PROVISION/ (BENEFIT) FOR INCOME TAXES
20,219

 
(76,557
)
 
40,034

 
(46,412
)
 
 
 
 
 
 
 
 
NET INCOME
$
68,089

 
$
161,243

 
$
151,640

 
$
228,113

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.88

 
$
2.09

 
$
1.96

 
$
2.95

Basic weighted average shares outstanding
77,216

 
77,218

 
77,202

 
77,250

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.88

 
$
2.08

 
$
1.96

 
$
2.94

Diluted weighted average shares outstanding
77,409

 
77,565

 
77,474

 
77,606


See notes to condensed consolidated financial statements
*Refer to Note 2 for the impact to previously presented financial statements as a result of the adoption of ASC 606

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JACK HENRY & ASSOCIATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
 
Six Months Ended
 
December 31,
 
2018
 
2017
 
 
 
*As Adjusted
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
151,640

 
$
228,113

Adjustments to reconcile net income from operations
     to net cash from operating activities:
 
 
 
Depreciation
22,470

 
24,602

Amortization
56,146

 
48,711

Change in deferred income taxes
1,256

 
(87,040
)
Expense for stock-based compensation
5,146

 
4,609

(Gain)/loss on disposal of assets and businesses
(22
)
 
(1,841
)
Changes in operating assets and liabilities:
 
 
 
Change in receivables  
113,563

 
143,914

Change in prepaid expenses, deferred costs and other
(45,768
)
 
(57,214
)
Change in accounts payable
(14,685
)
 
5,371

Change in accrued expenses
4,658

 
(13,236
)
Change in income taxes
12,654

 
1,829

Change in deferred revenues
(115,014
)
 
(120,910
)
Net cash from operating activities
192,044

 
176,908

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Payment for acquisitions, net of cash acquired
(19,981
)
 
(137,654
)
Capital expenditures
(32,968
)
 
(12,249
)
Proceeds from the sale of businesses

 
350

Proceeds from the sale of assets
76

 
205

Internal use software
(2,694
)
 
(6,025
)
Computer software developed
(54,086
)
 
(46,936
)
Net cash from investing activities
(109,653
)
 
(202,309
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings on credit facilities

 
100,000

Repayments on credit facilities

 
(50,000
)
Purchase of treasury stock
(21,276
)
 
(30,018
)
Dividends paid
(57,104
)
 
(47,844
)
Proceeds from issuance of common stock upon exercise of stock options
1

 
1

Tax withholding payments related to share based compensation
(13,485
)
 
(7,144
)
Proceeds from sale of common stock
4,189

 
3,360

Net cash from financing activities
(87,675
)
 
(31,645
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
$
(5,284
)
 
$
(57,046
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
$
31,440

 
$
114,765

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
26,156

 
$
57,719


See notes to condensed consolidated financial statements
*Refer to Note 2 for the impact to previously presented financial statements as a result of the adoption of ASC 606

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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 implementation services for financial institutions to utilize JHA 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, 2018 and 2017 equals the Company’s net income.
Prior Period Reclassification
The prior year periods have been recast to reflect the Company's retrospective adoption of Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, and related amendments, collectively referred to as Accounting Standards Codification ("ASC") 606.
Revenue Recognition
The Company generates revenue from data processing, transaction processing, software licensing and related services, professional services, and hardware sales.
Significant Judgments in Application of the Guidance
Identification of Performance Obligations
The Company enters into contracts with customers that may include multiple types of goods and services. At contract inception, the Company assesses the solutions and services promised in its contracts with customers and identifies a performance obligation for each promise to transfer to the customer a solution or service (or bundle of solutions or services) that is distinct - that is, if the solution or service is separately identifiable from other items in the arrangement and if the customer can benefit from the solution or service on its own or together with other resources that are readily available. The Company recognizes revenue when or as it satisfies each performance obligation by transferring control of a solution or service to the customer.
Determination of Transaction Price
The amount of revenue recognized is based on the consideration the Company expects to receive in exchange for transferring goods and services to the customer. The Company’s contracts with its customers frequently contain some component of variable consideration. The Company estimates variable consideration in its contracts primarily using the expected value method, based on both historical and current information. Where appropriate, the Company may constrain the estimated variable consideration included in the transaction price in the event of a high degree of uncertainty as to the final consideration amount.
Taxes collected from customers and remitted to governmental authorities are not included in revenue. The Company includes reimbursements from customers for expenses incurred in providing services (such as for postage, travel and telecommunications costs) in revenue, while the related costs are included in cost of revenue.
Technology or service components from third parties are frequently included in or combined with the Company’s applications or service offerings. Whether the Company recognizes revenue based on the gross amount billed to the customer or the net amount retained involves judgment in determining whether the Company controls the good or service before it is transferred to the customer. This assessment is made at the performance obligation level.

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Allocation of Transaction Price
The transaction price, once determined, is allocated between the various performance obligations in the contract based upon their relative standalone selling prices. The standalone selling prices are determined based on the prices at which the Company separately sells each good or service. For items that are not sold separately, the Company estimates the standalone selling prices using all information that is reasonably available, including reference to historical pricing data.
The following describes the nature of the Company’s primary types of revenue:
Processing
Processing revenue is generated from transaction-based fees for electronic deposit and payment services, electronic funds transfers and debit and credit card processing. The Company’s arrangements for these services typically require the Company to “stand-ready” to provide specific services on a when and if needed basis by processing an unspecified number of transactions over the contractual term. The fees for these services may be fixed or variable (based upon performing an unspecified quantity of services), and pricing may include tiered pricing structures. Amounts of revenue allocated to these services are recognized as those services are performed. Customers are typically billed monthly for transactions processed during the month. The Company evaluates tiered pricing to determine if a material right exists. If, after that evaluation, we determine a material right does exist, we assign value to the material right based upon standalone selling price after estimation of breakage associated with the material right.
Outsourcing and Cloud
Outsourcing and cloud revenue is generated from data and item processing services and hosting fees. The Company’s arrangements for these services typically require the Company to “stand-ready” to provide specific services on a when and if needed basis. The fees for these services may be fixed or variable (based upon performing an unspecified quantity of services), and pricing may include tiered pricing structures. Amounts of revenue allocated to these services are recognized as those services are performed. Data and item processing services are typically billed monthly. The Company evaluates tiered pricing to determine if a material right exists. If, after that evaluation, we determine a material right does exist, we assign value to the material right based upon standalone selling price.
Product Delivery and Services
Product delivery and services revenue is generated primarily from software licensing and related professional services and hardware delivery. Software licenses, along with any professional services from which they are not considered distinct, are recognized as they are delivered to the customer. Hardware revenue is recognized upon delivery. Professional services that are distinct are recognized as the services are performed. Deconversion fees are also included within product delivery and services, and are considered a contract modification. Therefore, the Company recognizes these fees over the remaining modified contract term.
In-House Support
In-house support revenue is generated from software maintenance for ongoing client support and software usage, which includes a license and ongoing client support. The Company’s arrangements for these services typically require the Company to “stand-ready” to provide specific services on a when and if needed basis. The fees for these services may be fixed or variable (based upon performing an unspecified quantity of services). Software maintenance fees are typically billed to the customer annually in advance and recognized ratably over the maintenance term. Software usage is typically billed annually in advance, with the license delivered and recognized at the outset, and the maintenance fee recognized ratably over the maintenance term. Accordingly, the Company utilizes the practical expedient which allows entities to disregard the effects of a financing component when the contract period is one year or less.

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Disaggregation of Revenue
The tables below present the Company's revenue disaggregated by type of revenue. Refer to Note 9, Reportable Segment Information, for disaggregated revenue by type and reportable segment. The majority of the Company’s revenue is earned domestically, with revenue from customers outside the United States comprising less than 1% of total revenue.
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2018
 
2017
 
2018
 
2017
Processing
$
148,953

 
$
134,191

 
$
294,928

 
$
268,723

 
 
 
 
 
 
 
 
Outsourcing & Cloud
100,066

 
88,253

 
197,425

 
173,387

Product Delivery & Services
58,794

 
59,392

 
116,758

 
118,462

In-House Support
78,462

 
75,373

 
169,707

 
157,921

Services & Support
237,322

 
223,018

 
483,890

 
449,770

 
 
 
 
 
 
 
 
Total Revenue
$
386,275

 
$
357,209

 
$
778,818

 
$
718,493

Contract Balances
The following table provides information about contract assets and contract liabilities from contracts with customers.
 
December 31,
2018
 
June 30,
2018
Receivables, net
$
184,737

 
$
297,271

Contract Assets- Current
16,697

 
14,063

Contract Assets- Non-current
44,465

 
35,630

Contract Liabilities (Deferred Revenue)- Current
240,863

 
352,431

Contract Liabilities (Deferred Revenue)- Non-current
$
14,773

 
$
17,484

Contract assets primarily result from revenue being recognized when or as control of a solution or service is transferred to the customer, but where invoicing is contingent upon the completion of other performance obligations or payment terms differ from the provisioning of services. The current portion of contract assets is reported within prepaid expenses and other in the condensed consolidated balance sheet, and the non-current portion is included in other non-current assets. Contract Liabilities (deferred revenue) primarily relate to consideration received from customers in advance of delivery of the related goods and services to the customer. Contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period.
The Company analyzes contract language to identify if a significant financing component does exist, and would adjust the transaction price for any material effects of the time value of money if the timing of payments provides either party to the contract with a significant benefit of financing the transaction.
During the three months ended December 31, 2018 and 2017, the Company recognized revenue of $93,656 and $82,410, respectively, that was included in the corresponding deferred revenue balance at the beginning of the periods.
During the six months ended December 31, 2018 and 2017, the Company recognized revenue of $164,051 and $154,585, respectively, that was included in the corresponding deferred revenue balance at the beginning of the periods.
Amounts recognized that relate to performance obligations satisfied (or partially satisfied) in prior periods were immaterial for each period presented. These adjustments are primarily the result of transaction price re-allocations due to changes in estimates of variable consideration.

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Transaction Price Allocated to Remaining Performance Obligations
As of December 31, 2018, estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period totaled $3,647,526. The Company expects to recognize approximately 28% over the next 12 months, 20% in 13-24 months, and the balance thereafter.
Contract Costs
The Company incurs incremental costs to obtain a contract as well as costs to fulfill contracts with customers that are expected to be recovered. These costs consist primarily of sales commissions, which are incurred only if a contract is obtained, and customer conversion or implementation related costs. Capitalized costs totaled $222,027 and $181,032, at December 31, 2018 and June 30, 2018, respectively.
Capitalized costs are amortized based on the transfer of goods or services to which the asset relates, in line with the percentage of revenue recognized for each performance obligation to which the costs are allocated. For the three months ended December 31, 2018 and 2017, amortization of deferred contract costs was $25,435 and $22,863, respectively. For the six months ended December 31, 2018 and 2017, amortization of deferred contract costs totaled $52,257 and $45,371, respectively. There were no impairment losses in relation to capitalized costs for the periods presented.
Property and Equipment
Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets.  Accumulated depreciation at December 31, 2018 totaled $387,261 and at June 30, 2018 totaled $364,153.
Intangible Assets
Intangible assets consist of goodwill, customer relationships, computer software, and trade names acquired in business acquisitions in addition to internally developed computer software. The amounts are amortized, with the exception of those intangible assets with an indefinite life (such as goodwill), over an estimated economic benefit period, generally three to twenty years.  Accumulated amortization of intangible assets totaled $658,480 and $602,479 at December 31, 2018 and June 30, 2018, respectively.
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 borrowings on its existing line-of-credit. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At December 31, 2018, there were 26,258 shares in treasury stock and the Company had the remaining authority to repurchase up to 3,733 additional shares. The total cost of treasury shares at December 31, 2018 is $1,076,536. During the first six months of fiscal 2019, the Company repurchased 150 treasury shares. At June 30, 2018, there were 26,108 shares in treasury stock and the Company had authority to repurchase up to 3,883 additional shares.
Dividends declared per share were $0.37 and $0.31, for the three months ended December 31, 2018 and 2017, respectively. For the six months ended December 31, 2018 and 2017, dividends declared totaled $0.74 and $0.62, 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 ("SEC") 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 (“Form 10-K”) for the fiscal year ended June 30, 2018. 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 for the fiscal year ended June 30, 2018, with updates to certain policies included in this Note 1.
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 state fairly the financial position of the Company as of December 31, 2018, the results of its operations for the three and six months ending

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December 31, 2018 and 2017, and its cash flows for the six months ending December 31, 2018 and 2017. The condensed consolidated balance sheet at June 30, 2018 was derived from audited annual financial statements, but does not contain all of the footnote disclosures from the annual financial statements.
The results of operations for the three and six months ended December 31, 2018 are not necessarily indicative of the results to be expected for the entire year.

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Guidance
The Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, in May 2014. This standard (and related amendments collectively referred to as “ASC 606”) 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 has superseded much of the 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. The standard was effective for the Company on July 1, 2018. Entities are allowed to transition to the new standard by either recasting prior periods (full retrospective) or recognizing the cumulative effect as of the beginning of the period of adoption (modified retrospective).
The Company adopted the new standard using the full retrospective transition approach, using certain practical expedients. The Company has not disclosed the amount of transaction price allocated to remaining performance obligations for reporting periods presented before the date of initial application. Also, the Company did not separately consider the effects of contract modifications that occurred before the beginning of the earliest reporting period presented, but reflects the aggregate effect of all modifications that occurred before the beginning of the earliest period presented. As a result, all fiscal 2018 financial information has been adjusted for the effects of applying ASC 606. The details of the significant changes are disclosed below:
Software Revenue Recognition
The Company previously recognized software license and related services within the scope of ASC Topic 985-605, which required the establishment of vendor-specific objective evidence (“VSOE”) of fair value in order to separately recognize revenue for each software-related good or service. Due to the inability to establish VSOE, the Company had previously deferred all revenue on software-related goods and services on a master contract until all the goods and services had been delivered. Under ASC 606, VSOE is no longer required for separation of otherwise distinct performance obligations within a revenue arrangement. This change has resulted in earlier recognition of revenue for the Company’s software-related goods and services, leading to a decrease in deferred revenue balances within our adjusted condensed consolidated balance sheets.
Impacts on Financial Statements
The following tables summarize the impacts of ASC 606 adoption on the Company’s Condensed Consolidated Financial Statements:

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Condensed Consolidated Balance Sheet as of June 30, 2018:
 
As Previously Reported
Adjustments
As Adjusted
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
31,440

$

$
31,440

Receivables, net
291,630

5,641

297,271

Income tax receivable
21,671


21,671

Prepaid expenses and other
84,810

11,331

96,141

Deferred costs
38,985

(11,916
)
27,069

Total current assets
468,536

5,056

473,592

PROPERTY AND EQUIPMENT, net
286,850


286,850

OTHER ASSETS:
 
 
 
Non-current deferred costs
95,540

(20,675
)
74,865

Computer software, net of amortization
288,172


288,172

Other non-current assets
107,775

2,524

110,299

Customer relationships, net of amortization
115,034


115,034

Other intangible assets, net of amortization
38,467


38,467

Goodwill
649,929


649,929

Total other assets
1,294,917

(18,151
)
1,276,766

Total assets
$
2,050,303

$
(13,095
)
$
2,037,208

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
34,510

$

$
34,510

Accrued expenses
97,848

(9,084
)
88,764

Deferred revenues
355,538

(3,107
)
352,431

Total current liabilities
487,896

(12,191
)
475,705

LONG-TERM LIABILITIES:
 
 
 
Non-current deferred revenues
93,094

(75,610
)
17,484

Non-current deferred income tax liability
189,613

18,690

208,303

Other long-term liabilities
12,872


12,872

Total long-term liabilities
295,579

(56,920
)
238,659

Total liabilities
783,475

(69,111
)
714,364

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



Common stock - $0.01 par value; 250,000,000 shares authorized;
103,278,562 shares issued at June 30, 2018
1,033


1,033

Additional paid-in capital
464,138


464,138

Retained earnings
1,856,917

56,016

1,912,933

Less treasury stock at cost
26,107,903 shares at June 30, 2018
(1,055,260
)

(1,055,260
)
Total stockholders' equity
1,266,828

56,016

1,322,844

Total liabilities and equity
$
2,050,303

$
(13,095
)
$
2,037,208



13

Table of Contents

Condensed Consolidated Statement of Income for the three and six months ended December 31, 2017:
 
Three Months Ended December 31, 2017
 
Six Months Ended December 31, 2017
 
As Previously Reported
Adjustments
As Adjusted
 
As Previously Reported
Adjustments
As Adjusted
REVENUE
$
374,756

$
(17,547
)
$
357,209

 
$
734,690

$
(16,197
)
$
718,493

 
 
 
 
 
 
 
 
EXPENSES
 
 
 
 
 
 
 
Cost of Revenue
211,653

(4,553
)
207,100

 
416,368

(5,352
)
411,016

Research and Development
22,414


22,414

 
43,343


43,343

Selling, General, and Administrative
45,613

(2,519
)
43,094

 
89,346

(5,165
)
84,181

Gain on Disposal of a Business
(189
)

(189
)
 
(1,894
)

(1,894
)
Total Expenses
279,491

(7,072
)
272,419

 
547,163

(10,517
)
536,646

 
 
 
 
 
 
 
 
OPERATING INCOME
95,265

(10,475
)
84,790

 
187,527

(5,680
)
181,847

 
 
 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
 
 
 
Interest Income
146


146

 
293


293

Interest Expense
(250
)

(250
)
 
(439
)

(439
)
Total Interest Income (Expense)
(104
)

(104
)
 
(146
)

(146
)
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
95,161

(10,475
)
84,686

 
187,381

(5,680
)
181,701

 
 
 
 
 
 
 
 
PROVISION/ (BENEFIT) FOR INCOME TAXES
(60,413
)
(16,144
)
(76,557
)
 
(31,604
)
(14,808
)
(46,412
)
 
 
 
 
 
 
 
 
NET INCOME
$
155,574

$
5,669

$
161,243

 
$
218,985

$
9,128

$
228,113

 
 
 
 
 
 
 
 
Basic earnings per share
$
2.01

 
$
2.09

 
$
2.83

 
$
2.95

Basic weighted average shares outstanding
77,218

 
77,218

 
77,250

 
77,250

 
 
 
 
 
 
 
 
Diluted earnings per share
$
2.01

 
$
2.08

 
$
2.82

 
$
2.94

Diluted weighted average shares outstanding
77,565

 
77,565

 
77,606

 
77,606



14

Table of Contents

Condensed Consolidated Statement of Cash Flows for the six months ended December 31, 2017:
 
Six Months Ended December 31, 2017
 
As Previously Reported
Adjustments
As Adjusted
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
218,985

$
9,128

$
228,113

Adjustments to reconcile net income from operations
     to net cash from operating activities:
 
 
 
Depreciation
24,602


24,602

Amortization
48,711


48,711

Change in deferred income taxes
(72,721
)
(14,319
)
(87,040
)
Expense for stock-based compensation
4,609


4,609

(Gain)/loss on disposal of assets and businesses
(1,841
)

(1,841
)
Changes in operating assets and liabilities:
 
 
 
Change in receivables  
115,572

28,342

143,914

Change in prepaid expenses, deferred costs and other
(17,105
)
(40,109
)
(57,214
)
Change in accounts payable
5,371


5,371

Change in accrued expenses
(15,386
)
2,150

(13,236
)
Change in income taxes
2,317

(488
)
1,829

Change in deferred revenues
(136,206
)
15,296

(120,910
)
Net cash from operating activities
176,908


176,908

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Payment for acquisitions, net of cash acquired
(137,654
)

(137,654
)
Capital expenditures
(12,249
)

(12,249
)
Proceeds from the sale of businesses
350


350

Proceeds from the sale of assets
205


205

Internal use software
(6,025
)

(6,025
)
Computer software developed
(46,936
)

(46,936
)
Net cash from investing activities
(202,309
)

(202,309
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Borrowings on credit facilities
100,000


100,000

Repayments on credit facilities
(50,000
)

(50,000
)
Purchase of treasury stock
(30,018
)

(30,018
)
Dividends paid
(47,844
)

(47,844
)
Proceeds from issuance of common stock upon exercise of stock options
1


1

Tax withholding payments related to share based compensation
(7,144
)

(7,144
)
Proceeds from sale of common stock
3,360


3,360

Net cash from financing activities
(31,645
)

(31,645
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
$
(57,046
)
$

$
(57,046
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
$
114,765

$

$
114,765

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
57,719

$

$
57,719


15

Table of Contents

ASU 2016-15 issued by the FASB in August 2016 clarifies cash flow classification of eight specific cash flow issues and is effective for our annual reporting period beginning July 1, 2018. The adoption of this standard did not have any impact on our financial statements.
Not Yet Adopted
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. Specifically, the standard requires operating lease commitments to be recorded on the balance sheet as operating lease liabilities and right-of-use assets, and the cost of those operating leases to be amortized on a straight-line basis. ASU No. 2016-02 will be effective for JHA's annual reporting period beginning July 1, 2019 and early adoption is permitted. We will take advantage of the transition package of practical expedients permitted within the new standard, which among other things, allows us to carryforward the historical lease classification. In addition, we will make an accounting policy election that will keep leases with an initial term of twelve months or less off of the balance sheet. Adoption of the standard will add right of use assets and lease obligations to our balance sheet and is not expected to significantly impact income before income taxes.   
In August of 2018, the FASB issued ASU No. 2018-15, Intangibles, Goodwill and Other - Internal-Use Software (Subtopic 350-40), which broadens the scope of Subtopic 350-40 to include costs incurred to implement a hosting arrangement that is a service contract. The costs are capitalized or expensed depending on the nature of the costs and the project stage during which they are incurred, consistent with costs for internal-use software. The amendments in this update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The ASU will be effective for the Company on July 1, 2020, with early adoption permitted. The Company is currently evaluating the impact that the guidance will have on our financial statements.

NOTE 3.    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 Company's estimates of the fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets, and requires that observable inputs be used in the valuations when available. The three levels of the hierarchy are as follows:
Level 1: inputs to the valuation are quoted prices in an active market for identical assets
Level 2: inputs to the valuation include quoted prices for similar assets in active markets that are observable either directly or indirectly
Level 3: valuation is based on significant inputs that are unobservable in the market and the Company's own estimates of assumptions that we believe market participants would use in pricing the asset
Fair value of financial assets, included in cash and cash equivalents, and financial liabilities is as follows:
 
 
Estimated Fair Value Measurements
 
Total Fair
 
 
Level 1
 
Level 2
 
Level 3
 
Value
December 31, 2018
 
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
 
Money market funds
 
$
9,033

 
$

 
$

 
$
9,033

June 30, 2018
 
 

 
 
 
 
 
 

Financial Assets:
 
 
 
 
 
 
 
 
Money market funds
 
$
14,918

 
$

 
$

 
$
14,918

Non-Recurring Fair Value Measurements
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
Long-lived assets held for sale
 
$

 
$
1,300

 
$

 
$
1,300

June 30, 2018
 
 
 
 
 
 
 
 
Long-lived assets held for sale (a)
 
$

 
$
1,300

 
$

 
$
1,300


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Table of Contents

(a) In accordance with ASC Subtopic 360-10, long-lived assets held for sale with a carrying value of $4,575 were written down to their fair value of $1,300, resulting in an impairment totaling $3,275, which was included in earnings for the period ended June 30, 2017. These assets are expected to be disposed of by sale in the fourth quarter of fiscal 2019.

NOTE 4.    DEBT
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 December 31, 2018, the Company was in compliance with all such covenants. The revolving loan terminates February 20, 2020. At December 31, 2018, there was no outstanding revolving loan balance. There was also no outstanding balance at June 30, 2018.
Other lines of credit
The Company has an unsecured bank credit line which provides for funding of up to $5,000 and bears interest at the prime rate less 1%. The credit line was renewed in April 2017 and expires on April 30, 2019. At December 31, 2018, no amount was outstanding. There was also no balance outstanding at June 30, 2018.
Interest
The Company paid interest of $192 and $355 during the six months ended December 31, 2018 and 2017, respectively.

NOTE 5.    INCOME TAXES
The effective tax rate was 22.9% of income before income taxes for the quarter ended December 31, 2018, compared to (90.4)% for the same quarter of the prior fiscal year. For the six months ended December 31, 2018, the effective tax rate was 20.9%, compared to (25.5)% for the six months ended December 31, 2017. The significant increase in the Company's effective tax rate for both the quarter and year-to-date periods was primarily due to $97,516 of tax benefits recorded in the prior fiscal year for the re-measurement of the net deferred tax liabilities due to the Tax Cuts and Jobs Act ("TCJA") enacted December 22, 2017. This increase is partially offset by the enacted lower corporate income tax rate that became effective January 1, 2018, which resulted in a U.S. statutory rate of approximately 28% for the fiscal year 2018, and 21% for fiscal 2019. The increase was further offset by increased excess tax benefits from share-based payments in the first six months of fiscal 2019.
The Company has relied on Staff Accounting Bulletin 118 ("SAB 118") and has recognized provisional amounts for tax reform items in its annual and interim financial statements for each prior reporting period since the enactment of the TCJA. The staff of the U.S. SEC has recognized the complexity of reflecting the impacts of the TCJA and on December 22, 2017, issued guidance in SAB 118. The guidance clarifies accounting for income taxes under ASC 740 if information is not available or complete and provides for up to a one-year period in which to complete the required analyses and accounting. The Company considers its accounting for the income tax effects of the TCJA to be complete. No significant adjustments to the provisional amounts previously reported were recorded during the six months ended December 31, 2018.
The Company paid income taxes, net of refunds, of $25,211 and $38,163 in the six months ended December 31, 2018 and 2017, respectively.
At December 31, 2018, the Company had $10,719 of gross unrecognized tax benefits, $9,967 of which, if recognized, would affect our effective tax rate. We had accrued interest and penalties of $1,431 and $1,318 related to uncertain tax positions at December 31, 2018 and 2017, respectively.
The U.S. federal and state income tax returns for fiscal year 2015 and all subsequent years remain subject to examination as of December 31, 2018 under statute of limitations rules. We anticipate potential changes due to lapsing statutes of limitations and examination closures could reduce the unrecognized tax benefits balance by $500 - $1,500 within twelve months of December 31, 2018.


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Table of Contents

NOTE 6.    STOCK-BASED COMPENSATION
Our operating income for the three months ended December 31, 2018 and 2017 included $3,374 and $3,096 of stock-based compensation costs, respectively. For the six months ended December 31, 2018 and 2017, stock-based compensation costs included in operating income totaled $5,146 and $4,609, respectively.
Stock Options
On November 10, 2015, the Company adopted the 2015 Equity Incentive Plan ("2015 EIP") for its employees and non-employee directors. The plan allows for grants of stock options, stock appreciation rights, restricted stock shares or units, and performance shares or units. The maximum number of shares authorized for issuance under the plan is 3,000. For stock options, terms and vesting periods of the options are determined by the Compensation Committee of the Board of Directors when granted. The option period must expire not more than ten years from the option grant date. The options granted under this plan are exercisable beginning three years after the grant date at an exercise price equal to 100% of the fair market value of the stock at the grant date. The options terminate upon surrender of the option, ninety days after termination of employment, upon the expiration of one year following notification of a deceased optionee, or ten years after grant.
The Company previously issued options to outside directors under the 2005 Non-Qualified Stock Option Plan (“2005 NSOP”). No additional stock options may be issued under this plan.
A summary of option plan activity under these plans is as follows:
 
Number of Shares
 
Weighted Average Exercise Price
 
Aggregate
 Intrinsic
 Value
Outstanding July 1, 2018
52

 
$
62.65

 
 
Granted

 

 
 
Forfeited

 

 
 
Exercised

 

 
 
Outstanding December 31, 2018
52

 
$
62.65

 
$
3,301

Vested and Expected to Vest December 31, 2018
52

 
$
62.65

 
$
3,301

Exercisable December 31, 2018
20

 
$
23.65

 
$
2,057

At December 31, 2018, there was $83 of compensation cost yet to be recognized related to outstanding options. The weighted average remaining contractual term on options currently exercisable as of December 31, 2018 was 0.50 years.
Restricted Stock Awards
The Company issues both share awards and unit awards under the 2015 EIP, and previously issued these awards through the 2005 Restricted Stock Plan. The following table summarizes non-vested share awards as of December 31, 2018, as well as activity for the six months then ended:
Share awards
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding July 1, 2018
23

 
$
81.33

Granted

 

Vested
(17
)
 
79.48

Forfeited

 

Outstanding December 31, 2018
6

 
$
86.74

At December 31, 2018, there was $83 of compensation expense that has yet to be recognized related to non-vested restricted stock share awards, which will be recognized over a weighted average period of 0.48 years.

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Table of Contents

The following table summarizes non-vested unit awards as of December 31, 2018, as well as activity for the six months then ended:
Unit awards
Units
 
Weighted
Average
Grant Date
Fair Value
 
Aggregate Intrinsic Value
Outstanding July 1, 2018
351

 
$
83.37

 
 
Granted
65

 
176.95

 
 
Vested
(117
)
 
79.51

 
 
Forfeited
(4
)
 
86.89

 
 
Outstanding December 31, 2018
295

 
$
105.38

 
$
37,305

The Company utilized a Monte Carlo pricing model customized to the specific provisions of the Company’s plan design to value unit awards subject to performance targets on the grant dates. The weighted average assumptions used in this model to estimate fair value at the measurement date and resulting values for 39 unit awards granted in fiscal 2019 are as follows:
Volatility
15.30
%
Risk free interest rate
2.89
%
Dividend yield
0.90
%
Stock Beta
0.669

The remaining 26 unit awards granted in fiscal 2019 are not subject to performance targets, and therefore the estimated fair value at measurement date is valued in the same manner as restricted stock share award grants.
At December 31, 2018, there was $17,684 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 1.44 years.

NOTE 7.    EARNINGS PER SHARE
The following table reflects the reconciliation between basic and diluted earnings per share.
(In Thousands, Except Per Share Data)
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2018
 
2017
 
2018
 
2017
Net Income
$
68,089

 
$
161,243

 
$
151,640

 
$
228,113

Common share information:
 
 
 
 
 
 
 
Weighted average shares outstanding for basic earnings per share
77,216

 
77,218

 
77,202

 
77,250

Dilutive effect of stock options and restricted stock
193

 
347

 
272

 
356

Weighted average shares outstanding for diluted earnings per share
77,409

 
77,565

 
77,474

 
77,606

Basic earnings per share
$
0.88

 
$
2.09

 
$
1.96

 
$
2.95

Diluted earnings per share
$
0.88

 
$
2.08

 
$
1.96

 
$
2.94

Per share information is based on the weighted average number of common shares outstanding for the three and six months ended December 31, 2018 and 2017. Stock options and restricted stock have been included in the calculation of earnings per share to the extent they are dilutive. There were 5 anti-dilutive stock options or restricted stock shares excluded for the quarter ended December 31, 2018 and no anti-dilutive stock options or restricted stock shares excluded for the quarter ended December 31, 2017. There were 1 anti-dilutive stock options or restricted stock shares excluded for the six months ended December 31, 2018 compared to none for the six months ended December 31, 2017.


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Table of Contents

NOTE 8.    BUSINESS ACQUISITIONS
BOLTS Technologies, Inc
On October 5, 2018, the Company acquired all of the equity interest of BOLTS Technologies, Inc. for $15,046 paid in cash. The acquisition was funded by cash generated from operations. BOLTS Technologies is the developer of boltsOPEN, a next-generation digital account opening solution.
Management has completed a preliminary purchase price allocation and its assessment of the fair value of acquired assets and liabilities assumed. The recognized amounts of identifiable assets acquired and liabilities assumed, based on their preliminary fair values as of October 5, 2018 are set forth below:
Current assets
$
1,384

Identifiable intangible assets
2,274

Total other liabilities assumed
(1,418
)
Total identifiable net assets
2,240

Goodwill
12,806

Net assets acquired
$
15,046

The amounts shown above may change as management finalizes its assessment of the fair value of acquired assets and liabilities and continues to evaluate the income tax implications of this business combination.
The goodwill of $12,806 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 BOLTS, together with the value of BOLTS' assembled workforce. The goodwill from this acquisition has been allocated to our Complementary segment and is not expected to be deductible for income tax purposes.
Identifiable intangible assets from this acquisition consist of customer relationships of $567, computer software of $1,409, and other intangible assets of $298. The weighted average amortization period for acquired customer relationships, computer software, and other intangible assets is 15 years, 10 years, and 10 years, respectively.
Current assets were inclusive of cash acquired of $1,365. The fair value of current assets acquired included accounts receivable of $14, none of which were expected to be uncollectible.
Costs incurred related to the acquisition of BOLTS in fiscal 2019 totaled $23 for legal, valuation, and other fees, and were expensed as incurred within selling, general, and administrative expense.
The Company's consolidated statements of income for the second quarter of fiscal 2019 included revenue of $35 and after-tax net loss of $246 resulting from BOLTS' operations.
The accompanying consolidated statements of income for the three and six months ended December 31, 2018 and 2017 do not include any revenues and expenses related to this acquisition prior to the acquisition date. The impact of this acquisition was considered immaterial to both the current and prior periods of our consolidated financial statements and pro forma financial information has not been provided.
Agiletics, Inc.
On October 1, 2018, the Company acquired all of the equity interest of Agiletics, Inc. for $7,649 paid in cash. The acquisition was funded by cash generated from operations. Agiletics is a provider of escrow, investment, and liquidity management solutions for banks serving commercial customers.
Management has completed a preliminary purchase price allocation and its assessment of the fair value of acquired assets and liabilities assumed. The recognized amounts of identifiable assets acquired and liabilities assumed, based on their preliminary fair values as of October 1, 2018 are set forth below:
Current assets
$
2,170

Long-term assets

Identifiable intangible assets
3,090

Non-current deferred income tax liability
(787
)
Total other liabilities assumed
(738
)
Total identifiable net assets
3,735

Goodwill
3,914

Net assets acquired
$
7,649


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Table of Contents

The amounts shown above may change as management finalizes its assessment of the fair value of acquired assets and liabilities and continues to evaluate the income tax implications of this business combination.
The goodwill of $3,914 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 Agiletics. The goodwill from this acquisition has been allocated to our Core segment and is not expected to be deductible for income tax purposes.
Identifiable intangible assets from this acquisition consist of customer relationships of $2,198, computer software of $701, and other intangible assets of $191. The weighted average amortization period for acquired customer relationships, computer software, and other intangible assets is 15 years, 10 years, and 10 years, respectively.
Current assets were inclusive of cash acquired of $1,349. The fair value of current assets acquired included accounts receivable of $299, none of which were expected to be uncollectible.
Costs incurred related to the acquisition of Agiletics in fiscal 2019 totaled $25 for legal, valuation, and other fees, and were expensed as incurred within selling, general, and administrative expense.
The Company's consolidated statements of income for the second quarter of fiscal 2019 included revenue of $193 and after-tax net loss of $111 resulting from Agiletics' operations.
The accompanying consolidated statements of income for the three and six months ended December 31, 2018 and 2017 do not include any revenues and expenses related to this acquisition prior to the acquisition date. The impact of this acquisition was considered immaterial to both the current and prior periods of our consolidated financial statements and pro forma financial information has not been provided.
Ensenta Corporation
On December 21, 2017, the Company acquired all of the equity interest of EST Holdings, Inc. and its wholly-owned subsidiary, EST Interco, Inc., for $134,381 paid in cash. EST Holdings, Inc. and EST Interco, Inc. jointly own all of the outstanding equity of Ensenta Corporation ("Ensenta"), a California-based provider of real-time, cloud-based solutions for mobile and online payments and deposits. This acquisition was partially funded by a draw on the Company's revolving credit facility, with the remaining amount funded by existing operating cash. The addition of Ensenta Corporation to the JHA Payment Solutions Group expands the Company’s ability to conduct real-time transactions with third-party platforms, extending its presence in the credit union market through shared branching technology.
Management has completed a purchase price allocation of Ensenta 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 December 21, 2017 are set forth below:
Current assets
$
14,125

Long-term assets
586

Identifiable intangible assets
58,806

Non-current deferred income tax liability
(21,859
)
Total other liabilities assumed
(8,496
)
Total identifiable net assets
43,162

Goodwill
91,219

Net assets acquired
$
134,381

The amounts shown above include measurement period adjustments made during the third and fourth quarters of fiscal 2018, and the second quarter of fiscal 2019, related to income tax adjustments and a fair value assessment.
The goodwill of $91,219 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 Ensenta, together with the value of Ensenta's assembled workforce. The goodwill from this acquisition has been allocated to our Payments segment and is not expected to be deductible for income tax purposes.
Identifiable intangible assets from this acquisition consist of customer relationships of $37,800, computer software of $16,505, and other intangible assets of $4,501. The weighted average amortization period for acquired customer relationships, computer software, and other intangible assets is 15 years, 10 years, and 10 years, respectively.
Current assets were inclusive of cash acquired of $7,274. The fair value of current assets acquired included accounts receivable of $4,668, none of which were expected to be uncollectible.
Costs incurred related to the acquisition of Ensenta in fiscal 2018 totaled $339 for legal, valuation, and other fees, and were expensed as incurred within selling, general, and administrative expense.

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The Company's consolidated statements of income for the second quarter of fiscal 2019 included revenue of $9,059 and after-tax net income of $2,919 resulting from Ensenta's operations. For the second quarter of fiscal 2018, Ensenta contributed revenue of $928 and after-tax net income of $6,366. The after-tax net income for the second quarter of fiscal 2018 included a large tax benefit recorded as a result of the TCJA. Excluding that benefit, the Company's after tax net income resulting from Ensenta's operations totaled $26.
For the six months ended December 31, 2018, the Company's consolidated statements of income included revenue of $17,231 and after-tax net income of $4,963. The results for the six months ended December 31, 2017 are the same as given above for the second quarter of fiscal 2018.
The accompanying consolidated statements of income for the three and six months ended December 31, 2018 and 2017 do not include any revenues and expenses related to this acquisition prior to the acquisition date. The following unaudited pro forma consolidated financial information for the period ended December 31, 2017 is presented as if this acquisition had occurred at the beginning of the earliest period presented. In addition, this unaudited pro forma financial information is provided for illustrative purposes only and should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the acquisition had actually occurred during those periods, or the results that may be obtained in the future as a result of the acquisition.
 
Three Months Ended
 
Six Months Ended
 
December 31,
 
December 31,
 
2018
 
2017
 
2018
 
2017
 
Actual
 
Proforma
 
Actual
 
Proforma
Revenue
$
386,275

 
$
363,563

 
$
778,818

 
$
731,611

Net Income
68,089

 
167,714

 
151,640

 
229,623

Basic Earnings Per Share
$
0.88

 
$
2.17

 
$
1.96

 
$
2.97

Diluted Earnings Per Share
$
0.88

 
$
2.16

 
$
1.96

 
$
2.96

Vanguard Software Group
On August 31, 2017, the Company acquired all of the equity interest of Vanguard Software Group, a Florida-based company specializing in the underwriting, spreading, and online decisioning of commercial loans, for $10,744 paid in cash. This acquisition was funded using existing operating cash. The addition of Vanguard Software Group to the Company's ProfitStars® Lending Solutions Group expands functionality offered to clients, allowing for near-real-time communication with JHA's core processing and ancillary solutions, and also enhances cross-sell opportunities.
Management has completed a purchase price allocation of Vanguard Software Group 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 August 31, 2017 are set forth below:
Current assets
$
1,153

Long-term assets
9

Identifiable intangible assets
4,200

Total liabilities assumed
(1,117
)
Total identifiable net assets
4,245

Goodwill
6,499

Net assets acquired
$
10,744

The goodwill of $6,499 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 Vanguard Software Group, together with the value of Vanguard Software Group's assembled workforce. The goodwill from this acquisition has been allocated to our Complementary segment and is expected to be deductible for income tax purposes.
Identifiable intangible assets from this acquisition consist of customer relationships of $2,234, computer software of $1,426, and other intangible assets of $540. The weighted average amortization periods for acquired customer relationships, computer software, and other intangible assets are 15 years, 10 years, and 10 years, respectively.
Current assets were inclusive of cash acquired of $289. The fair value of current assets acquired included accounts receivable of $847, none of which were expected to be uncollectible.
Costs incurred related to the acquisition of Vanguard Software Group were immaterial for the periods presented.

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The Company's consolidated statements of income for the second quarter of fiscal 2019 included revenue of $741 and an after-tax net loss of $86 resulting from Vanguard Software Group's operations. For the second quarter of fiscal 2018, Vanguard Software Group contributed revenue of $557 and an after-tax net loss of $178 to the Company's consolidated statements of income.
The Company's consolidated statements of income for the first six months of fiscal 2019 included revenue of $1,266 and an after-tax net loss of $254 resulting from Vanguard Software Group's operations. For the first six months of fiscal 2018, Vanguard Software Group contributed revenue of $656 and an after-tax net loss of $301 to the Company's consolidated statements of income.
The accompanying consolidated statements of income for the three and six months ended December 31, 2018 and 2017 do not include any revenues and expenses related to this acquisition prior to the acquisition date. The impact of this acquisition was considered immaterial to both the current and prior periods of our consolidated financial statements and pro forma financial information has not been provided.

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 four reportable segments: Core, Payments, Complementary, and Corporate & Other. The Core segment provides core information processing platforms to banks and credit unions, which consist of integrated applications required to process deposit, loan, and general ledger transactions, and maintain centralized customer/member information. The Payments segment provides secure payment processing tools and services, including: ATM, debit, and credit card transaction processing services; online and mobile bill pay solutions; ACH origination and remote deposit capture processing; and risk management products and services. The Complementary segment provides additional software and services that can be integrated with our Core solutions or used independently. The Corporate & Other segment includes hardware revenue and costs, as well as operating costs not directly attributable to the other three segments.
The Company evaluates the performance of its segments and allocates resources to them based on various factors, including performance against trend, budget, and forecast. Only revenue and costs of revenue are considered in the evaluation for each segment.
An immaterial adjustment was made to reclassify revenue recognized in fiscal 2018 from the Core to the Corporate and Other Segment. For the three and six months ended December 31, 2017, the amount reclassified totaled $744 and $1,482, respectively.


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Three Months Ending
 
December 31, 2018
 
Core
 
Payments
 
Complementary
 
Corporate & Other
 
Total
REVENUE
 
 
 
 
 
 
 
 
 
Services and Support
$
122,721

 
$
13,108

 
$
86,386

 
$
15,107

 
$
237,322

Processing
7,008

 
124,911

 
16,864

 
170

 
148,953

Total Revenue
129,729

 
138,019

 
103,250

 
15,277

 
386,275

 
 
 
 
 
 
 
 
 
 
Cost of Revenue
60,288

 
65,100

 
44,167

 
57,729

 
227,284

Research and Development
 
 
 
 
 
 
 
 
23,990

Selling, General, and Administrative
 
 
 
 
 
 
 
 
46,797

Total Expenses
 
 
 
 
 
 
 
 
298,071

 
 
 
 
 
 
 
 
 
 
SEGMENT INCOME
$
69,441

 
$
72,919

 
$
59,083

 
$
(42,452
)
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
 
 
 
 
 
 
 
88,204

 
 
 
 
 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
 
 
 
 
104

 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
 
 
 
 
 
 
 
$
88,308


 
Three Months Ending
 
December 31, 2017
 
Core
 
Payments
 
Complementary
 
Corporate & Other
 
Total
REVENUE
 
 
 
 
 
 
 
 
 
Services and Support
$
116,614

 
$
9,212

 
$
81,329

 
$
15,863

 
$
223,018

Processing
6,682

 
112,168

 
15,327

 
14

 
134,191

Total Revenue
123,296

 
121,380

 
96,656

 
15,877

 
357,209

 
 
 
 
 
 
 
 
 
 
Cost of Revenue
55,364

 
59,304

 
40,209

 
52,223

 
207,100

Research and Development
 
 
 
 
 
 
 
 
22,414

Selling, General, and Administrative
 
 
 
 
 
 
 
 
43,094

Gain on Disposal of Businesses
 
 
 
 
 
 
 
 
(189
)
Total Expenses
 
 
 
 
 
 
 
 
272,419

 
 
 
 
 
 
 
 
 
 
SEGMENT INCOME
$
67,932

 
$
62,076

 
$
56,447

 
$
(36,346
)
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
 
 
 
 
 
 
 
84,790

 
 
 
 
 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
 
 
 
 
(104
)
 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
 
 
 
 
 
 
 
$
84,686



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Six Months Ended
 
December 31, 2018
 
Core
 
Payments
 
Complementary
 
Corporate & Other
 
Total
REVENUE
 
 
 
 
 
 
 
 
 
Services and Support
$
253,109

 
$
25,878

 
$
176,449

 
$
28,454

 
$
483,890

Processing
14,172

 
246,338

 
34,109

 
309

 
294,928

Total Revenue
267,281

 
272,216

 
210,558

 
28,763

 
778,818

 
 
 
 
 
 
 
 
 
 
Cost of Revenue
119,504

 
130,807

 
85,998

 
111,087

 
447,396

Research and Development
 
 
 
 
 
 
 
 
48,016

Selling, General, and Administrative
 
 
 
 
 
 
 
 
91,979

Total Expenses
 
 
 
 
 
 
 
 
587,391

 
 
 
 
 
 
 
 
 
 
SEGMENT INCOME
$
147,777

 
$
141,409

 
$
124,560

 
$
(82,324
)
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
 
 
 
 
 
 
 
191,427

 
 
 
 
 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
 
 
 
 
247

 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
 
 
 
 
 
 
 
$
191,674


 
Six Months Ended
 
December 31, 2017
 
Core
 
Payments
 
Complementary
 
Corporate & Other
 
Total
REVENUE
 
 
 
 
 
 
 
 
 
Services and Support
$
237,091

 
$
19,176

 
$
161,626

 
$
31,877

 
$
449,770

Processing
13,550

 
225,098

 
30,057

 
18

 
268,723

Total Revenue
250,641

 
244,274

 
191,683

 
31,895

 
718,493

 
 
 
 
 
 
 
 
 
 
Cost of Revenue
110,949

 
116,627

 
80,201

 
103,239

 
411,016

Research and Development
 
 
 
 
 
 
 
 
43,343

Selling, General, and Administrative
 
 
 
 
 
 
 
 
84,181

Gain on Disposal of Businesses
 
 
 
 
 
 
 
 
(1,894
)
Total Expenses
 
 
 
 
 
 
 
 
536,646

 
 
 
 
 
 
 
 
 
 
SEGMENT INCOME
$
139,692

 
$
127,647

 
$
111,482

 
$
(71,344
)
 
 
 
 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
 
 
 
 
 
 
 
181,847

 
 
 
 
 
 
 
 
 
 
INTEREST INCOME (EXPENSE)
 
 
 
 
 
 
 
 
(146
)
 
 
 
 
 
 
 
 
 
 
INCOME BEFORE INCOME TAXES
 
 
 
 
 
 
 
 
$
181,701


The Company has not disclosed any additional asset information by segment, as the information is not generated for internal management reporting to the Chief Operating Decision Maker.


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NOTE 10: SUBSEQUENT EVENTS

None.






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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, 2018.
OVERVIEW
Jack Henry & Associates, Inc. ("JHA") is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Its solutions are marketed and supported through three primary brands. Jack Henry Banking® is a top provider of information and transaction processing solutions to U.S. banks ranging from community banks to multi-billion-dollar asset institutions.  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 and outsourced delivery.
Our two primary revenue streams are "Services and support" and "Processing". Services and support includes: "Outsourcing and cloud" fees that predominantly have contract terms of five years or longer at inception; "Product delivery and services" revenue, which includes revenue from the sales of licenses, implementation services, consulting, and hardware; and "In-house support" revenue, which is composed of maintenance fees which primarily contain annual contract terms. Processing revenue includes: "Remittance" revenue from payment processing, remote capture, and automated clearing house (ACH) transactions; "Card" fees, including card transaction processing and monthly fees; and "Transaction and digital" revenue, which includes transaction and mobile processing fees. We continually seek opportunities to increase revenue while at the same time containing costs to expand margins.
All dollar amounts in the following discussion are in thousands, except per share amounts.
RESULTS OF OPERATIONS
The adoption of ASC 606 has impacted the timing of our revenue recognition, as discussed in detail in Note 1, Nature of Operations and Summary of Significant Accounting Policies, of the condensed consolidated financial statements within this Quarterly Report on Form 10-Q. The prior year numbers presented below have been re-cast as part of our full retrospective adoption of the new standard.
In the second quarter of fiscal 2019, total revenue increased 8%, or $29,066, compared to the same quarter in the prior year. Excluding a decrease of $3,111 in deconversion fees quarter-over-quarter, and excluding revenue of $228 from companies acquired in fiscal 2019, total revenue increased 9% for the quarter.
Operating expenses increased 9% compared to the second quarter of fiscal 2018. Headcount increased 4% at December 31, 2018 compared to December 31, 2017, leading to increased salaries and benefits. Other reasons for the increase include: bonuses provided by the Company in response to the lower tax rate resulting from the Tax Cuts and Jobs Act ("TCJA"); increased amortization expense, partially due to assets acquired in the Ensenta acquisition; and higher direct cost of product, including costs related to our new card payment processing platform and faster payments incentives.
Operating income increased 4% for the quarter, but excluding deconversion fees, income from fiscal 2019 acquisitions, and the increased bonus expense, operating income increased 12%.
The provision for income taxes increased significantly compared to the prior year quarter due primarily to the impact of the enactment of the TCJA on our income taxes last year. The effective tax rate for the quarter is 22.9%.
The above changes led to a decrease in net income of 58% for the second quarter of fiscal 2019 compared to the second quarter in fiscal 2018, again primarily due to the impact of the TCJA in the prior year.
In the six months ended December 31, 2018, total revenue increased 8%, or $60,325, over the six months ended December 31, 2017. Deconversion fees in the year-to-date period decreased $5,993 compared to the same six months in the prior fiscal year. Revenue from fiscal 2019 acquisitions totaled $228. Excluding deconversion revenue from each period and revenue from fiscal 2019 acquisitions, total revenue increased 9%.
Operating expenses for the six months ended December 31, 2018 increased 9% compared to the equivalent period in the prior year, primarily due to increased headcount, the Ensenta acquisition, costs related to our new card payment processing platform, bonuses provided by the Company in response to the lower tax rate resulting from the TCJA, and increased amortization expense.

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Operating income increased 5% for the year-to-date period, but excluding deconversion fees, income from fiscal 2019 acquisitions, and the increased bonus expense, operating income increased 14%.
Provision for income taxes increased compared to the prior year-to-date period, due primarily to the enactment of the TCJA. The effective tax rate for the six months ended December 31, 2018 is 20.9%.
The result of the above changes led to a decrease in net income of 34% for the six months of fiscal 2019 compared to the same period in fiscal 2018.
We move into the third quarter of fiscal 2019 following strong performance in the second quarter. Significant portions of our business continue to come from recurring revenues 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 we believe 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 should 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 ending December 31, 2018 follows. Discussions compare the current three and six months ending December 31, 2018 to the prior year's three and six months ending December 31, 2017.
REVENUE
Services and Support
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
%
Change
 
2018
 
2017
 
 
 
2018
 
2017
 
 
Services and Support
$
237,322

 
$
223,018

 
6
%
 
$
483,890

 
$
449,770

 
8
%
Percentage of total revenue
61
%
 
62
%
 
 
 
62
%
 
63
%
 
 

There was 6% growth in services and support revenue in the second quarter of fiscal 2019 compared to the same quarter last year. Excluding deconversion fees from each period, which decreased $3,111 compared to the prior year quarter, and $205 of revenue from businesses acquired in fiscal 2019, services and support revenue grew 8%. The increase was primarily due to increases in our 'outsourcing and cloud' revenue stream, partially driven by added revenue from Ensenta, and supplemented by organic growth in hosting and data processing. 'In-house support' revenue also contributed to the increase.
In the six months ended December 31, 2018, services and support revenue grew 8% over the equivalent six months in the prior fiscal year. Excluding deconversion fees from each period presented, which decreased $5,993 compared to the prior year-to-date period, and revenue from businesses acquired in fiscal 2019, services and support revenue grew 9%. The increase was driven primarily by growth in our 'outsourcing and cloud' revenue stream, partially due to Ensenta revenue. Our 'in-house support' revenue stream also contributed to the increase, primarily due to higher software usage revenue, partially resulting from the addition of new customers.
Processing
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
%
Change
 
2018
 
2017
 
 
 
2018
 
2017
 
 
Processing
$
148,953

 
$
134,191

 
11
%
 
$
294,928

 
$
268,723

 
10
%
Percentage of total revenue
39
%
 
38
%
 
 
 
38
%
 
37
%
 
 
Processing revenue increased 11% in the second quarter of fiscal 2019 compared to the same quarter last year, primarily due to increased transaction volumes within each of the three components of processing revenue and added revenue from Ensenta.
Each component also experienced volume growth in the fiscal year-to-date period, leading to an increase in processing revenue of 10% for the six months ended December 31, 2018 as compared to the six months ended December 31, 2017.

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OPERATING EXPENSES
Cost of Revenue
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
%
Change
 
2018
 
2017
 
 
 
2018
 
2017
 
 
Cost of Revenue
$
227,284

 
$
207,100

 
10
%
 
$
447,396

 
$
411,016

 
9
%
Percentage of total revenue
59
%
 
58
%
 
 
 
57
%
 
57
%
 
 
Cost of revenue for the second quarter of fiscal 2019 increased 10% over the prior year, and increased 1% as a percentage of total revenue. Excluding costs related to deconversions, fiscal 2019 acquisitions, and bonuses provided by the Company in response to the lower tax rate resulting from the TCJA, cost of revenue increased 9%. A 4% expansion in headcount at December 31, 2018 compared to December 31, 2017 contributed to the increase, driving increased salaries and benefits. Other factors contributing to the increase include higher direct costs of product, including spending related to the ongoing project to expand our credit and debit card platform, and increased amortization expense, partially due the amortization of assets acquired from Ensenta.
For the year-to-date period, cost of revenue increased 9% due to the same factors discussed above, but remained a consistent percentage of revenue. Excluding costs related to deconversions, fiscal 2019 acquisitions, and bonuses provided by the Company in response to the lower tax rate resulting from the TCJA, cost of revenue increased 8%.
Research and Development
Three Months Ended December 31,
 
%
Change
 
Six Months Ended December 31,
 
%
Change
 
2018
 
2017
 
 
 
2018
 
2017
 
 
Research and Development
$