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Tyler Technologies 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-3.3
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1
tyl-10q_20150930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

x 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2015

OR

 

¨ 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File Number 1-10485

 

TYLER TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

DELAWARE

 

75-2303920

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification no.)

5101 TENNYSON PARKWAY

PLANO, TEXAS

75024

(Address of principal executive offices)

(Zip code)

(972) 713-3700

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate 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   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨

  

Smaller Reporting Company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨     No   x

The number of shares of common stock of registrant outstanding on October 16, 2015 was 33,939,000.

 

 

 

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share amounts)

(Unaudited)

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software licenses and royalties

$

15,690

 

 

$

13,226

 

 

$

44,576

 

 

$

36,541

 

Subscriptions

 

29,036

 

 

 

22,694

 

 

 

81,273

 

 

 

64,135

 

Software services

 

36,398

 

 

 

31,159

 

 

 

101,765

 

 

 

85,594

 

Maintenance

 

61,018

 

 

 

54,713

 

 

 

177,829

 

 

 

156,904

 

Appraisal services

 

6,557

 

 

 

5,802

 

 

 

19,337

 

 

 

16,097

 

Hardware and other

 

2,146

 

 

 

1,070

 

 

 

7,326

 

 

 

6,390

 

Total revenues

 

150,845

 

 

 

128,664

 

 

 

432,106

 

 

 

365,661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software licenses and royalties

 

147

 

 

 

565

 

 

 

1,183

 

 

 

1,439

 

Acquired software

 

552

 

 

 

448

 

 

 

1,464

 

 

 

1,373

 

Software services, maintenance and subscriptions

 

72,764

 

 

 

61,428

 

 

 

207,819

 

 

 

174,701

 

Appraisal services

 

3,984

 

 

 

3,764

 

 

 

12,397

 

 

 

10,740

 

Hardware and other

 

1,565

 

 

 

667

 

 

 

5,278

 

 

 

4,528

 

Total cost of revenues

 

79,012

 

 

 

66,872

 

 

 

228,141

 

 

 

192,781

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

71,833

 

 

 

61,792

 

 

 

203,965

 

 

 

172,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

31,869

 

 

 

27,344

 

 

 

90,810

 

 

 

80,130

 

Research and development expense

 

7,193

 

 

 

6,567

 

 

 

21,307

 

 

 

19,128

 

Amortization of customer and trade name intangibles

 

1,282

 

 

 

1,136

 

 

 

3,585

 

 

 

3,393

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

31,489

 

 

 

26,745

 

 

 

88,263

 

 

 

70,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

255

 

 

 

(47

)

 

 

621

 

 

 

(522

)

Income before income taxes

 

31,744

 

 

 

26,698

 

 

 

88,884

 

 

 

69,707

 

Income tax provision

 

11,602

 

 

 

9,698

 

 

 

32,633

 

 

 

26,084

 

Net income

$

20,142

 

 

$

17,000

 

 

$

56,251

 

 

$

43,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.59

 

 

$

0.52

 

 

$

1.66

 

 

$

1.32

 

Diluted

$

0.55

 

 

$

0.48

 

 

$

1.56

 

 

$

1.23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

$

20,142

 

 

$

17,000

 

 

$

56,251

 

 

$

43,623

 

 

See accompanying notes.

 

 

 

2

 


 

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share amounts)

 

 

 

September 30,

 

 

 

 

 

 

 

2015

 

 

December 31,

 

 

 

(unaudited)

 

 

2014

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

238,614

 

 

$

206,167

 

Accounts receivable (less allowance for losses of $1,499 in 2015 and $1,725 in 2014)

 

 

129,228

 

 

 

112,660

 

Short-term investments

 

 

9,124

 

 

 

 

Prepaid expenses

 

 

18,044

 

 

 

17,851

 

Other current assets

 

 

6,821

 

 

 

358

 

Deferred income taxes

 

 

9,674

 

 

 

9,674

 

Total current assets

 

 

411,505

 

 

 

346,710

 

 

 

 

 

 

 

 

 

 

Accounts receivable, long-term portion

 

 

1,072

 

 

 

1,761

 

Property and equipment, net

 

 

68,092

 

 

 

65,910

 

Other assets:

 

 

 

 

 

 

 

 

Goodwill

 

 

125,932

 

 

 

124,142

 

Other intangibles, net

 

 

35,701

 

 

 

34,722

 

Cost method investment

 

 

15,000

 

 

 

 

Non-current investments and other assets

 

 

21,080

 

 

 

737

 

 

 

$

678,382

 

 

$

573,982

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,385

 

 

$

4,119

 

Accrued liabilities

 

 

37,199

 

 

 

39,508

 

Deferred revenue

 

 

200,890

 

 

 

189,212

 

Total current liabilities

 

 

242,474

 

 

 

232,839

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

4,813

 

 

 

4,170

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $10.00 par value; 1,000,000 shares authorized; none issued

 

 

 

 

 

 

Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares

   issued in 2015 and 2014

 

 

481

 

 

 

481

 

Additional paid-in capital

 

 

230,840

 

 

 

201,389

 

Accumulated other comprehensive loss, net of tax

 

 

(46

)

 

 

(46

)

Retained earnings

 

 

317,401

 

 

 

261,150

 

Treasury stock, at cost; 14,218,757 and 14,678,782 shares in 2015 and 2014,

   respectively

 

 

(117,581

)

 

 

(126,001

)

Total shareholders' equity

 

 

431,095

 

 

 

336,973

 

 

 

$

678,382

 

 

$

573,982

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

3

 


 

TYLER TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine months ended September 30,

 

 

 

2015

 

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

56,251

 

 

$

43,623

 

Adjustments to reconcile net income to cash provided by operations:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,586

 

 

 

10,936

 

Share-based compensation expense

 

 

14,459

 

 

 

10,887

 

Excess tax benefit from exercises of share-based arrangements

 

 

(10,801

)

 

 

(6,717

)

Changes in operating assets and liabilities, exclusive of effects of

   acquired companies:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(14,356

)

 

 

(5,851

)

Prepaid expenses and other current assets

 

 

717

 

 

 

(1,570

)

Income taxes

 

 

4,754

 

 

 

16,182

 

Accounts payable

 

 

(369

)

 

 

864

 

Accrued liabilities

 

 

(3,349

)

 

 

(1,815

)

Deferred revenue

 

 

11,021

 

 

 

28,592

 

Net cash provided by operating activities

 

 

69,913

 

 

 

95,131

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of cost method investment

 

 

(15,000

)

 

 

 

Purchase of held-to-maturity securities

 

 

(29,391

)

 

 

 

Proceeds from sale of investments

 

 

 

 

 

808

 

Cost of acquisitions, net of cash acquired

 

 

(6,447

)

 

 

(3,242

)

Additions to property and equipment

 

 

(8,525

)

 

 

(8,037

)

Decrease in other

 

 

5

 

 

 

219

 

Net cash used by investing activities

 

 

(59,358

)

 

 

(10,252

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Purchase of treasury shares

 

 

(645

)

 

 

(22,817

)

Proceeds from exercise of stock options

 

 

8,369

 

 

 

6,739

 

Contributions from employee stock purchase plan

 

 

3,367

 

 

 

3,037

 

Excess tax benefit from exercises of share-based arrangements

 

 

10,801

 

 

 

6,717

 

Net cash provided (used) by financing activities

 

 

21,892

 

 

 

(6,324

)

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

32,447

 

 

 

78,555

 

Cash and cash equivalents at beginning of period

 

 

206,167

 

 

 

78,876

 

Cash and cash equivalents at end of period

 

$

238,614

 

 

$

157,431

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

4

 


Tyler Technologies, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(Tables in thousands, except per share data)

 

 

(1) Basis of Presentation

We prepared the accompanying condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States, or GAAP, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted for interim periods. Balance sheet amounts are as of September 30, 2015 and December 31, 2014 and operating result amounts are for the three and nine months ended September 30, 2015 and 2014, and include all normal and recurring adjustments that we considered necessary for the fair summarized presentation of our financial position and operating results. As these are condensed financial statements, one should also read the financial statements and notes included in our latest Form 10-K for the year ended December 31, 2014. Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.

 

(2) Acquisitions

 

On May 29, 2015, we acquired all of the capital stock of Brazos Technology Corporation (“Brazos”), which provides mobile hand-held solutions primarily to law enforcement agencies for field accident reporting and electronically issuing citations.  The purchase price, net of cash acquired of $312,000 and including debt assumed of $733,000, was $6.1 million in cash and 12,500 shares of Tyler common stock valued at $1.5 million. As of September 30, 2015, the purchase price allocation of Brazos is in process mainly due to completing the valuation of the acquired intangible assets. We currently expect to finalize the allocation of the purchase price in the fourth quarter. The impact of this acquisition on our operating results is not material.

                                                          

(3) Other Assets

Cash and cash equivalents consist of cash on deposit with several domestic banks and money market funds.

As of September 2015, we have $29.4 million in investment grade corporate and municipal bonds with maturity dates ranging from 2015 through mid-2017. We intend to hold these bonds to maturity and have classified them as such. We believe cost approximates fair value because of the relatively short duration of these investments. The fair value of these securities are considered Level II as they are based on inputs from quoted prices in markets that are not active or other observable market data. These investments are included in short-term investments and non-current investments and other assets.

 

On January 30, 2015, we made a $15.0 million investment in convertible preferred stock representing a 20% interest in Record Holdings Pty Limited (“Record Holdings”), a privately held Australian company specializing in digitizing the spoken word in court and legal settings. We do not believe we have the ability to significantly influence the day-to-day activities of Record Holdings and are accounting for this investment under the cost method.

 

(4) Shareholders’ Equity

The following table details activity in our common stock:

 

Nine months ended September 30,

 

 

2015

 

 

2014

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

Stock option exercises

 

420

 

 

$

8,369

 

 

 

419

 

 

$

6,739

 

Employee stock plan purchases

 

33

 

 

 

3,367

 

 

 

39

 

 

 

3,037

 

Shares issued for acquisitions

 

13

 

 

 

1,519

 

 

 

17

 

 

 

1,473

 

Purchase of common stock

 

(5

)

 

 

(645

)

 

 

(294

)

 

 

(22,817

)

As of September 30, 2015, we had authorization from our board of directors to repurchase up to 1.4 million additional shares of Tyler common stock.

 

 

(5) Income Tax Provision

For the three and nine months ended September 30, 2015, we had an effective income tax rate of 36.5% and 36.7%, respectively, compared to an effective income tax rate of 36.3% and 37.4% for the three and nine months ended months September 30, 2014, respectively. The effective income tax rates for the periods presented were different from the statutory United States federal income

5

 


tax rate of 35% primarily due to state income taxes, non-deductible share-based compensation expense, the qualified manufacturing activities deduction, and non-deductible meals and entertainment costs.

We made federal and state tax payments of $27.2 million during the nine months ended September 30, 2015 compared to $9.9 million for the same period in the prior year.

 

 

(6) Earnings Per Share

The following table details the reconciliation of basic earnings per share to diluted earnings per share:

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Numerator for basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

20,142

 

 

$

17,000

 

 

$

56,251

 

 

$

43,623

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average basic common shares outstanding

 

 

33,900

 

 

 

32,935

 

 

 

33,787

 

 

 

32,947

 

Assumed conversion of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

2,449

 

 

 

2,349

 

 

 

2,376

 

 

 

2,392

 

Denominator for diluted earnings per share

   - Adjusted weighted-average shares

 

 

36,349

 

 

 

35,284

 

 

 

36,163

 

 

 

35,339

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.59

 

 

$

0.52

 

 

$

1.66

 

 

$

1.32

 

Diluted

 

$

0.55

 

 

$

0.48

 

 

$

1.56

 

 

$

1.23

 

 

For the three and nine months ended September 30, 2015, stock options representing the right to purchase common stock of approximately 416,000 shares and 519,000 shares, respectively, were not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.  For the three and nine months ended September 30, 2014, stock options representing the right to purchase common stock of approximately 651,000 shares and 540,000 shares, respectively, were not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.  

 

 

(7) Share-Based Compensation

The following table summarizes share-based compensation expense related to share-based awards recorded in the statements of comprehensive income, pursuant to ASC 718, Stock Compensation:

 

 

 

Three months ended September 30,

 

 

Nine months ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Cost of software services, maintenance and subscriptions

 

$

902

 

 

$

569

 

 

$

2,349

 

 

$

1,595

 

Selling, general and administrative expenses

 

 

4,696

 

 

 

3,316

 

 

 

12,110

 

 

 

9,292

 

Total share-based compensation expenses

 

$

5,598

 

 

$

3,885

 

 

$

14,459

 

 

$

10,887

 

 

 

(8) Segment and Related Information

We are a major provider of integrated information management solutions and services for the public sector, with a focus on local governments.

We provide our software systems and services and appraisal services through four business units, which focus on the following products:

 

·

financial management, education and planning, regulatory and maintenance software solutions;

 

·

financial management, municipal courts, and land and vital records management software solutions;

 

·

courts and justice software solutions; and

 

·

appraisal and tax software solutions and property appraisal services.

6

 


In accordance with ASC 280-10, Segment Reporting, the financial management, education and planning, regulatory and maintenance software solutions unit; financial management, municipal courts and land and vital records management software solutions unit; and the courts and justice software solutions unit meet the criteria for aggregation and are presented in one reportable segment, Enterprise Software Solutions (“ESS”).  The ESS segment provides municipal and county governments and schools with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions such as financial management and courts and justice processes.  The Appraisal and Tax Software Solutions and Services (“ATSS”) segment provides systems and software that automate the appraisal and assessment of real and personal property as well as property appraisal outsourcing services for local governments and taxing authorities.  Property appraisal outsourcing services include: the physical inspection of commercial and residential properties; data collection and processing; computer analysis for property valuation; preparation of tax rolls; community education; and arbitration between taxpayers and the assessing jurisdiction.

We evaluate performance based on several factors, of which the primary financial measure is business segment operating income.  We define segment operating income for our business units as income before noncash amortization of intangible assets associated with their acquisition, interest expense and income taxes.  Segment operating income includes intercompany transactions.  The majority of intercompany transactions relate to contracts involving more than one unit and are valued based on the contractual arrangement.  Segment operating income for corporate primarily consists of compensation costs for the executive management team and certain accounting and administrative staff and share-based compensation expense for the entire company.  Corporate segment operating income also includes revenues and expenses related to a company-wide user conference.

 

For the three months ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Enterprise

Software

Solutions

 

 

Appraisal and Tax

Software Solutions

and Services

 

 

Corporate

 

 

Totals

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software licenses and royalties

 

$

14,680

 

 

$

1,010

 

 

$

 

 

$

15,690

 

Subscriptions

 

 

27,772

 

 

 

1,264

 

 

 

 

 

 

29,036

 

Software services

 

 

33,210

 

 

 

3,188

 

 

 

 

 

 

36,398

 

Maintenance

 

 

56,451

 

 

 

4,567

 

 

 

 

 

 

61,018

 

Appraisal services

 

 

 

 

 

6,557

 

 

 

 

 

 

6,557

 

Hardware and other

 

 

2,162

 

 

 

 

 

 

(16

)

 

 

2,146

 

Intercompany

 

 

1,014

 

 

 

 

 

 

(1,014

)

 

 

 

Total revenues

 

$

135,289

 

 

$

16,586

 

 

$

(1,030

)

 

$

150,845

 

Segment operating income

 

$

37,853

 

 

$

4,420

 

 

$

(8,950

)

 

$

33,323

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Enterprise

Software

Solutions

 

 

Appraisal and Tax

Software Solutions

and Services

 

 

Corporate

 

 

Totals

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software licenses and royalties

 

$

40,563

 

 

$

4,013

 

 

$

 

 

$

44,576

 

Subscriptions

 

 

77,814

 

 

 

3,459

 

 

 

 

 

 

81,273

 

Software services

 

 

94,203

 

 

 

7,562

 

 

 

 

 

 

101,765