tyl-10q_20160930.htm

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

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

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):

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

The number of shares of common stock of registrant outstanding on October 21, 2016 was 36,627,400.

	Three Months ended September 30,					Nine Months ended September 30,
	2016			2015		2016			2015
Revenues:
Software licenses and royalties	$	19,930		$	15,690	$	54,331		$	44,576
Subscriptions		36,869			29,036		104,926			81,273
Software services		44,738			36,398		133,208			101,765
Maintenance		83,000			61,018		237,775			177,829
Appraisal services		6,541			6,557		20,083			19,337
Hardware and other		3,419			2,146		12,439			7,326
Total revenues		194,497			150,845		562,762			432,106

Cost of revenues:
Software licenses and royalties		623			147		1,927			1,183
Acquired software		5,598			552		16,737			1,464
Software services, maintenance and subscriptions		88,623			72,764		260,610			207,819
Appraisal services		4,053			3,984		12,473			12,397
Hardware and other		2,120			1,565		8,481			5,278
Total cost of revenues		101,017			79,012		300,228			228,141

Gross profit		93,480			71,833		262,534			203,965

Selling, general and administrative expenses		42,007			31,869		124,998			90,810
Research and development expense		11,070			7,193		31,362			21,307
Amortization of customer and trade name intangibles		3,458			1,282		10,273			3,585

Operating income		36,945			31,489		95,901			88,263

Other (expense) income, net		(526	)		255		(1,713	)		621
Income before income taxes		36,419			31,744		94,188			88,884
Income tax provision		14,155			11,602		35,973			32,633
Net income	$	22,264		$	20,142	$	58,215		$	56,251

Earnings per common share:
Basic	$	0.61		$	0.59	$	1.60		$	1.66
Diluted	$	0.58		$	0.55	$	1.51		$	1.56

	September 30,
	2016			December 31,
	(unaudited)			2015
ASSETS
Current assets:
Cash and cash equivalents	$	23,314		$	33,087
Accounts receivable (less allowance for losses of $2,657 in 2016 and $1,640 in 2015)		188,429			176,360
Short-term investments		23,764			13,423
Prepaid expenses		21,384			22,334
Income tax receivable		17,680			21,080
Other current assets		2,756			1,931
Total current assets		277,327			268,215

Accounts receivable, long-term		2,744			2,777
Property and equipment, net		120,963			101,112
Other assets:
Goodwill		647,525			653,666
Other intangibles, net		276,326			295,378
Non-current investments and other assets		27,881			35,422
	$	1,352,766		$	1,356,570

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	5,992		$	6,789
Accrued liabilities		54,184			49,156
Deferred revenue		288,316			281,627
Total current liabilities		348,492			337,572

Revolving line of credit		34,000			66,000
Deferred revenue, long-term		2,924			3,115
Deferred income taxes		85,095			91,026

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 and outstanding as of September 30, 2016 and December 31, 2015		481			481
Additional paid-in capital		595,162			607,755
Accumulated other comprehensive loss, net of tax		(46	)		(46	)
Retained earnings		384,234			326,019
Treasury stock, at cost; 11,532,984 and 11,373,666 shares in 2016 and 2015, respectively		(97,576	)		(75,352	)
Total shareholders' equity		882,255			858,857
	$	1,352,766		$	1,356,570

See accompanying notes.

	Nine Months ended September 30,
	2016			2015
Cash flows from operating activities:
Net income	$	58,215		$	56,251
Adjustments to reconcile net income to cash provided (used) by operations:
Depreciation and amortization		37,521			11,586
Share-based compensation expense		21,348			14,459
Excess tax benefit from exercises of share-based arrangements		(18,816	)		(10,801	)
Deferred income tax (benefit) expense		(11,289	)		643
Changes in operating assets and liabilities, exclusive of effects of acquired companies:
Accounts receivable		(14,641	)		(14,356	)
Income taxes		22,215			4,754
Prepaid expenses and other current assets		1,169			74
Accounts payable		(917	)		(369	)
Accrued liabilities		8,515			(3,349	)
Deferred revenue		17,918			11,021
Net cash provided by operating activities		121,238			69,913

Cash flows from investing activities:
Additions to property and equipment		(29,529	)		(8,525	)
Purchase of marketable security investments		(13,127	)		(29,391	)
Proceeds from marketable security investments		9,256			—
Investment in Record Holdings Pty Limited		—			(15,000	)
Cost of acquisitions, net of cash acquired		(9,394	)		(6,447	)
Increase (decrease) in other		(52	)		5
Net cash used by investing activities		(42,846	)		(59,358	)

Cash flows from financing activities:
Decrease in net borrowings on revolving line of credit		(32,000	)		—
Purchase of treasury shares		(94,499	)		(645	)
Proceeds from exercise of stock options		15,089			8,369
Contributions from employee stock purchase plan		4,429			3,367
Excess tax benefit from exercises of share-based arrangements		18,816			10,801
Net cash (used) provided by financing activities		(88,165	)		21,892

Net (decrease) increase in cash and cash equivalents		(9,773	)		32,447
Cash and cash equivalents at beginning of period		33,087			206,167
Cash and cash equivalents at end of period	$	23,314		$	238,614

See accompanying notes.

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, 2016 and December 31, 2015 and operating result amounts are for the three and nine months ended September 30, 2016 and 2015, respectively, 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, 2015. 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.

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions, and other events and circumstances from non-owner sources and includes all components of net income (loss) and other comprehensive income (loss). We had no items of other comprehensive income (loss) for the three and nine months ended September 30, 2016 and 2015.

Certain amounts for the previous year have been reclassified to conform to the current year presentation.

In November 2015, we acquired all of the capital stock of New World Systems Corporation (“NWS”), which provides public safety and financial solutions for local governments. In the nine months ended September 30, 2016, we paid $2.0 million related to the working capital holdback of $4.0 million, which was accrued at December 31, 2015, and reduced the remaining working capital accrued liability. Other adjustments included several miscellaneous adjustments to the preliminary opening balance sheet related to a reduction in deferred revenue and related deferred taxes and additional reserves for receivables and contingencies for a net decrease to goodwill of approximately $10.2 million. As of September 30, 2016, the purchase price allocation for NWS is not yet complete. The preliminary estimates of fair value assumed at the acquisition date for intangibles, liabilities, deferred revenue, and related deferred taxes are subject to change as valuations are finalized.

The operating results of NWS are included with the operating results of the Enterprise Software Solutions segment, since the date of acquisition.

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

As of September 2016, we have $34.0 million in investment grade corporate and municipal bonds with maturity dates ranging from 2016 through mid-2018. 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.

We have a $15.0 million investment in convertible preferred stock representing a 20% interest in Record Holdings Pty Limited, a privately held Australian company specializing in digitizing the spoken word in court and legal proceedings. The investment in convertible preferred stock is accounted under the cost method because the Company does not have the ability to exercise significant influence over the investee and the securities do not have readily determinable fair values. Our investment is carried at cost less any impairment write-downs. Annually, the Company’s cost method investments are assessed for impairment. The Company does not reassess the fair value of cost method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments. This investment is included in non-current investments and other assets.

As of September 30, 2016, we had authorization from our board of directors to repurchase up to 2.1 million additional shares of Tyler common stock.

On November 16, 2015, we entered into a $300.0 million Credit Agreement (the “Credit Facility”) with the various lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent. The Credit Facility provides for a revolving credit line up to $300.0 million, including a $10.0 million sublimit for letters of credit. The Credit Facility matures on November 16, 2020. Borrowings under the Credit Facility may be used for general corporate purposes, including working capital requirements, acquisitions and share repurchases.

Borrowings under the Credit Facility bear interest at a rate of either (1) Wells Fargo Bank’s prime rate (subject to certain higher rate determinations) plus a margin of 0.25% to 1.00% or (2) the 30, 60, 90 or 180 day LIBOR rate plus a margin of 1.25% to 2.00%. As of September 30, 2016, our interest rate was 1.8%. The Credit Facility is secured by substantially all of our assets. The Credit Facility requires us to maintain certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash dividends or loans, and limits incurrence of additional indebtedness and liens. As of September 30, 2016, we were in compliance with those covenants.

As of September 30, 2016, we had $34.0 million in outstanding borrowings and two outstanding letters of credit totaling $2.2 million. Unused borrowing capacity under the Credit Facility was $263.8 million.

For the three and nine months ended September 30, 2016, we had effective income tax rates of 38.9% and 38.2%, respectively, compared to 36.5% and 36.7% for the three and nine months ended September 30, 2015, respectively. The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 35% principally due to state income taxes, non-deductible share-based compensation expense, the qualified manufacturing activities deduction, disqualifying incentive stock option dispositions and non-deductible meals and entertainment costs.

We made tax payments of $25.0 million and $27.2 million in the nine months ended September 30, 2016 and September 30, 2015, respectively.

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,
	2016		2015		2016		2015
Numerator for basic and diluted earnings per share:
Net income	$	22,264	$	20,142	$	58,215	$	56,251
Denominator:
Weighted-average basic common shares outstanding		36,433		33,900		36,438		33,787
Assumed conversion of dilutive securities:
Stock options		2,073		2,449		2,039		2,376
Denominator for diluted earnings per share - Adjusted weighted-average shares		38,506		36,349		38,477		36,163
Earnings per common share:
Basic	$	0.61	$	0.59	$	1.60	$	1.66
Diluted	$	0.58	$	0.55	$	1.51	$	1.56

For the three and nine months ended September 30, 2016, stock options representing the right to purchase common stock of approximately 741,000 shares and 737,000 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, 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.

The following table summarizes share-based compensation expense related to share-based awards recorded in the statements of income, pursuant to Accounting Standards Codification (“ASC”) 718, Stock Compensation:

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:

In accordance with ASC 280-10, Segment Reporting, the financial management, education and planning, regulatory and maintenance software solutions unit; financial management, municipal courts, planning, regulatory and maintenance, and land and vital records management software solutions unit; and the courts and justice and public safety software solutions unit meet the criteria for aggregation and are presented in one reportable segment, Enterprise Software (“ES”) segment. The ES 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; public safety; planning, regulatory and maintenance; and land and vital records management. The Appraisal and Tax (“A&T”) 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 non-cash 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, 2016
	Enterprise Software		Appraisal and Tax		Corporate			Totals
Revenues
Software licenses and royalties	$	18,492	$	1,438	$	—		$	19,930
Subscriptions		35,169		1,700		—			36,869
Software services		40,608		4,130		—			44,738
Maintenance		78,292		4,708		—			83,000
Appraisal services		—		6,541		—			6,541
Hardware and other		3,428		—		(9	)		3,419
Intercompany		1,971		—		(1,971	)		—
Total revenues	$	177,960	$	18,517	$	(1,980	)	$	194,497
Segment operating income	$	52,372	$	4,713	$	(11,084	)	$	46,001



For the nine months ended September 30, 2016
	Enterprise Software		Appraisal and Tax		Corporate			Totals
Revenues
Software licenses and royalties	$	50,585	$	3,746	$	—		$	54,331
Subscriptions		99,470		5,456		—			104,926
Software services		121,372		11,836		—			133,208
Maintenance		223,802		13,973		—			237,775
Appraisal services		—		20,083		—			20,083
Hardware and other		9,406		16		3,017			12,439
Intercompany		4,743		—		(4,743	)		—
Total revenues	$	509,378	$	55,110	$	(1,726	)	$	562,762
Segment operating income	$	139,151	$	13,534	$	(29,774	)	$	122,911

For the three months ended September 30, 2015
	Enterprise Software		Appraisal and Tax		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		Appraisal and Tax		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
Maintenance		164,457		13,372		—			177,829
Appraisal services		—		19,337



DELAWARE		75-2303920
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

	Three Months ended September 30,				Nine Months ended September 30,
	2016		2015		2016		2015
Cost of software services, maintenance and subscriptions	$	1,779	$	902	$	4,668	$	2,349
Selling, general and administrative expenses		5,877		4,696		16,680		12,110
Total share-based compensation expenses	$	7,656	$	5,598	$	21,348	$	14,459


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


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

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller Reporting Company	☐