Quarterly Report (10-q)

Date : 10/30/2019 @ 8:42PM
Source : Edgar (US Regulatory)
Stock : Tyler Technologies Corp (TYL)
Quote : 280.87  -4.48 (-1.57%) @ 9:01PM
After Hours
Last Trade
Last $ 280.87 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2019
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)
(City)
(State)
(Zip code)
(972) 713-3700
(Registrant’s telephone number, including area code)
Title of each class
Trading symbol
Name of each exchange
on which registered
COMMON STOCK, $0.01 PAR VALUE
TYL
New York Stock Exchange
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 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       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 definition of “large accelerated filer," "accelerated filer,” "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
  
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 Act).  Yes       No  
The number of shares of common stock of registrant outstanding on October 29, 2019 was 38,986,401.
 




PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
Software licenses and royalties
 
$
25,379

 
$
22,444

 
$
67,847

 
$
67,620

Subscriptions
 
75,272

 
58,699

 
216,022

 
160,736

Software services
 
54,997

 
48,199

 
160,841

 
144,812

Maintenance
 
109,833

 
96,215

 
316,674

 
286,188

Appraisal services
 
6,008

 
5,544

 
17,455

 
16,470

Hardware and other
 
3,911

 
4,966

 
18,751

 
17,475

Total revenues
 
275,400

 
236,067


797,590


693,301

 
 
 
 
 
 
 
 
 
Cost of revenues:
 
 
 
 
 
 
 
 
Software licenses and royalties
 
971

 
957

 
2,680

 
2,939

Acquired software
 
7,975

 
5,897

 
22,645

 
17,003

Software services, maintenance and subscriptions
 
128,545

 
111,508

 
371,464

 
327,080

Appraisal services
 
4,096

 
3,505

 
11,306

 
10,854

Hardware and other
 
3,096

 
2,574

 
14,870

 
11,718

Total cost of revenues
 
144,683

 
124,441

 
422,965

 
369,594

 
 
 
 
 
 
 
 
 
Gross profit
 
130,717

 
111,626

 
374,625

 
323,707

 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
63,888

 
52,605

 
187,481

 
152,471

Research and development expense
 
21,130

 
17,050

 
60,172

 
45,929

Amortization of other intangibles
 
5,646

 
4,386

 
15,762

 
11,742

 
 
 
 
 
 
 
 
 
Operating income
 
40,053

 
37,585

 
111,210

 
113,565

 
 
 
 
 
 
 
 
 
Other income, net
 
499

 
1,041

 
838

 
2,198

Income before income taxes
 
40,552

 
38,626

 
112,048

 
115,763

Income tax provision (benefit)
 
162

 
(298
)
 
12,311

 
(147
)
Net income
 
$
40,390

 
$
38,924

 
$
99,737

 
$
115,910

 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
Basic
 
$
1.04

 
$
1.00

 
$
2.58

 
$
3.01

Diluted
 
$
1.00

 
$
0.96

 
$
2.49

 
$
2.87

See accompanying notes.

2



TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)


 
 
September 30, 2019
(unaudited)
 
December 31, 2018
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
161,438

 
$
134,279

Accounts receivable (less allowance for doubtful accounts of $4,302 in 2019 and $4,647 in 2018)
 
347,982

 
298,912

Short-term investments
 
32,931

 
44,306

Prepaid expenses
 
24,544

 
33,258

Income tax receivable
 
4

 
4,697

Other current assets
 
2,907

 
3,406

Total current assets
 
569,806

 
518,858

 
 
 
 
 
Accounts receivable, long-term
 
20,437

 
16,020

Operating lease right-of-use assets
 
20,172

 

Property and equipment, net
 
169,950

 
155,177

Other assets:
 
 
 
 
Goodwill
 
826,040

 
753,718

Other intangibles, net
 
377,580

 
276,852

Non-current investments and other assets
 
71,104

 
70,338

 Total assets
 
$
2,055,089

 
$
1,790,963

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
9,060

 
$
6,910

Accrued liabilities
 
69,781

 
66,480

Operating lease liabilities
 
6,413

 

Current income tax payable
 

 

Deferred revenue
 
391,560

 
350,512

Total current liabilities
 
476,814

 
423,902

 
 
 
 
 
Revolving line of credit
 

 

Deferred revenue, long-term
 
241

 
424

Deferred income taxes
 
40,303

 
41,791

Operating lease liabilities, long-term
 
18,134

 

 
 
 
 
 
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, 2019 and December 31, 2018
 
481

 
481

Additional paid-in capital
 
692,586

 
731,435

Accumulated other comprehensive loss, net of tax
 
(46
)
 
(46
)
Retained earnings
 
870,546

 
771,925

Treasury stock, at cost; 9,172,316 and 9,872,505 shares in 2019 and 2018, respectively
 
(43,970
)
 
(178,949
)
Total shareholders' equity
 
1,519,597

 
1,324,846

 Total liabilities and shareholders' equity
 
$
2,055,089

 
$
1,790,963

See accompanying notes.

3



TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended September 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
99,737

 
$
115,910

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
56,547

 
45,627

Share-based compensation expense
 
44,369

 
37,966

 Operating lease right-of-use assets - non cash
 
3,979

 

Deferred income tax benefit
 
(10,329
)
 
(5,034
)
         Changes in operating assets and liabilities, exclusive of effects of
   acquired companies:
 
 
 
 
Accounts receivable
 
(35,544
)
 
(31,393
)
Income taxes
 
4,553

 
(1,942
)
Prepaid expenses and other current assets
 
(7,630
)
 
983

Accounts payable
 
1,548

 
(4,729
)
Operating lease liabilities
 
(4,530
)
 

Accrued liabilities
 
(1,379
)
 
1,523

Deferred revenue
 
27,206

 
20,442

Net cash provided by operating activities
 
178,527

 
179,353

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Additions to property and equipment
 
(28,833
)
 
(23,460
)
Purchase of marketable security investments
 
(27,322
)
 
(92,638
)
Proceeds from marketable security investments
 
56,854

 
60,208

Investment in software
 
(3,540
)
 

Cost of acquisitions, net of cash acquired
 
(199,870
)
 
(167,308
)
(Increase) decrease in other
 
(493
)
 
857

Net cash used by investing activities
 
(203,204
)
 
(222,341
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Purchase of treasury shares
 
(17,786
)
 

Proceeds from exercise of stock options
 
62,295

 
70,536

Contributions from employee stock purchase plan
 
7,327

 
5,978

Net cash provided by financing activities
 
51,836

 
76,514

 
 
 
 
 
Net increase in cash and cash equivalents
 
27,159

 
33,526

Cash and cash equivalents at beginning of period
 
134,279

 
185,926

Cash and cash equivalents at end of period
 
$
161,438

 
$
219,452

See accompanying notes.

4




TYLER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Treasury Stock
 
Total
Shareholders'
Equity
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Balance at June 30, 2019
48,148

 
$
481

 
$
715,920

 
$
(46
)
 
$
830,156

 
(9,582
)
 
$
(124,881
)
 
$
1,421,630

Net income

 

 

 

 
40,390

 

 

 
40,390

Exercise of stock options and vesting of restricted stock units


 

 
(38,160
)
 

 

 
396

 
78,323

 
40,163

Employee taxes paid for withheld shares upon equity award settlement

 

 

 

 

 
(1
)
 
(191
)
 
(191
)
Stock compensation

 

 
14,887

 

 

 

 

 
14,887

Issuance of shares pursuant to employee stock purchase plan

 

 
(61
)
 

 

 
15

 
2,779

 
2,718

Treasury stock purchases

 

 

 

 

 

 

 

Balance at September 30, 2019
48,148

 
$
481

 
$
692,586

 
$
(46
)
 
$
870,546

 
(9,172
)
 
$
(43,970
)
 
$
1,519,597



 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Treasury Stock
 
Total
Shareholders'
Equity
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Balance at June 30, 2018
48,148

 
$
481

 
$
686,782

 
$
(46
)
 
$
701,449

 
(9,517
)
 
$
(48,377
)
 
$
1,340,289

Net income

 

 

 

 
38,924

 

 

 
38,924

Exercise of stock options and vesting of restricted stock units

 

 
21,645

 

 

 
326

 
4,574

 
26,219

Stock compensation

 

 
14,476

 

 

 

 

 
14,476

Issuance of shares pursuant to
employee stock purchase plan

 

 
2,032

 

 

 
12

 
186

 
2,218

Treasury stock purchases

 

 

 

 

 

 

 

Balance at September 30, 2018
48,148

 
$
481

 
$
724,935

 
$
(46
)
 
$
740,373

 
(9,179
)
 
$
(43,617
)
 
$
1,422,126

See accompanying notes.











5





TYLER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Treasury Stock
 
Total
Shareholders'
Equity
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Balance at December 31, 2018
48,148

 
$
481

 
$
731,435

 
$
(46
)
 
$
771,925

 
(9,872
)
 
$
(178,949
)
 
$
1,324,846

Retained earnings adjustment-adoption of Topic 842 Leases, net of taxes

 

 

 

 
(1,116
)
 

 

 
(1,116
)
Net income

 

 

 

 
99,737

 

 

 
99,737

Exercise of stock options and vesting of restricted stock units

 

 
(82,449
)
 

 

 
746

 
144,744

 
62,295

Employee taxes paid for withheld shares for taxes upon equity award

 

 

 

 

 
(17
)
 
(3,572
)
 
(3,572
)
Stock compensation

 

 
44,369

 

 

 

 

 
44,369

Issuance of shares pursuant to employee stock purchase plan

 

 
(769
)
 

 

 
43

 
8,096

 
7,327

Treasury stock purchases

 

 

 

 

 
(72
)
 
(14,289
)
 
(14,289
)
Balance at September 30, 2019
48,148

 
$
481

 
$
692,586

 
$
(46
)
 
$
870,546

 
(9,172
)
 
$
(43,970
)
 
$
1,519,597




 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Treasury Stock
 
Total
Shareholders'
Equity
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
Balance at December 31, 2017
48,148

 
$
481

 
$
626,867

 
$
(46
)
 
$
624,463

 
(10,262
)
 
$
(60,029
)
 
$
1,191,736

Net income

 

 

 

 
115,910

 

 

 
115,910

Exercise of stock options and vesting of restricted stock units


 

 
54,666

 

 

 
1,048

 
15,870

 
70,536

Stock compensation

 

 
37,966

 

 

 

 

 
37,966

Issuance of shares pursuant to employee stock purchase plan

 

 
5,436

 

 

 
35

 
542

 
5,978

Treasury stock purchases

 

 

 

 

 

 

 

Balance at September 30, 2018
48,148

 
$
481

 
$
724,935

 
$
(46
)
 
$
740,373

 
(9,179
)
 
$
(43,617
)
 
$
1,422,126

See accompanying notes.











6



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, 2019, and December 31, 2018, and operating result amounts are for the three and nine months ended September 30, 2019, and 2018, 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, 2018. 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, 2019, and 2018.
(2)    Accounting Standards and Significant Accounting Policies
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Except for the accounting policies for leases recognition that were adjusted as a result of adopting ASU No. 2016-02, Leases ("Topic 842"), there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 20, 2019, that have had a material impact on our condensed consolidated financial statements and related notes.
USE OF ESTIMATES
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include revenue recognition, determining the nature and timing of satisfaction of performance obligations, determining the standalone selling price ("SSP") of performance obligations, variable consideration, and other obligations such as returns and refunds; loss contingencies; the estimated useful life of deferred commissions; the carrying amount and estimated useful lives of intangible assets; the carrying amount of operating lease right-of-use assets and operating lease liabilities; determining share-based compensation expense; the valuation allowance for receivables; and determining the potential outcome of future tax consequences of events that have been recognized on our consolidated financial statements or tax returns. Actual results could differ from estimates.
REVENUE RECOGNITION
Nature of Products and Services:
We earn revenue from software licenses, royalties, subscription-based services, software services, post-contract customer support (“PCS” or “maintenance”), hardware, and appraisal services. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We determine revenue recognition through the following steps:
Identification of the contract, or contracts, with a customer
Identification of the performance obligations in the contract
Determination of the transaction price

7



Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, we satisfy a performance obligation
Most of our software arrangements with customers contain multiple performance obligations that range from software licenses, installation, training, and consulting to software modification and customization to meet specific customer needs (services), hosting, and PCS. For these contracts, we account for individual performance obligations separately when they are distinct. We evaluate whether separate performance obligations can be distinct or should be accounted for as one performance obligation. Arrangements that include software services, such as training or installation, are evaluated to determine whether the customer can benefit from the services either on their own or together with other resources readily available to the customer and whether the services are separately identifiable from other promises in the contract. The transaction price is allocated to the distinct performance obligations on a relative SSP basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts. Revenue is recognized net of allowances for sales adjustments and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Significant Judgments:
Our contracts with customers often include multiple performance obligations to a customer. When a software arrangement (license or subscription) includes both software licenses and software services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the software services and recognized over time.
The transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine SSP using the expected cost-plus margin approach.
For arrangements that involve significant production, modification or customization of the software, or where software services otherwise cannot be considered distinct, we recognize revenue as control is transferred to the customer over time using progress-to-completion methods. Depending on the contract, we measure progress-to-completion primarily using labor hours incurred, or value added. The progress-to-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract because we can provide reasonably dependable estimates of contract billings and contract costs. We use the level of profit margin that is most likely to occur on a contract. If the most likely profit margin cannot be precisely determined, the lowest probable level of profit margin in the range of estimates is used until the results can be estimated more precisely. These arrangements are often implemented over an extended time period and occasionally require us to revise total cost estimates. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent.
Typically, the structure of our arrangements does not give rise to variable consideration. However, in those instances whereby variable consideration exists, we include in our estimates additional revenue for variable consideration when we believe we have an enforceable right, the amount can be estimated reliably and its realization is probable.
Refer to Note 13 - Disaggregation of Revenue for further information, including the economic factors that affect the nature, amount, timing, and uncertainty of revenue and cash flows of our various revenue categories.
Contract Balances:
Accounts receivable and allowance for doubtful accounts
Timing of revenue recognition may differ from the timing of invoicing to customers. We record an unbilled receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record an unbilled receivable related to revenue recognized for on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses.

8



At September 30, 2019, and December 31, 2018, total current and long-term accounts receivable, net of allowance for doubtful accounts, was $368.4 million and $314.9 million, respectively. We have recorded unbilled receivables of $126.5 million and $104.2 million at September 30, 2019, and December 31, 2018, respectively. Included in unbilled receivables are retention receivables of $12.9 million and $12.2 million at September 30, 2019, and December 31, 2018, respectively, which become payable upon the completion of the contract or completion of our fieldwork and formal hearings. Unbilled receivables expected to be collected within one year have been included with accounts receivable, current portion in the accompanying condensed consolidated balance sheets. Unbilled receivables and retention receivables expected to be collected past one year have been included with accounts receivable, long-term portion in the accompanying condensed consolidated balance sheets.
We maintain allowances for doubtful accounts, which are provided at the time the revenue is recognized. Since most of our customers are domestic governmental entities, we rarely incur a loss resulting from the inability of a customer to make required payments. Events or changes in circumstances that indicate the carrying amount for the allowances for doubtful accounts may require revision, include, but are not limited to, deterioration of a customer’s financial condition, failure to manage our customer’s expectations regarding the scope of the services to be delivered, and defects or errors in new versions or enhancements of our software products.
The following table summarizes the changes in the allowance for doubtful accounts (in thousands):
 
Nine months ended September 30, 2019
Balance, beginning of period December 31, 2018
$
4,647

Provisions for losses - accounts receivable
2,908

Collection of accounts previously written off

Deductions for accounts charged off or credits issued
(3,253
)
Balance, end of period
$
4,302


LEASES
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities on our consolidated balance sheets. We currently do not have any finance lease arrangements.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date of the lease in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally accounted as a single lease component.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Leases. We adopted Topic 842 using the transition method that allows us to initially apply the guidance at the adoption date of January 1, 2019, and recognized a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We used the package of practical expedients that allows us to not reassess: (1) lease classification for any expired or existing leases and (2) initial direct costs for any expired or existing leases. We did not elect to use the hindsight application for evaluating the life of the lease arrangement. The impact of adoption is reflected in the financial information herein. For additional details, see Note 10 to our condensed consolidated financial statements.
The impact of Topic 842 on our consolidated balance sheet beginning January 1, 2019, included the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. We had no finance leases prior to the adoption of Topic 842 and currently do not have any.

9



Amounts recognized at January 1, 2019, for operating leases were as follow (in thousands):
 
 
 
Operating lease right-of-use assets
 
$
15,633

Operating lease liabilities
 
(4,344
)
Operating lease liabilities, long-term
 
(12,405
)
Retained earnings
 
$
(1,116
)

No impact was recorded to the statement of income for the adoption of Topic 842.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We will adopt the new standard in the first quarter of 2020 and are currently assessing its potential impact on our consolidated financial statements and results of operations.
(3)    Acquisitions
On February 28, 2019, we acquired all of the capital stock of MP Holdings Parent, Inc. dba MicroPact ("MicroPact"), a leading provider of commercial off-the-shelf (COTS) solutions, including entellitrak®, a low-code application development platform for case management and business process management used extensively in the public sector. The total purchase price, net of cash acquired of $2.0 million, was approximately $203.7 million consisting of $198.2 million paid in cash, accrued contingent consideration of $6.6 million contingent upon the achievement of certain financial performance objectives, and $1.0 million accrued for certain holdbacks, subject to certain post-closing adjustments.
We have performed a preliminary valuation analysis of the fair market value of MicroPact’s assets and liabilities. The following table summarizes the preliminary allocation of the purchase price as of the acquisition date:
(In thousands)
 
 
Cash
 
$
1,983

Accounts receivable
 
12,247

Other current assets
 
8,979

Other noncurrent assets
 
10,417

Identifiable intangible assets
 
131,443

Goodwill
 
73,193

Accounts payable
 
(602
)
Accrued expenses
 
(2,542
)
Other noncurrent liabilities
 
(8,879
)
Deferred revenue
 
(11,312
)
Deferred tax liabilities, net
 
(9,209
)
Total consideration
 
$
205,718


In connection with this transaction, we acquired total tangible assets of $33.6 million and assumed liabilities of approximately $23.3 million. We recorded goodwill of $73.2 million, none of which is expected to be deductible for tax purposes, and other identifiable intangible assets of approximately $131.4 million. The $131.4 million of intangible assets are attributable to customer relationships, acquired software, trade name and favorable fair value of an operating lease and will be amortized over a weighted average period of approximately 11 years. We recorded deferred tax liabilities of $9.2 million related to estimated fair value allocations.

10



The acquisition of MicroPact augments our product solutions, positions us in new practice areas such as health and human services, and presents opportunities to expand our business across new and complementary markets. We intend to expand our total addressable market through MicroPact's strong presence in the federal market. Therefore, the goodwill of $73.2 million arising from this acquisition is primarily attributed to our ability to generate increased revenues, earnings and cash flow by expanding our addressable market and client base. In the nine months ended September 30, 2019, we recorded adjustments to the preliminary opening balance sheet attributed to changes in accounts receivable, deferred revenue, customer relationships, contingent consideration and related deferred taxes resulting in a net decrease to goodwill of approximately $8.8 million.
The following unaudited pro forma consolidated operating results information has been prepared as if the MicroPact acquisition had occurred at January 1, 2018, after giving effect to certain adjustments, including amortization of intangibles, interest, transaction costs and tax effects.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues
 
$
275,400

 
$
257,236

 
$
809,389

 
$
750,240

Net income
 
40,390

 
40,907

 
99,449

 
115,181

Basic earnings per share
 
1.04

 
1.06

 
2.58

 
2.99

Diluted earnings per share
 
$
1.00

 
$
1.01

 
$
2.49

 
$
2.85


The pro forma information above does not include acquisitions that are not considered material to our results of operations. The pro forma information does not purport to represent what our results of operations actually would have been had such transaction occurred on the date specified or to project our results of operations for any future period.
On February 1, 2019, we acquired all the assets of Civic, LLC ("MyCivic"), a company that provides software solutions to connect communities. The total purchase price was $3.7 million in cash.
As of September 30, 2019, the purchase price allocations for MicroPact and MyCivic are not yet complete. The preliminary estimates of fair value assumed at the acquisition date for intangible assets, deferred revenue, accrued contingent consideration, accrued holdbacks and related deferred taxes are subject to change as valuations are finalized. The operating results of MicroPact and MyCivic are included in the operating results of the Enterprise Software segment since their respective dates of acquisition. Revenues from MicroPact included in Tyler's results of operations were approximately $16.4 million and $36.4 million for the three and nine months ended September 30, 2019, respectively, and net loss was $2.0 million and $5.6 million for the three and nine months ended September 30, 2019, respectively. Revenues and operating results from MyCivic included in 2019 results were not significant. During the nine months ended September 30, 2019, we incurred fees of approximately $0.9 million for financial advisory, legal, accounting, due diligence, valuation and other various services necessary to complete these acquisitions. These fees were expensed in 2019 and are included in Selling, general and administrative expenses on the condensed consolidated statement of income.
Our balance sheet as of September 30, 2019, reflects the allocation of the purchase price to the assets acquired based on their fair value at the date of each acquisition. The fair value of the assets and liabilities acquired are based on valuations using Level III, unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.


11



(4)     Shareholders’ Equity

The following table details activity in our common stock (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
Purchases of treasury shares
 

 
$

 

 
$

 
(72
)
 
$
(14,289
)
 

 
$

Stock option exercises
 
395

 
40,163

 
326

 
26,219

 
691

 
62,295

 
1,048

 
70,536

Employee stock plan purchases
 
15

 
2,718

 
12

 
2,218

 
43

 
7,327

 
35

 
5,978

Restricted stock units vested, net of withheld shares upon award settlement
 
1

 
$
(191
)
 

 
$

 
38

 
$
(3,572
)
 

 
$


As of September 30, 2019, we had authorization from our board of directors to repurchase up to 2.6 million additional shares of our common stock.

(5)    Deferred Commissions
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized commensurate with the recognition of associated revenue over a period of benefit that we have determined to be three to seven years. Deferred commissions were $27.4 million and $21.9 million as of September 30, 2019, and December 31, 2018, respectively. Amortization expense was $4.4 million and $12.3 million for the three and nine months ended September 30, 2019, respectively, and $3.8 million and $10.9 million for the three and nine months ended September 30, 2018, respectively. There were no indicators of impairment in relation to the costs capitalized for the periods presented. Deferred commissions have been included with prepaid expenses for the current portion and non-current other assets for the long-term portion in the accompanying condensed consolidated balance sheets. Amortization expense related to deferred commissions is included in Selling, general and administrative expenses in the accompanying condensed consolidated statements of income.
(6)    Other Assets
As of September 30, 2019, we have $68.2 million in investment grade corporate and municipal bonds with maturity dates ranging through 2022. 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 values 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.
(7)    Revolving Line of Credit

On September 30, 2019, we entered into a $400 million credit agreement with various lender parties and Wells Fargo Bank, National Association, as Administrative Agent (the “Credit Agreement”). The Credit Agreement provides for a revolving credit line up to $400 million, including a $25 million sublimit for letters of credit. The Credit Agreement matures on September 30, 2024. The new Credit Agreement replaces Tyler’s existing $300 million secured credit facility, which was scheduled to mature in November 2020. Borrowings under the Credit Agreement may be used for general corporate purposes, including working capital requirements, acquisitions and share repurchases.

Borrowings under the Credit Agreement bear interest at a rate of either (1) Wells Fargo Bank’s prime rate (subject to certain higher rate determinations) plus a margin of 0.125% to 0.75% or (2) the one-, two-, three-, or six-month LIBOR rate plus a margin of 1.125% to 1.75%. As of September 30, 2019, the interest rates were 5.25% under the Wells Fargo Bank's prime rate and approximately 3.14% under the 30-day LIBOR option. The Credit Agreement 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, 2019, we were in compliance with those covenants.

As of September 30, 2019, we had no outstanding borrowings under the Credit Agreement, and available borrowing capacity was $400.0 million.


12



(8)    Income Tax Provision
We had an effective income tax rate of 0.4% and 11.0% for the three and nine months ended September 30, 2019, respectively, compared to negative 0.8% and negative 0.1% for the three and nine months ended September 30, 2018, respectively. The change in the effective tax rate for the three and nine months ended September 30, 2019, as compared to the same period in 2018, was principally driven by the fluctuations of the excess tax benefits related to stock incentive awards.
The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 21% due to excess tax benefits related to stock incentive awards, state income taxes, non-deductible business expenses, and the tax benefit of research tax credits. The excess tax benefits related to stock incentive awards realized were $11.6 million and $18.6 million for the three and nine months ended September 30, 2019, respectively, compared to $9.3 million and $30.0 million for the three and nine months ended September 30, 2018, respectively. Excluding the excess tax benefits, the effective rate was 28.9% and 27.6% for the three and nine months ended September 30, 2019, compared to 23.3% and 25.8% for the three and nine months ended September 30, 2018, respectively.
We made tax payments of $18.1 million and $6.8 million in the nine months ended September 30, 2019, and 2018, respectively.

(9)    Earnings Per Share

The following table details the reconciliation of basic earnings per share to diluted earnings per share (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Numerator for basic and diluted earnings per share:
 
 
 
 
 
 
 
 
Net income
 
$
40,390

 
$
38,924

 
$
99,737

 
$
115,910

Denominator:
 
 

 
 

 


 


Weighted-average basic common shares outstanding
 
38,765

 
38,761

 
38,614

 
38,533

Assumed conversion of dilutive securities:
 
 
 
 
 

 

Stock awards
 
1,515

 
1,767

 
1,401

 
1,812

Denominator for diluted earnings per share
   - Adjusted weighted-average shares
 
40,280

 
40,528

 
40,015

 
40,345

Earnings per common share:
 
 

 
 

 


 


Basic
 
$
1.04

 
$
1.00

 
$
2.58

 
$
3.01

Diluted
 
$
1.00

 
$
0.96

 
$
2.49

 
$
2.87



For the three and nine months ended September 30, 2019 and September 30, 2018, stock awards representing the right to purchase common stock of approximately 443,000 and 815,000 shares and 350,000 and 734,000 shares, respectively, were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect. 

(10)    Leases

We lease office facilities for use in our operations, as well as transportation and other equipment. Most of our leases are non-cancelable operating lease agreements and they expire from one year to eight years. Some of these leases include options to extend for up to 10 years. We had no finance leases and no related party lease agreements as of September 30, 2019. Operating lease costs were approximately $2.6 million and $7.3 million for the three and nine months ended September 30, 2019, respectively, and $1.7 million and $5.0 million for the three and nine months ended September 30, 2018, respectively.


13



The components of operating lease expense were as follows (in thousands):
Lease Costs
 
Financial Statement Classification
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
2019
 
2019
Operating lease cost
 
Selling, general and administrative expenses
 
$
1,692

 
$
4,726

Short-term lease cost
 
Selling, general and administrative expenses
 
545

 
1,707

Variable lease cost
 
Selling, general and administrative expenses
 
370

 
901

Net lease cost
 
 
 
$
2,607

 
$
7,334



As of September 30, 2019, ROU lease assets and lease liabilities for our operating leases were recorded in the condensed consolidated balance sheet as follows (in thousands):
 
 
September 30, 2019
Assets:
 
 
Operating lease right-of-use assets
 
$
20,172

Liabilities:
 
 
Operating leases, short-term
 
6,413

Operating leases, long-term
 
18,134

Total lease liabilities
 
$
24,547



Supplemental information related to leases was as follows:
Other Information
 
Nine Months Ended September 30,
 
 
2019
Cash Flows (in thousands):
 
 
Cash paid amounts included in the measurement of lease liabilities:
 
 
Operating cash outflows from operating leases
 
$
5,141

 
 
 
Right-of-use assets obtained in exchange for lease obligations (non-cash):
 
 
Operating leases
 
$
3,350

 
 
 
Lease Term and Discount Rate:
 
 
Weighted average remaining lease term (years)
 
4

Weighted average discount rate
 
4.00
%


14



As of September 30, 2019, maturities of lease liabilities were as follows (in thousands):
Year ending December 31,
 
Amount
2019 (Remaining 2019)
 
$
2,124

2020
 
7,499

2021
 
6,063

2022
 
3,821

2023
 
2,856

Thereafter
 
4,528

Total lease payments
 
26,891

Less: Interest
 
(2,344
)
Present value of operating lease liabilities
 
$
24,547



As of December 31, 2018, the future minimum lease commitments related to lease agreements under Topic 840, the predecessor of Topic 842, were as follows (in thousands):
Year ending December 31,
 
Amount
2019
 
$
5,994

2020
 
5,146

2021
 
3,976

2022
 
1,925

2023
 
1,164

Thereafter
 
2,132

Total
 
$
20,337



We own office buildings in Bangor, Falmouth and Yarmouth, Maine; Lubbock and Plano, Texas; Troy, Michigan; Latham, New York; and Moraine, Ohio. We lease space in some of these buildings to third-party tenants. The property we lease to others under operating leases consists primarily of specific facilities where one tenant obtains substantially all of the economic benefit from the asset and has the right to direct the use of the asset. These non-cancelable leases expire between 2019 and 2025, some of which have options to extend the lease for up to five years. We determine if an arrangement is a lease at inception. None of our leases allow the lessee to purchase the leased asset.

Rental income for the three and nine months ended September 30, 2019, totaled $261,000 and $815,000, respectively, and for the three and nine months ended September 30, 2018 totaled $276,000 and $898,000, respectively. Rental income is included in Hardware and other revenue on the condensed consolidated statements of income. Future minimum operating rental income based on contractual agreements is as follows (in thousands):

Year ending December 31,
 
Amount
 
 
 
2019 (Remaining 2019)
 
$
331

2020
 
1,341

2021
 
1,372

2022
 
1,402

2023
 
1,432

Thereafter
 
2,395

Total
 
$
8,273



As of September 30, 2019, we had no additional significant operating or finance leases that had not yet commenced.


15



(11)    Share-Based Compensation
The following table summarizes share-based compensation expense related to share-based awards recorded in the condensed consolidated statements of income, pursuant to ASC 718, Stock Compensation (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Cost of software services, maintenance and subscriptions
 
$
3,612

 
$
3,909

 
$
11,166

 
$
9,640

Selling, general and administrative expenses
 
11,275

 
10,567

 
33,203

 
28,326

Total share-based compensation expense
 
$
14,887

 
$
14,476

 
$
44,369

 
$
37,966



(12)    Segment and Related Information
We provide 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 five business units, which focus on the following products:
financial management, education and planning, regulatory and maintenance software solutions;
financial management, municipal courts, planning, regulatory and maintenance, and land and vital records management software solutions;
courts and justice and public safety software solutions;
data and insights solutions; and
appraisal and tax software solutions and property appraisal services.
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; courts and justice and public safety software solutions unit; and the data and insights solutions unit meet the criteria for aggregation and are presented in one reportable segment, the Enterprise Software (“ES”) segment. The ES segment provides public sector entities with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions such as: financial management and education, courts and justice, public safety, planning, regulatory and maintenance, land and vital records management and data and insights. 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 acquisitions, 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.

16



For the three months ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
Enterprise
Software
 
Appraisal and Tax
 
Corporate
 
Totals
Revenues
 
 
 
 
 
 
 
 
Software licenses and royalties
 
$
23,449

 
$
1,930

 
$

 
$
25,379

Subscriptions
 
72,398

 
2,874

 

 
75,272

Software services
 
46,296

 
8,701

 

 
54,997

Maintenance
 
103,438

 
6,395

 

 
109,833

Appraisal services
 

 
6,008

 

 
6,008

Hardware and other
 
3,925

 

 
(14
)
 
3,911

Intercompany
 
4,029

 

 
(4,029
)
 

Total revenues
 
$
253,535

 
$
25,908

 
$
(4,043
)
 
$
275,400

Segment operating income
 
$
64,140

 
$
7,577

 
$
(18,043
)
 
$
53,674


For the three months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
Enterprise
Software
 
Appraisal and Tax
 
Corporate
 
Totals
Revenues
 
 
 
 
 
 
 
 
Software licenses and royalties
 
$
19,544

 
$
2,900

 
$

 
$
22,444

Subscriptions
 
56,220

 
2,479

 

 
58,699

Software services
 
41,640

 
6,559

 

 
48,199

Maintenance
 
90,072

 
6,143

 

 
96,215

Appraisal services
 

 
5,544

 

 
5,544

Hardware and other
 
4,999

 

 
(33
)
 
4,966

Intercompany
 
3,373

 

 
(3,373
)
 

Total revenues
 
$
215,848

 
$
23,625

 
$
(3,406
)
 
$
236,067

Segment operating income
 
$
59,334

 
$
6,695

 
$
(18,161
)
 
$
47,868


For the nine months ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
Enterprise
Software
 
Appraisal and Tax
 
Corporate
 
Totals
Revenues
 
 
 
 
 
 
 
 
Software licenses and royalties
 
$
60,443

 
$
7,404

 
$

 
$
67,847

Subscriptions
 
207,907

 
8,115

 

 
216,022

Software services
 
138,404

 
22,437

 

 
160,841

Maintenance
 
297,933

 
18,741

 

 
316,674

Appraisal services
 

 
17,455

 

 
17,455

Hardware and other
 
12,613

 
2

 
6,136

 
18,751

Intercompany
 
11,242

 

 
(11,242
)
 

Total revenues
 
$
728,542

 
$
74,154

 
$
(5,106
)
 
$
797,590

Segment operating income
 
$
182,565

 
$
19,312

 
$
(52,260
)
 
$
149,617




17



For the nine months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
Enterprise
Software
 
Appraisal and Tax
 
Corporate
 
Totals
Revenues
 
 
 
 
 
 
 
 
Software licenses and royalties
 
$
60,224

 
$
7,396

 
$

 
$
67,620

Subscriptions
 
153,541

 
7,195

 

 
160,736

Software services
 
126,928

 
17,884

 

 
144,812

Maintenance
 
267,681

 
18,507

 

 
286,188

Appraisal services
 

 
16,470

 

 
16,470

Hardware and other
 
12,525

 
33

 
4,917

 
17,475

Intercompany
 
9,696

 

 
(9,696
)
 

Total revenues
 
$
630,595

 
$
67,485

 
$
(4,779
)
 
$
693,301

Segment operating income
 
$
174,365

 
$
16,845

 
$
(48,900
)
 
$
142,310




 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Reconciliation of reportable segment operating income to the Company's consolidated totals:
 
2019
 
2018
 
2019
 
2018
Total segment operating income
 
$
53,674

 
$
47,868

 
$
149,617

 
$
142,310

Amortization of acquired software
 
(7,975
)
 
(5,897
)
 
(22,645
)
 
(17,003
)
Amortization of customer and trade name intangibles
 
(5,646
)
 
(4,386
)
 
(15,762
)
 
(11,742
)
Other income, net
 
499

 
1,041

 
838

 
2,198

Income before income taxes
 
$
40,552

 
$
38,626

 
$
112,048

 
$
115,763




18



(13)    Disaggregation of Revenue
The tables below show disaggregation of revenue into categories that reflect how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows.
Timing of Revenue Recognition
Timing of revenue recognition by revenue category during the period is as follows (in thousands):
For the three months ended September 30, 2019
 
 
 
 
 
 
 
 
Products and services transferred at a point in time
 
Products and services transferred over time
 
Total
Revenues
 
 
 
 
 
 
Software licenses and royalties
 
$
21,362

 
$
4,017

 
$
25,379

Subscriptions
 

 
75,272

 
75,272

Software services
 

 
54,997

 
54,997

Maintenance
 

 
109,833

 
109,833

Appraisal services
 

 
6,008

 
6,008

Hardware and other
 
3,911

 

 
3,911

Total
 
$
25,273

 
$
250,127

 
$
275,400

For the nine months ended September 30, 2019
 
 
 
 
 
 
 
 
Products and services transferred at a point in time
 
Products and services transferred over time
 
Total
Revenues
 
 
 
 
 
 
Software licenses and royalties
 
$
54,074

 
$
13,773

 
$
67,847

Subscriptions
 

 
216,022

 
216,022

Software services
 

 
160,841

 
160,841

Maintenance
 

 
316,674

 
316,674

Appraisal services
 

 
17,455

 
17,455

Hardware and other
 
18,751

 

 
18,751

Total
 
$
72,825</