e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended March 31, 2011
OR
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o |
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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)
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DELAWARE
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75-2303920 |
(State or other jurisdiction of
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(I.R.S. employer |
incorporation or organization)
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identification no.) |
5949 SHERRY LANE, SUITE 1400
DALLAS, TEXAS
75225
(Address of principal executive offices)
(Zip code)
(972) 713-3700
(Registrants 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 þ No o
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 o No o
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):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
The number
of shares of common stock of registrant outstanding on April 26, 2011 was 32,041,000.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
TYLER TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
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Three months ended |
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March 31, |
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2011 |
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2010 |
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Revenues: |
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Software licenses |
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$ |
6,822 |
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$ |
8,449 |
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Subscriptions |
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6,964 |
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5,253 |
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Software services |
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16,764 |
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17,056 |
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Maintenance |
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35,512 |
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33,416 |
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Appraisal services |
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6,197 |
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4,275 |
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Hardware and other |
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1,134 |
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1,371 |
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Total revenues |
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73,393 |
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69,820 |
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Cost of revenues: |
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Software licenses |
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795 |
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707 |
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Acquired software |
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295 |
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398 |
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Software services, maintenance and subscriptions |
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35,180 |
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34,881 |
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Appraisal services |
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3,824 |
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2,877 |
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Hardware and other |
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676 |
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938 |
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Total cost of revenues |
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40,770 |
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39,801 |
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Gross profit |
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32,623 |
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30,019 |
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Selling, general and administrative expenses |
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17,288 |
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17,561 |
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Research and development expense |
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4,549 |
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3,516 |
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Amortization of customer and trade name intangibles |
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804 |
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806 |
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Operating income |
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9,982 |
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8,136 |
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Other expense, net |
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(500 |
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(42 |
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Income before income taxes |
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9,482 |
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8,094 |
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Income tax provision |
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3,754 |
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3,222 |
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Net income |
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$ |
5,728 |
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$ |
4,872 |
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Earnings per common share: |
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Basic |
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$ |
0.18 |
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$ |
0.14 |
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Diluted |
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$ |
0.17 |
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$ |
0.13 |
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Basic weighted average common shares outstanding |
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32,086 |
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35,101 |
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Diluted weighted average common shares outstanding |
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33,720 |
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36,655 |
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See accompanying notes.
1
TYLER TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(In thousands, except par value and share amounts)
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March 31, |
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2011 |
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December 31, |
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(Unaudited) |
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2010 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
2,248 |
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$ |
2,114 |
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Short-term investments available-for-sale |
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25 |
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Accounts
receivable (less allowance for losses of $952 in 2011 and $1,603 in 2010) |
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66,474 |
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81,860 |
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Prepaid expenses |
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7,915 |
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7,801 |
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Other current assets |
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1,896 |
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3,543 |
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Deferred income taxes |
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3,106 |
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3,106 |
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Total current assets |
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81,639 |
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98,449 |
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Accounts receivable, long-term portion |
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1,403 |
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1,231 |
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Property and equipment, net |
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41,386 |
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34,851 |
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Non-current investments available-for-sale |
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2,126 |
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2,126 |
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Other assets: |
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Goodwill |
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92,831 |
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92,831 |
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Other intangibles, net |
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31,106 |
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32,307 |
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Sundry |
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1,912 |
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2,237 |
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$ |
252,403 |
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$ |
264,032 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
2,446 |
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$ |
2,626 |
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Accrued liabilities |
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19,908 |
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19,433 |
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Deferred revenue |
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91,792 |
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102,590 |
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Income taxes payable |
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1,448 |
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Total
current liabilities |
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115,594 |
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124,649 |
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Revolving line of credit |
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22,500 |
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26,500 |
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Deferred income taxes |
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5,911 |
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5,911 |
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Commitments and contingencies |
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Shareholders equity: |
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Preferred stock, $10.00 par value; 1,000,000 shares authorized,
none issued |
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Common stock, $0.01 par value; 100,000,000 shares authorized;
48,147,969 shares issued in 2011 and 2010 |
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481 |
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481 |
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Additional paid-in capital |
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153,969 |
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153,576 |
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Accumulated other comprehensive loss, net of tax |
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(275 |
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(275 |
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Retained earnings |
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108,286 |
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102,558 |
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Treasury stock, at cost; 16,084,010 and 15,854,205 shares
in 2011 and 2010, respectively |
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(154,063 |
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(149,368 |
) |
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Total shareholders equity |
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108,398 |
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106,972 |
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$ |
252,403 |
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$ |
264,032 |
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See accompanying notes.
2
TYLER TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three months ended March 31, |
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2011 |
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2010 |
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Cash flows from operating activities: |
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Net income |
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$ |
5,728 |
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$ |
4,872 |
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Adjustments
to reconcile net income to net cash provided by operations: |
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Depreciation and amortization |
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2,585 |
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2,649 |
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Share-based compensation expense |
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1,449 |
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1,465 |
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Excess tax benefit from exercises of share-based arrangements |
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(272 |
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(48 |
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Changes in
operating assets and liabilities, exclusive of effects of acquired companies: |
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Accounts receivable |
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15,214 |
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18,078 |
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Income tax payable |
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3,592 |
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1,215 |
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Prepaid expenses and other current assets |
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(343 |
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180 |
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Accounts payable |
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(180 |
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(740 |
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Accrued liabilities |
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492 |
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(7,448 |
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Deferred revenue |
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(10,798 |
) |
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(13,289 |
) |
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Net cash provided by operating activities |
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17,467 |
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6,934 |
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Cash flows from investing activities: |
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Proceeds from sale of investments |
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25 |
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50 |
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Cost of acquisitions, net of cash acquired |
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(9,623 |
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Additions to property and equipment |
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(7,804 |
) |
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(2,238 |
) |
Decrease in restricted investments |
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1,000 |
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Decrease (increase) in other |
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214 |
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(25 |
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Net cash used by investing activities |
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(7,565 |
) |
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(10,836 |
) |
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Cash flows from financing activities: |
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Purchase of treasury shares |
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(6,839 |
) |
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(2,317 |
) |
Decrease in net borrowings on revolving line of credit |
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(4,000 |
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Contributions from employee stock purchase plan |
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456 |
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447 |
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Proceeds from exercise of stock options |
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343 |
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79 |
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Excess tax benefit from exercises of share-based arrangements |
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272 |
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48 |
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Net cash used by financing activities |
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(9,768 |
) |
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(1,743 |
) |
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Net increase (decrease) in cash and cash equivalents |
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134 |
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(5,645 |
) |
Cash and cash equivalents at beginning of period |
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2,114 |
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9,696 |
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Cash and cash equivalents at end of period |
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$ |
2,248 |
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$ |
4,051 |
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See accompanying notes.
3
Tyler Technologies, Inc.
Notes to Condensed Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
(1) Basis of Presentation
We prepared the accompanying condensed 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 March 31, 2011 and December 31, 2010 and
operating result amounts are for the three months ended March 31, 2011 and 2010, 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, 2010. 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) Financial Instruments
Assets recorded at fair value in the balance sheet as of March 31, 2011 are categorized based upon
the level of judgment associated with the inputs used to measure their fair value. Hierarchical
levels, defined by Accounting Standards Codification (ASC) 820, Fair Value Measurements and
Disclosures, which are directly related to the amount of subjectivity associated with the inputs to
fair valuation of these assets, are as follows:
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Level 1 Inputs are unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date; |
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Level 2 Inputs other than Level 1 inputs that are either directly or indirectly
observable; and |
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Level 3 Unobservable inputs, for which little or no market data exist, therefore
requiring an entity to develop its own assumptions. |
As of March 31, 2011 we held certain items that are required to be measured at fair value on a
recurring basis. The following table summarizes the fair value of these financial assets:
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Quoted prices in |
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active markets for |
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Significant other |
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Significant |
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identical assets |
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observable inputs |
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unobservable inputs |
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Total |
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(Level 1) |
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(Level 2) |
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(Level 3) |
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Cash and cash equivalents |
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$ |
2,248 |
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$ |
2,248 |
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$ |
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$ |
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Investments available-for-sale |
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2,126 |
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2,126 |
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Total |
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$ |
4,374 |
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$ |
2,248 |
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$ |
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$ |
2,126 |
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Cash and cash equivalents consist primarily of money market funds with original maturity dates
of three months or less, for which we determine fair value through quoted market prices.
Investments available-for-sale consist of two auction rate municipal securities (ARS) which
are collateralized debt obligations supported by municipal agencies and do not include
mortgage-backed securities. These ARS are debt instruments with stated maturities ranging
from 21 to 32 years, for which the interest rate is designed to be reset through Dutch
auctions approximately every 30 days. However, due to events in the credit markets, auctions
for these securities have not occurred since February 2008. Both of our ARS have had a series
of very small partial redemptions at par in the period from July 2009 through February 2011.
As of March 31, 2011 we have continued to earn and collect interest on both of our ARS.
Because quoted prices in active markets are no longer available we determined the estimated fair
values of these securities utilizing a discounted trinomial model. The model considers the
probability of three potential occurrences for each auction event through the maturity date of
each ARS. The three potential outcomes for each auction are (i) successful auction/early
redemption, (ii) failed auction and (iii) issuer default. Inputs in determining the
probabilities of the potential outcomes include but are not limited to, the securities
collateral, credit rating, insurance, issuers financial standing, contractual restrictions on
disposition and the liquidity in the market. The fair value of each ARS is determined by
summing the present value of the probability-weighted future principal and interest payments
determined by the model. Since there can be no assurances that auctions for these securities
will be successful in the near future, we have classified our ARS as non-current investments.
4
The par and carrying values, and related cumulative unrealized loss for our non-current ARS as of
March 31, 2011 are as follows:
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Par Value |
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Temporary Impairment |
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Carrying Value |
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Investments
available-for-sale |
|
$ |
2,550 |
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$ |
424 |
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$ |
2,126 |
|
We consider the impairment in our ARS as temporary because we do not have the intent to sell, nor
is it more-likely-than-not that we will be required to sell these securities before recovery of
their cost basis. We believe that this decline in fair value is temporary, because the underlying
assets of these securities are supported by municipal agencies and do not include mortgage-backed
securities, have redemption features which call for redemption at 100% of par value and have a
current credit rating of A or AA. The ratings on the ARS take into account credit support through
insurance policies guaranteeing each of the bonds payment of principal and accrued interest, if it
becomes necessary. In addition, both ARS have had a series of very small partial redemptions at
par in the period July 2009 through February 2011. We did not record any unrealized gains or
losses on our ARS in the three months ended March 31, 2011. Based on our cash and cash equivalents
balance of $2.2 million, expected operating cash flows and a $150.0 million credit line, we do not
believe a lack of liquidity associated with our ARS will adversely affect our ability to conduct
business, and believe we have the ability to hold the securities throughout the currently estimated
recovery period. We will continue to evaluate any changes in the market value of our ARS and in
the future, depending upon existing market conditions, we may be required to record an
other-than-temporary decline in market value.
The following table reflects the activity for assets measured at fair value using Level 3 inputs
for the three months ended
March 31, 2011:
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Balance as of December 31, 2010 |
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$ |
2,126 |
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Transfers into level 3 |
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Transfers out of level 3 |
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Unrealized gains included in accumulated other comprehensive loss |
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Balance as of March 31, 2011 |
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$ |
2,126 |
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(3) Shareholders Equity
The following table details activity in our common stock:
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Three months ended March 31, |
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2011 |
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2010 |
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Shares |
|
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Amount |
|
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Shares |
|
|
Amount |
|
Purchases of common stock |
|
|
(335 |
) |
|
$ |
(6,839 |
) |
|
|
(129 |
) |
|
$ |
(2,411 |
) |
Stock option exercises |
|
|
78 |
|
|
|
343 |
|
|
|
18 |
|
|
|
79 |
|
Employee stock plan purchases |
|
|
27 |
|
|
|
473 |
|
|
|
25 |
|
|
|
425 |
|
As of March 31, 2011 we had authorization from our board of directors to repurchase up to 2.4
million additional shares of Tyler common stock.
(4) Revolving Line of Credit
In August 2010, we entered into a $150.0 million Credit Agreement (the Credit Facility) and a
related pledge and security agreement with a group of seven financial institutions with Bank of
America, N.A., as Administrative Agent. The Credit Facility provides for a revolving credit line
of $150.0 million (which may be increased up to $200.0 million subject to our obtaining commitments
for such increase), with a $25.0 million sublimit for letters of credit. The Credit Facility
matures on August 11, 2014. 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) the Bank of Americas
prime rate plus a margin of 1.50% to 2.75% or (2) the 30, 60, 90 or 180-day LIBOR rate plus a
margin of 2.50% to 3.75%, with the margin determined by our consolidated leverage ratio. As of
March 31, 2011, our effective average interest rate for borrowings during the three months
5
ended
March 31, 2011 was 3.0%. As of March 31, 2010, our interest rate was 3.25%. The Credit Facility
is secured by substantially all of our assets, excluding real property. 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 March 31, 2011, we were in compliance with those
covenants.
As of March 31, 2011, we had $22.5 million in outstanding borrowings and unused available borrowing
capacity of $119.2 million under the Credit Facility. In addition, as of March 31, 2011, our bank
had issued outstanding letters of credit totaling $8.3 million to secure surety bonds required by
some of our customer contracts. These letters of credit reduce our available borrowing capacity
and expire through early 2012.
(5) Income Tax Provision
For the three months ended March 31, 2011, we had an effective income tax rate of 39.6% compared to
39.8% for the three months ended March 31, 2010. The effective income tax rates for the periods
presented were different from the statutory United States federal income tax rate of 35% primarily
due to state income taxes, non-deductible share-based compensation expense, the qualified
manufacturing activities deduction, research and development tax credit and non-deductible meals
and entertainment costs.
We made federal and state income tax payments, net of refunds, of $174,000 in the three months
ended March 31, 2011, compared to $2.0 million in net payments for the same period of 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 |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Numerator for basic and diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,728 |
|
|
$ |
4,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
Weighted-average basic common shares outstanding |
|
|
32,086 |
|
|
|
35,101 |
|
Assumed conversion of dilutive securities: |
|
|
|
|
|
|
|
|
Stock options |
|
|
1,634 |
|
|
|
1,554 |
|
|
|
|
|
|
|
|
Denominator for diluted earnings
per share Adjusted weighted-average shares |
|
|
33,720 |
|
|
|
36,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.18 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.17 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
For the three months ended March 31, 2011 and the three months ended March 31, 2010, stock
options representing the right to purchase common stock of approximately 1.0 million shares and 2.1
million 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 operations, pursuant to ASC 718, Stock Compensation:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Cost of software services, maintenance and
subscriptions |
|
$ |
196 |
|
|
$ |
165 |
|
Selling, general and administrative expense |
|
|
1,253 |
|
|
|
1,300 |
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
1,449 |
|
|
$ |
1,465 |
|
|
|
|
|
|
|
|
6
(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 and education software solutions; |
|
|
|
|
financial management, municipal courts software solutions and land and vital
records; |
|
|
|
|
courts and justice software solutions; and |
|
|
|
|
appraisal and tax software solutions and property appraisal services. |
In accordance with ASC 280-10, Segment Reporting, the financial management and education software
solutions unit, financial management, municipal courts and land and vital records software
solutions unit and the courts and justice software solutions unit meet the criteria for aggregation
and are presented in one segment, Enterprise Software Solutions (ESS). The ESS segment provides
municipal and county governments and schools with software systems 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 as income before noncash
amortization of intangible assets associated with their acquisition, share-based compensation
expense, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2011 |
|
ESS |
|
|
ATSS |
|
|
Corporate |
|
|
Totals |
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses |
|
$ |
6,287 |
|
|
$ |
535 |
|
|
$ |
|
|
|
$ |
6,822 |
|
Subscriptions |
|
|
6,837 |
|
|
|
127 |
|
|
|
|
|
|
|
6,964 |
|
Software services |
|
|
14,263 |
|
|
|
2,501 |
|
|
|
|
|
|
|
16,764 |
|
Maintenance |
|
|
31,632 |
|
|
|
3,880 |
|
|
|
|
|
|
|
35,512 |
|
Appraisal services |
|
|
|
|
|
|
6,197 |
|
|
|
|
|
|
|
6,197 |
|
Hardware and other |
|
|
1,134 |
|
|
|
|
|
|
|
|
|
|
|
1,134 |
|
Intercompany |
|
|
407 |
|
|
|
|
|
|
|
(407 |
) |
|
|
|
|
|
|
|
Total revenues |
|
$ |
60,560 |
|
|
$ |
13,240 |
|
|
$ |
(407 |
) |
|
$ |
73,393 |
|
Segment operating income |
|
$ |
12,348 |
|
|
$ |
2,635 |
|
|
$ |
(3,902 |
) |
|
$ |
11,081 |
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2010 |
|
ESS |
|
|
ATSS |
|
|
Corporate |
|
|
Totals |
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses |
|
$ |
7,922 |
|
|
$ |
527 |
|
|
$ |
|
|
|
$ |
8,449 |
|
Subscriptions |
|
|
5,174 |
|
|
|
79 |
|
|
|
|
|
|
|
5,253 |
|
Software services |
|
|
14,555 |
|
|
|
2,501 |
|
|
|
|
|
|
|
17,056 |
|
Maintenance |
|
|
29,709 |
|
|
|
3,707 |
|
|
|
|
|
|
|
33,416 |
|
Appraisal services |
|
|
|
|
|
|
4,275 |
|
|
|
|
|
|
|
4,275 |
|
Hardware and other |
|
|
1,364 |
|
|
|
7 |
|
|
|
|
|
|
|
1,371 |
|
Intercompany |
|
|
325 |
|
|
|
|
|
|
|
(325 |
) |
|
|
|
|
|
|
|
Total revenues |
|
$ |
59,049 |
|
|
$ |
11,096 |
|
|
$ |
(325 |
) |
|
$ |
69,820 |
|
Segment operating income |
|
$ |
11,262 |
|
|
$ |
1,793 |
|
|
$ |
(3,715 |
) |
|
$ |
9,340 |
|
|
|
|
|
|
|
|
|
|
Reconciliation of reportable segment operating |
|
For the three months ended March 31, |
|
income to the Companys consolidated totals: |
|
2011 |
|
|
2010 |
|
Total segment operating income |
|
$ |
11,081 |
|
|
$ |
9,340 |
|
Amortization of acquired software |
|
|
(295 |
) |
|
|
(398 |
) |
Amortization of customer and trade name intangibles |
|
|
(804 |
) |
|
|
(806 |
) |
Other expense, net |
|
|
(500 |
) |
|
|
(42 |
) |
|
|
|
Income before income taxes |
|
$ |
9,482 |
|
|
$ |
8,094 |
|
|
|
|
(9) Commitments and Contingencies
As of March 31, 2011, our accounts receivable balance includes $4.2 million associated with one
customer that terminated its arrangement with us for convenience and, in addition, has disputed
certain amounts we invoiced the customer prior to the termination of the arrangement. We believe
the receivable is a valid and enforceable claim under the terms of the arrangement, and we intend
to aggressively pursue collection.
Other than ordinary course, routine litigation incidental to our business and except as described
in this Quarterly Report, there are no material legal proceedings pending to which we are party or
to which any of our properties are subject.
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are not
historical in nature and typically address future or anticipated events, trends, expectations or
beliefs with respect to our financial condition, results of operations or business.
Forward-looking statements often contain words such as believes, expects, anticipates,
foresees, forecasts, estimates, plans, intends, continues, may, will, should,
projects, might, could or other similar words or phrases. Similarly, statements that describe
our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking
statements. We believe there is a reasonable basis for our forward-looking statements, but they
are inherently subject to risks and uncertainties and actual results could differ materially from
the expectations and beliefs reflected in the forward-looking statements. We presently consider
the following to be among the important factors that could cause actual results to differ
materially from our expectations and beliefs: (1) changes in the budgets or regulatory
environments of our customers, primarily local and state governments, that could negatively impact
information technology spending; (2) our ability to achieve our financial forecasts due to various
factors, including project delays by our customers, reductions in transaction size, fewer
transactions, delays in delivery of new products or releases or a decline in our renewal rates for
service agreements; (3) economic, political and market conditions, including the global economic
and financial crisis, and the general tightening of access to debt or equity capital; (4)
technological and market risks associated with the development of new products or services or of
new versions of existing or acquired products or services; (5) our ability to successfully complete
acquisitions and achieve growth or operational synergies through the integration of acquired
businesses, while avoiding unanticipated costs and disruptions to existing operations; (6)
8
competition in the industry in which we conduct business and the impact of competition on pricing,
customer retention and pressure for new products or services; (7) the ability to attract and retain
qualified personnel and dealing with the loss or retirement of key members of management or other
key personnel; and (8) costs of compliance and any failure to comply with government and stock
exchange regulations. A detailed discussion of these factors and other risks that affect
our business are described in our filings with the
Securities and Exchange Commission, including the detailed Risk Factors contained in our most
recent annual report on Form 10-K. We expressly disclaim any obligation to publicly update or
revise our forward-looking statements.
GENERAL
We provide integrated information management solutions and services for local governments. We
develop and market a broad line of software products and services to address the information
technology (IT) needs of cities, counties, schools and other local government entities. In
addition, we provide professional IT services to our customers, including software and hardware
installation, data conversion, and training and for certain customers, product modifications, along
with continuing maintenance and support for customers using our systems. We also provide
subscription-based services such as application service provider (ASP) arrangements and other
hosting services as well as property appraisal outsourcing services for taxing jurisdictions.
Our products generally automate three major functional areas: (1) financial management and
education, (2) courts and justice and (3) property appraisal, and tax and we report our results in
two segments. The Enterprise Software Solutions (ESS) segment provides municipal and county
governments and schools with software systems 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.
During the three months ended March 31, 2011, we purchased 335,000 shares of our common stock for
an aggregate purchase price of $6.8 million.
In March 2011, we paid $6.6 million for approximately 27 acres of land and a building in Plano,
Texas.
Our total employee count declined from 2,034 at March 31, 2010 to 2,019 at March 31, 2011.
Outlook
Consistent with 2010, we expect to continue to invest aggressively in product development in 2011.
We believe that our competitive position is strong and that we are well-positioned to take
advantage of an eventual return to a stronger economic environment. However, until we see signs of
sustained improvement, we are expecting that the new business environment in 2011 will continue to
be both challenging and unpredictable, and that growth will come primarily from recurring revenues.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our
condensed financial statements. These condensed financial statements have been prepared following
the requirements of accounting principles generally accepted in the United States (GAAP) for
interim periods and require us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue
recognition and amortization and potential impairment of intangible assets and goodwill and
share-based compensation expense. As these are condensed financial statements, one should also
read expanded information about our critical accounting policies and estimates provided in Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations, included
in our Form 10-K for the year ended December 31, 2010. There have been no material changes to our
critical accounting policies and estimates from the information provided in our 10-K for the year
ended December 31, 2010.
9
ANALYSIS OF RESULTS OF OPERATIONS
Revenues
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total Revenues |
|
|
|
First Quarter |
|
|
|
2011 |
|
|
2010 |
|
Revenues: |
|
|
|
|
|
|
|
|
Software licenses |
|
|
9.3 |
% |
|
|
12.1 |
% |
Subscriptions |
|
|
9.5 |
|
|
|
7.5 |
|
Software services |
|
|
22.8 |
|
|
|
24.4 |
|
Maintenance |
|
|
48.4 |
|
|
|
47.9 |
|
Appraisal services |
|
|
8.4 |
|
|
|
6.1 |
|
Hardware and other |
|
|
1.6 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Cost of software licenses and acquired software |
|
|
1.5 |
|
|
|
1.6 |
|
Cost of software services, maintenance and subscriptions |
|
|
47.9 |
|
|
|
50.0 |
|
Cost of appraisal services |
|
|
5.2 |
|
|
|
4.1 |
|
Cost of hardware and other |
|
|
0.9 |
|
|
|
1.3 |
|
Selling, general and administrative expenses |
|
|
23.6 |
|
|
|
25.1 |
|
Research and development expense |
|
|
6.2 |
|
|
|
5.0 |
|
Amortization of customer base and trade name intangibles |
|
|
1.1 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
Operating income |
|
|
13.6 |
|
|
|
11.7 |
|
Other expenses, net |
|
|
(0.7 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
Income before income taxes |
|
|
12.9 |
|
|
|
11.6 |
|
Income tax provision |
|
|
5.1 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
Net income |
|
|
7.8 |
% |
|
|
7.0 |
% |
|
|
|
|
|
|
|
Software licenses.
The following table sets forth a comparison of our software license revenues for the periods
presented as of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
Change |
|
($ in thousands) |
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
ESS |
|
$ |
6,287 |
|
|
$ |
7,922 |
|
|
$ |
(1,635 |
) |
|
|
(21) |
% |
ATSS |
|
|
535 |
|
|
|
527 |
|
|
|
8 |
|
|
|
2 |
|
|
|
|
Total software license revenues |
|
$ |
6,822 |
|
|
$ |
8,449 |
|
|
$ |
(1,627 |
) |
|
|
(19) |
% |
|
|
|
In the three months ended March 31, 2011, we signed 15 new large contracts with average
software license fees of approximately $232,000 compared to 16 new large contracts signed in the
three months ended March 31, 2010 with average software license fees of approximately $406,000. We
consider contracts with a license fee component of $100,000 or more to be large. Although a
contract is signed in a particular quarter, the period in which the revenue is recognized may be
different because we recognize revenue according to our revenue recognition policy as described in
Note 1 in the Notes to the Financial Statements included in our Form 10-K for the year
ended December 31, 2010.
For the three months ended March 31, 2011, the decline in ESS software license revenues recognized
was mainly attributable to longer sales cycles and postponement of customer purchasing decisions
mainly due to budgetary constraints related to economic conditions. In addition, a portion of the
decline was due to a number of customers choosing our subscription-based options, rather than
purchasing the software under a traditional perpetual software arrangement. Subscription-based
arrangements result in lower software license revenues in the initial year as compared to
traditional perpetual software license arrangements but generate higher overall subscription-based
revenue over the term of the contract. We had 12 new ESS customers enter into subscription-based
arrangements in the three months ending March 31, 2011 compared to five new customers in the three
months ended March 31, 2010. We currently expect ESS software license revenues in 2011 to be
moderately lower than 2010.
10
Subscriptions.
The following table sets forth a comparison of our subscription revenues for the periods presented
as of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
Change |
|
($ in thousands) |
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
ESS |
|
$ |
6,837 |
|
|
$ |
5,174 |
|
|
$ |
1,663 |
|
|
|
32 |
% |
ATSS |
|
|
127 |
|
|
|
79 |
|
|
|
48 |
|
|
|
61 |
|
|
|
|
Total subscriptions revenues |
|
$ |
6,964 |
|
|
$ |
5,253 |
|
|
$ |
1,711 |
|
|
|
33 |
% |
|
|
|
Subscription-based services revenue primarily consists of revenues derived from ASP
arrangements and other hosted service offerings, software subscriptions and disaster recovery
services. ASP and other software subscription agreements are typically for initial periods of
three to six years and automatically renew unless either party cancels the agreement. Disaster
recovery and miscellaneous other hosted service agreements are typically renewable annually. New
customers for ASP and other hosted service offerings provided the majority of the subscription
revenue increase with the remaining increase due to new disaster recovery customers and slightly
higher rates for disaster recovery services. In the three months ending March 31, 2011, we added
13 new ESS and ATSS customers and one existing customer elected to convert to our ASP model.
Software services.
The following table sets forth a comparison of our software service revenues for the periods
presented as of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
Change |
|
($ in thousands) |
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
ESS |
|
$ |
14,263 |
|
|
$ |
14,555 |
|
|
$ |
(292 |
) |
|
|
(2) |
% |
ATSS |
|
|
2,501 |
|
|
|
2,501 |
|
|
|
|
|
|
|
|
|
|
|
|
Total software services revenues |
|
$ |
16,764 |
|
|
$ |
17,056 |
|
|
$ |
(292 |
) |
|
|
(2) |
% |
|
|
|
Software services revenues primarily consists of professional services billed in connection
with the installation of our software, conversion of customer data, training customer personnel and
consulting. New customers who purchase our proprietary software licenses generally also contract
with us to provide for the related software services as well. Existing customers also periodically
purchase additional training, consulting and minor programming services. The decline in software
services revenues for the three months ended March 31, 2011 is principally due to lower software
license revenue arrangements since late 2009 due to weak economic conditions and related budget
pressures in the public sector. In addition, the increase in the mix of customers choosing our
subscription-based solutions was a factor in lower software services revenues.
Maintenance.
The following table sets forth a comparison of our maintenance revenues for the periods presented
as of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
Change |
|
($ in thousands) |
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
ESS |
|
$ |
31,632 |
|
|
$ |
29,709 |
|
|
$ |
1,923 |
|
|
|
6 |
% |
ATSS |
|
|
3,880 |
|
|
|
3,707 |
|
|
|
173 |
|
|
|
5 |
|
|
|
|
Total maintenance revenues |
|
$ |
35,512 |
|
|
$ |
33,416 |
|
|
$ |
2,096 |
|
|
|
6 |
% |
|
|
|
We provide maintenance and support services for our software products and third party
software. Maintenance and support revenues increased due to growth in our installed customer
base from new software license sales and maintenance rate increases on most of our product
lines. Our maintenance growth rate has declined compared to the previous years growth rate
partly due to a number of customers converting to ASP arrangements in the last twelve months
as well as new customers choosing our subscription-based options, rather than purchasing the
software under a traditional perpetual software license arrangement.
11
Appraisal services.
The following table sets forth a comparison of our appraisal service revenues for the periods
presented as of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
Change |
|
($ in thousands) |
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
ESS |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
ATSS |
|
|
6,197 |
|
|
|
4,275 |
|
|
|
1,922 |
|
|
|
45 |
|
|
|
|
|
|
|
|
Total appraisal services revenues |
|
$ |
6,197 |
|
|
$ |
4,275 |
|
|
$ |
1,922 |
|
|
|
45 |
% |
|
|
|
|
|
|
|
The appraisal services business is somewhat cyclical and driven in part by legislated
revaluation cycles in various states. We began work on several new large revaluation contracts in
late 2009 and mid-2010 which provided the majority of the increase in appraisal services revenues.
We expect appraisal revenues for the full year 2011 to be moderately higher than 2010.
Cost of Revenues and Gross Margins
The following table sets forth a comparison of the key components of our cost of revenues for the
periods presented as of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
Change |
|
($ in thousands) |
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
Software licenses |
|
$ |
795 |
|
|
$ |
707 |
|
|
$ |
88 |
|
|
|
12 |
% |
Acquired software |
|
|
295 |
|
|
|
398 |
|
|
|
(103 |
) |
|
|
(26 |
) |
Software
services, maintenance and subscriptions |
|
|
35,180 |
|
|
|
34,881 |
|
|
|
299 |
|
|
|
1 |
|
Appraisal services |
|
|
3,824 |
|
|
|
2,877 |
|
|
|
947 |
|
|
|
33 |
|
Hardware and other |
|
|
676 |
|
|
|
938 |
|
|
|
(262 |
) |
|
|
(28 |
) |
|
|
|
|
|
|
|
Total cost of revenues |
|
$ |
40,770 |
|
|
$ |
39,801 |
|
|
$ |
969 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
The following table sets forth a comparison of gross margin percentage by revenue type for the
periods presented as of
March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
Change |
|
Gross margin percentage |
|
2011 |
|
|
2010 |
|
|
% |
|
|
Software license and acquired software |
|
|
84.0 |
% |
|
|
86.9 |
% |
|
|
(2.9 |
)% |
Software
services, maintenance and subscriptions |
|
|
40.6 |
|
|
|
37.4 |
|
|
|
3.2 |
|
Appraisal services |
|
|
38.3 |
|
|
|
32.7 |
|
|
|
5.6 |
|
Hardware and other |
|
|
40.4 |
|
|
|
31.6 |
|
|
|
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall gross margin |
|
|
44.4 |
% |
|
|
43.0 |
% |
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses and acquired software. Costs of software license and acquired software is
comprised of third party software costs, amortization expense for software acquired through
acquisitions and amortization expense for capitalized development costs on certain software
products.
For the three months ended March 31, 2011, cost of software license revenues relating to third
party products was approximately 70% of our cost of software license revenues compared to
approximately 53% of our cost of software license revenues for the three months ended March 31,
2010. The cost of acquired software license for the three months ended March 31, 2011 and 2010 was
approximately 27% and 36%, respectively, of the total costs of software license. We completed
several acquisitions in the period 2007 through the first quarter of 2010 and these costs are being
amortized over a weighted average period of approximately five years.
The remaining balance in costs of software license is amortization expense for capitalized
development costs on certain software. Once a product is released, we begin to amortize the costs
associated with its development over the estimated useful life of the product. Amortization
expense is determined on a product-by-product basis at an annual rate not less than straight-line
basis over the products estimated life, which is generally five years. Development costs consist
mainly of personnel costs, such as salary and benefits paid to our developers, and rent for related
office space.
12
For the three months ended March 31, 2011, our software license gross margin percentage declined
because the product mix included more third party software. Third party software has a lower gross
margin than proprietary software solutions.
Software services, maintenance and subscription services. Cost of software services, maintenance
and subscriptions primarily consists of personnel costs related to installation of our
software, conversion of customer data, training customer personnel and support activities and
various other services such as ASP and disaster recovery. For the three months ended March
31, 2011, the software services, maintenance and subscriptions gross margin increased 3.2%
compared to the prior year period in part because maintenance and various other services such
as ASP and disaster recovery costs typically grow at a slower rate than related revenues due
to leverage in the utilization of our support and maintenance staff and economies of scale, as
well as slightly higher rates on certain services. We are also managing costs and staff
levels to ensure they are in line with demand for professional services. Our implementation
and support staff has declined by 115 employees since March 31, 2010.
Appraisal services. Our appraisal services gross margin increased 5.6% in the three months ended
March 31, 2011 compared to the prior year period. The appraisal services gross margin was
positively impacted by operational efficiencies associated with a large revaluation contract
which began in mid-2010. We often hire temporary employees to assist in appraisal projects
whose term of employment generally ends with the projects completion and have increased our
appraisal services staff by 81 employees since March 31, 2010 in connection with several new
revaluation contracts which began in late 2009 and mid-2010.
Our blended gross margin rose 1.4% in the three months ended March 31, 2011 compared to the prior
year period. This increase was primarily due to leverage in the utilization of our support and
maintenance staff and economies of scale and slightly higher rates on certain services, and
operational efficiencies associated with appraisal services.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses consist primarily of salaries, employee
benefits, travel, share-based compensation expense, commissions and related overhead costs for
administrative and sales and marketing employees, as well as professional fees, trade show
activities, advertising costs and other marketing related costs. The following table sets
forth a comparison of our SG&A expenses for the periods presented as of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
Change |
|
($ in thousands) |
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
Selling, general
and
administrative
expenses |
|
$ |
17,288 |
|
|
$ |
17,561 |
|
|
$ |
(273 |
) |
|
|
(2 |
)% |
SG&A as a percentage of revenues for the three months ended March 31, 2011 was 23.6% compared
25.1% for the three months ended March 31, 2010.
Research and Development Expense
The following table sets forth a comparison of our research and development expense for the
periods presented as of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
Change |
|
($ in thousands) |
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
Research and development expense |
|
$ |
4,549 |
|
|
$ |
3,516 |
|
|
$ |
1,033 |
|
|
|
29 |
% |
Research and development expense consist mainly of costs associated with development of new
products and new software platforms from which we do not currently generate revenue. These include
the Microsoft Dynamics AX project, as well as other new product development efforts. We have
increased our development staff by 39 employees since March 31, 2010. In January 2007, we entered
into a Software Development and License Agreement, which provides for a strategic alliance with
Microsoft Corporation (Microsoft) to jointly develop core public sector functionality for
Microsoft Dynamics AX to address the accounting needs of public sector organizations worldwide. In
September 2007, Tyler and Microsoft signed an amendment to the Software Development and License
Agreement, which grants Microsoft intellectual property rights in and to certain portions of the
software code provided and developed by Tyler into Microsoft Dynamics AX products to be marketed
and sold outside of the public sector in exchange for reimbursement payments to partially offset
the research and development costs. In April 2011, Tyler and Microsoft entered into an amended and
superseded Master Software Development and License Agreement, which among other
13
things, grants
Microsoft intellectual property rights in the remaining portions of the software code developed by
Tyler in exchange for certain other concessions. Under the new agreement, Tyler will continue to
receive the previously agreed to reimbursement payments. In addition, Tyler has agreed to commit
certain resources to the development of the next version of Dynamics AX and will receive
software and maintenance royalties on direct and indirect sales of the solutions co-developed under
this arrangement.
In the three months ended March 31, 2011 and 2010, we offset our research and development expense
by $415,000 and $1.2 million, respectively, which were the amounts earned under the terms of our
agreement with Microsoft. Prior to December 31, 2010, we received offsets from Microsoft to our
research and development expense of approximately $850,000 each quarter from mid-2008 through the
end of 2010 as specified in a statement of work under the Amended Software Development and License
Agreement with Microsoft. In addition, in October 2009, the scope of the project was further
expanded which will result in additional offsets to research and development expense, varying in
amount from quarter to quarter through mid-2012 for a total of approximately $6.2 million. As of
March 31, 2011, we have received $1.5 million and expect to receive the remaining $4.7 million
through mid-2012. The actual amount and timing of future research and development costs and
related reimbursements and whether they are capitalized or expensed may vary. We expect the rate
at which we recognize offsets to our research and development expense to decline compared to 2010
due to changes in the timing of deployment of resources and we believe most of the offsets relating
to 2011 efforts will be recognized in the fourth quarter.
Amortization of Customer and Trade Name Intangibles
Acquisition intangibles are composed of the excess of the purchase price over the fair value of net
tangible assets acquired that is allocated to acquired software and customer and trade name
intangibles. The remaining excess purchase price is allocated to goodwill that is not subject to
amortization. Amortization expense related to acquired software is included with cost of revenues
while amortization expense of customer and trade name intangibles is recorded as a non-operating
expense. The
following table sets forth a comparison of amortization of customer and trade name intangibles for
the periods presented as of
March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
Change |
|
($ in thousands) |
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
Amortization of customer and trade name intangibles |
|
$ |
804 |
|
|
$ |
806 |
|
|
$ |
(2 |
) |
|
|
(0) |
% |
Other Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
Change |
|
($ in thousands) |
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
Other expense, net |
|
$ |
(500 |
) |
|
$ |
(42 |
) |
|
$ |
(458 |
) |
|
NA |
The majority of other expense is comprised of interest expense, non-usage and other fees
associated with a credit agreement. Interest expense was higher than the prior year period due to
higher debt levels associated with a series of stock repurchases that
began in early 2010 and continued for the remainder of the year. The effective interest rate for
the three months ended March 31, 2011 was 3.0% compared to 3.25% in the prior year period.
Income Tax Provision
The following table sets forth a comparison of our income tax provision for the periods presented
as of March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
Change |
|
($ in thousands) |
|
2011 |
|
|
2010 |
|
|
$ |
|
|
% |
|
|
Income tax provision |
|
$ |
3,754 |
|
|
$ |
3,222 |
|
|
|
532 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
39.6 |
% |
|
|
39.8 |
% |
|
|
|
|
|
|
|
|
The effective income tax rates for the three months ended March 31, 2011 and 2010 were
different from the statutory United States federal income tax rate of 35% primarily due to state
income taxes, non-deductible share-based compensation expense, the qualified manufacturing
activities deduction, research and development tax credit and non-deductible meals and
entertainment costs.
14
FINANCIAL CONDITION AND LIQUIDITY
As of March 31, 2011 we had cash and cash equivalents of $2.2 million and investments of $2.1
million, compared to cash and cash equivalents of $2.1 million and investments of $2.2 million at
December 31, 2010. As of March 31, 2011, we had $22.5 million in outstanding borrowings and unused
borrowing capacity of $119.2 million under our revolving line of credit. In addition, as of March
31, 2011, we had outstanding letters of credit totaling $8.3 million to secure surety bonds
required by some of our customer contracts. These letters of credit are issued under our revolving
line of credit and reduce our available borrowing capacity. These letters of credit expire through
early 2012.
The following table sets forth a summary of cash flows for the three months ended March 31:
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
2011 |
|
|
2010 |
|
Cash flows provided (used) by: |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
17,467 |
|
|
$ |
6,934 |
|
Investing activities |
|
|
(7,565 |
) |
|
|
(10,836 |
) |
Financing activities |
|
|
(9,768 |
) |
|
|
(1,743 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
134 |
|
|
$ |
(5,645 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities continues to be our primary source of funds to
finance operating needs and capital expenditures. Other capital resources include cash on hand,
public and private issuances of debt and equity securities, and bank borrowings. It is possible
that our ability to access the capital and credit markets in the future may be limited by economic
conditions or other factors. We currently believe that cash provided by operating activities,
cash on hand and available credit are sufficient to fund our working capital requirements, capital
expenditures, income tax obligations, and share repurchases for the foreseeable future.
For the three months ended March 31, 2011, operating activities provided net cash of $17.5 million,
primarily generated from net income of $5.7 million, non-cash depreciation and amortization charges
of $2.6 million and non-cash share-based compensation expense of $1.4 million. Working capital,
excluding cash, decreased by approximately $8.0 million mainly due to collection of annual
maintenance renewals that are billed near the end of December and timing of payments on income tax
liabilities.
In general changes in deferred revenue are cyclical and primarily driven by the timing of our
maintenance renewal billings. Our renewal dates occur throughout the year but our heaviest renewal
cycles occur in the second and fourth quarters.
Our days sales outstanding (DSO) was 81 days at March 31, 2011, compared to 102 days at December
31, 2010 and 81 days at March 31, 2010. Our maintenance billing cycle typically peaks at its
highest level in June and second highest level in December of each year and is followed by
collections in the subsequent quarter. As a result our DSO usually declines in the first quarter
compared to the fourth quarter. DSO is calculated based on quarter-end accounts receivable divided
by the quotient of annualized quarterly revenues divided by 360 days.
Investing activities used cash of $7.6 million in the three months ending March 31, 2011 compared
to $10.8 million for the same period in 2010. In March 2011 we paid $6.6 million for approximately
27 acres of land and a building in Plano, Texas. In January 2010, we completed the acquisition of
the assets of Wiznet, Inc. for $9.5 million in cash. Also, we paid $1.2 million in the three
months ended March 31, 2010, for construction of an office building in Lubbock, Texas. Capital
expenditures and acquisitions were funded from cash generated from operations.
Non-current investments available-for-sale consist of two auction rate municipal securities (ARS)
which are collateralized debt obligations supported by municipal agencies and do not include
mortgage-backed securities. These ARS are debt instruments with stated maturities ranging
from 21 to 32 years, for which the interest rate is designed to be reset through Dutch
auctions approximately every 30 days. However, due to events in the credit markets, auctions
for these securities have not occurred since February 2008. Both of our ARS have had a series
of very small partial redemptions at par in the period from July 2009 through February 2011.
As of March 31, 2011 we have continued to earn and collect interest on both of our ARS.
Because quoted prices in active markets are no longer available we determined the estimated
fair values of these securities utilizing a discounted trinomial model. The model considers
the probability of three potential occurrences for each auction event through the maturity
date of each ARS. The three potential outcomes for each auction are (i) successful
auction/early redemption, (ii) failed auction and (iii) issuer default. Inputs in determining
the probabilities of the potential outcomes include but are not limited to, the
15
securities
collateral, credit rating, insurance, issuers financial standing, contractual restrictions on
disposition and the liquidity in the market. The fair value of each ARS is determined by
summing the present value of the probability-weighted future principal and interest payments
determined by the model. Since there can be no assurances that auctions for these securities
will be successful in the near future, we have classified our ARS as non-current investments.
We consider the impairment in our ARS as temporary because we do not have the intent to sell, nor
is it more-likely-than-not that we will be required to sell these securities before recovery of
their cost basis. We believe that this decline in fair value is temporary because the underlying
assets of these securities are supported by municipal agencies and do not include mortgage-backed
securities, have redemption features which call for redemption at 100% of par value and have a
current credit rating of A or AA. The ratings on the ARS take into account credit support through
insurance policies guaranteeing each of the bonds payment of principal and accrued interest, if it
becomes necessary. In addition, both ARS have had a series of very small partial redemptions at
par in the period July 2009 through February 2011. We did not record any unrealized gains or
losses on our ARS in the three months ended March 31, 2011. Based on our cash and cash equivalents
balance of $2.2 million, expected operating cash flows and a $150.0 million revolving credit line,
we do not believe a lack of liquidity associated with our ARS will adversely affect our ability to
conduct business, and believe we have the ability to hold the securities throughout the currently
estimated recovery period. We will continue to evaluate any changes in the market value of our ARS
and in the future, depending upon existing market conditions, we may be required to record an
other-than-temporary decline in market value.
Financing activities used cash of $9.8 million in the three months ended March 31, 2011 compared to
$1.7 million in the same period for 2010. Cash used by financing activities in 2011 was primarily
comprised of purchases of 335,000 shares of our common stock for $6.8 million. These purchases
were funded by borrowings under our revolving credit line and cash from operations. We also
collected $799,000 from stock option exercises and employee stock purchase plan activity.
At March 31, 2011, we had authorization to repurchase up to 2.4 million additional shares of Tyler
common stock. A summary of the repurchase activity during the three months ended March 31, 2011 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum number of |
|
|
|
|
|
|
|
Additional number |
|
|
|
|
|
|
shares that may be |
|
|
|
|
|
|
|
of shares |
|
|
|
|
|
|
repurchased under |
|
|
|
Total number of |
|
|
authorized that may |
|
|
Average price paid |
|
|
current |
|
(Shares in thousands) |
|
shares repurchased |
|
|
be repurchased |
|
|
per share |
|
|
authorization |
|
January 1 through January 31 |
|
|
335 |
|
|
|
|
|
|
$ |
20.43 |
|
|
|
2,369 |
|
February 1 through February 28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,369 |
|
March 1 through March 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total three months ended March 31, 2011 |
|
|
335 |
|
|
|
|
|
|
$ |
20.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The repurchase program, which was approved by our board of directors, was announced in October
2002, and was amended in April and July 2003, October 2004, October 2005, May 2007, May 2008, May
2009, July and October 2010. There is no expiration date specified for the authorization and we
intend to repurchase stock under the plan from time to time in the future.
Our Credit Agreement (the Credit Facility) provides for a revolving credit line of $150.0 million
(which may be increased up to $200.0 million subject to our obtaining commitments for such
increase), with a $25.0 million sublimit for letters of credit. The Credit Facility matures on
August 11, 2014. 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) the Bank of Americas
prime rate plus a margin of 1.50% to 2.75% or (2) the 30, 60, 90 or 180-day LIBOR rate plus a
margin of 2.50% to 3.75%, with the margin determined by our consolidated leverage ratio. As of
March 31, 2011, our effective average interest rate for borrowings during the three months ended
March 31, 2011 was 3.0%. The Credit Facility is secured by substantially all of our assets,
excluding real property. 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 March 31,
2011, we were in compliance with those covenants.
We made federal and state income tax payments, net of refunds, of $174,000 in the three months
ended March 31, 2011 compared to $2.0 million in the prior year.
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Excluding acquisitions, we anticipate that 2011 capital spending will be between $11.5 million and
$12.0 million. Capital expenditures in 2011 include the purchase of approximately 27 acres of land
and a building for $6.6 million in the three months ended March 31, 2011. For the remainder of the
year we expect the majority of our capital expenditures will consist of computer equipment and
software for infrastructure replacements and expansion. We currently do not expect to capitalize
significant amounts related to software development in 2011, but the actual amount and timing of
those costs, and whether they are capitalized or expensed may result in additional capitalized
software development. Capital spending in 2011 is expected to be funded from existing cash
balances and cash flows from operations.
From time to time we engage in discussions with potential acquisition candidates. In order to
consummate any such opportunities, which could require significant commitments of capital; we may
be required to incur debt or to issue additional potentially dilutive securities in the future. No
assurance can be given as to our future acquisitions and how such acquisitions may be financed.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may affect us due to adverse changes in financial
market prices and interest rates. Our investments available-for-sale consist of auction rate
municipal securities (ARS) which are collateralized debt obligations supported by municipal
agencies and do not include mortgage-backed securities.
Non-current investments available-for-sale consist of two ARS with stated maturities ranging from
21 to 32 years, for which the interest rate is designed to be reset through Dutch auctions
approximately every 30 days which would have qualified as Level 1 under ASC 820, Fair Value
Measurements. However, due to events in the credit markets, auctions for these securities have not
occurred since February 2008. Therefore, quoted prices in active markets are no longer available
and we determined the estimated fair values of these securities as of March 31, 2011 utilizing a
discounted trinomial model.
We consider the impairment in our ARS as temporary because we do not have the intent to sell, nor
is it more-likely-than-not that we will be required to sell these securities before recovery of
their cost basis. We believe that this decline in fair value is temporary, because the underlying
assets of these securities are supported by municipal agencies and do not include mortgage-backed
securities, have redemption features which call for redemption at 100% of par value and have a
current credit rating of A or AA. The ratings on the ARS take into account credit support through
insurance policies guaranteeing each of the bonds payment
of principal and accrued interest, if it becomes necessary. In addition, both ARS have had a
series of very small partial redemptions at par in the period July 2009 through February 2011.
Based on our cash and cash equivalents balance of $2.2 million, expected operating cash flows and a
$150.0 million revolving credit line, we do not believe a lack of liquidity associated with our ARS
will adversely affect our ability to conduct business, and believe we have the ability to hold the
securities throughout the currently estimated recovery period. We will continue to evaluate any
changes in the fair value of our ARS and in the future, depending upon existing market conditions,
we may be required to record an other-than-temporary decline in market value.
As of March 31, 2011 we had $22.5 million in outstanding borrowings under the Credit Facility.
These borrowings bear interest at a rate of either (1) the Bank of Americas prime rate plus a
margin of 1.50% to 2.75% or (2) the 30, 60, 90 or 180-day LIBOR rate plus a margin of 2.50% to
3.75%, with the margin determined by our consolidated leverage ratio. As of March 31, 2011 our
interest rate was 3.25%. Assuming borrowings of $22.5 million, a hypothetical 10% increase in our
interest rate at March 31, 2011 for a one year period would result in approximately $73,000 of
additional interest rate expense.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures
(as defined in Rule 13a-15(e) of the Securities Exchange Act) designed to provide reasonable
assurance that the information required to be disclosed by us in the reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms. These include controls and procedures designed to ensure
that this information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosures. Management, with the participation of the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report. Based on this evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and procedures were
effective as of March 31, 2011.
Changes in Internal Control over Financial Reporting. There were no changes in our internal
control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the
three months ended March 31, 2011, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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Part II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Other than ordinary course, routine litigation incidental to our business and except as described
in this Quarterly Report, there are no material legal proceedings pending to which we are party or
to which any of our properties are subject.
ITEM 1A. Risk Factors
In addition to the other information set forth in this report, one should carefully consider the
discussion of various risks and uncertainties contained in Part I, Item 1A. Risk Factors in our
2010 Annual Report on Form 10-K. We believe those risk factors are the most relevant to our
business and could cause our results to differ materially from the forward-looking statements made
by us. Please note, however, that those are not the only risk factors facing us. Additional risks
that we do not consider material, or of which we are not currently aware, may also have an adverse
impact on us. Our business, financial condition and results of operations could be seriously
harmed if any of these risks or uncertainties actually occurs or materializes. In that event, the
market price for our common stock could decline, and our shareholders may lose all or part of their
investment. During the three months ended March 31, 2011, there were no material changes in the
information regarding risk factors contained in our Annual Report on Form 10-K for the year ended
December 31, 2010.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
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ITEM 5. Other Information |
None
ITEM 6. Exhibits
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Exhibit 31.1
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Exhibit 31.2
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Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Exhibit 32.1
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Certifications Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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TYLER TECHNOLOGIES, INC.
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By: |
/s/ Brian K. Miller
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Brian K. Miller |
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Executive Vice President and Chief Financial Officer
(principal financial officer and an authorized
signatory) |
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Date: April 29, 2011
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