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TYLER TECHNOLOGIES INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(Edgar Glimpses Via Acquire Media NewsEdge) 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 protect client
information from security breaches and provide uninterrupted operations of data
centers; (3) material portions of our business require the Internet
infrastructure to be further developed or adequately maintained; (4) 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; (5) economic, political and market conditions, including
the global economic and financial crisis, and the general tightening of access
to debt or equity capital; (6) technological and market risks associated with
the development of new products or services or of new versions of existing or
acquired products or services; (7) 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; (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; (9) 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 (10) 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
Item 1A, "Risk Factors." We expressly disclaim any obligation to publicly update
or revise our forward-looking statements.
OVERVIEW
General
We provide integrated information management solutions and services for the
public sector, with a focus on 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, 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 software as a service ("SaaS"), which utilizes the Tyler private cloud,
and electronic document filing solutions ("e-filings"). In 2010 we began
providing e-filings for courts and law offices which simplify the filing and
management of court related documents. Revenues for e-filings are generally
derived from transaction fees. We also provide 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 and services to meet their information technology and
automation needs for mission-critical "back-office" functions such as financial
management and courts and justice processes. The Appraisal and Tax Software
Solutions and Services ("ATSS") segment provides systems and software that
automate the appraisal and assessment of real and personal property as well as
property appraisal outsourcing services for local governments and taxing
authorities. Property appraisal outsourcing services include: the physical
inspection of commercial and residential properties; data collection and
processing; computer analysis for property valuation; preparation of tax rolls;
community education; and arbitration between taxpayers and the assessing
jurisdiction.
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We monitor and analyze several key performance indicators in order to manage our
business and evaluate our financial and operating performance. These indicators
include the following:
• Revenues - We derive our revenues from five primary sources: sale of software licenses; subscription-based arrangements; software services;
maintenance and appraisal services. Subscriptions and maintenance are
considered recurring revenue sources and comprised approximately 60% of
our revenue in 2012. The number of new SaaS customers and the number of
existing customers who convert from our traditional software arrangements
to our SaaS model are a significant driver to our business, together with
new software license sales and maintenance rate increases. In addition, we
also monitor our customer base and churn as we historically have
experienced very low customer turnover. During 2012, our customer turnover
was approximately 2%.
• Cost of Revenues and Gross Margins - Our primary cost component is personnel expenses in connection with providing software implementation,
subscription-based services, maintenance and support, and appraisal
services to our customers. We can improve gross margins by controlling
headcount and related costs and by expanding our revenue base, especially
from those products and services that produce incremental revenue with
minimal incremental cost, such as software licenses, subscription-based
services, and maintenance and support. Our appraisal projects are cyclical
in nature, and we often employ appraisal personnel on a short-term basis
to coincide with the life of a project. As of December 31, 2012, our total
employee count increased to 2,388 from 2,091 at December 31, 2011. This
increase includes 169 employees added as a result of acquisitions
completed in 2012.
• Selling, General and Administrative ("SG&A") Expenses - The primary
components of SG&A expenses are administrative and sales personnel
salaries and commissions, marketing expense, share-based compensation
expense, rent and professional fees. Sales commissions typically fluctuate
with revenues and share-based compensation expense generally increases
when the market price of our stock increases. Other administrative
expenses tend to grow at a slower rate than revenues.
• Liquidity and Cash Flows - The primary driver of our cash flows is net
income. Uses of cash include acquisitions, capital investments in property
and equipment and discretionary purchases of treasury stock. During 2012
we invested $9.1 million in property and equipment and paid $25.7 million
in cash for four small acquisitions. Our investment in property and
equipment included $4.3 million in cash in connection with the
construction of an office building in Plano, Texas and purchase of land and a building in Moraine, Ohio. Our working capital needs are fairly
stable throughout the year with the significant components of cash
outflows being payment of personnel expenses offset by cash inflows
representing collection of accounts receivable and cash receipts from
customers in advance of revenue being earned.
• Balance Sheet - Cash, accounts receivable and days sales outstanding and
deferred revenue balances are important indicators of our business.
Acquisitions
In November 2012, we acquired all of the capital stock of EnerGov Solutions,
L.L.C. ("EnerGov") which develops and sells enterprise permitting, land
management, licensing and regulatory software solutions to governmental
agencies. The purchase price, net of cash acquired of $15,000 was $10.5 million
in cash and 60,000 shares of Tyler common stock valued at $2.8 million.
In April 2012, we acquired all of the capital stock of Computer Software
Associates, Inc. ("CSA") for a cash purchase price of $9.4 million, net of cash
acquired of $437,000. CSA is a reseller of Tyler's Infinite Visions school
enterprise solution, and sells proprietary CSA tax and recording solutions to
county governments, primarily in the Northwest.
In March 2012, we acquired all the capital stock of UniFund, L.L.C. ("UniFund")
for a cash purchase price of $4.6 million, net of cash acquired of $780,000.
UniFund provides enterprise resource planning solutions to schools and local
governments, primarily in the Northeast. UniFund is also a reseller of Tyler's
Infinite Visions school enterprise solution.
In January 2012, we acquired substantially all of the assets of Akanda
Innovation, Inc., a provider of web-based solutions to the public sector which
are integrated with our property tax software, for a total purchase price of
$2.9 million. The purchase price included certain liabilities we assumed of
approximately $800,000, resulting in net cash paid to the sellers of $2.1
million, of which $900,000 was paid prior to December 31, 2011.
The operating results of these acquisitions are included in our results of
operations since their dates of acquisition. The operating results of EnerGov,
CSA and UniFund are included in the operating profit results of the ESS segment
and the operating results of Akanda are included in the operating results of the
ATSS segment.
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Outlook
We expect the trend of gradual improvements in the marketplace to continue in
2013. We plan to make significant investments in our business that we believe
will enhance our market leadership and improve long-term revenue and margin
growth. These investments include expenses associated with new e-filing
contracts as well as accelerated hiring to ensure that we are well-positioned to
deliver our current backlog and anticipated new business.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of operations is
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"). The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities at the date
of the financial statements, the reported amounts of revenues, cost of revenues
and expenses during the reporting period, and related disclosure of
contingencies. The Notes to the Financial Statements included as part of this
Annual Report describe our significant accounting policies used in the
preparation of the financial statements. Significant items subject to such
estimates and assumptions include the application of the
percentage-of-completion and proportional performance methods of revenue
recognition, the carrying amount and estimated useful lives of intangible
assets, determination of share-based compensation expense and valuation
allowance for receivables. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies require significant
judgments and estimates used in the preparation of our financial statements.
Revenue Recognition. We recognize revenues in accordance with the provisions of
Accounting Standards Codification ("ASC") 605, Revenue Recognition and ASC
985-605, Software Revenue Recognition. Our revenues are derived from sales of
software licenses, subscription-based services, appraisal services, maintenance
and support, and services that typically range from installation, training and
basic consulting to software modification and customization to meet specific
customer needs. For multiple element software arrangements, which do not entail
the performance of services that are considered essential to the functionality
of the software, we generally record revenue when the delivered products or
performed services result in a legally enforceable and non-refundable claim. We
maintain allowances for doubtful accounts and sales adjustments, which are
provided at the time the revenue is recognized. Because most of our customers
are governmental entities, we rarely incur a loss resulting from the inability
of a customer to make required payments. In a limited number of cases, we
encounter a customer who is dissatisfied with some aspect of the software
product or our service, and we may offer a "concession" to such customer. In
those limited situations where we grant a concession, we rarely reduce the
contract arrangement fee, but alternatively may perform additional services,
such as additional training or creating additional custom reports. These amounts
have historically been nominal. In connection with our customer contracts and
the adequacy of related allowances and measures of progress towards contract
completion, our project managers are charged with the responsibility to
continually review the status of each customer on a specific contract basis.
Also, we review, on at least a quarterly basis, significant past due accounts
receivable and the adequacy of related reserves. Events or changes in
circumstances that indicate that the carrying amount for the allowances for
doubtful accounts and sales adjustments 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.
We use contract accounting, primarily the percentage-of-completion method, as
discussed in ASC 605-35, Construction - Type and Certain Production - Type
Contracts, for those software arrangements that involve significant production,
modification or customization of the software, or where our software services
are otherwise considered essential to the functionality of the software. We
measure progress-to-completion primarily using labor hours incurred, or value
added. In addition, we recognize revenue using the proportional performance
method of revenue recognition for our property appraisal projects, some of which
can range up to five years. These methods rely on estimates of total expected
contract revenue, billings and collections and expected contract costs, as well
as measures of progress toward completion. We believe reasonably dependable
estimates of revenue and costs and progress applicable to various stages of a
contract can be made. At times, we perform additional and/or non-contractual
services for little to no incremental fee to satisfy customer expectations. If
changes occur in delivery, productivity or other factors used in developing our
estimates of expected costs or revenues, we revise our cost and revenue
estimates, and any revisions are charged to income in the period in which the
facts that give rise to that revision first become known. In connection with
these and certain other contracts, we may perform the work prior to when the
services are billable and/or payable pursuant to the contract. The termination
clauses in most of our contracts provide for the payment for the value of
products delivered and services performed in the event of an early termination.
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For SaaS arrangements, we evaluate whether the customer has the contractual
right to take possession of our software at any time during the hosting period
without significant penalty and whether the customer can feasibly maintain the
software on the customer's hardware or enter into another arrangement with a
third party to host the software. If we determine that the customer has the
contractual right to take possession of our software at any time during the
hosting period without significant penalty and can feasibly maintain the
software on the customer's hardware or enter into another arrangement with a
third party to host the software, we recognize the license, professional
services and hosting services revenues pursuant to ASC 985-605, Software Revenue
Recognition. For SaaS arrangements that do not meet the criteria for recognition
under ASC 985-605, we account for the elements under ASC 605-25, Multiple
Element Arrangements using all applicable facts and circumstances, including
whether (i) the element has stand-alone value, (ii) there is a general right of
return and (iii) the revenue is contingent on delivery of other elements. We
allocate the contract value to each element of the arrangement that qualifies
for treatment as a separate element based on vendor-specific objective evidence
of fair value ("VSOE"), and if VSOE is not available, third party evidence, and
if third party evidence is unavailable, estimated selling price. For
professional services associated with SaaS arrangements that we determine do not
have stand-alone value to the customer or are contingent on delivery of other
elements, we recognize the services revenue ratably over the remaining
contractual period once hosting has gone live and we may begin billing for the
hosting services. We record amounts that have been invoiced in accounts
receivable and in deferred revenue or revenues, depending on whether the revenue
recognition criteria have been met.
In connection with certain of our contracts, we have recorded retentions
receivable or unbilled receivables consisting of costs and estimated profit in
excess of billings as of the balance sheet date. Many of the contracts which
give rise to unbilled receivables at a given balance sheet date are subject to
billings in the subsequent accounting period. We review unbilled receivables and
related contract provisions to ensure we are justified in recognizing revenue
prior to billing the customer and that we have objective evidence which allows
us to recognize such revenue. In addition, we have a sizable amount of deferred
revenue which represents billings in excess of revenue earned. The majority of
this liability consists of maintenance billings for which payments are made in
advance and the revenue is ratably earned over the maintenance period, generally
one year. We also have deferred revenue for those contracts in which we receive
a deposit and the conditions in which to record revenue for the service or
product has not been met. On a periodic basis, we review by customer the detail
components of our deferred revenue to ensure our accounting remains appropriate.
Intangible Assets and Goodwill. Our business acquisitions typically result in
the creation of goodwill and other intangible asset balances, and these balances
affect the amount and timing of future period amortization expense, as well as
expense we could possibly incur as a result of an impairment charge. The cost of
acquired companies is allocated to identifiable tangible and intangible assets
based on estimated fair value, with the excess allocated to goodwill.
Accordingly, we have a significant balance of acquisition date intangible
assets, including software, customer related intangibles, trade name and
goodwill. These intangible assets (other than goodwill) are amortized over their
estimated useful lives. We currently have no intangible assets with indefinite
lives other than goodwill.
When testing goodwill for impairment quantitatively, we first compare the fair
value of each reporting unit with its carrying amount. If the carrying amount of
a reporting unit exceeds its fair value, a second step is performed to measure
the amount of potential impairment. In the second step, we compare the implied
fair value of reporting unit goodwill with the carrying amount of the reporting
unit's goodwill. If the carrying amount of reporting unit goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized. The fair
values calculated in our impairment tests are determined using discounted cash
flow models involving several assumptions. The assumptions that are used are
based upon what we believe a hypothetical marketplace participant would use in
estimating fair value. We base our fair value estimates on assumptions we
believe to be reasonable but that are unpredictable and inherently uncertain. We
evaluate the reasonableness of the fair value calculations of our reporting
units by comparing the total of the fair value of all of our reporting units to
our total market capitalization.
In the first quarter of 2012, ASU 2011-08, "Testing Goodwill for Impairment"
became effective. ASU 2011-08 allows entities testing goodwill for impairment
the option of performing a qualitative assessment before calculating the fair
value of a reporting unit (i.e., the first step of the goodwill impairment
test). If entities determine, on the basis of qualitative factors, that the fair
value of the reporting unit is more likely than not greater than the carrying
amount, a quantitative calculation would not be needed.
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Our annual goodwill impairment analysis, which we performed quantitatively
during the second quarter of 2012, did not result in an impairment charge.
During 2012 we did not identify any triggering events which would require an
update to our annual impairment review.
All intangible assets with definite and indefinite lives are reviewed for
impairment annually or whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of other
intangible assets is measured by comparison of the carrying amount to estimated
undiscounted future cash flows. The assessment of recoverability or of the
estimated useful life for amortization purposes will be affected if the timing
or the amount of estimated future operating cash flows is not achieved. Such
indicators may include, among others: a significant decline in expected future
cash flows; a sustained, significant decline in stock price and market
capitalization; a significant adverse change in legal factors or in the business
climate; unanticipated competition; and reductions in growth rates. In addition,
products, capabilities, or technologies developed by others may render our
software products obsolete or non-competitive. Any adverse change in these
factors could have a significant impact on the recoverability of goodwill or
other intangible assets.
Share-Based Compensation. We have a stock option plan that provides for the
grant of stock options to key employees, directors and non-employee consultants.
We estimate the fair value of share-based awards on the date of grant using the
Black-Scholes option valuation model. Share-based compensation expense includes
the estimated effects of forfeitures, which will be adjusted over the requisite
service period to the extent actual forfeitures differ, or are expected to
differ from such estimates. Changes in estimated forfeitures are recognized in
the period of change and will also impact the amount of expense to be recognized
in future periods. Forfeiture rate assumptions are derived from historical data.
We estimate stock price volatility at the date of grant based on the historical
volatility of our common stock. Estimated option life is determined using the
"simplified method" in accordance with ASC 718-10, Stock Compensation.
Determining the appropriate fair-value model and calculating the fair value of
share-based awards at the grant date requires considerable judgment, including
estimating stock price volatility, expected option life and forfeiture rates.
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ANALYSIS OF RESULTS OF OPERATIONS AND OTHER
The following discussion compares the historical results of operations on a
basis consistent with GAAP for the years ended December 31, 2012, 2011 and 2010.
Percentage of Total Revenue
Years ended December 31,
2012 2011 2010
Revenue:
Software licenses 9.1 % 10.5 % 12.1 %
Subscriptions 12.3 10.1 8.1
Software services 23.0 22.5 23.7
Maintenance 47.3 47.4 47.0
Appraisal services 6.2 7.5 7.1
Hardware and other 2.1 2.0 2.0
Total revenue 100.0 100.0 100.0
Operating Expenses:
Cost of software licenses and acquired software 1.1 1.3 1.8
Cost of software services, maintenance and
subscriptions 47.2 46.5 47.8
Cost of appraisal services 4.1 4.7 4.5
Cost of hardware and other 1.4 1.6 1.5
Selling, general and administrative expenses 23.9 24.5 24.1
Research and development expense 5.5 5.3 4.8
Amortization of customer base and trade name
intangibles 1.2 1.1 1.1
Operating income 15.6 15.0 14.4
Other expense 0.8 0.7 0.6
Income before income taxes 14.8 14.3 13.8
Income tax provision 5.7 5.4 5.1
Net income 9.1 % 8.9 % 8.7 %
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2012 Compared to 2011
Revenues
Software licenses.
The following table sets forth a comparison of our software license revenues for
the years ended December 31:
Change
($ in thousands) 2012 2011 $ %
ESS $ 31,304 $ 30,194 $ 1,110 4 %
ATSS 1,868 2,400 (532 ) (22 )
Total software license revenue $ 33,172 $ 32,594 $ 578 2 %
Excluding the impact of acquisitions, total software license revenue declined by
6% compared to 2011. Most of the decline was due to fewer add-on sales to our
existing customer base. In addition, software license growth was reduced
somewhat because of a growing number of customers choosing our
subscription-based options, rather than purchasing the software under a
traditional perpetual software license arrangement. Subscription-based
arrangements result in no software license revenues in the initial year as
compared to traditional perpetual software license arrangements but generate
higher overall subscription-based services revenue over the term of the
contract. We had 76 new customers that entered into subscription-based
arrangements in 2012 compared to 47 new customers in 2011. We expect software
license revenues in 2013 to be higher than 2012 but the mix of software license
arrangements and subscription-based arrangements may reduce the degree of the
increase.
Subscriptions.
The following table sets forth a comparison of our subscription revenues for the
years ended December 31:
Change
($ in thousands) 2012 2011 $ %
ESS $ 43,319 $ 30,400 $ 12,919 42 %
ATSS 1,299 760 539 71
Total subscriptions revenue $ 44,618 $ 31,160 $ 13,458 43 %
Subscription-based services revenue primarily consists of revenues derived from
our SaaS arrangements, which utilize the Tyler private cloud. As part of our
subscription-based services, we also provide e-filings that simplify the filing
and management of court related documents for courts and law offices. Revenues
for e-filings are generally derived from transaction fees. The contract term for
SaaS arrangements range from one to 10 years but are typically for a period of
three to six years.
Excluding the impact of acquisitions, subscription-based services revenue
increased 40% compared to 2011. New SaaS customers as well as existing customers
who converted to our SaaS model provided the majority of the subscription-based
revenue increase. In 2012, we added 76 new customers and 68 existing customers
elected to convert to our SaaS model. E-filing services also contributed
approximately $2.3 million of the subscription revenue increase as a result of
new clients implementing e-filing and several existing clients adopting or
expanding mandatory e-filing for court documents in the last half of 2011 and
2012.
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Software services.
The following table sets forth a comparison of our software services revenues
for the years ended December 31:
Change
($ in thousands) 2012 2011 $ %
ESS $ 76,103 $ 60,840 $ 15,263 25 %
ATSS 7,305 8,777 (1,472 ) (17 )
Total software services revenue $ 83,408 $ 69,617 $ 13,791 20 %
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. Existing customers also periodically purchase
additional training, consulting and minor programming services. Excluding the
impact of acquisitions, software services increased 14% compared to 2011. The
increase is due partly to contract arrangements that included more programming
services as well as several state-wide arrangements that in addition to
services, include more third party vendor services to build certain software
interfaces.
Maintenance.
The following table sets forth a comparison of our maintenance revenues for the
years ended December 31:
Change
($ in thousands) 2012 2011 $ %
ESS $ 155,290 $ 130,999 $ 24,291 19 %
ATSS 16,561 15,499 1,062 7
Total maintenance revenue $ 171,851 $ 146,498 $ 25,353 17 %
We provide maintenance and support services for our software products and
certain third party software. Excluding the impact of acquisitions, maintenance
revenue grew 9% from 2011. This increase was due to growth in our installed
customer base and maintenance rate increases on most of our product lines,
offset slightly by customers converting to our SaaS model.
Appraisal services.
The following table sets forth a comparison of our appraisal service revenues
for the years ended December 31:
Change
($ in thousands) 2012 2011 $ %
ESS $ - $ - $ - - %
ATSS 22,543 23,228 (685 ) (3 )
Total appraisal services revenue $ 22,543 $ 23,228 $ (685 ) (3 )%
Appraisal services revenue declined 3% in 2012 compared to 2011. The appraisal
services business is somewhat cyclical and driven in part by statutory
revaluation cycles in various states. The decline is mainly due to the
completion of a large contract in Pennsylvania offset slightly by the start-up
of smaller projects in 2012, including several in Ohio. We expect appraisal
revenues for 2013 will increase slightly compared to 2012.
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Cost of Revenues and Gross Margins
The following table sets forth a comparison of the key components of our cost of
revenues for the years ended December 31:
Change
($ in thousands) 2012 2011 $ %
Software licenses $ 1,983 $ 3,034 $ (1,051 ) (35 )%
Acquired software 1,888 1,125 763 68
Software services, maintenance and subscriptions 171,584 143,776 27,808 19
Appraisal services 14,889 14,550 339 2
Hardware and other 5,258 4,994 264 5
Total cost of revenues $ 195,602 $ 167,479 $ 28,123 17 %
The following table sets forth a comparison of gross margin percentage by
revenue type for the years ended December 31:
Gross margin percentage 2012 2011 Change
Software license and acquired software 88.3 % 87.2 % 1.1 %
Software services, maintenance and subscriptions 42.8 41.9 0.9
Appraisal services 34.0 37.4 (3.4 )
Hardware and other 31.8 20.7 11.1
Overall gross margin 46.2 % 45.9 % 0.3 %
Software license and acquired software. Costs of software license and acquired
software are primarily comprised of third party software costs and amortization
expense for software acquired through acquisitions. In 2012 our software license
gross margin percentage increased compared to 2011 because our product mix
included less third party software which offset higher amortization expense
associated with acquisitions.
Software services, maintenance and subscription-based services. Cost of software
services, maintenance and subscription-based services 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 SaaS arrangements and e-filings. Maintenance and various other
services such as SaaS 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. In 2012, the software services, maintenance and
subscriptions gross margin increased compared to the prior year partly because
we improved our utilization of our support and maintenance staff and due to
annual rate increases on certain services. We are managing costs and staff
levels to ensure they are in line with demand for professional services.
Excluding 147 employees added with acquisitions, our implementation and support
staff has increased by 103 employees since 2011. Most of these additions
occurred mid- to late 2012. We expect to increase development efforts in 2013
for geographic expansion efforts, primarily in California and in our e-filing
solutions infrastructure in order to pursue more opportunities with both
existing and new clients.
In late 2012 we signed a contract with the Texas Office of Court Administration
for our Odyssey File and Serve e-filing offering for TexFile, a unified,
statewide electronic filing system for courts. Subsequently, the state of Texas
issued an order mandating e-filing in civil cases beginning in January 2014.
Mandatory e-filing will be phased in over a two and a half year period,
beginning with the largest counties in January 2014. We will be paid on a
per-filing basis but expect very limited revenues from TexFile e-filings in
2013. However, during 2013 we will invest significant amounts in the range of
$3.0 million, to prepare to implement the system with courts across the state.
With the recent order mandating e-filing in Texas, we expect that this contract
will provide a long-term recurring revenue stream of $15.0 million to $20.0
million when it becomes fully mandatory.
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Appraisal services. Appraisal services revenues are approximately 6% of total
revenues. The appraisal services gross margin declined compared to 2011. A high
proportion of the costs of appraisal services revenue are variable, as we often
hire temporary employees to assist in appraisal projects, whose term of
employment generally ends with the projects' completion. The appraisal services
gross margin in 2011 was also favorably impacted by operational efficiencies
associated with a large revaluation contract which began in mid-2010 and was
substantially complete by mid-2011.
Our blended gross margin for 2012 increased 0.3% from 2011 mainly due to
leverage in the utilization of our support, maintenance and subscription-based
services staff and economies of scale and slightly higher rates on certain
services. The gross margin also benefited from lower third party software costs.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses consist primarily of
salaries, employee benefits, travel, share-based compensation expense,
commissions and related overhead costs for administrative and sales and
marketing employees as well as, professional fees, trade show activities,
advertising costs and other marketing related costs. The following table sets
forth a comparison of our SG&A expenses for the following years ended
December 31:
Change
($ in thousands) 2012 2011 $ %
Selling, general and administrative expenses $ 86,706 $ 75,650 $ 11,056 15 %
Excluding the impact of acquisitions, SG&A increased approximately 11% compared
to 2011. SG&A as a percentage of revenues was 23.9% in 2012 compared to 24.5% in
2011. SG&A expenses increased due to higher commission expense in connection
with increased sales; increased headcount in sales and related expenses to
support geographic expansion; and increased incentive compensation costs due to
improved results and higher stock compensation expense because our company stock
price has increased substantially over the last few years.
Research and Development Expense
Research and development expense consists primarily of salaries, employee
benefits and related overhead costs associated with product development. The
following table sets forth a comparison of our research and development expense
for the years ended December 31:
Change
($ in thousands) 2012 2011 $ % Research and development expense $ 20,140 $ 16,414 $ 3,726 23 %
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 next version of Microsoft Dynamics
AX project, as well as other new product development efforts. In 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. This agreement and
subsequent amendments granted Microsoft intellectual property rights in 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
and royalties on direct and indirect public-sector sales worldwide of the
solutions co-developed under this arrangement. 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
public-sector sales worldwide of the solutions co-developed under this
arrangement.
Our research and development expense increased $3.7 million in 2012 compared to
2011. The increase is mainly due to lower reimbursements from Microsoft in 2012.
In 2012 we had $1.0 million in research and development expense offsets compared
to $3.5 million in 2011, which were the amounts earned under the terms of our
agreement with Microsoft. Under our amended agreement with Microsoft, the
project included offsets to research and development expense, varying in amount
from quarter to quarter from 2009 through 2012 for a total of approximately $6.2
million. As of September 30, 2012, we received the final $1.0 million under the
agreement.
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Amortization of Customer and Trade Name Intangibles
Acquisition intangibles are comprised of the excess of the purchase price over
the fair value of net tangible assets acquired that is allocated to acquired
software and customer and trade name intangibles. The remaining excess purchase
price is allocated to goodwill that is not subject to amortization. Amortization
expense related to acquired software is included with cost of revenues, while
amortization expense of customer and trade name intangibles is recorded as other
operating expense. The estimated useful lives of both customer and trade name
intangibles are five to 25 years. The following table sets forth a comparison of
amortization of customer and trade name intangibles for the years ended
December 31:
Change
($ in thousands) 2012 2011 $ %
Amortization of customer and trade name intangibles $ 4,279 $ 3,331 $ 948 28 %
In 2012, we completed several acquisitions that increased amortizable customer
and trade name intangibles by approximately $11.1 million. This amount is being
amortized over a weighted average period of 11.8 years.
Estimated annual amortization expense relating to customer and trade name
acquisition intangibles, excluding acquired software for which the amortization
expense is recorded as cost of revenues, for the next five years is as follows
(in thousands):
2013 $ 4,491
2014 4,490
2015 4,490
2016 4,490
2017 4,490
Other
The following table sets forth a comparison of other expense, net for the years
ended December 31:
Change
($ in thousands) 2012 2011 $ %
Other expense, net $ 2,709 $ 2,404 $ 305 13 %
Other expense is primarily comprised of interest expense, non-usage and other
fees associated with our revolving line of credit agreement. Interest expense
was higher in 2012 than 2011 due to higher debt levels associated with several
acquisitions completed since October 2011 and stock repurchases in the last half
of 2011. The effective interest rate in 2012 was 3.4% compared to 3.3% in 2011.
Income Tax Provision
The following table sets forth a comparison of our income tax provision for the
years ended December 31:
Change
($ in thousands) 2012 2011 $ %
Income tax provision $ 20,874 $ 16,556 $ 4,318 26 %
Effective income tax rate 38.8 % 37.5 %
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The effective income tax rates for both years were different from the statutory
United States federal income tax rate of 35% due to state income taxes,
non-deductible share-based compensation expense, the qualified manufacturing
activities deduction, disqualifying incentive stock option ("ISOs") dispositions
and non-deductible meals and entertainment costs. The effective income tax rate
in 2011 was also reduced by a research and development tax credit. The qualified
manufacturing activities deduction declined in 2012 contributing to a higher
effective tax rate.
Approximately 35% of our stock option expense is related to ISOs. As such, a tax
benefit is not recorded at the time the compensation cost related to the options
is recorded for book purposes due to the fact that an ISO does not ordinarily
result in a tax benefit unless there is a disqualifying disposition.
Non-qualified stock options result in the creation of a deferred tax asset,
which is a temporary difference, until the time that the option is exercised.
Due to the treatment of ISOs for tax purposes, our effective tax rate from year
to year is subject to variability.
2011 Compared to 2010
Revenues
Software licenses.
The following table sets forth a comparison of our software license revenues for
the years ended December 31:
Change
($ in thousands) 2011 2010 $ %
ESS $ 30,194 $ 32,757 $ (2,563 ) (8 )%
ATSS 2,400 2,156 244 11
Total software license revenue $ 32,594 $ 34,913 $ (2,319 ) (7 )%
In October 2011, we acquired Windsor, which provides a suite of financial and
human capital management software solutions to the K-12 education market and is
included in our ESS segment. Excluding the impact of this acquisition, total
software license revenue declined by 8% compared to 2010. The decrease in
software license revenues is mainly attributable to longer sales cycles and
postponements of customer purchasing decisions mainly due to budgetary
constraints related to economic conditions. In addition, a portion of the
decline was due to a growing number of customers choosing our subscription-based
options, rather than purchasing the software under a traditional perpetual
software license arrangement.
Subscriptions.
The following table sets forth a comparison of our subscription revenues for the
years ended December 31:
Change
($ in thousands) 2011 2010 $ %
ESS $ 30,400 $ 22,975 $ 7,425 32 %
ATSS 760 323 437 135
Total subscriptions revenue $ 31,160 $ 23,298 $ 7,862 34 %
New customers for SaaS arrangements as well as existing customers who converted
to our SaaS model provided the majority of the subscription revenue increase. In
2011, we added 47 new customers and 40 existing customers elected to convert to
our SaaS model. E-filing services also contributed approximately $500,000 of the
subscription revenue increase as a result of several counties and one state
adopting or expanding mandatory e-filing for court documents in the last half of
2011.
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Software services.
The following table sets forth a comparison of our software service revenues for
the years ended December 31:
Change
($ in thousands) 2011 2010 $ %
ESS $ 60,840 $ 58,371 $ 2,469 4 %
ATSS 8,777 9,969 (1,192 ) (12 )
Total software services revenue $ 69,617 $ 68,340 $ 1,277 2 %
Excluding the impact of the Windsor acquisition, software services increased 1%.
In 2011 software services revenue included more third party vendor services to
build certain software interfaces associated with a state-wide contract, and
reflected slightly higher billing rates.
Maintenance.
The following table sets forth a comparison of our maintenance revenues for the
years ended December 31:
Change
($ in thousands) 2011 2010 $ %
ESS $ 130,999 $ 120,764 $ 10,235 8 %
ATSS 15,499 14,891 608 4
Total maintenance revenue $ 146,498 $ 135,655 $ 10,843 8 %
Excluding the impact of the Windsor acquisition, maintenance revenue grew 7%
from 2010. This increase was due to growth in our installed customer base and
slightly higher maintenance rates on most of our product lines. Our annual
maintenance revenue growth rate has been reduced somewhat by the effect of
existing installed customers converting to our SaaS model, which results in a
loss of maintenance revenue offset by a larger increase in subscription revenue.
Appraisal services.
The following table sets forth a comparison of our appraisal service revenues
for the years ended December 31:
Change
($ in thousands) 2011 2010 $ %
ESS $ - $ - $ - - %
ATSS 23,228 20,554 2,674 13
Total appraisal services revenue $ 23,228 $ 20,554 $ 2,674 13 %
Appraisal services revenue increased 13% in 2011 compared to 2010. The appraisal
services business is somewhat cyclical and driven in part by statutory
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.
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Cost of Revenues and Gross Margin
The following table sets forth a comparison of the key components of our cost of
revenues for the years ended December 31:
Change
($ in thousands) 2011 2010 $ %
Software licenses $ 3,034 $ 3,456 $ (422 ) (12 )%
Acquired software 1,125 1,592 (467 ) (29 )
Software services, maintenance and subscriptions 143,776 138,085 5,691 4
Appraisal services 14,550 12,910 1,640 13
Hardware and other 4,994 4,268 726 17
Total cost of revenues $ 167,479 $ 160,311 $ 7,168 4 %
The following table sets forth a comparison of gross margin percentage by
revenue type for the years ended December 31:
Gross margin percentage 2011 2010 Change
Software license and acquired software 87.2 % 85.5 % 1.7 %
Software services, maintenance and subscriptions 41.9 39.2 2.7
Appraisal services 37.4 37.2 0.2
Hardware and other 20.7 27.3 (6.6 )
Overall gross margin 45.9 % 44.5 % 1.4 %
Software license and acquired software. Cost of software license and acquired
software in 2011 was comprised of third party software license with the
remaining balance primarily related to amortization expense related to acquired
software. In 2010, cost of software license and acquired software also included
amortization expense associated with capitalized software development. In early
2011 most of our capitalized software development costs became fully amortized.
We did not capitalize any internal software development costs in 2011 or 2010.
Cost of software license and acquired software also declined due to several
acquired software solutions that became fully amortized in early 2011.
In 2011, our software license gross margin percentage increased compared to the
prior year period because several acquired software solutions and substantially
all of our capitalized software development became fully amortized by 2011.
Software services, maintenance and subscription-based services. In 2011, the
software services, maintenance and subscriptions gross margin increased compared
to the prior year partly because we improved our utilization of our support and
maintenance staff and due to annual rate increases on certain services.
Appraisal services. Our appraisal services gross margin was flat compared to
2010. A high proportion of the costs of appraisal services revenue are variable,
as we often hire temporary employees to assist in appraisal projects whose term
of employment generally ends with the projects' completion.
Our blended gross margin for 2011 increased 1.4% from 2010 mainly due to
leverage in the utilization of our support, maintenance and subscription-based
services staff and economies of scale and slightly higher rates on certain
services. The gross margin also benefited from lower acquired software
amortization costs.
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Selling, General and Administrative Expenses
The following table sets forth a comparison of our SG&A expenses for the years
ended December 31:
Change
($ in thousands) 2011 2010 $ % Selling, general and administrative expenses $ 75,650 $ 69,480 $ 6,170 9 %
SG&A as a percentage of revenues was 24.5% in 2011 compared to 24.1% in 2010.
SG&A expenses in 2011 included costs associated with consolidating office space
in our new Yarmouth, Maine facility and other facilities related costs.
Research and Development Expense
The following table sets forth a comparison of our research and development
expense for the years ended December 31:
Change
($ in thousands) 2011 2010 $ % Research and development expense $ 16,414 $ 13,971 $ 2,443 17 %
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 costs associated with the Microsoft
Dynamics AX project, as well as other new product development efforts. In 2011
and 2010, we offset our research and development expense by $3.5 million and
$5.1 million, respectively, which were the amounts earned under the terms of our
agreement with Microsoft.
Amortization of Customer and Trade Name Intangibles
The following table sets forth a comparison of amortization of customer and
trade name intangibles for the years ended December 31:
Change
($ in thousands) 2011 2010 $ % Amortization of customer and trade name intangibles $ 3,331 $ 3,225
$ 106 3 %
In October 2011 we completed an acquisition that increased amortizable customer
and trade name intangibles by approximately $5.6 million. This amount is being
amortized over 10 years.
Other
The following table sets forth a comparison of other expense, net for the years
ended December 31:
Change
($ in thousands) 2011 2010 $ %
Other expense, net $ 2,404 $ 1,742 $ 662 38 %
Interest expense was higher in 2011 than 2010 due to higher debt levels
associated with our stock repurchases and the acquisition of Windsor in October
2011. The effective interest rate in 2011 was 3.3% compared to 3.4% in 2010.
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Income Tax Provision
The following table sets forth a comparison of our income tax provision for the
years ended December 31:
Change
($ in thousands) 2011 2010 $ %
Income tax provision $ 16,556 $ 14,845 $ 1,711 12 %
Effective income tax rate 37.5 % 37.2 %
The effective income tax rates for both years were different from the statutory
United States federal income tax rate of 35% due to state income taxes,
non-deductible share-based compensation expense, the qualified manufacturing
activities deduction, the research and development tax credit and non-deductible
meals and entertainment costs.
FINANCIAL CONDITION AND LIQUIDITY
As of December 31, 2012, we had cash and cash equivalents of $6.4 million and
investments available-for-sale of $2.0 million, compared to cash and cash
equivalents of $1.3 million and investments available-for-sale of $2.0 million
at December 31, 2011. As of December 31, 2012, we had $18.0 million in
outstanding borrowings and outstanding letters of credit totaling $5.9 million.
Some of our customers, primarily those for our property appraisal services,
require that we secure performance bonds in connection with our contracts. The
maximum potential amount of an outstanding performance bond would be the
remaining cost of work to be performed under our contracts. The notional amount
of performance guarantees outstanding as of December 31, 2012 was estimated to
be $35.1 million. We provide letters of credit as security for the issuance of
performance bonds. We do not believe these letters of credit will be required to
be drawn upon. These letters of credit expire in 2013. We believe our $150.0
million revolving line of credit provides us with sufficient flexibility to meet
our long-term financial needs.
The following table sets forth a summary of cash flows for the years ended
December 31:
($ in thousands) 2012 2011 2010
Cash flows provided (used) by:
Operating activities $ 58,668 $ 56,435 $ 35,350
Investing activities (34,736 ) (28,809 ) (8,694 )
Financing activities (18,852 ) (28,414 ) (34,238 )
Net increase (decrease) in cash and cash equivalents $ 5,080 $
(788 ) $ (7,582 )
Net cash provided by operating activities continues to be our primary source of
funds to finance operating needs and capital expenditures. Other potential
capital resources include cash on hand, public and private issuances of debt or
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 at least the next twelve months.
In 2012, operating activities provided net cash of $58.7 million, primarily
generated from net income of $33.0 million, non-cash depreciation and
amortization charges of $12.7 million and non-cash share-based compensation
expense of $7.4 million. Working capital, excluding cash, declined $13.6 million
mainly due to higher deferred revenue balances than 2011 due to an increase in
annual software maintenance billings as a result of growth in our installed
customer base. In addition, our growth in subscription-based arrangements has
also contributed to larger deferred revenue balances. The increase in deferred
revenues was offset somewhat by higher accounts receivable balances from annual
software maintenance billings.
In general, changes in the balance of 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.
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At December 31, 2012, our days sales outstanding ("DSOs") were 95 days compared
to DSOs of 99 days at December 31, 2011. DSOs are calculated based on accounts
receivable (excluding long-term receivables, but including unbilled receivables)
divided by the quotient of annualized quarterly revenues divided by 360 days.
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 of 19 to 29 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 very small partial
redemptions at par in the period from July 2009 through July 2012. As of
December 31, 2012 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, issuer's 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.
In connection with this estimate of fair value, we have recorded an after-tax
temporary unrealized gain on our non-current ARS of $87,000, net of related tax
effects of $47,000 in 2012, which is included in accumulated other comprehensive
loss on our balance sheet.
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
temporary decline in fair value is due entirely to liquidity issues, 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 very small partial redemptions
at par in the period July 2009 through July 2012. Based on our cash and cash
equivalents balance, 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.
Investing activities used cash of $34.7 million in 2012 compared to $28.8
million in 2011. In 2012, we completed the acquisitions of Akanda, UniFund, CSA
and EnerGov. The combined cash purchase prices paid in 2012, net of cash
acquired was approximately $25.7 million. In May 2012 we purchased land and a
building in Moraine, Ohio to support our appraisal and tax operations for a
purchase price of $2.6 million, which was comprised of $1.7 million in cash and
land and a building valued at $900,000. We also paid $2.3 million in 2012 in
connection with the construction of an office building in Plano, Texas. These
expenditures were funded from cash generated from operations and borrowings
under our revolving credit line.
In 2011, we completed the acquisition of Windsor. The purchase price, net of
cash acquired, was approximately $16.4 million. 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, in connection with plans to consolidate workforces
and support planned long-term growth, we paid $1.3 million in 2010 in connection
with the construction of an office building in Lubbock, Texas. The impact of
these investing activities in 2010 was offset somewhat by the release of $6.0
million of restricted cash. In August 2010, we elected to replace our
cash-collateralized letters of credit with ones issued under our revolving line
of credit.
Cash used in financing activities in 2012 was mainly comprised of $42.7 million
in payments on our revolving line of credit offset by collections of $15.1
million from stock option exercises and contributions from the employee stock
purchase plan.
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In 2011, cash used in financing activities was primarily comprised of purchases
of treasury shares, net of proceeds from stock option exercises, borrowings and
payments on our revolving credit line and contributions from our employee stock
purchase plan. During 2011, we purchased 3.0 million shares of our common stock
for an aggregate purchase price of $71.8 million.
The share 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, October 2008, May 2009, July
2010, October 2010 and September 2011. As of December 31, 2012, we had remaining
authorization to repurchase up to 1.7 million additional shares of our common
stock. Our share repurchase program allows us to repurchase shares at our
discretion and market conditions influence the timing of the buybacks and the
number of shares repurchased, as well as the volume of employee stock option
exercises. These share repurchases are funded using our existing cash balances
and borrowings under our revolving credit agreement and may occur through open
market purchases and transactions structured through investment banking
institutions, privately negotiated transactions and/or other mechanisms. There
is no expiration date specified for the authorization and we intend to
repurchase stock under the plan from time to time.
During 2010, we purchased 3.6 million shares of our common stock for an
aggregate purchase price of $65.8 million.
In 2012 we issued 1.2 million shares of common stock and received $12.4 million
in aggregate proceeds upon exercise of stock options. In 2011 we received $3.6
million from the exercise of options to purchase approximately 582,000 shares of
our common stock under our employee stock option plan and during 2010, we
received $3.2 million from the exercise of options to purchase approximately
615,000 shares of our common stock under our employee stock option plan. In
2012, 2011 and 2010 we received $2.6 million, $2.0 million and $1.9 million,
respectively, from contributions to the Tyler Technologies, Inc. Employee Stock
Purchase Plan.
We have 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. In 2010 we paid $2.0 million in related debt issuance costs.
Borrowings under the Credit Facility bear interest at a rate of either (1) the
Bank of America's 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. In 2012 and 2011 our effective
average interest rate for borrowings was 3.4% and 3.3%, respectively. As of
December 31, 2012 our interest rate was 2.7%. 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
December 31, 2012, we were in compliance with those covenants.
As of December 31, 2012, we had $18.0 million in outstanding borrowings and
unused available borrowing capacity of $126.1 million under the Credit Facility.
In addition, as of December 31, 2012, our bank had issued outstanding letters of
credit totaling $5.9 million to secure surety bonds required by some of our
customer contracts. These letters of credit reduce our available borrowing
capacity and expire in 2013.
We paid income taxes, net of refunds received, of $13.1 million in 2012, $13.4
million in 2011, and $15.8 million in 2010.
Excluding acquisitions and investments in office buildings, we anticipate that
2013 capital spending will be between $8.2 million and $9.2 million. We expect
the majority of this capital spending 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
2013, but the actual amount and timing of those costs, and whether they are
capitalized or expensed may result in additional capitalized software
development. We also plan to spend approximately $14.8 million in 2013 in
connection with the completion of construction of an office building in Plano,
Texas. Capital spending, including the construction of an office facility, 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 pursue 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 acquisition opportunities and how such opportunities will
be financed.
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We lease office facilities, as well as transportation, computer and other
equipment used in our operations under non-cancelable operating lease agreements
expiring at various dates through 2021. Most leases contain renewal options and
some contain purchase options.
Summarized in the table below are our obligations to make future payments under
our long-term revolving credit agreement and lease obligations at December 31,
2012 (in thousands):
2013 2014 2015 2016 2017 Thereafter TotalRevolving line of credit $ - $ 18,000 $ - $ - $ - $ - $ 18,000
Lease obligations 6,278 4,519 3,949 3,682 3,223 3,482 25,133
Total future payment obligations $ 6,278 $ 22,519 $ 3,949 $ 3,682 $ 3,223 $ 3,482 $ 43,133
As of December 31, 2012, we do not have any off-balance sheet arrangements,
guarantees to third parties or material purchase commitments, except for the
operating lease commitments listed above.
CAPITALIZATION
At December 31, 2012, our capitalization consisted of $18.0 million in long-term
obligations and $145.3 million of shareholders' equity. Our total
debt-to-capital ratio was 11.0% at December 31, 2012.
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