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4: EX-32.1 Certification -- §906 - SOA'02 HTML 26K
10: R1 Cover Page HTML 75K
11: R2 Condensed Consolidated Statements of Income HTML 111K
12: R3 Condensed Consolidated Statements of Comprehensive HTML 52K
Income
13: R4 Condensed Consolidated Balance Sheets HTML 156K
14: R5 Condensed Consolidated Balance Sheets HTML 43K
(Parenthetical)
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16: R7 Consolidated Statements of Shareholders' Equity HTML 105K
17: R8 Basis of Presentation HTML 27K
18: R9 Accounting Standards and Significant Accounting HTML 45K
Policies
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20: R11 Debt HTML 76K
21: R12 Financial Instruments HTML 49K
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27: R18 Earnings Per Share HTML 49K
28: R19 Leases HTML 88K
29: R20 Commitments and Contingencies HTML 26K
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31: R22 Disaggregation of Revenue HTML 145K
32: R23 Deferred Revenue and Performance Obligations HTML 145K
33: R24 Deferred Commissions HTML 145K
34: R25 Subsequent Events HTML 25K
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Policies (Policies)
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Policies (Details)
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51: R42 Acquisitions - Assets and Liabilities Acquired HTML 49K
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Investments (Details)
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61: R52 Fair Value - Schedule of fair value, assets and HTML 60K
liabilities measured on recurring basis (Details)
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sheet grouping (Details)
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(Exact
name of registrant as specified in its charter)
iDelaware
i75-2303920
(State
or other jurisdiction of incorporation or organization)
(I.R.S. employer identification no.)
i5101 TENNYSON PARKWAY
iPLANO
iTexas
i75024
(Address
of principal executive offices)
(City)
(State)
(Zip code)
(i972) i713-3700
(Registrant’s telephone number, including area code)
Title
of each class
Trading symbol
Name of each exchange
on which registered
iCOMMON STOCK, $0.01 PAR VALUE
iTYL
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,""accelerated filer,”"smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No i☒
The number of shares of common stock of registrant outstanding on July 28, 2022 was i41,581,473.
Accounts
receivable (less allowance for losses and sales adjustments of $i12,538 in 2022 and $i12,086 in 2021)
i597,560
i521,059
Short-term
investments
i34,466
i52,300
Prepaid
expenses
i61,938
i55,513
Income
tax receivable
i2,552
i18,137
Other
current assets
i7,709
i8,151
Total
current assets
i957,287
i964,331
Accounts
receivable, long-term
i12,665
i13,937
Operating
lease right-of-use assets
i40,577
i39,720
Property
and equipment, net
i177,907
i181,193
Other
assets:
Software development costs, net
i43,505
i28,489
Goodwill
i2,449,638
i2,359,674
Other
intangibles, net
i1,032,786
i1,052,493
Non-current
investments
i26,464
i46,353
Other
non-current assets
i46,217
i45,971
$
i4,787,046
$
i4,732,161
LIABILITIES
AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
i130,998
$
i119,988
Accrued
liabilities
i133,910
i158,424
Operating
lease liabilities
i10,363
i10,560
Deferred
revenue
i528,588
i510,529
Current
portion of term loans
i30,000
i30,000
Total
current liabilities
i833,859
i829,501
Revolving
credit facility
i—
i—
Term
loans
i639,464
i718,511
Convertible
senior notes due 2026, net
i593,624
i592,765
Deferred
revenue, long-term
i—
i38
Deferred
income taxes
i216,947
i228,085
Operating
lease liabilities, long-term
i36,018
i36,336
Other
long-term liabilities
i8,807
i2,893
Total
liabilities
i2,328,719
i2,408,129
Commitments
and contingencies
i—
i—
Shareholders'
equity:
Preferred stock, $ii10.00/
par value; ii1,000,000/ shares
authorized; iinone/ issued
i—
i—
Common
stock, $ii0.01/ par value; ii100,000,000/
shares authorized; iiii48,147,969///
shares issued and outstanding as of June 30, 2022 and December 31, 2021
i481
i481
Additional
paid-in capital
i1,128,821
i1,075,650
Accumulated
other comprehensive loss, net of tax
(i809)
(i46)
Retained
earnings
i1,353,544
i1,273,614
Treasury
stock, at cost; i6,583,971 and i6,832,640 shares in 2022 and 2021, respectively
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)
(1) iBasis of Presentation
We
prepared the accompanying condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States, or GAAP, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted for interim periods. Balance sheet amounts are as of June 30, 2022, and December 31, 2021, and operating result amounts are for the three and six months ended June 30, 2022, and 2021, respectively, and include all normal and recurring adjustments that we considered necessary for the fair summarized presentation of our financial position and operating results. As these are condensed
financial statements, one should also read the financial statements and notes included in our latest Form 10-K for the year ended December 31, 2021. 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. Certain amounts for the previous year have been reclassified to conform to the current year presentation.
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all components of net income (loss) and other comprehensive income (loss). During the three and six months ended June 30, 2022, we had approximately $i66,000
and $i763,000 of other comprehensive loss, net of taxes, from our available-for-sale investment holdings and iino/
items of other comprehensive income (loss) during the three and six months ended June 30, 2021.
(2) iAccounting Standards and Significant Accounting Policies
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Except for the January
1, 2022, adoption of ASU 2021-08 - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASC 805)(“ASU 2021-08”), there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 23, 2022, that have had a material impact on our condensed consolidated financial statements and related notes. See Recently Adopted Accounting Pronouncements below.
i
USE
OF ESTIMATES
The preparation of our financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include revenue recognition, determining the nature and timing of satisfaction of performance obligations, determining the standalone selling price (“SSP”) of performance obligations, variable consideration, and other obligations such as returns and refunds; loss contingencies; the estimated useful life of deferred commissions; the carrying amount of goodwill; the carrying amount and estimated useful lives of intangible assets; the carrying amount of operating lease right-of-use assets and operating lease liabilities;
determining share-based compensation expense; the valuation allowance for receivables; and determining the potential outcome of future tax consequences of events that have been recognized on our consolidated financial statements or tax returns. Actual results could differ from estimates.
8
i
REVENUE RECOGNITION
Nature
of Products and Services
We earn revenue from software licenses, royalties, subscription-based services, software services, post-contract customer support (“PCS” or “maintenance”), hardware, and appraisal services. Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We determine revenue recognition through the following steps:
•Identification
of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, we satisfy a performance obligation
Most of our software arrangements with customers contain multiple performance obligations that range from software licenses, installation, training, and consulting to software modification and customization to meet specific customer needs (services), hosting, and PCS. For these contracts,
we account for individual performance obligations separately when they are distinct. We evaluate whether separate performance obligations can be distinct or should be accounted for as one performance obligation. Arrangements that include software services, such as training or installation, are evaluated to determine whether those services are highly interdependent or interrelated to the product’s functionality. The transaction price is allocated to the distinct performance obligations on a relative standalone selling price (“SSP”) basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts.
Revenue is recognized net of allowances for sales adjustments and any taxes collected from customers, which are subsequently remitted to governmental authorities.
Significant Judgments:
Our contracts with customers often include multiple performance obligations to a customer. When a software arrangement (license or subscription) includes both software licenses and software services, judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the software services and recognized over time.
The transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine the SSP based on our overall pricing objectives,
taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts.We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine SSP using the expected cost-plus margin approach.
For arrangements that involve significant production, modification, or customization of the software,
or where software services otherwise cannot be considered distinct, we recognize revenue as control is transferred to the customer over time using progress-to-completion methods. Depending on the contract, we measure progress-to-completion primarily using labor hours incurred, or value added. The progress-to-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract because we can provide reasonably dependable estimates of contract billings and contract costs. We use the level of profit margin that is most likely to occur on a contract.
If the most likely profit margin cannot be precisely determined, the lowest probable level of profit margin in the range of estimates is used until the results can be estimated more precisely. These arrangements are often implemented over an extended time period and occasionally require us to revise total cost estimates. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent.
9
For
e-filing transaction fees and transaction-based revenues from digital government services and online payments, we have the right to charge the customer an amount that directly corresponds with the value to the customer of our performance to date. Therefore, we recognize revenue for these services over time based on the amount billable to the customer in accordance with the 'as invoiced' practical expedient in ASC 606-10-55-18. In some cases, we are paid on a fixed fee basis and recognize the revenue ratably over the contractual period. Typically, the structure of our arrangements does not give rise to variable consideration. However, in those instances whereby variable consideration exists, we include in our estimates, additional revenue for variable consideration when we believe we have an enforceable right, the amount can be estimated reliably, and its realization is probable.
Refer to Note 15 - “Disaggregation of Revenue”
for further information, including the economic factors that affect the nature, amount, timing, and uncertainty of revenue and cash flows of our various revenue categories.
Accounts receivable and allowance for losses and sales adjustments
Timing of revenue recognition may differ from the timing of invoicing to customers. We record an unbilled receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record an unbilled receivable related to revenue recognized for on-premises licenses as we have an unconditional right to invoice and receive
payment in the future related to those licenses.
At June 30, 2022, and December 31, 2021, total current and long-term accounts receivable, net of allowance for losses and sales adjustments, was $i610.2 million and $i535.0
million, respectively. We have recorded unbilled receivables of $i134.5 million and $i140.3 million at June 30, 2022 and December 31,
2021, respectively. Included in unbilled receivables are retention receivables of $i7.9 million and $i7.7 million at June 30, 2022 and December 31,
2021, respectively, which become payable upon the completion of the contract or completion of our fieldwork and formal hearings. Unbilled receivables expected to be collected within one year have been included with accounts receivable, current portion in the accompanying condensed consolidated balance sheets. Unbilled receivables and retention receivables expected to be collected past one year have been included with accounts receivable, long-term portion in the accompanying condensed consolidated balance sheets.
We maintain allowances for losses and sales adjustments, which losses are recorded against revenue at the time the loss is incurred. Since most of our clients are domestic governmental entities, we rarely incur a credit loss resulting from the inability of a client to make required payments. Events or changes in circumstances
that indicate the carrying amount for the allowances for losses and sales adjustments may require revision, include, but are not limited to, managing our client’s expectations regarding the scope of the services to be delivered and defects or errors in new versions or enhancements of our software products. Our allowance for losses and sales adjustments of $i12.5 million and $i12.1 million
at June 30, 2022, and December 31, 2021, respectively, does not include provisions for credit losses. Because we rarely experience credit losses with our clients, we have not recorded a material reserve for credit losses.
i
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
We assess goodwill for impairment annually, or more frequently whenever
events or changes in circumstances indicate its carrying value may not be recoverable. We begin with the qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying value before applying the quantitative assessment described below. 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 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 (Level 3 inputs). 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 are 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.
10
Determining the fair value of our reporting units involves the use of significant estimates and assumptions and considerable management judgment. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Changes in market conditions or other factors outside of our control, such as a worsening of expected impact of COVID-19, could cause us to change key assumptions and our judgment about a reporting unit’s prospects. Similarly, in a specific period, a reporting unit could significantly underperform relative to its historical
or projected future operating results. Either situation could result in a meaningfully different estimate of the fair value of our reporting units, and a consequent future impairment charge.
We performed our annual assessment during the fourth quarter of 2021, in which our impairment analysis did not result in an impairment charge. Since our assessment and through June 30, 2022, we have had no triggering events or change in circumstances indicating any potential impairment.
iRECENTLY
ADOPTED ACCOUNTING PRONOUNCEMENTS
In October 2021, the FASB issued ASU 2021-08 - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASC 805)(“ASU 2021-08”). ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue
recognition guidance in Topic 606. Under this "Topic 606 approach," the acquirer applies the revenue model as if it had originated the contracts. This is a departure from the current requirement to measure contract assets and contract liabilities at fair value. ASU 2021-08 is effective for all public business entities in annual and interim periods starting after December 15, 2022, and early adoption is permitted. An entity that early adopts should apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application
and (2) prospectively to all business combinations that occur on or after the date of initial application. We early adopted as of January 1, 2022. The adoption of ASU 2021-08 resulted in no adjustments to the fair value of the deferred revenue balances assumed in our US eDirect acquisition, completed on February 8, 2022. See Note 3, “Acquisitions,” for further discussion.
(3) iAcquisitions
On
February 8, 2022, we acquired US eDirect Inc. (US eDirect), a market-leading provider of technology solutions for campground and outdoor recreation management. The total purchase price, net of cash acquired of $i6.4 million, was approximately $i116.7 million,
consisting of $i117.6 million paid in cash and approximately $i5.5 million related
to indemnity holdbacks, subject to certain post-closing adjustments.
We have performed a preliminary valuation analysis of the fair market value of US eDirect's assets and liabilities. iThe following table summarizes the preliminary allocation of the purchase price as of the acquisition date:
Cash
$
i6,361
Accounts
receivable
i1,730
Other current assets
i594
Other
noncurrent assets
i698
Goodwill and identifiable intangible assets
i125,751
Accounts
payable
(i1,881)
Accrued expenses
(i357)
Other
noncurrent liabilities
(i743)
Deferred revenue
(i688)
Deferred
tax liabilities, net
(i8,428)
Total consideration
$
i123,037
11
In
connection with this transaction, we acquired total tangible assets of $i9.4 million and assumed liabilities of approximately $i3.7 million.
We recorded goodwill of approximately $i91.7 million, none of which is expected to be deductible for tax purposes, and other identifiable intangible assets of approximately $i34.1 million.
The identifiable intangible assets are attributable to customer relationships, acquired software, and trade name and will be amortized over a weighted average period of approximately i13 years. We recorded net deferred tax liabilities of $i8.4 million
related to the tax effect of our estimated fair value allocations. Since the acquisition date, we recorded adjustments to the preliminary opening balance sheet attributed to decreases in other current assets, other noncurrent assets, identifiable intangible assets, accrued expenses, and deferred revenue and increases in accounts receivable, accounts payable, and deferred tax liabilities, resulting in a net increase to goodwill of approximately $i10.5 million.
The goodwill of approximately $i91.7 million
arising from this acquisition is primarily attributed to our ability to generate increased revenues, earnings, and cash flow by expanding our addressable market and client base.
The operating results of US eDirect are included with the operating results of the Platform Technologies segment since its date of acquisition. The impact of the US eDirect acquisition on our operating results, assets, and liabilities is not material. For the six months ended June 30, 2022, we incurred fees of approximately $i1.0
million for financial advisory, legal, accounting, due diligence, valuation, and other various services necessary to complete acquisitions. These costs were expensed in 2022 and are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.
As of June 30, 2022, the purchase price allocation for US eDirect is not final; therefore, certain preliminary valuation estimates of fair value assumed at the acquisition date for intangible assets, receivables, and related deferred taxes are subject to change as valuations are finalized. Our balance sheet as of June 30, 2022, reflects the allocation of the purchase price to the net assets acquired based on their estimated fair value at the date of the acquisition. The fair value of the assets and liabilities acquired are based
on valuations using Level 3 unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
i
The following unaudited pro forma consolidated operating results information has been prepared as if the acquisition of US eDirect had occurred on January 1, 2021, after giving effect to certain adjustments, including amortization of intangibles, transaction costs, and tax effects.
The
pro forma information above does not purport to represent what our results of operations actually would have been had such transaction occurred on the date specified or to project our results of operations for any future period.
12
(4) iDebt
i
The
following table summarizes our total outstanding borrowings related to the 2021 Credit Agreement and Convertible Senior Notes:
Less:
unamortized debt discount and debt issuance costs
(i11,912)
(i13,724)
Total
borrowings, net
i1,263,088
i1,341,276
Less:
current portion of debt
(i30,000)
(i30,000)
Carrying
value
$
i1,233,088
$
i1,311,276
/
2021
Credit Agreement
In connection with the completion of the acquisition of NIC on April 21, 2021, we, as borrower, entered into a new $i1.4 billion Credit Agreement (the “2021 Credit Agreement”) with the various lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender, and Issuing Lender. The 2021 Credit Agreement provides for (1) a senior unsecured revolving credit facility in an aggregate
principal amount of up to $i500 million, including sub-facilities for standby letters of credit and swingline loans (the “Revolving Credit Facility”), (2) an amortizing ifive-year term loan in the aggregate amount
of $i600 million (the “Term Loan A-1”), and (3) a non-amortizing ithree-year term loan in the aggregate amount of $i300
million (the “Term Loan A-2”) and, together (the “Term Loans”). The 2021 Credit Agreement matures on April 20, 2026, and the loans may be prepaid at any time, without premium or penalty, subject to certain minimum amounts and payment of any LIBOR breakage costs. In addition to the required amortization payments on the Term Loan A-1 of i5% annually, certain mandatory quarterly prepayments of the Term Loans and the Revolving Credit Facility will be required (i) upon the issuance or incurrence
of additional debt not otherwise permitted under the 2021 Credit Agreement and (ii) upon the occurrence of certain asset sales and insurance and condemnation recoveries, subject to certain thresholds, baskets, and reinvestment provisions as provided in the 2021 Credit Agreement.
Borrowings under the Revolving Credit Facility and the Term Loan A-1 bear interest, at the Company’s option, at a per annum rate of either (1) the Administrative Agent’s prime commercial lending rate (subject to certain higher rate determinations) (the “Base Rate”) plus a margin of ii0.125/%
to ii0.75/% or (2)
the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of ii1.125/%
to ii1.75/%. The
Term Loan A-2 bears interest, at the Company’s option, at a per annum rate of either (1) the Base Rate plus a margin of i0% to i0.5%
or (2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of i0.875% to i1.5%. The margin in each case is based
upon the Company’s total net leverage ratio, as determined pursuant to the 2021 Credit Agreement. The 2021 Credit Agreement has customary benchmark replacement language with respect to the replacement of LIBOR once LIBOR becomes unavailable. In addition to paying interest on the outstanding principal of loans under the Revolving Credit Facility, the Company is required to pay a commitment fee on the average daily unused portion of the Revolving Credit Facility, initially i0.25%
per annum, ranging from i0.15% to i0.3% based upon the Company’s total
net leverage ratio.
13
The 2021 Credit Agreement requires us to maintain certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash dividends or loans, and limits incurrence of additional indebtedness and liens. As of June 30, 2022, we were in compliance with those covenants.
Convertible Senior Notes due 2026
On March 9, 2021, we issued i0.25%
Convertible Senior Notes due 2026 in the aggregate principal amount of $i600.0 million (“the Convertible Senior Notes” or “the Notes”). The Convertible Senior Notes were issued pursuant to, and are governed by, an indenture (the “Indenture”), dated as of March 9, 2021, with U.S. Bank National Association, as trustee. The net proceeds
from the issuance of the Convertible Senior Notes were $i591.4 million, net of initial purchasers’ discounts of $i6.0 million and debt issuance
costs of $i2.6 million.
The Convertible Senior Notes are senior, unsecured obligations and are (i) equal in right of payment with our future senior, unsecured indebtedness; (ii) senior in right of payment to our future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to our future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all future indebtedness and other liabilities, including trade payables, and (to the extent
we are not a holder thereof) preferred equity, if any, of our subsidiaries.
The Convertible Senior Notes accrue interest at a rate of i0.25% per annum, payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2021. The Convertible Senior Notes mature on March 15, 2026, unless earlier repurchased,
redeemed, or converted.
Before September 15, 2025, holders of the Convertible Senior Notes have the right to convert their Convertible Senior Notes only upon the occurrence of certain events. Under the terms of the Indenture, the Convertible Senior Notes are convertible into common stock of Tyler Technologies, Inc. (referred to as “our common stock” herein) at the following times or circumstances:
•during any calendar quarter commencing after the calendar quarter ended June 30, 2021, if the last reported sale price per share of our common stock exceeds i130%
of the conversion price for each of at least i20 trading days (whether or not consecutive) during the i30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar
quarter;
•during the five consecutive business days immediately after any five consecutive trading day period (such five consecutive trading day period, the “Measurement Period”) if the trading price per $1,000 principal amount of Convertible Senior Notes, as determined following a request by their holder in accordance with the procedures in the indenture, for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day;
•upon the occurrence of certain corporate events or distributions on our common stock, including but not limited to a “Fundamental Change” (as defined in the Indenture);
•upon
the occurrence of specified corporate events; or
•on or after September 15, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, March 15, 2026.
With certain exceptions, upon a change of control or other fundamental change (both as defined in the Indenture governing the Convertible Senior Notes), the holders of the Convertible Senior Notes may require us to repurchase all or part of the principal amount of the Convertible Senior Notes at a repurchase price equal to i100%
of the principal amount of the Convertible Senior Notes, plus any accrued and unpaid interest to, but excluding, the redemption date.
As of June 30, 2022, none of the conditions allowing holders of the Convertible Senior Notes to convert have been met.
From and including September 15, 2025, holders of the Convertible Senior Notes may convert their Convertible Senior Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. We will settle any conversions of the Convertible Senior Notes either entirely in cash or in a combination of cash and shares of common stock, at our election. However, upon conversion of any Convertible Senior Notes, the conversion value, which will be determined over an “Observation
Period” (as defined in the Indenture) consisting of i30 trading days, will be paid in cash up to at least the principal amount of the Notes being converted.
14
The initial conversion rate is 2.0266 shares of common stock per $1,000 principal amount of Convertible Senior Notes, which represents an initial conversion price of approximately
$i493.44 per share of common stock. The conversion rate and conversion price will be subject to adjustment upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
The Convertible Senior Notes are redeemable, in whole or in part,
at our option at any time, and from time to time, on or after March 15, 2024 and on or before the 30th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, up to, but excluding, the redemption date, but only if the last reported sale price per share of our common stock exceeds i130% of the conversion price of the Notes on (i) each of at least i20
trading days, whether or not consecutive, during the i30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice; and (ii) the trading day immediately before the date we send such notice. In addition, calling any Note for redemption constitutes a Make-Whole Fundamental Change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called
for redemption.
Effective Interest
The weighted average interest rates for the borrowings under the 2021 Credit Agreement and Convertible Senior Notes due 2026 were i2.71% and i0.25%,
as of June 30, 2022, respectively. During the six months ended June 30, 2022, the effective interest rates for our borrowings were i2.38% and i0.54%
for the 2021 Credit Agreement and the Convertible Senior Notes, respectively. The following sets forth the interest expense recognized related to the borrowings under the 2021 Credit Agreement and Convertible Senior Notes and is included in interest expense in the accompanying condensed consolidated statements of income:
Amortization
of debt discount and debt issuance costs
(i1,149)
(i959)
(i2,271)
(i1,054)
Interest
expense and amortization of debt issuance costs - terminated 2019 Credit Agreement and Senior Unsecured Bridge loan facility
i—
(i7,909)
i—
(i8,209)
Total
$
(i6,214)
$
(i12,437)
$
(i11,018)
$
(i12,915)
As
of June 30, 2022, we had $i600 million in outstanding principal for the Convertible Senior Notes due 2026. Under our 2021 Credit Agreement, we had $i675
million in outstanding principal for the unsecured term loans, ino outstanding borrowings under the 2021 Revolving Credit Facility, and an available borrowing capacity of $i500
million as of June 30, 2022. As of June 30, 2022, we had one outstanding standalone letter of credit totaling $i2.0 million. The letter of credit, which guarantees our performance under a client contract, renews automatically annually unless canceled in writing, and expires in the third quarter of 2026. For the six months ended June 30,
2022, we repaid $i80.0 million of the unsecured term loans under the 2021 Credit Agreement.
In the six months ended June 30, 2022, and 2021, respectively, we made interest payments of $i5.7
million and $i9.4 million, associated with the 2021 Credit Agreement and the Convertible Senior Notes, including payment of a $i6.4 million commitment fee related to the senior unsecured bridge loan facility paid
in 2021.
15
(5) iFinancial Instruments
i
The
following table presents our financial instruments:
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.
Our available-for-sale securities were historically classified as held-to-maturity. During the fourth quarter of 2021, management determined that our investment portfolio would be transferred from held-to-maturity to available-for-sale, in order to have the flexibility to buy and sell investments and maximize cash liquidity for potential acquisitions or for debt repayments. Accordingly, our investment portfolio is now classified as available-for-sale as of June 30, 2022. Our available-for-sale investments primarily consist of investment grade corporate bonds, municipal bonds, and asset-backed securities with maturity dates through 2027. These investments are presented at fair value and are included
in short-term investments and non-current investments in the accompanying condensed consolidated balance sheets. Unrealized gains or losses associated with the investments are included in accumulated other comprehensive loss, net of tax in the accompanying condensed consolidated balance sheets and statements of comprehensive income. For our available-for-sale investments, we do not have the intent to sell, nor is it more likely than not that we would be required to sell before recovery of their cost basis.
As of June 30, 2022, we have an accrued interest receivable balance of approximately $i318,000
which is included in accounts receivable, net. We do not measure an allowance for credit losses for accrued interest receivables. We record any losses within the maturity period or at the time of sale of the investment and any write-offs to accrued interest receivables are recorded as a reduction to interest income in the period of the loss. During the three and six months ended June 30, 2022, we have recorded iino/
credit losses for accrued interest receivables. Interest income and amortization of discounts and premiums are included in other income, net in the accompanying condensed consolidated statements of income.
i
The following table presents the components of our available-for-sale investments:
As
of June 30, 2022, we have $i34.5 million of available-for-sale debt securities with contractual maturities of one year or less and $i26.5 million
with contractual maturities great than one year.
The following table presents the activity on our available-for-sale investments:
Our
equity investments consist of an i18% interest in BFTR, LLC., a wholly owned subsidiary of Bison Capital Partners V L.P. BFTR, LLC, a privately held Australian company specializing in digitizing the spoken word in court and legal proceedings. The investment in common stock is accounted for under the equity method because we do not have the ability to exercise significant influence over the investee; and as the securities do not have readily determinable fair values, our investment is carried at cost less any impairment write-downs.
16
(6) iOther
Comprehensive Income (Loss)
i
The following tables present the changes in the balances of accumulated other comprehensive loss, net of tax by component:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market for that asset or liability. Guidance on fair value measurements and disclosures establishes a valuation hierarchy for disclosure of inputs used in measuring fair value defined as follows:
•Level 1—Inputs are unadjusted quoted prices that are available in active markets for identical assets or liabilities.
•Level 2—Inputs include quoted prices for similar assets and liabilities in active markets and quoted prices in non-active markets, inputs other than quoted prices that are observable, and inputs that are not directly observable, but are corroborated
by observable market data.
•Level 3—Inputs that are unobservable and are supported by little or no market activity and reflect the use of significant management judgment.
The classification of a financial asset or liability within the hierarchy is determined based on the least reliable level of input that is significant to the fair value measurement. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We also consider the counterparty and our own non-performance risk in our assessment of fair value.
17
i
The
following table presents fair values of our financial and debt instruments categorized by their fair value hierarchy as of June 30, 2022:
Level 1
Level 2
Level 3
Total
Available-for-sale
investments
$
i—
$
i60,930
$
i—
$
i60,930
Equity
investments
i—
i—
i10,000
i10,000
2021
Credit Agreement
Revolving Credit Facility
i—
i—
i—
i—
Term
Loan A-1
i—
i566,034
i—
i566,034
Term
Loan A-2
i—
i103,430
i—
i103,430
Convertible
Senior Notes due 2026
i—
i567,006
i—
i567,006
/
Assets
that are Measured at Fair Value on a Recurring Basis
Cash and cash equivalents, accounts receivable, accounts payable, short-term obligations, and certain other assets at cost approximate fair value because of the short maturity of these instruments.
As of June 30, 2022, we have $i60.9 million in available-for-sale investment grade corporate bonds, municipal bonds and asset-backed
securities with maturity dates through 2027. The fair values of these securities are considered Level 2 as they are based on inputs from quoted prices in markets that are not active or other observable market data.
Assets that are Measured at Fair Value on a Nonrecurring Basis
As of June 30, 2022, we have an i18% interest in BFTR, LLC. Periodically, our equity method investments are assessed for impairment. We do not reassess the fair value of equity method
investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments. No events or changes in circumstances have occurred during the period that require reassessment. There has been no impairment of our cost method investment for the periods presented. This investment is included in other assets in the accompanying consolidated balance sheets.
We assess goodwill for impairment annually on October 1. In addition, we review goodwill, property and equipment, and other intangibles for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.During the fourth quarter of 2021, we completed our annual assessment of goodwill which did not result in an impairment charge. Further, we identified no indicators of impairment to long-lived and other assets and
therefore, no impairment was recorded as of and for the three and six months ended June 30, 2022.
Financial instruments measured at fair value only for disclosure purposes
The fair value of our borrowing under our 2021 Credit Agreement would approximate book value as of June 30, 2022, because our interest rates reset approximately every 30 days or less.
The carrying amount of the Revolving Credit Facility and Term Loans is the par value less the debt discount and debt issuance costs that are amortized to interest expense using the effective interest method over the terms of the Term Loans. Interest expense is included in the accompanying condensed consolidated statements of income.
The fair value
of our Convertible Senior Notes due 2026 is determined based on quoted market prices for a similar liability when traded as an asset in an active market, a Level 2 input. See Note 4, “Debt,” for further discussion.
The carrying amount of the Convertible Senior Notes is the par value less the debt discount and debt issuance costs that are amortized to interest expense using the effective interest method over the term of the Convertible Senior Notes. Interest expense is included in the accompanying condensed consolidated statements of income.
18
i
The
following table presents the fair value and carrying value, net, of the 2021 Credit Agreement and our Convertible Notes due 2026):
We had an effective income tax rate of i21.3% and i21.8% for the three and six months ended June 30,
2022, respectively, compared to i2.2% and i2.9% for the three and six months ended June 30, 2021, respectively.
The increase in the effective tax rates for the three and six months ended June 30, 2022, respectively, as compared to the same period in 2021, was principally driven by a decrease in the excess tax benefits related to stock incentive awards and an increase in reserves for state income tax benefits which are no longer more likely than not to be realized.
The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 21% primarily due to excess tax benefits related to stock incentive awards and the tax benefit of research tax credits, offset by state income taxes, non-deductible business expenses, and reserves for unrecognized state income tax benefits. The excess tax benefits related to stock incentive awards realized were $i1.7
million and $i4.7 million for the three and six months ended June 30, 2022, respectively, as compared to $i6.4
million and $i15.2 million for the three and six months ended June 30, 2021, respectively. Excluding the excess tax benefits, the effective tax rate was i24.6%
and i26.4% for the three and six months ended June 30, 2022, respectively, compared to i26.7%
and i26.5% for the three and six months ended June 30, 2021, respectively.
We made tax payments of $i24.3
million and $i967,000 in the six months ended June 30, 2022, and 2021, respectively.
(9) iShareholders’
Equity
i
The following table details activity in our common stock ($ in thousands):
Restricted
stock units vested, net of withheld shares upon award settlement
i50
(i7,743)
i43
(i7,052)
i128
(i20,330)
i99
(i16,010)
/
As
of June 30, 2022, we have authorization from our board of directors to repurchase up to i2.4 million additional shares of our common stock.
(10) iShare-Based
Compensation
i
The following table summarizes share-based compensation expense related to share-based awards recorded in the condensed consolidated statements of income, pursuant to ASC 718, Stock Compensation:
Numerator for basic and diluted earnings per share:
Net income
$
ii39,946/
$
ii25,530/
$
ii79,930/
$
ii62,506/
Denominator:
Weighted-average
basic common shares outstanding
i41,500
i40,765
i41,499
i40,761
Assumed
conversion of dilutive securities:
Stock awards
i821
i1,329
i950
i1,387
Convertible
Senior Notes
i—
i—
i—
i—
Denominator
for diluted earnings per share
- Adjusted weighted-average shares
i42,321
i42,094
i42,449
i42,148
Earnings
per common share:
Basic
$
i0.96
$
i0.63
$
i1.93
$
i1.53
Diluted
$
i0.94
$
i0.61
$
i1.88
$
i1.48
/
For
the three and six months ended June 30, 2022, and 2021, stock awards, representing the right to purchase common stock of approximately i486,000 shares and i350,000
shares and i191,000 shares and i166,000
shares, respectively, were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.
We have used the if-converted method for calculating any potential dilutive effect of the Convertible Senior Notes due 2026 on our diluted net income per share. Under the if-converted method, the Notes are assumed to be converted at the beginning of the period and the resulting common shares are included in the denominator of the diluted earnings per share calculation for the entire period being presented and interest expense, net of tax, recorded in connection with the Convertible Senior Notes is not added back to the numerator, only in the periods in which such effect is dilutive. The approximately iiii1.2/// million
remaining resulting common shares related to the Notes are not included in the dilutive weighted-average common shares outstanding calculation for the three and six months ended June 30, 2022, and 2021, as their effect would be anti-dilutive given none of the conversion features have been triggered. See Note 4, "Debt"for discussion on the conversion features related to the Convertible Senior Notes.
(12) iiLeases/
We
lease office facilities for use in our operations, as well as transportation and other equipment. Most of our leases are non-cancelable operating lease agreements with original maturities between one to i10 years from the execution date. Some of these leases include options to extend for up to ifive
years. We have no finance leases and no related party lease agreements as of June 30, 2022. Right-of-use lease assets and lease liabilities for our operating leases were recorded in the condensed consolidated balance sheets.
i
The components of operating lease expense were as follows:
Cash
amounts paid included in the measurement of lease liabilities:
Operating cash outflows from operating leases
$
i7,238
$
i6,203
Right-of-use
assets obtained in exchange for lease obligations (non-cash):
Operating leases
$
i6,606
$
i2,961
Lease
term and discount rate:
Weighted average remaining lease term (years)
i5.8
i3.9
Weighted
average discount rate
i1.64
%
i2.51
%
/
Rental
Income from third parties
We own office buildings in Bangor, Falmouth, and Yarmouth, Maine; Lubbock and Plano, Texas; Troy, Michigan; Latham, New York; and Moraine, Ohio. We lease space in some of these buildings to third-party tenants. The property we lease to others under operating leases consists primarily of specific facilities where one tenant obtains substantially all of the economic benefit from the asset and has the right to direct the use of the asset. These non-cancelable leases expire between 2022 and 2027, and some have options to extend the lease for up to i10 years. We determine
if an arrangement is a lease at inception. None of our leases allow the lessee to purchase the leased asset.
Rental income from third-party tenants for the three and six months ended June 30, 2022 totaled $i493,000 and $i798,000,
respectively, and for the three and six months ended June 30, 2021 totaled $i296,000 and $i590,000, respectively. Rental income
is included in hardware and other revenue in the condensed consolidated statements of income. iAs of June 30, 2022, future minimum operating rental income based on contractual agreements is as follows:
Year ending December 31,
Amount
2022
(Remaining)
$
i914
2023
i1,858
2024
i1,898
2025
i1,363
2026
i408
Thereafter
i131
Total
$
i6,572
(13) iCommitments
and Contingencies
Litigation
Other than routine litigation incidental to our business, there are ino material legal proceedings pending to which we are party or to which any of our properties are subject.
21
(14) iSegment
and Related Information
We provide integrated information management solutions and services for the public sector.
We provide our software systems and services and appraisal services through iseven business units, which focus on the following products:
•financial management, education and planning, regulatory, and maintenance software solutions;
•financial management, municipal
courts, planning, regulatory, and maintenance software solutions;
•courts and justice and public safety software solutions;
•data and insights solutions;
•appraisal and tax software solutions, land and vital records management software solutions, and property appraisal services;
•development platform solutions including case management and business process management; and
•NIC digital government and payments solutions.
In accordance with ASC 280-10, Segment Reporting, we report our results in itwo
reportable segments. The Enterprise Software ("ES") reportable segment provides public sector entities with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions. The business units presented in the ES reportable segment are the following: financial management, education and planning, regulatory, and maintenance software solutions; financial management, municipal courts, planning, regulatory, and maintenance software solutions; courts and justice and public safety software solutions; data and insights solutions; and appraisal and tax software solutions, land and vital records management software solutions, and property appraisal services. The Platform Technologies ("PT") reportable segment provides public sector entities with software solutions to perform transaction processing, streamline data processing, and improve operations and workflows. The business units presented
in the PT reportable segment are the following: NIC digital government and payments solutions and development platform solutions.
We evaluate performance based on several factors, of which the primary financial measure is business segment operating income. We define segment operating income for our business units as income before non-cash amortization of intangible assets associated with their acquisitions, interest expense, and income taxes. Segment operating income includes intercompany transactions. The majority of intercompany transactions relate to contracts involving more than one unit and are valued based on the contractual arrangement. Corporate segment operating loss primarily consists of compensation costs for the executive management team, certain shared services staff, and share-based compensation expense for the entire company.
Corporate segment operating income also includes revenues and expenses related to a company-wide user conference.
i
As of January 1, 2022, the appraisal and tax software solutions, land and vital records management software solutions, and property appraisal service business unit, which was previously reported in the Appraisal & Tax ("A&T") reportable segment, was moved to the ES reportable segment and the NIC digital government and payments
solutions and development platform solutions moved to the PT reportable segment to reflect changes in the way in which management makes operating decisions, allocates resources, and manages the growth and profitability of the Company. As the result of the changes in our reportable segments, the former A&T and NIC reportable segments are no longer considered separate segments. Prior year amounts for the ES and PT reportable segments have been adjusted to reflect the segment change.
Reconciliation of reportable segment operating income to the Company's consolidated totals:
2022
2021
2022
2021
Total segment operating income
$
i84,400
$
i61,534
$
i168,203
$
i113,118
Amortization
of acquired software
(i14,039)
(i11,823)
(i27,260)
(i19,787)
Amortization
of customer and trade name intangibles
(i13,604)
(i11,420)
(i28,318)
(i16,832)
Interest
expense
(i6,214)
(i12,437)
(i11,018)
(i12,915)
Other
income, net
i216
i238
i581
i804
Income
before income taxes
$
i50,759
$
i26,092
$
i102,188
$
i64,388
/
23
(15) iDisaggregation
of Revenue
The tables below show disaggregation of revenue into categories that reflect how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows.
Timing of Revenue Recognition
i
Timing of revenue recognition by revenue category during the period is as follows:
Products and services transferred at a point in time
Products and services transferred over time
Total
Revenues
Software licenses and royalties
$
i26,813
$
i5,724
$
i32,537
Subscriptions
i—
i302,037
i302,037
Software
services
i—
i100,977
i100,977
Maintenance
i—
i238,733
i238,733
Appraisal
services
i—
i12,730
i12,730
Hardware
and other
i11,863
i—
i11,863
Total
$
i38,676
$
i660,201
$
i698,877
/
24
Recurring
Revenue
The majority of our revenue is comprised of revenues from maintenance and subscriptions, which we consider to be recurring revenue. Virtually all of our on-premises software clients contract with us for maintenance and support, which provides us with a significant source of recurring revenue. We generally provide maintenance and support for our on-premises clients under annual, or in some cases, multi-year contracts. The contract terms for subscription arrangements range from one to i10
years but are typically contracted for initial periods of three to ifive years, providing a significant source of recurring revenues on an annual basis. We consider all other revenue categories to be non-recurring revenues.
Recurring revenues and non-recurring revenues recognized during the period are as follows:
Transaction Price Allocated to the Remaining Performance Obligations
The aggregate amount of transaction price allocated to the remaining performance obligations represents contracted revenue that has not yet been recognized (“backlog”), which
includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Backlog as of June 30, 2022, was $i1.85 billion, of which we expect to recognize approximately i47%
as revenue over the next i12 months and the remainder thereafter.
(17) Deferred Commissions
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for
initial contracts are deferred and then amortized commensurate with the recognition of associated revenue over a period of benefit that we have determined to be generally three to iseven years. Deferred commissions were $i40.4
million and $i38.1 million as of June 30, 2022, and December 31, 2021, respectively. Amortization expense was $i3.7
million and $i7.2 million for the three and six months ended June 30, 2022, respectively, and $i3.2
million and $i6.3 million for the three and six months ended June 30, 2021, respectively. There were iino/
indicators of impairment in relation to the costs capitalized for the periods presented. Deferred commissions have been included with prepaid expenses for the current portion and non-current other assets for the long-term portion in the accompanying condensed consolidated balance sheets. Amortization expense related to deferred commissions is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.
(18) iSubsequent
Events
In July 2022, we repaid $i100 million of the unsecured term loans under the 2021 Credit Agreement.
26
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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) the effects of the COVID-19 pandemic, including its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; (2) changes in the budgets or regulatory environments of our clients, primarily local and state governments, that could negatively impact information technology spending; (3) disruption to our business and harm to our competitive position resulting from cyber-attacks and security vulnerabilities (4) our ability to protect client
information from security breaches and provide uninterrupted operations of data centers; (5) our ability to achieve growth or operational synergies through the integration of acquired businesses, while avoiding unanticipated costs and disruptions to existing operations; (6) material portions of our business require the Internet infrastructure to be adequately maintained; (7) our ability to achieve our financial forecasts due to various factors, including project delays by our clients, reductions in transaction size, fewer transactions, delays in delivery of new products or releases or a decline in our renewal rates for service agreements; (8) general economic, political and market conditions, including inflation and changes in interest rates; (9) technological and market risks associated with the development of new products or services or of new versions of existing or acquired products or services; (10) competition in the industry in which we conduct business and the
impact of competition on pricing, client retention and pressure for new products or services; (11) 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 (12) 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.
GENERAL
We provide integrated information management solutions and services for the public sector. We develop and market a broad line of software products and services to address the IT needs of public sector entities. In addition, we provide professional IT services to our clients, including software and hardware installation,
data conversion, training, and for certain clients, product modifications, along with continuing maintenance and support for clients using our systems. We also provide subscription-based services such as software as a service (“SaaS”) and electronic document filing solutions (“e-filing”), which simplify the filing and management of court related documents. Additionally, we provide property appraisal outsourcing services for taxing jurisdictions.
Our products generally automate nine major functional areas: (1) financial management and education, (2) courts and justice, (3) public safety, (4) property appraisal and tax, (5) planning, regulatory and maintenance, (6) land and vital records management, (7) data and insights, (8) development platform technologies, and (9) NIC digital government and payments. We report our results in two reportable segments. The ES reportable segment provides
public sector entities with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions such as: financial management and education, courts and justice, public safety, planning, regulatory and maintenance, data and insights, appraisal and tax software solutions, land and vital records management software solutions, and property appraisal services. The Platform Technologies ("PT") reportable segment provides public sector entities with software solutions to perform transaction processing, streamline data processing, and improve operations and workflows such as the NIC digital government and payments solutions and development platform solutions.
As of January 1, 2022, the appraisal and tax software solutions, land and vital records management software solutions, and property appraisal service
business unit, which was previously reported in the Appraisal & Tax ("A&T") reportable segment, was moved to the ES reportable segment and the NIC digital government and payments solutions and development platform solutions moved to the PT reportable segment to reflect changes in the way in which management makes operating decisions, allocates resources, and manages the growth and profitability of the Company. As the result of the changes in our reportable segments, the former A&T and NIC reportable segments are no longer considered separate segments. Prior year amounts for the ES and PT reportable segments have been adjusted to reflect the segment change.
27
Our total employee
count increased to 7,143 at June 30, 2022, including 93 employees from acquisitions completed in 2021 and 2022, from 6,593 at June 30, 2021.
On February 8, 2022, we acquired US eDirect Inc. (US eDirect), a market-leading provider of technology solutions for campground and outdoor recreation management. The total purchase price, net of cash acquired of $6.4 million, was approximately $116.7 million, consisting of $117.6 million paid in cash, and approximately $5.5 million related to indemnity holdbacks, subject to certain post-closing adjustments.
For the three and six months ended June 30, 2022, total revenues increased 16.0% and 32.3%, respectively, compared
to the prior year period. Excluding the impact of 2021 and 2022 acquisitions, revenue increased 6.0% and 6.5% for the three and six months ended June 30, 2022, respectively, compared to the prior year period. Revenues from acquisitions completed in 2021 and 2022 accounted for 10.0% and 25.8% of the increase in revenues for the three and six months ended June 30, 2022, respectively.
Subscriptions revenue grew 28.2% and 66.0% for the three and six months ended June 30, 2022, respectively, compared to the prior year period, primarily due the impact of the NIC acquisition, as well as an ongoing shift toward SaaS arrangements, along with growth in our transaction-based revenues such as e-filing and online payment services. Excluding the impact of 2021 and 2022 acquisitions, subscriptions
revenue increased 10.0% and 12.3% for the three and six months ended June 30, 2022, respectively, compared to the prior year period. Subscription revenues from acquisitions completed in 2021 and 2022 contributed 18.2% and 53.7% for the three and six months period ended June 30, 2022, respectively.
Our backlog as of June 30, 2022, was $1.85 billion, a 13.9% increase from last year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These condensed consolidated financial statements have been prepared following the requirements of GAAP for the interim period
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, 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, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our Form 10-K for the year ended December 31, 2021. Except for the accounting policies for business combinations as a result of adopting Accounting for Contract
Assets and Contract Liabilities from Contracts with Customers (ASC 805)(“ASU 2021-08”), there have been no material changes to our critical accounting policies and estimates from the information provided in our Form 10-K for the year ended December 31, 2021.
Software
licenses, royalties and acquired software
3.6
3.3
3.5
3.2
Subscriptions, software services and maintenance
52.1
49.4
52.0
47.8
Appraisal
services
1.3
1.1
1.3
1.3
Hardware and other
1.7
1.1
1.4
1.0
Selling, general and administrative
expenses
21.3
27.0
21.4
26.9
Research and development expense
5.0
5.8
5.1
6.5
Amortization
of customer and trade name intangibles
2.9
2.8
3.1
2.4
Operating income
12.1
9.5
12.2
10.9
Interest
expense
(1.3)
(3.1)
(1.2)
(1.8)
Other income, net
—
0.1
0.1
0.1
Income before income taxes
10.8
6.5
11.1
9.2
Income
tax provision
2.3
0.1
2.4
0.3
Net income
8.5
%
6.4
%
8.7
%
8.9
%
Revenues
Acquisitions
On
February 8, 2022, we acquired US eDirect Inc. (US eDirect), a market-leading provider of technology solutions for campground and outdoor recreation management. The impact of the US eDirect acquisition on our operating results is not considered material. US eDirect is operated as a part of the NIC division and the results of NIC and US eDirect, from their respective dates of acquisition, are included with the operating results of the PT segment.
On April 21, 2021, we acquired NIC, which became a direct subsidiary of the Company and NIC’s subsidiaries became indirect subsidiaries
of the Company. NIC is a leading digital government solutions and payment company that serves federal, state and local government agencies.
29
The following table details revenue for NIC for the three and six months ended June 30, 2022, which is presented in our condensed consolidated statements of income from the date of acquisition and included in the operating results of the PT reportable segment.
The following table sets forth a comparison of our software licenses and royalties revenue for the periods presented as of June 30:
Three
Months Ended
Change
Six Months Ended
Change
2022
2021
$
%
2022
2021
$
%
ES
$
14,623
$
16,239
$
(1,616)
(10)
%
$
30,728
$
30,611
$
117
—
%
PT
386
1,365
(979)
(72)
787
1,926
(1,139)
(59)
Total
software licenses and royalties revenue
$
15,009
$
17,604
$
(2,595)
(15)
%
$
31,515
$
32,537
$
(1,022)
(3)
%
Software
licenses and royalties revenue decreased 15% and 3% for the three and six months ended June 30, 2022, respectively, compared to the prior year periods. The decrease in software licenses and royalties revenue for the three months ended June 30, 2022, is attributed to more clients choosing our SaaS offering rather than purchasing the software under a traditional perpetual software arrangement. Our total new client mix for the six months ended June 30, 2022, was approximately 22% perpetual software license arrangements and approximately 78% subscription-based arrangements, compared to total new client mix for the six months ended June 30, 2021, of approximately 36% perpetual software license arrangements and approximately 64% subscription-based arrangements.
Although
the mix of new contracts between SaaS-based and perpetual license arrangements may vary from quarter to quarter and year to year, we expect our software license growth rate to continue to decline as a growing number of clients choose our SaaS-based options, rather than purchasing the software under a traditional perpetual software license arrangement and the Company begins transitioning to cloud-based only offerings. SaaS-based arrangements generally do not result in license revenue in the initial year as compared to perpetual software license arrangements but generate higher overall revenue over the term of the contract.
Subscriptions
The
following table sets forth a comparison of our subscriptions revenue for the periods presented as of June 30:
Three
Months Ended
Change
Six Months Ended
Change
2022
2021
$
%
2022
2021
$
%
ES
$
128,694
$
102,617
$
26,077
25
%
$
249,010
$
201,946
$
47,064
23
%
PT
127,122
96,941
30,181
31
252,249
100,091
152,158
152
Total
subscriptions revenue
$
255,816
$
199,558
$
56,258
28
%
$
501,259
$
302,037
$
199,222
66
%
30
Subscriptions
revenue primarily consists of revenue derived from online payments and SaaS arrangements. Other sources of subscription-based services are derived from digital government services and e-filing arrangements that simplify the filing and management of court related documents for courts and law offices. E-filing revenue is derived from transaction fees and fixed fee arrangements.
Subscriptions revenue grew 28% and 66% for the three and six months ending June 30, 2022, respectively, compared to the prior period, primarily due to the inclusion of NIC’s revenues from the date of acquisition. Excluding the impact of revenue from 2021 and 2022 acquisitions of $36.4 million and $162.2 million for the three and six months ended June 30, 2022, respectively, subscriptions revenue increased 10.0% and 12.3% for the three and six months ended
June 30, 2022, respectively. New SaaS clients as well as existing clients who converted to our SaaS model provided the majority of the subscriptions revenue increase. In the three and six months ending June 30, 2022, respectively, we added 167 and 316 new SaaS clients and 96 and 184 existing on-premises clients converted to our SaaS model. Since June 30, 2021, we have added 595 new SaaS clients while 322 existing on-premises clients converted to our SaaS offerings. Also excluding the impact of revenue from 2021 and 2022 acquisitions, transaction-based fees contributed $4.6 million and $7.3 million to the increase in subscriptions revenue for the three and six months ended June 30, 2022, respectively, due to the increased volumes of online payments from e-filing and utility
billings.
Software services
The following table sets forth a comparison of our software services revenue for the periods presented as of June 30:
Three
Months Ended
Change
Six Months Ended
Change
2022
2021
$
%
2022
2021
$
%
ES
$
41,841
$
42,478
$
(637)
(1)
%
$
84,490
$
84,895
$
(405)
—
%
PT
21,284
10,859
10,425
96
40,132
16,082
24,050
150
Total
software services revenue
$
63,125
$
53,337
$
9,788
18
%
$
124,622
$
100,977
$
23,645
23
%
Software
services revenue primarily consists of professional services delivered in connection with implementing our software, converting client data, training client personnel, custom development activities, and consulting. New clients who acquire our software generally also contract with us to provide the related software services. Existing clients also periodically purchase additional training, consulting, and minor programming services. Software services revenue increased 18% and 23% for the three and six months ended June 30, 2022, respectively, compared to the prior year period. Excluding the impact of revenue from 2021 and 2022 acquisitions of $3.7 million and $17.0 million for the three and six months ended June 30, 2022, respectively, software services increased 11.3% and 6.6% for
the three and six months ended June 30, 2022, respectively. That increase for three months ended June 30, 2022 in software services revenue is primarily attributed to higher revenues generated by the COVID pandemic-related rent relief services, partially offset by more clients selecting our cloud solutions instead of our on-premises license arrangements which typically require more professional services.
Maintenance
The following table sets forth a comparison of our maintenance revenue for the periods presented as of June 30:
Three
Months Ended
Change
Six Months Ended
Change
2022
2021
$
%
2022
2021
$
%
ES
$
110,760
$
109,815
$
945
1
%
$
221,455
$
219,284
$
2,171
1
%
PT
6,055
9,806
(3,751)
(38)
12,389
19,449
(7,060)
(36)
Total
maintenance revenue
$
116,815
$
119,621
$
(2,806)
(2)
%
$
233,844
$
238,733
$
(4,889)
(2)
%
We
provide maintenance and support services for our software products and certain third-party software. Maintenance revenue decreased 2% for both the three and six months ended June 30, 2022, compared to the prior year period. For the three months ended June 30, 2022, maintenance revenue decreased mainly due to attrition related to a legacy case management solution and clients converting from on-premises license arrangements to SaaS, partially offset by annual maintenance rate increases and maintenance associated with new software license sales.
31
Appraisal services
The following table sets forth a comparison of our appraisal services
revenue for the periods presented as of June 30:
Three
Months Ended
Change
Six Months Ended
Change
2022
2021
$
%
2022
2021
$
%
ES
$
8,812
$
6,265
$
2,547
41
%
$
17,330
$
12,730
$
4,600
36
%
PT
—
—
—
—
—
—
—
—
Total
appraisal services revenue
$
8,812
$
6,265
$
2,547
41
%
$
17,330
$
12,730
$
4,600
36
%
Appraisal
services revenue for the three and six months ended June 30, 2022, increased by 41% and 36%, respectively, compared to the prior year primarily due to the ramp-up of appraisal services for several new revaluation contracts which started in recent quarters. The appraisal services business is somewhat cyclical and driven in part by statutory revaluation cycles in various states.
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 June 30:
Three
Months Ended
Change
Six Months Ended
Change
2022
2021
$
%
2022
2021
$
%
Software
licenses and royalties
$
2,869
$
1,368
$
1,501
110
%
$
5,478
$
2,604
$
2,874
110
%
Acquired
software
14,039
11,823
2,216
19
27,260
19,787
7,473
38
Subscriptions, software services,
and maintenance
244,192
199,771
44,421
22
481,088
334,091
146,997
44
Appraisal services
5,976
4,429
1,547
35
11,912
9,046
2,866
32
Hardware
and other
8,161
4,623
3,538
77
13,188
7,081
6,107
86
Total cost of revenues
$
275,237
$
222,014
$
53,223
24
%
$
538,926
$
372,609
$
166,317
45
%
The
following table sets forth a comparison of gross margin percentage by revenue type for the periods presented as of June 30:
Three
Months Ended
Six Months Ended
2022
2021
Change
2022
2021
Change
Software licenses, royalties and acquired software
(12.7)
%
25.1
%
(37.8)
%
(3.9)
%
31.2
%
(35.1)
%
Subscriptions,
software services and maintenance
44.0
46.4
(2.4)
44.0
47.9
(3.9)
Appraisal services
32.2
29.3
2.9
31.3
28.9
2.4
Hardware
and other
10.4
39.9
(29.5)
18.7
40.3
(21.6)
Overall gross margin
41.3
%
45.1
%
(3.8)
%
41.7
%
46.7
%
(5.0)
%
Software
licenses, royalties and acquired software. Amortization expense for acquired software comprises the majority of costs of software licenses, royalties, and acquired software. We do not have any direct costs associated with royalties. The gross margin for software licenses, royalties and acquired software is negative 12.7% and negative 3.9% for the three and six months ended June 30, 2022, respectively, and 25.1% and 31.2% for three and six months ended June 30, 2021, respectively. Excluding the impact of amortization expense of acquired software, the margin is 80.9% and 82.6% for the three and six months ended June 30, 2022, respectively, and 92.2% and 92.0% for three and six months ended June 30, 2021, respectively. The decline in software licenses,
royalties and acquired software gross margin compared to prior year periods is due to lower revenue from software licenses and increased amortization expense related to acquired software from recent acquisitions.
32
Subscriptions, software services and maintenance. Cost of subscriptions, software services and maintenance primarily consists of personnel costs related to installation of our software, conversion of client data, training client personnel and support activities, and various other services such as custom client development and ongoing operation of SaaS and e-filing arrangements. The subscriptions, software services, and maintenance gross margin in the three and six months ended June 30, 2022,
decreased 2.4% and 3.9%, respectively, from the comparable prior year period, primarily due to the inclusion of NIC’s revenues, which historically have lower margins than Tyler. Excluding the impact from 2021 and 2022 acquisitions, the gross margins were 44.6% and 46.2% for the three and six months ended June 30, 2022, respectively. The decrease of 1.8% and 1.7% for the three and six months ended June 30, 2022, respectively, from the comparable prior periods is due to several factors, including lower maintenance revenue resulting from attrition related to a legacy case management solution; a post-COVID return of low-margin revenues such as billable travel; higher personnel costs related to inflation, as well as an increase in professional services employees to enable delivery of our growing backlog and anticipated growth who are not yet billable; and higher hosting costs
related to our accelerated shift to the cloud. Excluding employees added through acquisitions, our implementation and support staff has grown by 239 employees since June 30, 2021.
Appraisal services. Appraisal services revenue was approximately 1.9% of total revenue for the three and six months ended June 30, 2022, respectively. The appraisal services gross margin for the three and six months ended June 30, 2022, increased 2.9% and 2.4%, respectively, compared to the same period in 2021. The increase in margin is primarily due to cost savings attributed to lower travel expenses associated with appraisal projects. The appraisal services business is somewhat cyclical and driven in part by statutory revaluation cycles in various states.
Overall
Gross Margin. For the three and six months ended June 30, 2022, our overall gross margin decreased 3.8% and 5.0%, respectively, compared to the prior year period, primarily due to the inclusion of NIC’s revenues, which historically have lower margins than Tyler. Excluding the impact from 2021 and 2022 acquisitions, overall gross margins were 42.3% and 44.2% for the three and six months ended June 30, 2022, respectively. For the three months ended June 30, 2022, the decrease in overall gross margin compared to the prior year period is due to lower revenue from software licenses and maintenance, higher personnel costs related to inflation, and "bubble costs" related to the transition from our proprietary data centers to Amazon Web Services ("AWS").
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 June 30:
Three
Months Ended
Change
Six Months Ended
Change
2022
2021
$
%
2022
2021
$
%
Selling,
general and administrative expenses
$
99,701
$
108,922
$
(9,221)
(8)
%
$
197,596
$
187,696
$
9,900
5
%
SG&A
as a percentage of revenues was 21.3% and 21.4% for the three and six months ended June 30, 2022, respectively, compared to 27.0% and 26.9% for the three and six months ended June 30, 2021, respectively. Excluding the impact of SG&A expense from 2021 and 2022 acquisitions of $6.1 million and $23.8 million for the three and six months ended June 30, 2022, respectively, SG&A decreased 14.1% and 7.4% for the three and six months ending June 30, 2022, respectively, compared to the prior year period. The decrease in SG&A as a percentage of revenues is primarily attributed to lower transaction expense related to acquisitions completed in 2022 compared to those completed in 2021 and the decline in stock compensation expense due to the lower fair value of each share-based
award issued in connection with our stock compensation plan. The decline in SG&A is partially offset by increased staff levels and other administrative expenses compared to prior periods.
Research and Development Expense
The following table sets forth a comparison of our research and development expense for the periods presented as of June 30:
Three
Months Ended
Change
Six Months Ended
Change
2022
2021
$
%
2022
2021
$
%
Research
and development expense
$
23,386
$
23,428
$
(42)
—
%
$
47,327
$
45,241
$
2,086
5
%
33
Research
and development ("R&D") expense consists mainly of costs associated with development of new products and technologies from which we do not currently generate significant revenue. R&D expense in the three and six months ended June 30, 2022, remained flat and increased 5%, respectively, compared to the prior period. Excluding the impact of R&D expense from 2021 and 2022 acquisitions of $224,000 and $1.1 million for the three and six months ended June 30, 2022, respectively, R&D expense decreased 1.1% and increased 2.2% for the three and six months ending June 30, 2022, respectively, compared to prior year period. The decline in R&D expense for the three months ended June 30. 2022, is mainly attributed to a shift of some development resources to certain projects which meet the criteria for capitalization.
The increase in R&D expense for the six months ended June 30, 2022, is mainly due to a number of new Tyler product development initiatives across our product suites somewhat offset by a shift of some development resources to certain projects which meet the criteria for capitalization.
Amortization of Other Intangibles
The following table sets forth a comparison of amortization of customer and trade name intangibles for the periods presented as of June 30:
Three
Months Ended
Change
Six Months Ended
Change
2022
2021
$
%
2022
2021
$
%
Amortization
of other intangibles
$
13,604
$
11,420
$
2,184
19
%
$
28,318
$
16,832
$
11,486
68
%
Acquisition
intangibles are comprised of the excess of the purchase price over the fair value of net tangible assets acquired that are 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 operating expense. For the three and six months ended June 30, 2022, amortization expense increased compared to the prior period due to acquisitions completed in 2021 and 2022.
Interest Expense
The following table sets forth a comparison of our interest expense for the periods presented as of June 30:
Three
Months Ended
Change
Six Months Ended
Change
2022
2021
$
%
2022
2021
$
%
Interest
expense
$
(6,214)
$
(12,437)
$
6,223
(50)
%
$
(11,018)
$
(12,915)
$
1,897
(15)
%
Interest
expense is primarily comprised of interest expense and non-usage and other fees associated with our borrowings. The change in interest expense in the three and six months ended June 30, 2022, compared to the prior period is attributable to the prior year period including $6.4 million of expense related to the senior unsecured bridge loan facility commitment fee paid in 2021 and lower levels of borrowings in the current year related to the 2021 Credit Agreement, offset by an increase in interest rates compared to prior year periods.
Other Income, Net
The following table sets forth a comparison of our other income, net, for the periods presented as of June 30:
Three
Months Ended
Change
Six Months Ended
Change
2022
2021
$
%
2022
2021
$
%
Other
income, net
$
216
$
238
$
(22)
(9)
%
$
581
$
804
$
(223)
(28)
%
Other
income, net, is primarily comprised of interest income from invested cash. The change in other income, net, in the three and six months ended June 30, 2022, compared to the prior period is attributed to lower levels of invested cash.
34
Income Tax Provision
The following table sets forth a comparison of our income tax provision for the periods presented as of June 30:
Three
Months Ended
Change
Six Months Ended
Change
2022
2021
$
%
2022
2021
$
%
Income
tax provision
$
10,813
$
562
$
10,251
1,824%
$
22,258
$
1,882
$
20,376
1,083
Effective
income tax rate
21.3
%
2.2
%
21.8
%
2.9
%
The increase in effective tax rate for the three and six months ended June 30,
2022, as compared to the same period in 2021, was principally driven by a decrease in excess tax benefits related to stock incentive awards. The effective income tax rates for the three and six months ended June 30, 2022 and 2021, were different from the statutory United States federal income tax rate of 21% primarily due to excess tax benefits related to stock incentive awards and the tax benefit of research tax credits, offset by state income taxes, non-deductible business expenses, and reserves for unrecognized state income tax benefits. The excess tax benefits related to stock incentive awards realized were $1.7 million and $4.7 million for the three and six months ended June 30, 2022, respectively, compared to $6.4 million and $15.2 million for the three and six months ended June 30,
2021, respectively. Excluding the excess tax benefits, the effective tax rate was 24.6% and 26.4% for the three and six months ended June 30, 2022, respectively, compared to 26.7% and 26.5% for the three and six months ended June 30, 2021, respectively.
FINANCIAL CONDITION AND LIQUIDITY
As of June 30, 2022, we had cash and cash equivalents of $253.1 million compared to $309.2 million at December 31, 2021. We also had $60.9 million invested in investment grade corporate and municipal bonds as of June 30, 2022. These investments have varying maturity dates through 2027 and are held as available-for-sale. As of June 30,
2022, we believe our cash from operating activities, revolving credit facility, cash on hand, and access to the capital markets provides us with sufficient flexibility to meet our long-term financial needs.
The following table sets forth a summary of cash flows for the six months ended June 30:
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.
For the six months ended June 30, 2022, operating activities provided cash of $130.2 million. Operating activities that provided cash were primarily comprised of net income of $79.9 million, non-cash depreciation and amortization charges of $75.9 million, non-cash share-based compensation expense of $51.1 million and a non-cash decrease in operating lease right-of-use assets of $5.1 million. Working capital, excluding cash, increased approximately $81.7 million mainly due to higher accounts receivable
because of an increase in unbilled receivables attributed to revenues recognized prior to billings and our maintenance billing cycle peaking in June, the timing of bonuses payments, the timing of payments of payroll related taxes, and deferred taxes associated with stock option activity during the period. These increases were offset by an increase in deferred revenue during the period, the timing of payments to and receipts from our government partners and end-user consumers, and the timing of income tax payments. 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 largest renewal billing cycles occur in the second and fourth quarters. In addition, subscription renewals are billed throughout the year.
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Our
days sales outstanding (“DSO”) was 115 days at June 30, 2022, compared to 108 days at December 31, 2021, and 131 days at June 30, 2021. The increase in DSO compared to December 31, 2021, is primarily attributed to our maintenance billing cycle, which typically peaks at its highest level in June and second highest level in December of each year, followed by collections in the subsequent quarter. DSO is calculated based on quarter-end accounts receivable divided by the quotient of annualized quarterly revenues divided by 360 days. The decrease in DSO compared to June 30, 2021, is attributed to improved collection efforts.
Investing activities used cash of $110.4 million in
the six months ending June 30, 2022. On February 8, 2022, we acquired US eDirect Inc. (US eDirect), a market-leading provider of technology solutions for campground and outdoor recreation management. The total purchase price, net of cash acquired of $6.4 million, was approximately $116.7 million, consisting of $117.6 million paid in cash, and approximately $5.5 million related to indemnity holdbacks, subject to certain post-closing adjustments. In addition, approximately $16.5 million of software development costs were capitalized. The remaining additions were for computer equipment and furniture and fixtures in support of internal growth, particularly with respect to data centers supporting growth in our cloud-based offerings.
Financing activities used cash of $76.0 million in
the six months ended June 30, 2022, primarily attributable to repayment of $80.0 million of the unsecured term loans and offset by payments received from stock option exercises and employee stock purchase plan activity, net of withheld shares for taxes upon equity award.
In February 2019, our board of directors authorized the repurchase of an additional 1.5 million shares of our common stock. The repurchase program, which was approved by our board of directors, was originally announced in October 2002 and was amended at various times from 2003 through 2019. As of June 30, 2022, we have authorization from our board of directors to repurchase up to 2.4 million additional shares of our common stock. Our share repurchase program allows us to repurchase shares at our discretion. Market conditions influence the timing of the buybacks
and the number of shares repurchased, as well as the volume of employee stock option exercises. Share repurchases are generally funded using our existing cash balances and borrowings under our credit facility 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.
We made tax payments of $24.3 million and $967,000 in the six months ended June 30, 2022, and 2021, respectively.
As of June 30, 2022, we had $600 million in outstanding principal for the Convertible Senior Notes due 2026. Under our
2021 Credit Agreement, we had $675 million in outstanding principal for the unsecured term loans, no outstanding borrowings under the 2021 Revolving Credit Facility, and an available borrowing capacity of $500 million as of June 30, 2022. As of June 30, 2022, we had one outstanding standalone letter of credit totaling $2.0 million. The letter of credit, which guarantees our performance under a client contract, renews automatically annually unless canceled in writing, and expires in the third quarter of 2026. For the six months ended June 30, 2022, we repaid $80.0 million of the unsecured term loans under 2021 Credit Agreement.
Subsequent to June 30,
2022, we repaid $100 million of the unsecured term loans under the 2021 Credit Agreement in July 2022.
In the six months ended June 30, 2022, and 2021, respectively, we made interest payments of $5.7 million and $9.4 million, associated with the 2021 Credit Agreement and the Convertible Senior Notes, including payment of a $6.4 million commitment fee related to the senior unsecured bridge loan facility paid in 2021.
See Note 4, "Debt", to the Condensed Consolidated Financial Statements for discussions of the 2021 Credit Agreement and Convertible Senior Notes.
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.
We anticipate that 2022 capital spending will be between $58 million and $62 million, including approximately $34 million of capitalized software development. We expect the majority of the other capital spending will consist of computer equipment and software for infrastructure replacements and expansion. Capital spending is expected to be funded from existing cash balances and cash flows from operations.
We lease office facilities, as well as transportation and other equipment used in our operations under non-cancelable operating lease agreements expiring at various dates through 2027.
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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.
As of June 30, 2022, we had $675.0 million of outstanding borrowings under our 2021 Credit Agreement and available borrowing capacity under the 2021 Credit Agreement was $500.0 million.
Borrowings under the Revolving Credit Facility and the Term Loan A-1 bear interest, at the Company’s option, at a per annum rate of either (1) the Administrative Agent’s prime commercial lending rate (subject to certain higher rate determinations) (the “Base Rate”) plus a margin of 0.125% to 0.75% or (2) the one-, three-, six-, or,
subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 1.125% to 1.75%. The Term Loan A-2 bears interest, at the Company’s option, at a per annum rate of either (1) the Base Rate plus a margin of 0% to 0.5% or (2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 0.875% to 1.5%.
During the six months ended June 30, 2022, the effective interest rate for our borrowings was 2.38%. Based on the aggregate outstanding principal balance under the 2021 Credit Agreement as of June 30, 2022, of $675.0 million, each quarter point change in interest rates would result in a $1.7 million change in annual interest 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 period specified in the SEC’s 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 June 30, 2022.
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 June 30, 2022, 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 routine litigation incidental to our business, 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 2021 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 June 30, 2022, 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, 2021.
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
Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags, including Cover Page XBRL tags, are embedded within the Inline XBRL Document.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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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.
