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3: EX-31.2 Certification -- §302 - SOA'02 HTML 24K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 22K
11: R1 Cover Page HTML 72K
12: R2 Condensed Consolidated Statements of Income HTML 93K
13: R3 Condensed Consolidated Balance Sheets HTML 125K
14: R4 Condensed Consolidated Balance Sheets HTML 39K
(Parenthetical)
15: R5 Condensed Consolidated Statements of Cash Flows HTML 108K
16: R6 Consolidated Statements of Shareholders' Equity HTML 69K
17: R7 Basis of Presentation HTML 23K
18: R8 Accounting Standards and Significant Accounting HTML 49K
Policies
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20: R10 Shareholders' Equity HTML 35K
21: R11 Deferred Commissions HTML 92K
22: R12 Other Assets HTML 23K
23: R13 Debt HTML 44K
24: R14 Income Tax Provision HTML 25K
25: R15 Earnings Per Share HTML 39K
26: R16 Leases HTML 109K
27: R17 Share-Based Compensation HTML 28K
28: R18 Segment and Related Information HTML 85K
29: R19 Disaggregation of Revenue HTML 92K
30: R20 Deferred Revenue and Performance Obligations HTML 92K
31: R21 Commitments and Contingencies HTML 23K
32: R22 Subsequent Events HTML 27K
33: R23 Accounting Standards and Significant Accounting HTML 49K
Policies (Policies)
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35: R25 Debt (Tables) HTML 31K
36: R26 Earnings Per Share (Tables) HTML 37K
37: R27 Leases (Tables) HTML 79K
38: R28 Share-Based Compensation (Tables) HTML 29K
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41: R31 Deferred Revenue and Performance Obligations HTML 32K
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Policies (Details)
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44: R34 Shareholders' Equity - Summary of Activities in HTML 41K
Common Stock (Details)
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(Details)
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Segment Revenues and Operations (Details)
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(Details)
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65: R55 Disaggregation of Revenue - Additional Information HTML 26K
(Details)
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Deferred Revenue (Details)
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Additional Information (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. iiYes/☒ 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). iiYes/☒ 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 May 4, 2021 was i40,738,702.
Accounts
receivable (less allowance for losses and sales adjustments of $i8,198 in 2021 and $i9,255 in 2020)
i330,824
i382,319
Short-term
investments
i59,030
i72,187
Prepaid
expenses
i38,106
i30,864
Income
tax receivable
i17,066
i21,598
Other
current assets
i4,574
i2,479
Total
current assets
i1,700,352
i1,113,070
Accounts
receivable, long-term
i23,802
i21,417
Operating
lease right-of-use assets
i19,192
i18,734
Property
and equipment, net
i169,295
i168,004
Other
assets:
Software development costs, net
i12,190
i9,121
Goodwill
i851,629
i838,428
Other
intangibles, net
i308,614
i322,068
Non-current
investments
i112,910
i82,640
Other
non-current assets
i33,806
i33,792
Total
assets
$
i3,231,790
$
i2,607,274
LIABILITIES
AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
i12,386
$
i14,011
Accrued
liabilities
i86,522
i83,084
Operating
lease liabilities
i5,913
i5,904
Deferred
revenue
i420,535
i461,278
Total
current liabilities
i525,356
i564,277
Revolving
line of credit
i—
i—
Convertible
senior notes, net
i591,483
i—
Deferred
revenue, long-term
i83
i100
Deferred
income taxes
i37,239
i40,507
Operating
lease liabilities, long-term
i16,636
i16,279
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 March 31, 2021 and December 31, 2020
i481
i481
Additional
paid-in capital
i941,960
i905,332
Accumulated
other comprehensive loss, net of tax
(i46)
(i46)
Retained
earnings
i1,149,132
i1,112,156
Treasury
stock, at cost; i7,424,104 and i7,608,627 shares in 2021 and 2020, 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 March 31, 2021, and December 31, 2020, and operating result amounts are for the three months ended March 31, 2021, and 2020, 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, 2020. 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). We had no items of other comprehensive income (loss) for the three months ended March 31, 2021, and 2020.
(2) iAccounting
Standards and Significant Accounting Policies
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Except for the January 1, 2021, adoption of ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06"), 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, 2020, filed with
the SEC on February 19, 2021, that have had a material impact on our condensed consolidated financial statements and related notes. See recently adopted accounting pronouncements below.
Impacts of the COVID-19 Pandemic
The pandemic continues to delay some government procurement processes and is expected to impact our ability to complete certain implementations, negatively impacting our revenue. Because an increasing portion of our revenues are recurring, the effect of COVID-19 on our results of operations may also not be fully reflected for some time. It could also negatively impact the timing of client payments to us.We continue to monitor these trends in order to respond to the ever-changing impact of COVID-19 on our clients and Tyler’s operations.
For
the three months ended March 31, 2021, the impact of the COVID-19 pandemic resulted in lower revenues from software licenses and software services. Lower software licenses compared to prior periods are attributed to slower sales cycles as government procurement processes are delayed and contract signings have been pushed to future periods. The software services revenue decline is attributed to delays in implementations caused by travel restrictions in effect during the period. Lower revenues compared to prior periods were partially offset by cost savings attributed to lower spend on travel, user conferences and trade show expenses, health claims and other employee-related expenses. As travel restrictions are relaxed, we expect software services and appraisal services revenues to increase as the limited number of our clients who
require that all or a portion of their services be delivered onsite will be able to receive those services. Also, we are adapting the way we do business by encouraging web and video conferencing, conducting virtual sales demonstrations and delivering professional services remotely, which result in increases in staff utilization rates and billable time.
Recurring revenues from subscriptions and maintenance comprised i75% of our total consolidated revenue for the three months ended March 31,
2021, and include transaction-based revenue streams such as e-filing and online payments. On March 9, 2021, we issued i0.25% Convertible Senior Notes due 2026 (the "Convertible Senior Notes") in the aggregate principal amount of $i600
million. The net proceeds from the issuance of the Convertible Senior Notes of $i594 million were used as one of the funding sources to complete the acquisition of NIC Inc ("NIC"), see Note 16 Subsequent Events. As of March 31, 2021, we had $i1.4
billion in cash and investments and ino outstanding borrowings under our credit facility.
6
On April 21, 2021, Tyler Technologies, Inc ("the Company") consummated the acquisition of NIC contemplated by the Agreement and Plan
of Merger dated February 9, 2021. In connection with the completion of the acquisition, the Company, as borrower, entered into a new $i1.4 billion Credit Agreement with the various lenders consisting of a revolving credit facility of up to $i500
million and aggregate term loans totaling $i900 million. On the April 21, 2021, the Company paid approximately $i2.3 billion
in cash for the purchase of NIC. The proceeds from the term loans and a portion of the proceeds from the revolving credit facility were used as sources of funding for the purchase of NIC. For more information on the acquisition of NIC and New Credit Agreement, see Note 16 Subsequent Events.
We have recorded no impairment to goodwill or other assets as of the balance sheet date, as no triggering events or changes in circumstances indicating a potential impairment have occurred as of period-end to require such an impairment; however, due to significant uncertainty surrounding the pandemic and market conditions, management’s judgment regarding this could change in the future.
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.
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 the customer can benefit from the services either on their own or together with other resources readily available to the customer and whether the services are separately identifiable from other promises in the contract. The transaction price is allocated to the distinct performance obligations on a relative SSP basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the
number and types of users within our contracts. Revenue is recognized net of allowances for sales adjustments and any taxes collected from customers, which are subsequently remitted to governmental authorities.
7
Significant Judgments:
Our contracts with customers often include multiple performance obligations to a customer. When a software arrangement (license or subscription) includes both software licenses and software services, judgment is required to determine whether the software license is considered distinct and accounted for separately,
or not distinct and accounted for together with the software services and recognized over time.
The transaction price is allocated to the separate performance obligations on a relative SSP basis. We determine the SSP based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the applications sold, customer demographics, and the number and types of users within our contracts.We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative SSP of the various products and services. In instances where
SSP is not directly observable, such as when we do not sell the product or service separately, we determine SSP using the expected cost-plus margin approach.
For arrangements that involve significant production, modification or customization of the software, or where software services otherwise cannot be considered distinct, we recognize revenue as control is transferred to the customer over time using progress-to-completion methods. Depending on the contract, we measure progress-to-completion primarily using labor hours incurred, or value added. The progress-to-completion method generally results in the recognition of reasonably consistent profit margins over the life of a contract because we can provide reasonably dependable estimates of contract
billings and contract costs. We use the level of profit margin that is most likely to occur on a contract. If the most likely profit margin cannot be precisely determined, the lowest probable level of profit margin in the range of estimates is used until the results can be estimated more precisely. These arrangements are often implemented over an extended time period and occasionally require us to revise total cost estimates. Amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates. Changes to total estimated contract costs, if any, are recorded in the period they are determined. Estimated losses on uncompleted
contracts are recorded in the period in which we first determine that a loss is apparent.
Typically, the structure of our arrangements does not give rise to variable consideration. However, in those instances whereby variable consideration exists, we include in our estimates additional revenue for variable consideration when we believe we have an enforceable right, the amount can be estimated reliably and its realization is probable.
Refer to Note 13 - "Disaggregation of Revenue" for further information, including the economic factors that affect the nature, amount, timing, and uncertainty of revenue and cash flows of our various revenue categories.
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 March 31, 2021, and December 31, 2020, total current and long-term accounts receivable, net of allowance for losses and
sales adjustments, was $i354.6 million and $i403.7 million, respectively. We have recorded unbilled receivables of $i145.7
million and $i140.8 million at March 31, 2021, and December 31, 2020, respectively. Included in unbilled receivables are retention receivables of $i10.4
million and $i13.1 million at March 31, 2021, and December 31, 2020, 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.
8
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 $i8.2 million at March 31, 2021, does not include provisions for credit losses. As of January 1, 2020, we adopted ASU 2016-13, Financial Instruments - Credit Losses, and primarily evaluated our historical experience with credit losses related to trade and other receivables. Because we have not experienced any historical credit losses with
the majority of our clients, we have no basis to record a reserve for credit losses as defined by the standard.
GOODWILL AND OTHER INTANGIBLE ASSETS
iGoodwill
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. If it is determined through the evaluation of events or circumstances that the carrying value may not be recoverable, we perform a comparison of the estimated fair value of the reporting unit to which the goodwill has been assigned to the sum of the carrying value of the assets and liabilities of that unit. If the sum of the carrying value of the assets and liabilities of a reporting unit exceeds the estimated fair value of that reporting unit, the carrying value of the reporting unit's goodwill is reduced to its fair value through an adjustment to the goodwill balance, resulting in an impairment charge. The fair values calculated in our impairment tests are determined using discounted cash flow models involving several assumptions. The assumptions that are used are based upon what we believe a hypothetical marketplace participant would use in estimating fair value. We 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.
As part of our annual impairment test in fiscal year 2020, we performed qualitative assessments for all reporting units except for the data and insights reporting unit. As a result of these qualitative assessments, we determined that it was not more likely than not that an impairment existed; therefore, we did not perform a Step 1 quantitative impairment test. We did perform a quantitative assessment for goodwill of $i75.7
million associated with our data and insights business unit and concluded no impairment existed as of our annual assessment date. For most of our reporting units, goodwill relates to a combination of legacy and acquired businesses and as a result those units have fair values that substantially exceed their underlying carrying values. For other reporting units, in particular our platform technologies and data and insights units, goodwill entirely relates to recently acquired businesses and as a result those units do not have significant excess fair values over carrying values. The platform technologies and data and insights business units combined goodwill was $i158.6
million, or i19%, of total goodwill as of March 31, 2021. Since our assessment in the second quarter of 2020, we have recorded no impairment to goodwill as no triggering events or changes in circumstances indicating a potential impairment have occurred as of period-end.
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 the COVID-19 pandemic, 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.
9
i
RECENTLY
ADOPTED ACCOUNTING PRONOUNCEMENTS
In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. ASU 2020-06 also requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. This standard will be effective for the Company’s fiscal years
beginning in the first quarter of 2022, with early adoption permitted. The Company has elected to early adopt this standard as of January 1, 2021. Our accounting and disclosures related to our convertible senior notes issued on March 9, 2021, reflect the requirements of this standard. For further information, please refer to Note 7, Debt.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, ("ASU 2019-12") which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the
current guidance to promote consistency among reporting entities. The new standard is effective for fiscal years beginning after December 15, 2020. We adopted ASU 2019-12 as of January 1, 2021. The adoption of this standard did not have a material impact on our consolidated financial statements.
(3) iAcquisitions
On
March 31, 2021, we acquired all the equity interest of Glass Arc, Inc. (dba ReadySub). Readysub is a cloud-based platform that assists school districts with absence tracking, filling substitute teacher assignments, and automating essential payroll processes. The total purchase price was approximately $i6.3 million, net of cash acquired, of which $i6.2
million was paid in cash and approximately $i98,000 was accrued for a working capital holdback subject to certain post-closing adjustments.
On March 31, 2021, we acquired substantially all assets of DataSpec, Inc. ("DataSpec"), a provider of a software-as-a-service (SaaS) solution that allows for secure electronic claims submission to the federal Department of Veterans Affairs (VA) and reporting
capabilities, in addition to scheduling, calendaring, and payments. The total purchase price was approximately $i5.9 million of which $i5.8
million was paid in cash and approximately $i63,000 was accrued for a working capital holdback, subject to certain post-closing adjustments.
Our balance sheet as of March 31, 2021, reflects the allocation of the purchase price to the assets acquired based on their fair value at the date of each acquisition, subject to post closing adjustments. The fair value of the assets acquired and liabilities
assumed are based on valuations using Level III, unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The operating results for ReadySub and DataSpec are included in the ES segment.
(4) iShareholders’ Equity
i
The
following table details activity in our common stock:
Restricted
stock units vested, net of withheld shares upon award settlement
i56
$
(i8,958)
i10
$
(i2,301)
/
As
of March 31, 2021, we have authorization from our board of directors to repurchase up to i2.5 million additional shares of our common stock.
10
(5) iDeferred
Commissions
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized commensurate with the recognition of associated revenue over a period of benefit that we have determined to be three to iseven years. Deferred commissions were $i32.6
million and $i32.3 million as of March 31, 2021, and December 31, 2020, respectively. Amortization expense was $ii3.0/
million for both the three months ended March 31, 2021, and March 31, 2020. 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.
(6) iOther
Assets
As of March 31, 2021, we have $i171.9 million in investment grade corporate and municipal bonds with varying maturity dates through 2026. We intend to hold these bonds to maturity and have classified them as such. It is not more than likely that these bonds will be required to sell before recovery of their amortized costs. We believe cost approximates fair value given the portfolio consists of fixed income and high credit investments. The fair values of these securities are
considered Level II as they are based on inputs from quoted prices in markets that are not active or other observable market data. These investments are presented at amortized cost and are included in short-term investments and non-current investments in the accompanying condensed consolidated balance sheets. As of March 31, 2021, we have an accrued interest receivable balance of $i1.0 million 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 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 months ended March 31, 2021, we have recorded ino 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.
In 2020, we purchased $i10
million in common stock representing a 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 under the cost method because we do not have the ability to exercise significant influence over the investee and the securities do not have readily determinable fair values. Our investment is carried at cost less any impairment write-downs. Annually, our cost method investments are assessed
for impairment. We do not reassess the fair value of cost method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments. No events or changes in have occurred during the period that require reassessment. This investment is included in other non-current assets in the accompanying condensed consolidated balance sheets.
(7) iDebt
Revolving
Line of Credit
On September 30, 2019, we entered into a $i400 million credit agreement with various lender parties and Wells Fargo Bank, National Association, as Administrative Agent (the “Credit Facility”). The Credit Facility provides for a revolving credit line up to $i400
million, including a $i25 million sublimit for letters of credit. The Credit Facility matures on September 30, 2024.
Borrowings under the Credit Facility bear interest at a rate of either (1) Wells Fargo Bank’s prime rate (subject to certain higher rate determinations) plus a margin of i0.125%
to i0.75% or (2) the one-, two-, three-, or six-month LIBOR rate plus a margin of i1.125% to i1.75%.
As of March 31, 2021, the interest rates were i3.38% under the Wells Fargo Bank's prime rate and approximately i1.24% under
the 30-day LIBOR option. The Credit Facility requires us to maintain certain financial ratios and other financial conditions and prohibits us from making certain investments, advances, cash dividends or loans, and limits incurrence of additional indebtedness and liens. As of March 31, 2021, we were in compliance with those covenants.
As of March 31, 2021, we had ino outstanding borrowings under the Credit Facility, and available borrowing capacity
was $i400 million. In addition, as of March 31, 2021 we had one outstanding standalone letter of credit totaling $i2
million. The letter of credit guarantees our performance under a client contract and expires in third quarter of 2021.
11
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 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 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 governing the notes);
•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 100% of the principal amount of the Convertible Senior Notes, plus any accrued and unpaid interest to, but excluding, the redemption date.
As of March 31, 2021, none of the conditions allowing holders of the Convertible Senior Notes to convert have been met.
12
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.
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.
i
The net carrying value of the Convertible Senior Notes, net of unamortized debt discount and unamortized debt issuance
costs were as follows (in thousands):
The carrying amount is the par value of the Convertible Senior Notes 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.
The effective interest rate for the Convertible Senior Notes is i0.36%. The following sets forth the interest expense recognized related to the Convertible Senior Notes (in thousands):
On April 21, 2021, the
Company consummated the acquisition of NIC contemplated by the Agreement and Plan of Merger dated February 9, 2021. In connection with the completion of the acquisition, the Company, as borrower, entered into a new $i1.4 billion Credit Agreement with the various lenders consisting of a revolving credit facility
of up to $i500 million and aggregate term loans of $i900 million. The proceeds from the term loans and a portion of the proceed from
the revolving credit facility were used a source of funding for the purchase of NIC. For more information on the New Credit Agreement, see Note 16 Subsequent Events.
13
(8) iIncome Tax Provision
We
had an effective income tax rate of i3.4% for the three months ended March 31, 2021, compared to negative i36.3%
for the three months ended March 31, 2020. The higher effective tax rate for the three months ended March 31, 2021, as compared to the same period in 2020, was principally driven by a decrease in the excess tax benefits related to stock incentive awards.
The effective income tax rates for the periods presented were different from the statutory United States federal income tax rate of 21% primarily due to excess tax benefits related to stock incentive awards and the tax benefit of research tax credits offset by state income taxes and non-deductible business expenses. The excess tax benefits related to stock incentive awards realized were $i8.8
million for the three months ended March 31, 2021, compared to $i22.1 million for the three months ended March 31, 2020. Excluding the excess tax benefits, the effective tax rate was i26.4%
for the three months ended March 31, 2021, compared to i27% for the three months ended March 31, 2020.
We made tax payments of $i59,000
and $i176,000 in the three months ended March 31, 2021, and 2020, respectively.
(9) iEarnings
Per Share
i
The following table details the reconciliation of basic earnings per share to diluted earnings per share:
Numerator for basic and diluted earnings per share:
Net income
$
i36,976
$
i47,550
Denominator:
Weighted-average
basic common shares outstanding
i40,611
i39,500
Assumed
conversion of dilutive securities:
Stock awards
i1,445
i1,644
Convertible
senior notes
i—
i—
Denominator
for diluted earnings per share
- Adjusted weighted-average shares
i42,056
i41,144
Earnings
per common share:
Basic
$
i0.91
$
i1.20
Diluted
$
i0.88
$
i1.16
/
For
the three months ended March 31, 2021 and 2020, stock awards, representing the right to purchase common stock of approximately i141,000 shares and i79,000
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 these notes on our diluted net income per share. Under the if-converted method, the Convertible Senior 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 added back to the numerator, only in the periods in which such effect is dilutive. The approximately 1.2 million resulting common shares related to the Convertible Senior Notes are not included in the dilutive weighted-average common shares outstanding calculation for the three months ended
March 31, 2021, respectively, as their effect would be anti-dilutive given none of the conversion features have been triggered. See Note 7, Debt for discussion on the conversion features related to the Convertible Senior Notes.
(10) 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 ieight years from the execution date. Some of these leases include options to extend for up to i10
years. We have no finance leases and no related party lease agreements as of March 31, 2021. Operating lease costs were approximately $ii2.6/
million for both the three months ended March 31, 2021, and March 31, 2020, respectively.
14
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
$
i1,829
$
i1,873
Right-of-use
assets obtained in exchange for lease obligations (non-cash):
Operating leases
$
i2,005
$
i457
Lease
term and discount rate:
Weighted average remaining lease term (years)
i4.6
i4
Weighted
average discount rate
i2.69
%
i4.00
%
/
15
i
As
of March 31, 2021, maturities of lease liabilities were as follows:
Year ending December 31,
Amount
2021 (Remaining 2021)
$
i5,537
2022
i5,220
2023
i4,197
2024
i3,712
2025
i2,576
Thereafter
i2,545
Total
lease payments
i23,787
Less: Interest
(i1,238)
Present
value of operating lease liabilities
$
i22,549
/
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 2021 and 2025, and some have options to extend the lease for up to ifive 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 months ended March 31, 2021, totaled $i294,000 and for the three months ended March 31, 2020, totaled $i274,000.
Rental income is included in hardware and other revenue on the condensed consolidated statements of income. iAs of March 31, 2021, future minimum operating rental income based on contractual agreements is as follows:
Year
ending December 31,
Amount
2021 (Remaining 2021)
$
i1,068
2022
i1,449
2023
i1,479
2024
i1,510
2025
i966
Thereafter
i—
Total
$
i6,472
As of March 31, 2021, we had no additional significant operating or finance leases that had not yet commenced.
(11) 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:
Cost of subscriptions, software services and maintenance
$
i5,000
$
i4,252
Selling,
general and administrative expenses
i20,724
i13,050
Total
share-based compensation expense
$
i25,724
$
i17,302
/
16
(12) iSegment
and Related Information
We provide integrated information management solutions and services for the public sector, with a focus on local governments.
We provide our software systems and services and appraisal services through isix 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;
•platform technologies; and
•appraisal and tax software solutions, land and vital records management software solutions, and property appraisal services.
In accordance with ASC 280-10, Segment Reporting, we report our results in itwo
segments. The financial management, education and planning, regulatory and maintenance software solutions unit; financial management, municipal courts, planning, regulatory and maintenance software solutions unit; courts and justice and public safety software solutions unit; the data and insights solutions unit; and platform technologies solutions unit meet the criteria for aggregation and are presented in one reportable segment, the Enterprise Software (“ES”). The ES segment provides public sector entities with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions such as: financial management and education, courts and justice, public safety, planning, regulatory and maintenance, data and insights, and platform technologies processes. The Appraisal and Tax (“A&T”) segment provides systems and software that automate the appraisal and assessment of real and personal
property, land and vital records management as well as provides property appraisal outsourcing services for local governments and taxing authorities. Property appraisal outsourcing services include: the physical inspection of commercial and residential properties; data collection and processing; computer analysis for property valuation; preparation of tax rolls; community education; and arbitration between taxpayers and the assessing jurisdiction.
We evaluate performance based on several factors, of which the primary financial measure is business segment operating income. We define segment operating income for our business units as income before non-cash amortization of intangible assets associated with their acquisitions, interest expense and income taxes. Segment operating income includes intercompany transactions. The majority of intercompany transactions relate to contracts
involving more than one unit and are valued based on the contractual arrangement. Corporate segment operating income primarily consists of compensation costs for the executive management team and certain accounting and administrative staff and share-based compensation expense for the entire company. Corporate segment operating income also includes revenues and expenses related to a company-wide user conference.
As of January 1, 2021, certain administrative costs related to information technology, which were previously allocated and reported in the ES and A&T segments, were moved to the Corporate segment to reflect changes in the way in which management makes operating decisions, allocates resources, and manages the growth and profitability of the Company. Prior year amounts for all segments
have been adjusted to reflect the segment change.
Reconciliation of reportable segment operating income to the Company's consolidated totals:
2021
2020
Total segment operating income
$
i51,584
$
i47,312
Amortization
of acquired software
(i7,964)
(i8,027)
Amortization
of customer and trade name intangibles
(i5,412)
(i5,392)
Other
income, net
i88
i990
Income
before income taxes
$
i38,296
$
i34,883
/
(13) Disaggregation
of Revenue
The tables below show disaggregation of revenue into categories that reflect how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows.
Timing of Revenue Recognition
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
$
i16,066
$
i2,671
$
i18,737
Subscriptions
i—
i81,723
i81,723
Software
services
i—
i52,133
i52,133
Maintenance
i—
i114,365
i114,365
Appraisal
services
i—
i5,763
i5,763
Hardware
and other
i3,820
i—
i3,820
Total
$
i19,886
$
i256,655
$
i276,541
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 March 31, 2021, was $i1.55 billion, of which we expect to recognize approximately i47%
as revenue over the next i12 months and the remainder thereafter.
(15) iCommitments
and Contingencies
Security Incident
As previously disclosed, we experienced a security incident in September 2020 (the "Incident") involving ransomware disrupting access to some of our internal information technology (IT) systems and telephone systems. Although we believe we have contained and recovered from the Incident, and we have taken and will continue to take appropriate remediation steps, we are subject to risk and uncertainties as a result of the Incident. We have completed our investigation and remediation efforts related to the Incident. For the three months period ended March 31, 2021, we have recorded $i215,000
of expenses and recorded approximately $i573,000 of accrued insurance recoveries. The recorded costs consist primarily of payments to third-party service providers and consultants, including legal fees, and enhancements to our cybersecurity measures. We maintain cybersecurity insurance coverage in an amount that we believe is adequate.
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.
(16) iSubsequent Events
The following events or transactions have occurred subsequent to March 31, 2021:
In connection with the completion of the Merger and on the Closing Date, the Company, as borrower, entered into a new $i1.4
billion Credit Agreement with the various lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender, and Issuing Lender. The New 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 New Credit Agreement matures on April 21, 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 New 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 New Credit Agreement. The New Credit Agreement replaces and terminates the Company’s existing $i400 million credit facility pursuant to the Credit Agreement dated as of September
30, 2019 (the “2019 Credit Agreement”). The Company’s previously announced commitment from Goldman Sachs Bank USA for a $i1.6 billion i364-day
senior unsecured bridge loan facility also terminated on the Closing Date.
Borrowings under the Revolving Credit Facility and the Term Loan A-1 will 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 will bear interest, at the Company’s option, at a per annum rate of either (1) the Base Rate plus a margin of i0.00% to i0.50%
or (2) the one-, three-, or six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of i0.875% to i1.50%. The margin in each case
is based upon the Company’s total net leverage ratio, as determined pursuant to the New Credit Agreement. The New 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 i0.30% based upon the Company’s
total net leverage ratio.
On the Closing date, the Company paid approximately $i2.3 billion in cash for the purchase of NIC. The Term Loans of $i900 million
and a portion of the proceeds of the Revolving Credit Facility, in the amount of $i250 million, together with cash available to the Company of $i609 million
and the proceeds of its Convertible Senior Notes of $i594 million, were used to complete the Merger, and pay fees and expenses in connection with the Merger and the New Credit Agreement. The remaining portion of the Revolving Credit Facility may be used for working capital requirements, acquisitions, and capital expenditures of the Company and its subsidiaries.
The
foregoing is a summary of the material terms and conditions of the New Credit Agreement and not a complete description of the New Credit Agreement. Accordingly, the foregoing is qualified in its entirety by reference to the full text of the New Credit Agreement attached to the Current Report on Form 8-K as Exhibit 10.1, dated April 21, 2021, which is incorporated by reference herein.
21
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; (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, with a focus on local governments. 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”), which primarily utilize the Tyler private cloud, and electronic document filing solutions (“e-filing”), which simplify the filing and management of court related documents. Revenues for e-filing are derived from transaction fees and, in some cases, fixed fee arrangements. Other transaction-based fees primarily relate to online payment services. We also provide property appraisal outsourcing services for taxing jurisdictions.
Our products generally automate eight 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 and (8) platform technologies. We
report our results in two segments. The Enterprise Software (“ES”) segment provides public sector entities with software systems and services to meet their information technology and automation needs for mission-critical “back-office” functions such as: financial management; courts and justice processes; public safety; planning, regulatory and maintenance; data analytics; and platform technologies. The Appraisal and Tax (“A&T”) segment provides systems and software that automate the appraisal and assessment of real and personal property, land and vital records management as well as provides property appraisal outsourcing services for local governments and taxing authorities. Property appraisal outsourcing services include: the physical inspection of commercial and residential properties; data collection and processing; computer analysis for property valuation; preparation of tax rolls; community education; and arbitration between taxpayers and
the assessing jurisdiction.
As of January 1, 2021, certain administrative costs related to information technology, which were previously reported in the ES and A&T segments, were moved to the Corporate segment to reflect changes in the way management makes operating decisions, allocates resources, and manages the growth and profitability of the Company. Prior year amounts for all segments have been adjusted to reflect the segment change.
For
the three months ended March 31, 2021, total revenues increased 6.6% compared to the prior year period.
Subscriptions revenue grew 25.4% for the three months ended March 31, 2021, due to an ongoing shift toward cloud-based, software as a service business, as well as continued growth in our transaction-based revenues related to online-payment services.
Our backlog as of March 31, 2021, was $1.55 billion, a 3.0% increase from last year.
Impacts of the COVID-19 Pandemic
The pandemic continues to delay some government procurement processes and is expected to impact our ability to complete certain implementations, negatively impacting our revenue.
Because an increasing portion of our revenues are recurring, the effect of COVID-19 on our results of operations may also not be fully reflected for some time. It could also negatively impact the timing of client payments to us.We continue to monitor these trends in order to respond to the ever-changing impact of COVID-19 on our clients and Tyler’s operations.
For the three months ended March 31, 2021, the impact of the COVID-19 pandemic resulted in lower revenues from software licenses and software services. Lower software licenses compared to prior periods are attributed to slower sales cycles as government procurement processes are delayed and contract signings have been pushed to future periods. The software services revenue decline
is attributed to delays in implementations caused by travel restrictions in effect during the period. Lower revenues compared to prior periods were partially offset by cost savings attributed to lower spend on travel, user conferences and trade show expenses, health claims and other employee-related expenses. As travel restrictions are relaxed, we expect software services and appraisal services revenues to increase as the limited number of our clients who require that all or a portion of their services be delivered onsite will be able to receive those services. Also, we are adapting the way we do business by encouraging web and video conferencing, conducting virtual sales demonstrations and delivering professional services remotely, which result in increases in staff utilization rates and billable time.
Recurring revenues from subscriptions and maintenance comprised 75% of our total consolidated revenue for the three months
ended March 31, 2021, and include transaction-based revenue streams such as e-filing and online payments. On March 9, 2021, we issued 0.25% Convertible Senior Notes due 2026 (the "Convertible Senior Notes") in the aggregate principal amount of $600 million. The net proceeds from the issuance of the Convertible Senior Notes of $594 million were used as one of the funding sources to complete the acquisition of NIC Inc ("NIC"), see Note 16 Subsequent Events. As of March 31, 2021, we had $1.4 billion in cash and investments and no outstanding borrowings under our credit facility.
We have recorded no impairment to goodwill or other assets as of the balance sheet date, as no triggering events or changes in circumstances
indicating a potential impairment have occurred as of period-end to require such an impairment; however, due to significant uncertainty surrounding the pandemic and market conditions, management’s judgment regarding this could change in the future.
23
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 and amortization and potential impairment of intangible assets and goodwill and share-based compensation expense. As these are condensed financial statements, one should also read expanded information about our critical accounting policies and estimates provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations", included in our Form 10-K for the year ended December 31, 2020. Except for the accounting policies for convertible senior notes updated as a result of adopting Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40) ("ASU
2020-06"), 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, 2020.
Software
licenses, royalties and acquired software
3.1
3.2
Subscriptions, software services and maintenance
45.6
47.7
Appraisal services
1.6
1.6
Hardware
and other
0.8
0.9
Selling, general and administrative expenses
26.7
24.4
Research and development expense
7.4
8.1
Amortization
of customer and trade name intangibles
1.8
1.9
Operating income
13.0
12.2
Other income, net
—
0.4
Income
before income taxes
13.0
12.6
Income tax provision (benefit)
0.4
(4.6)
Net income
12.6
%
17.2
%
24
Revenues
Software
licenses and royalties
The following table sets forth a comparison of our software licenses and royalties revenue for the periods presented as of March 31:
Three
Months Ended
Change
2021
2020
$
%
ES
$
13,047
$
15,951
$
(2,904)
(18)
%
A&T
1,886
2,786
(900)
(32)
Total
software licenses and royalties revenue
$
14,933
$
18,737
$
(3,804)
(20)
%
Software licenses and royalties revenue decreased 20% for
the three months ended March 31, 2021, compared to the prior year period. The decline in software licenses and royalties revenue for the three months March 31, 2021, is primarily due to longer sales cycles attributed to our education suite and appraisal products as the impact of COVID-19 has slowed government procurement processes and some contract signings have been pushed to future periods. Offsetting the decline in software license revenue is a shift in the mix of new software contracts toward more perpetual software license arrangements compared to the prior year. Our total new client mix for the three months ended March 31, 2021, was approximately
45% perpetual software license arrangements and approximately 55% subscription-based arrangements compared to total new client mix for the three months ended March 31, 2020, of approximately 39% perpetual software license arrangements and approximately 61% subscription-based arrangements.
Although the mix of new contracts between subscription-based and perpetual license arrangements may vary from quarter to quarter and year to year, we expect our longer-term software license growth rate to slow as a growing number of clients choose our subscription-based options, rather than purchasing the software under a traditional perpetual software license arrangement. Subscription-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 March 31:
Three
Months Ended
Change
2021
2020
$
%
ES
$
94,831
$
76,644
$
18,187
24
%
A&T
7,648
5,079
2,569
51
Total
subscriptions revenue
$
102,479
$
81,723
$
20,756
25
%
Subscriptions revenue primarily consists of revenue derived from our SaaS arrangements, which
generally utilize the Tyler private cloud. As part of our subscription-based services, we also provide 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. Other sources of subscription-based services are derived from transaction-based fees primarily related to online payment services.
Subscriptions revenue grew 25% for the three months ending March 31, 2021, compared to the prior year. 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 months ending March 31, 2021, we added 84 new SaaS clients and 39 existing on-premises clients converted to our SaaS model. Since March 31,
2020, we have added 441 new SaaS clients while 177 existing on-premises clients converted to our SaaS model. Also, transaction-based fees contributed $4.9 million to the increase in subscriptions revenue for the three months ended March 31, 2021, due to the increased volumes of online payments from utility billings.
25
Software services
The following table sets forth a comparison of our software services revenue for the periods presented as of March 31:
Three
Months Ended
Change
2021
2020
$
%
ES
$
42,560
$
44,949
$
(2,389)
(5)
%
A&T
5,080
7,184
(2,104)
(29)
Total
software services revenue
$
47,640
$
52,133
$
(4,493)
(9)
%
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 decreased 9% for the three months ended March 31, 2021, compared to the prior year period. The decline in software services revenue is due to delays in client implementations caused by COVID-19 restrictions, together with a decline in billable travel revenue, as most services are now being delivered virtually rather than on-site.
Maintenance
The following table sets forth a
comparison of our maintenance revenue for the periods presented as of March 31:
Three
Months Ended
Change
2021
2020
$
%
ES
$
109,783
$
104,841
$
4,942
5
%
A&T
9,329
9,524
(195)
(2)
Total
maintenance revenue
$
119,112
$
114,365
$
4,747
4
%
We provide maintenance and support services for our software products and certain
third-party software. Maintenance revenue grew 4% for the three months ended March 31, 2021, compared to the prior year period. Maintenance revenue increased mainly due to contributions of maintenance revenue from recent acquisitions and completion of the recognition of the majority of acquisition-related deferred maintenance revenue that was fair valued at rates below Tyler's average maintenance rate in prior periods. The remainder of the increase is attributed to annual maintenance rate increases and growth in our installed customer base from new software license sales, partially offset by attrition and clients converting from on-premises license arrangements to SaaS.
Appraisal services
The following table sets forth a comparison of our appraisal services revenue for the periods presented as of March 31:
Three
Months Ended
Change
2021
2020
$
%
ES
$
—
$
—
$
—
—
%
A&T
6,465
5,763
702
12
Total
appraisal services revenue
$
6,465
$
5,763
$
702
12
%
Appraisal services revenue for the three months ended March 31,
2021, increased by 12%, compared to the prior year primarily due to the addition of several new revaluation contracts which started during the fourth quarter of 2020, offset somewhat by delays to several ongoing projects as a result of travel and social distancing restrictions related to COVID-19. The appraisal services business is somewhat cyclical and driven in part by statutory revaluation cycles in various states.
26
Cost of Revenues and Gross Margins
The following table sets forth a comparison of the key components of our cost of revenues for the periods presented as of March 31:
Three
Months Ended
Change
2021
2020
$
%
Software licenses and royalties
$
1,236
$
740
$
496
67
%
Acquired
software
7,964
8,027
(63)
(0.8)
Subscriptions, software services and maintenance
134,320
131,779
2,541
2
Appraisal
services
4,617
4,385
232
5
Hardware and other
2,458
2,479
(21)
(1)
Total
cost of revenues
$
150,595
$
147,410
$
3,185
2
%
The following table sets forth a comparison of gross margin percentage by revenue type for the periods
presented as of March 31:
Three Months Ended
2021
2020
Change
Software
licenses, royalties and acquired software
38.4
%
53.2
%
(14.8)
%
Subscriptions, software services and maintenance
50.1
46.9
3.2
Appraisal
services
28.6
23.9
4.7
Hardware and other
41.1
35.1
6.0
Overall
gross margin
48.9
%
46.7
%
2.2
%
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. In the three months ended March 31,
2021, our software licenses, royalties and acquired software gross margin decreased 14.8% compared to the prior year periods due to lower revenue from software licenses.
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 months ended March 31, 2021, increased 3.2% from the comparable prior year period. Margins have increased primarily due to a reduction in software services revenues from reimbursable travel that has little to no margin, as well
as improved utilization of our professional services staff resulting from the shift to virtual delivery of most implementation services. Our implementation and support staff has grown by 25 employees since March 31, 2020, as we accelerated hiring to ensure that we are well-positioned to deliver our current backlog and anticipated new business. Costs related to maintenance and various other services such as SaaS and e-filing typically grow at a slower rate than related revenue due to leverage in the utilization of support and maintenance staff and economies of scale.
Appraisal services. Appraisal services revenue was approximately 2.2% of total revenue for the three months ended March 31, 2021. The appraisal services gross margin for the three months ended March 31,
2021, increased 4.7% compared to the same period in 2020. 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.
27
For the three months ended March 31, 2021, our overall gross margin increased 2.2% compared to the prior year period. The increase in overall margin is attributed to a higher revenue mix for subscription revenues compared to the prior year periods resulting in an increase in incremental margin related to software services, maintenance and subscriptions. Margins have also increased due a reduction in software services
revenue from reimbursable travel that that has little to no margin, as well as improved utilization of our professional services staff resulting from the shift to virtual delivery of most implementation services. Costs related to maintenance and various other services such as SaaS and e-filing typically grow at a slower rate than related revenue due to leveraging utilization of support and maintenance staff and economies of scale. The increase in overall gross margin is partially offset by lower margins from software licenses due to lower software license revenue.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses consist primarily of salaries, employee benefits, travel, share-based compensation expense, commissions and related overhead costs for administrative and sales and marketing employees, as well as professional fees,
trade show activities, advertising costs and other marketing related costs.
The following table sets forth a comparison of our SG&A expenses for the periods presented as of March 31:
Three
Months Ended
Change
2021
2020
$
%
Selling, general and administrative expenses
$
78,774
$
67,485
$
11,289
17
%
SG&A
as a percentage of revenues was 26.7% for the three months ended March 31, 2021, compared to 24.4% for the three months ended March 31, 2020. The increase in SG&A expense for the three months ending March 31, 2021, is attributed to higher stock compensation expense, increased staff levels and other administrative expenses compared to prior periods. For the three months ended March 31, 2021, stock compensation expense rose $7.7 million compared to the same period in 2020, primarily due to an increase in share-based awards issued in connection with our stock compensation plan coupled with the higher fair value of each share-based award due to the increase in our stock price. We have added 24 SG&A employees mainly to our sales and finance teams, since March
31, 2020. For the three months ended March 31, 2021, SG&A expense includes $3.2 million related to an accrual for litigation and $813,000 of transaction costs related the NIC acquisition. These increases in SG&A were partially offset by lower travel expenses associated with sales and marketing activities, including trade shows, as a result of COVID-19 travel restrictions.
Research and Development Expense
The following table sets forth a comparison of our research and development expense for the periods presented as of March 31:
Three
Months Ended
Change
2021
2020
$
%
Research and development expense
$
21,813
$
22,361
$
(548)
(2)
%
Research
and development expense consists mainly of costs associated with development of new products and technologies from which we do not currently generate significant revenue.
Research and development expense in the three months ended March 31, 2021, decreased 2% compared to the prior period mainly due to a shift of some development resources to certain projects which meet the criteria for capitalization, as well as lower investments needed related to recently acquired businesses.
Amortization of Other Intangibles
Acquisition intangibles are comprised of the excess of the purchase price over the fair value of net tangible assets acquired that is allocated to acquired software and customer and trade name intangibles. The remaining excess purchase price is allocated to goodwill that is not subject
to amortization. Amortization expense related to acquired software is included with cost of revenues while amortization expense of customer and trade name intangibles is recorded as operating expense. For the three months ended March 31, 2021, amortization expense was relatively flat compared to prior period due to no new acquisitions in fiscal year 2020.
28
The following table sets forth a comparison of amortization of customer and trade name intangibles for the periods presented as of March 31:
Three
Months Ended
Change
2021
2020
$
%
Amortization of other intangibles
$
5,412
$
5,392
$
20
—
%
Other
Income, Net
The following table sets forth a comparison of our other income, net, for the periods presented as of March 31:
Three
Months Ended
Change
2021
2020
$
%
Other income, net
$
88
$
990
$
(902)
(91)
Other
income, net, is comprised of interest income from invested cash, net of interest expense and non-usage and other fees associated with our revolving credit agreement and Convertible Senior Notes. The decrease in other income, net, in the three months ended March 31, 2021, compared to the prior period is attributable to the significant decrease in interest rates on cash balances since March 2020, partially offset by higher levels of invested cash. Also contributing to the decrease in other income is interest related to the Convertible Senior Notes.
Income Tax Provision
The following table sets forth a comparison of our income tax provision for the periods presented as of March 31:
Three
Months Ended
Change
2021
2020
$
%
Income tax provision (benefit)
$
1,320
$
(12,667)
$
13,987
NM
Effective
income tax rate
3.4
%
(36.3)
%
The change in effective tax rate for the three months ended March 31, 2021, as compared to the same period in 2020, was principally driven by the change in the excess tax benefits related
to stock incentive awards. The effective income tax rates for the three months ended March 31, 2021 and 2020, were different from the statutory United States federal income tax rate of 21% due to excess tax benefits related to stock incentive awards and the tax benefit of research tax credits offset by state income taxes and non-deductible business expenses. The excess tax benefits related to stock incentive awards realized were $8.8 million for the three months ended March 31, 2021, compared to $22.1 million for the three months ended March 31, 2020. Excluding the excess tax benefits, the effective tax rate was 26.4% for the three months ended March 31, 2021, compared to 27.0% for the three months ended March 31,
2020.
FINANCIAL CONDITION AND LIQUIDITY
As of March 31, 2021, we had cash and cash equivalents of $1.3 billion compared to $603.6 million at December 31, 2020. We also had $171.9 million invested in investment grade corporate and municipal bonds as of March 31, 2021. These investments have varying maturity dates through 2026, and we intend to hold these investments until maturity. As of March 31, 2021, we believe our cash from operating activities, revolving line of credit, 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 three months ended March 31:
Net cash provided by operating activities continues to be our primary source of funds to finance operating needs and capital expenditures. Other potential capital resources include cash on hand, public and private issuances of debt or equity securities, and bank borrowings. It is possible that our ability to access the capital and credit markets
in the future may be limited by economic conditions or other factors. We believe that cash provided by operating activities, cash on hand and available credit are sufficient to fund our working capital requirements, capital expenditures, income tax obligations, debt servicing obligations, and share repurchases for at least the next twelve months.
For the three months ended March 31, 2021, operating activities provided cash of $71.7 million. Operating activities that provided cash were primarily comprised of net income of $37.0 million, non-cash depreciation and amortization charges of $21.1 million, non-cash share-based compensation
expense of $25.7 million and a non-cash decrease in operating lease right-of-use assets of $1.5 million. Working capital, excluding cash, increased approximately $13.6 million mainly due to decline in deferred revenue balances, timing of bonus payments, decreases in operating lease liabilities and deferred taxes associated with stock option activity during the period. These increases were offset by the collections of annual maintenance renewals and subscription renewal billings that are billed in the fourth quarter. 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.
Our days sales outstanding (“DSO”) was 101 days at March 31,
2021, compared to 121 days at December 31, 2020, and 104 days at March 31, 2020. The decrease in DSO compared to December 31, 2020, is due to collections from 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.
Investing activities used cash of $39.7 million in the three months ending March 31, 2021. On March 31, 2021, we completed two acquisitions with the total purchase price of $12.2 million, net of cash acquired,
including $12.0 million paid in cash and accrued working capital holdbacks of $161,000. Approximately $6.6 million was invested in property and equipment, including $2.7 million related to real estate. 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. In addition, approximately $3.5 million of software development costs were capitalized.
Financing activities provided cash of $615.1 million in the three months ended March 31, 2021, and were primarily comprised of proceeds from issuance of Convertible Senior Notes. On March 9, 2021, we issued $600 million aggregate principal amount of Convertible Senior Notes. The net proceeds from the issuance of the Convertible Senior Notes were
$591.4 million, net of initial purchasers’ discounts of $6.0 million paid and debt issuance costs of $2.6 million accrued as of March 31, 2021. The remainder of the financing activities were attributed to stock option exercises and employee stock purchase plan activity.
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 March 31, 2021, we have authorization from our board of directors to repurchase up to 2.5 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 $59,000 and $176,000 in the three months ended March 31, 2021, and 2020, respectively.
On September 30, 2019, we entered into a $400 million credit agreement with various lender parties and Wells Fargo Bank,
National Association, as Administrative Agent (the “Credit Facility”). The Credit Facility provides for a revolving credit line up to $400 million, including a $25 million sublimit for letters of credit. The Credit Facility matures on September 30, 2024.
See Note 7, Debt to the Condensed Consolidated Financial Statements for discussions of the Convertible Senior Notes.
30
On April 21, 2021, the Company consummated the acquisition of NIC contemplated by the Agreement and Plan
of Merger dated February 9, 2021. In connection with the completion of the acquisition and on the Closing Date, the Company, as borrower, entered into a new $1.4 billion Credit Agreement with the various lenders consisting of a unsecured revolving credit facility of up to $500 million and aggregate unsecured term loans totaling $900 million. On the Closing date, the Company paid approximately $2.3 billion in cash for the purchase of NIC. The Term Loans of $900 million and a portion of the proceeds of the Revolving Credit Facility, in the amount of $250 million, together with cash available to the Company of $609 million and the proceeds of its Convertible Senior Notes
of $594 million, were used to complete the Merger, and pay fees and expenses in connection with the Merger and the New Credit Agreement. For more information on the acquisition of NIC and the New Credit Agreement, see Note 16 Subsequent Events.
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 2021 capital spending will be between $39 million and $40 million, including approximately $3 million related to real estate and approximately $17 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 2028.
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 March 31,
2021, we had no outstanding borrowings under our Credit Facility and available borrowing capacity under the Credit Agreement was $400 million.
Borrowings under the Credit Facility bear interest at a rate of either (1) Wells Fargo Bank’s prime rate (subject to certain higher rate determinations) plus a margin of 0.125% to 0.75% or (2) the one-, two-, three-, or six-month LIBOR rate plus a margin of 1.125% to 1.75%.
As of March 31, 2021, our interest rate was 3.38% under the Wells Fargo Bank prime rate and approximately 1.24% under the 30-day LIBOR option.
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 March 31, 2021.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the three months ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
31
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 2020 Annual Report on Form 10-K. We believe those risk factors are the most relevant to our business and could cause our results to differ materially from the forward-looking statements made by us. Please note, however, that those are not the only risk factors facing us. Additional risks that we do not consider
material, or of which we are not currently aware, may also have an adverse impact on us. Our business, financial condition and results of operations could be seriously harmed if any of these risks or uncertainties actually occurs or materializes. In that event, the market price for our common stock could decline, and our shareholders may lose all or part of their investment. During the three months ended March 31, 2021, except for the risk factors described below, 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, 2020.
Risks Related to Our Indebtedness
Servicing our indebtedness requires a significant amount of cash. We may not have sufficient cash flow from our business to pay our indebtedness,
and we may not otherwise have the ability to raise the funds necessary to settle for cash conversions of the Convertible Senior Notes or to repurchase the Convertible Senior Notes upon a fundamental change, or to repay our indebtedness obligations under our New Credit Agreement (defined below), each of which could adversely affect our business and results of operations.
As of March 31, 2021, we had outstanding an aggregate principal amount of $600 million of our Convertible Senior Notes. On April 21, 2021, we entered into a new Credit Agreement (the “New Credit Agreement”) with significantly increased borrowing capacity of up to $1.4 billion and on the closing date of April 21, 2021, we borrowed initial loans in the aggregate principal amount of $1.15 billion. Our New
Credit Agreement also has an option to increase the amount available up to an additional $435 million, subject to our leverage and other factors. The proceeds from the Convertible Senior Notes and loans under the New Credit Agreement were used as sources of funding for the purchase of NIC. Our indebtedness may increase our vulnerability to any generally adverse economic and industry conditions, and we and our subsidiaries may, subject to the limitations in the terms of our existing and future indebtedness, incur additional debt, secure existing or future debt or recapitalize our debt. If we incur additional indebtedness, the risks related to our business would increase and our ability to service or repay our indebtedness may be adversely impacted.
Pursuant to their terms, holders may convert their Convertible Senior Notes at their option
prior to the scheduled maturities of their Convertible Senior Notes under certain circumstances. Upon conversion of the Convertible Senior Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be obligated to make cash payments. In addition, holders of our Convertible Senior Notes will have the right to require us to repurchase their Convertible Senior Notes upon the occurrence of a fundamental change (as defined in the Indenture, dated as of March 9, 2021, between the Company and U.S. Bank National Association, as trustee (the “Trustee”) (the “Indenture”),
at a repurchase price equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased, plus accrued and unpaid interest, if any. Although it is our intention, and we currently expect to have the ability, to settle the Convertible Senior Notes in cash, there is a risk that we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Convertible Senior Notes surrendered or Convertible Senior Notes being converted. In addition, our ability to make payments may be limited by law, by regulatory authority, or by agreements governing our future indebtedness. Our failure to repurchase Convertible Senior Notes at a time when the repurchase is required by the Indenture or to pay any cash payable on future conversions of the Convertible Senior Notes as required by the Indenture
would constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our other existing or future indebtedness. If the repayment of other indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the other indebtedness and repurchase the Convertible Senior Notes or make cash payments upon conversions thereof.
32
Our ability to make scheduled payments of the principal and interest on our indebtedness when due or to make payments upon conversion
or repurchase demands with respect to our Convertible Senior Notes, or to refinance our indebtedness as we may need or desire, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to satisfy our obligations under our existing indebtedness, and any future indebtedness we may incur, and to make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance existing or future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these
activities on desirable terms, which could result in a default on our existing or future indebtedness and have a material adverse effect on our business, results of operations, and financial condition.
Covenant restrictions under the Company’s indebtedness may limit our ability to operate our business and may adversely affect our financial condition, results of operations, and earnings per share.
The Indenture governing the Notes and the New Credit Agreement do, and our future indebtedness agreements may, contain covenants that may restrict the Company’s ability to finance future operations or capital needs or to engage in other
business activities. Subject to customary carve-outs, thresholds and baskets, the New Credit Agreement (and the Indenture by means of a cross-default) restricts, absent consent of the agent and lenders under the New Credit Agreement, our ability and the ability of our restricted subsidiaries to, among other things:
• Incur additional indebtedness,
• Permit liens on our assets,
• Make certain investments, acquisitions and dispositions,
• Make certain specified fundamental changes, and
• Make certain restricted payments.
In
addition, the New Credit Agreement (and the Indenture by means of a cross-default) contains other customary affirmative and negative covenants, and events of default. The New Credit Agreement is unsecured but requires us to maintain certain financial ratios regarding our total leverage and interest coverage and other financial conditions in addition to the restrictions described above. Events beyond the Company’s control, including changes in general economic and business conditions, may result in a breach of any of these covenants and result in a default under the New Credit Agreement that may, in turn, result in a default under the Indenture. If an event of default under the New Credit Agreement occurs, the
lenders could terminate all commitments to lend and elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If the Company was unable to pay such amounts, the lenders could proceed against the guarantees by our direct and indirect material domestic subsidiaries. Should the lenders proceed against the guarantees, we cannot give assurance that we would have sufficient assets to pay amounts due on the New Credit Agreement and the Convertible Senior Notes.
Variable rate indebtedness subjects the Company to interest rate risk, which could cause our debt service obligations to increase significantly.
Our
borrowings under the New Credit Agreement are, and are expected to continue to be, at variable rates of interest and expose the Company to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease. Revolving credit facility loans and Term A-1 Loans under the New Credit Agreement bear interest at a per annum rate equal to, at our option, 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%. Our Term A-2 Loans bear interest, our option, at a per annum rate of either (1) the Base Rate plus
a margin of 0.00% to 0.50% or (2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 0.875% to 1.50%. The margin in each case is based upon our total net leverage ratio, as determined pursuant to the New Credit Agreement. Based upon initial borrowings under the New Credit Agreement on the closing date in the aggregate principal amount of $1.15 billion, each quarter point change in interest rates would result in a $2.9 million change in annual interest expense under the New Credit Agreement.
33
The conditional conversion feature of the Convertible Senior Notes, if triggered, may adversely affect our financial condition and results of operations.
In the event the conditional
conversion feature of the notes is triggered, holders of our Convertible Senior Notes will be entitled to convert the Convertible Senior Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Senior Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Convertible Senior Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
Transactions relating
to our Convertible Senior Notes may affect the value of our common stock.
Our Convertible Senior Notes may become convertible in the future at the option of their holders under certain circumstances. If holders of our Convertible Senior Notes elect to convert their notes, we may settle our conversion obligation by delivering to them a significant number of shares of our common stock, which would cause dilution to our existing shareholders.
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).
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.
