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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
Commission File Number 1-10485
TYLER TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2303920
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. employer
identification no.)
5101 TENNYSON PARKWAYPLANOTexas75024
 (Address of principal executive offices)(City)(State)(Zip code)
(972) 713-3700
(Registrant’s telephone number, including area code)
Title of each classTrading symbol
Name of each exchange
on which registered
COMMON STOCK, $0.01 PAR VALUETYLNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes       No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer," "accelerated filer,” "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer   Accelerated filer 
    
Non-accelerated filer   Smaller reporting company 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes       No  
The number of shares of common stock of registrant outstanding on October 29, 2021 was 40,976,329.




PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Revenues:    
Software licenses and royalties$22,673 $19,937 $55,210 $55,699 
Subscriptions252,942 89,290 554,979 256,651 
Software services54,624 47,946 155,601 143,733 
Maintenance117,833 117,979 356,566 349,104 
Appraisal services7,146 5,394 19,876 15,853 
Hardware and other4,655 5,200 16,518 12,338 
Total revenues459,873 285,746 1,158,750 833,378 
Cost of revenues:    
Software licenses and royalties1,547 1,177 4,151 3,047 
Acquired software12,896 7,965 32,683 23,998 
Subscriptions, software services and maintenance241,944 125,881 576,035 381,947 
Appraisal services4,506 3,434 13,552 11,795 
Hardware and other2,764 3,780 9,845 8,748 
Total cost of revenues263,657 142,237 636,266 429,535 
Gross profit196,216 143,509 522,484 403,843 
Selling, general and administrative expenses101,847 66,819 289,543 196,825 
Research and development expense24,002 21,642 69,243 65,952 
Amortization of other intangibles14,183 5,392 31,015 16,176 
Operating income56,184 49,656 132,683 124,890 
Interest expense(5,396)(254)(18,311)(757)
Other income, net445 534 1,249 2,497 
Income before income taxes51,233 49,936 115,621 126,630 
Income tax provision (benefit)7,063 10,652 8,945 (14,096)
Net income$44,170 $39,284 $106,676 $140,726 
Earnings per common share:    
Basic$1.08 $0.98 $2.61 $3.52 
Diluted$1.04 $0.94 $2.53 $3.39 
See accompanying notes.
2


TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
September 30, 2021 (unaudited)December 31, 2020
ASSETS  
Current assets:  
Cash and cash equivalents$234,128 $603,623 
Accounts receivable (less allowance for losses and sales adjustments of $10,575 in 2021 and $9,255 in 2020)
538,119 382,319 
Short-term investments49,355 72,187 
Prepaid expenses47,546 30,864 
Income tax receivable3,509 21,598 
Other current assets5,599 2,479 
Total current assets878,256 1,113,070 
Accounts receivable, long-term14,917 21,417 
Operating lease right-of-use assets40,449 18,734 
Property and equipment, net176,745 168,004 
Other assets:  
Software development costs, net22,570 9,121 
Goodwill2,355,144 838,428 
Other intangibles, net1,086,457 322,068 
Non-current investments64,916 82,640 
Other non-current assets43,484 33,792 
Total assets$4,682,938 $2,607,274 
LIABILITIES AND SHAREHOLDERS' EQUITY  
Current liabilities:  
Accounts payable$100,569 $14,011 
Accrued liabilities180,281 83,084 
Operating lease liabilities10,125 5,904 
Deferred revenue495,250 461,278 
Current portion of term loans30,000  
Total current liabilities816,225 564,277 
Revolving credit facility  
Term loans805,535  
Convertible senior notes due 2026, net 592,335  
Deferred revenue, long-term53 100 
Deferred income taxes227,537 40,507 
Operating lease liabilities, long-term37,348 16,279 
Other long-term liabilities3,132  
Total liabilities2,482,165 621,163 
Commitments and contingencies  
Shareholders' equity:  
Preferred stock, $10.00 par value; 1,000,000 shares authorized; none issued
  
Common stock, $0.01 par value; 100,000,000 shares authorized; 48,147,969 shares issued and outstanding as of September 30, 2021 and December 31, 2020
481 481 
Additional paid-in capital1,010,212 905,332 
Accumulated other comprehensive loss, net of tax(46)(46)
Retained earnings1,218,832 1,112,156 
Treasury stock, at cost; 7,197,156 and 7,608,627 shares in 2021 and 2020, respectively
(28,706)(31,812)
Total shareholders' equity2,200,773 1,986,111 
Total liabilities and shareholders' equity$4,682,938 $2,607,274 
See accompanying notes.
3


TYLER TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)(Unaudited)
 Nine Months Ended September 30,
 20212020
Cash flows from operating activities:  
Net income$106,676 $140,726 
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization97,864 60,746 
Share-based compensation expense80,360 54,112 
Operating lease right-of-use assets expense7,016 4,233 
Deferred income tax benefit(15,681)(2,458)
  Changes in operating assets and liabilities, exclusive of effects of
   acquired companies:
Accounts receivable2,403 9,394 
Income tax receivable24,171 (14,270)
Prepaid expenses and other current assets(10,456)(7,333)
Accounts payable(64,383)(3,904)
Operating lease liabilities(3,904)(5,121)
Accrued liabilities4,817 6,276 
Deferred revenue29,609 23,927 
Increase in other long-term liabilities(1,749) 
Net cash provided by operating activities256,743 266,328 
Cash flows from investing activities:  
Additions to property and equipment(20,770)(19,064)
Purchase of marketable security investments(75,684)(111,329)
Proceeds from marketable security investments114,563 61,794 
Purchase of investment in common shares (10,000)
Proceeds from the sale of investment in preferred shares 15,000 
Investment in software(14,966)(4,316)
Cost of acquisitions, net of cash acquired(2,088,394)(261)
Other463 13 
Net cash used by investing activities(2,084,788)(68,163)
Cash flows from financing activities:  
Net borrowings on revolving credit facility  
Payment on term loans(57,500) 
Proceeds from term loans900,000  
Proceeds from issuance of convertible senior notes600,000  
Payment of debt issuance costs (27,165) 
Purchase of treasury shares(12,975)(15,484)
Payment of contingent consideration (5,619)
Proceeds from exercise of stock options46,433 100,732 
Contributions from employee stock purchase plan9,757 8,209 
Net cash provided by financing activities1,458,550 87,838 
Net (decrease) increase in cash and cash equivalents(369,495)286,003 
Cash and cash equivalents at beginning of period603,623 232,682 
Cash and cash equivalents at end of period$234,128 $518,685 
See accompanying notes.
4



TYLER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Common StockAdditional
Paid-in
Capital
Accumulated Other
Comprehensive
Income (Loss)
Retained
Earnings
Treasury StockTotal
Shareholders'
Equity
 SharesAmountSharesAmount
Balance at June 30, 202148,148 $481 $962,557 $(46)$1,174,662 (7,315)$(29,663)$2,107,991 
Net income— — — — 44,170 — — 44,170 
Exercise of stock options and vesting of restricted stock units— — 14,712 — — 112 2,333 17,045 
Employee taxes paid for withheld shares upon equity award settlement— — — — — (3)(1,451)(1,451)
Stock compensation— — 29,461 — — — — 29,461 
Issuance of shares pursuant to employee stock purchase plan— — 3,482 — — 9 75 3,557 
Treasury stock purchases— — — — — —   
Purchase consideration for conversion of unvested restricted stock— —  — — — —  
Balance at September 30, 202148,148 $481 $1,010,212 $(46)$1,218,832 (7,197)$(28,706)$2,200,773 

Common StockAdditional
Paid-in
Capital
Accumulated Other
Comprehensive
Income (Loss)
Retained
Earnings
Treasury StockTotal
Shareholders'
Equity
 SharesAmountSharesAmount
Balance at June 30, 202048,148 $481 $843,998 $(46)$1,018,778 (7,917)$(33,883)$1,829,328 
Net income— — — — 39,284 — — 39,284 
Exercise of stock options and vesting of restricted stock units— — 7,578 — — 75 817 8,395 
Employee taxes paid for withheld shares upon equity award settlement— — — — — (1)(316)(316)
Stock compensation— — 18,424 — — — — 18,424 
Issuance of shares pursuant to employee stock purchase plan— — 2,963 — — 11 69 3,032 
Treasury stock purchases— — — — — — (2)(2)
Balance at September 30, 202048,148 $481 $872,963 $(46)$1,058,062 (7,832)$(33,315)$1,898,145 







5




TYLER TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Common StockAdditional
Paid-in
Capital
Accumulated Other
Comprehensive
Income (Loss)
Retained
Earnings
Treasury StockTotal
Shareholders'
Equity
 SharesAmountSharesAmount
Balance at December 31, 2020 48,148 $481 $905,332 $(46)$1,112,156 (7,609)$(31,812)$1,986,111 
Net income— — — — 106,676 — — 106,676 
Exercise of stock options and vesting of restricted stock units— — 13,089 — — 458 33,344 46,433 
Employee taxes paid for withheld shares for taxes upon equity award settlement— — — — — (40)(17,461)(17,461)
Stock compensation— — 80,360 — — — — 80,360 
Issuance of shares pursuant to employee stock purchase plan— — 9,559 — — 26 198 9,757 
Treasury stock purchases— — — — — (32)(12,975)(12,975)
Purchase consideration for conversion of unvested restricted stock awards— — 1,872 — — — — 1,872 
Balance at September 30, 202148,148 $481 $1,010,212 $(46)$1,218,832 (7,197)$(28,706)$2,200,773 
Common StockAdditional
Paid-in
Capital
Accumulated Other
Comprehensive
Income (Loss)
Retained
Earnings
Treasury StockTotal
Shareholders'
Equity
 SharesAmountSharesAmount
Balance at December 31, 2019 48,148 $481 $739,478 $(46)$917,336 (8,839)$(40,191)$1,617,058 
Net income— — — — 140,726 — — 140,726 
Exercise of stock options and vesting of restricted stock units— — 74,162 — — 1,055 26,570 100,732 
Employee taxes paid for withheld shares for taxes upon equity award settlement— — — — — (20)(7,208)(7,208)
Stock compensation— — 54,112 — — — — 54,112 
Issuance of shares pursuant to employee stock purchase plan— — 5,211 — — 31 2,998 8,209 
Treasury stock purchases— — — — — (59)(15,484)(15,484)
Balance at September 30, 202048,148 $481 $872,963 $(46)$1,058,062 (7,832)$(33,315)$1,898,145 

6


Tyler Technologies, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Tables in thousands, except per share data)

(1)    Basis of Presentation
We prepared the accompanying condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States, or GAAP, for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted for interim periods. Balance sheet amounts are as of September 30, 2021, and December 31, 2020, and operating result amounts are for the three and nine months ended September 30, 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 and nine months ended September 30, 2021, and 2020.
On April 21, 2021, the Company acquired NIC, Inc. (“NIC”) as contemplated by the Agreement and Plan of Merger dated February 9, 2021. The results of NIC are include in condensed consolidated financial statements since the date of acquisition. See Note 3, Acquisitions for further information.
(2)    Accounting 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 nine months ended September 30, 2021, excluding the impact of 2021 acquisitions, 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 in part attributed to slower sales cycles as some government procurement processes have been delayed and contract signings have been pushed to future periods. Software services revenues have been affected by a decline in billable travel revenue, as most services are now being delivered virtually rather than on-site. 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, software services and appraisal services revenues are increasing. Also, we have adapted 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.
7


For the three and nine months ended September 30, 2021, total revenues include subscriptions revenue and software services revenues of $43.3 million and $58.4 million, respectively, from NIC's TourHealth and pandemic unemployment services offerings. We currently expect these COVID-related revenues to decrease significantly in the fourth quarter of 2021 and wind down in the first half of 2022.
Recurring revenues from subscriptions and maintenance comprised 79% of our total consolidated revenue for the nine months ended September 30, 2021, and include transaction-based revenue streams such as e-filing, online payments, and digital government services. 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. As of September 30, 2021, we had $348.4 million in cash and investments and $842.5 million of principal outstanding borrowings under our 2021 Credit Agreement executed on April 21, 2021. As of September 30, 2021, we had available borrowing capacity of $500 million under our 2021 Credit Agreement.
We have recorded no impairment to goodwill or other assets as of the balance sheet date. Due to significant uncertainty surrounding the pandemic and market conditions, management’s judgment regarding this could change in the future.
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.
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 and services. We determine revenue recognition through the following steps:
Identification of the contract, or contracts with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
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.
8


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.
For e-filing transaction fees and transaction-based revenues from digital government services and online payments, we have the right to charge the customer an amount that directly corresponds with the value to the customer of our performance to date. Therefore, we recognize revenue for these services over time based on the amount billable to the customer in accordance with the 'as invoiced' practical expedient in ASC 606-10-55-18. In some cases, we are paid on a fixed fee basis and recognize the revenue ratably over the contractual period. Typically, the structure of our arrangements does not give rise to variable consideration. However, in those instances whereby variable consideration exists, we include in our estimates, additional revenue for variable consideration when we believe we have an enforceable right, the amount can be estimated reliably and its realization is probable.
Refer to Note 13 - “Disaggregation of Revenue” for further information, including the economic factors that affect the nature, amount, timing, and uncertainty of revenue and cash flows of our various revenue categories.
Contract Balances:
Accounts receivable and allowance for 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 invoicing occurs prior to recognizing revenue. 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 September 30, 2021, and December 31, 2020, total current and long-term accounts receivable, net of allowance for losses and sales adjustments, was $553.0 million and $403.7 million, respectively. We have recorded unbilled receivables of $147.4 million and $140.8 million at September 30, 2021 and December 31, 2020, respectively. Included in unbilled receivables are retention receivables of $8.2 million and $13.1 million at September 30, 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.
9


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 $10.6 million and $9.3 million at September 30, 2021, and December 31, 2020, respectively, 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 rarely experience credit losses with our clients, we have not recorded a material reserve for credit losses.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
We assess goodwill for impairment annually, or more frequently whenever events or changes in circumstances indicate its carrying value may not be recoverable. We begin with the qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying value before applying the quantitative assessment described below. 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 (Level 3 inputs). The assumptions that are used are based upon what we believe a hypothetical marketplace participant would use in estimating fair value. We 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.
We have historically evaluated goodwill for impairment annually as of April 1, or more frequently if impairment indicators arose. During the second quarter 2021, we voluntarily changed the date of our annual assessment of goodwill to October 1 for all reporting units. The change in testing date for goodwill impairment is a change in accounting principle, which management believes is preferable as the new date of the assessment better aligns with our annual planning process. The change in the assessment date does not delay or avoid a potential impairment charge nor does it change our requirement to assess goodwill on an interim date between scheduled annual testing dates if triggering events are present. To ensure that no lapse in an assessment occurred since the prior period, we performed qualitative assessments for all reporting units except for the data and insights and platform technologies reporting units. As a result of these qualitative assessments, we determined that it was not more likely that an impairment existed; therefore, we did not perform Step 1 quantitative impairment test. We did perform a quantitative assessment for goodwill of $75.6 million and $78.3 million associated with our data and insights reporting unit and platform technologies units, respectively. 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 data and insights and platform technologies units, goodwill entirely relates to recently acquired businesses and as a result those units do not have significant excess fair values over carrying values. As a result of our interim qualitative and quantitative assessments, we concluded no impairment existed as of second quarter 2021. Since our assessment, we had no triggering events as of September 30, 2021.
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.
10


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)    Acquisitions
On September 9, 2021, we acquired all the equity interest of Ultimate Information Systems, Inc. (dba Arx). Arx is a cloud-based platform which creates accessible technology to enable a modern-day police force that is fully transparent, accountable, and a trusted resource to the community it serves. The total purchase price, net of cash acquired, was approximately $12.8 million, of which $12.4 million was paid in cash and approximately $0.5 million was accrued for indemnity holdbacks, subject to certain post-closing adjustments.
On September 1, 2021, we acquired VendEngine, Inc. (VendEngine) as contemplated by the Agreement and Plan of Merger dated June 3, 2021. As result of the merger, VendEngine became a direct subsidiary of the Company. VendEngine is a cloud-based software provider focused on financial technology for the corrections market. The total purchase price, net of cash acquired of $3.0 million, was approximately $83.1 million, consisting of $80.2 million paid in cash, and approximately $5.9 million related to indemnity holdbacks, subject to certain post-closing adjustments.
In connection with this transaction, we acquired total tangible assets of $6.6 million and assumed liabilities of approximately $4.3 million. We recorded goodwill of approximately $58.7 million, none of which is expected to be deductible for tax purposes, and other identifiable intangible assets of approximately $32.0 million. The $32.0 million of intangible assets are attributable to customer relationships, acquired software, trade name and will be amortized over a weighted average period of approximately 17 years. We recorded net deferred tax liabilities of $7.5 million related to the tax effect of our estimated fair value allocations.
VendEngine provides a suite of financial and communications applications ranging from deposit technologies for commissary, ordering, and warehouse technology to a host of informational, electronic communications, security, accounting, and financial trust management components for more than 300 correctional facilities across 32 states and the Caribbean. Therefore, the goodwill of approximately $58.7 million arising from this acquisition is primarily attributed to our ability to generate increased revenues, earnings and cash flow by expanding our addressable market and client base.
On April 21, 2021 (the “Closing Date”), we acquired NIC as contemplated by the Agreement and Plan of Merger dated February 9, 2021. As result of the merger, NIC became a direct subsidiary of the Company and NIC’s subsidiaries became indirect subsidiaries. NIC is a leading digital government solutions and payment company that primarily serves federal and state government agencies. The total purchase price, net of cash acquired of $331.8 million, was approximately $2.0 billion, consisting of cash paid of $2.3 billion and $1.9 million of purchase consideration related to the conversion of unvested restricted stock awards.
11


We have performed a preliminary valuation analysis of the fair market value of NIC’s assets and liabilities. The following table summarizes the preliminary allocation of the purchase price as of the acquisition date:
(In thousands)
Cash$331,783 
Accounts receivable149,515 
Other current assets12,988 
Other noncurrent assets20,974 
Identifiable intangible assets790,000 
Goodwill1,438,603 
Accounts payable(150,099)
Accrued expenses(63,809)
Other noncurrent liabilities(11,493)
Deferred revenue(3,294)
Deferred tax liabilities, net(194,676)
Total consideration$2,320,492 
In connection with this transaction, we acquired total tangible assets of $515.3 million and assumed liabilities of approximately $228.7 million. We recorded goodwill of approximately $1.4 billion, none of which is expected to be deductible for tax purposes, and other identifiable intangible assets of approximately $790.0 million. The $790.0 million of intangible assets are attributable to customer relationships, acquired software and trade name and will be amortized over a weighted average period of approximately 17 years. We recorded net deferred tax liabilities of $194.7 million related to the tax effect of our estimated fair value allocations. In the nine months ended September 30, 2021, we recorded adjustments to the preliminary opening balance sheet attributed to a decrease to accounts receivable and increases in identifiable intangible assets, deferred revenue and related deferred taxes resulting in a net decrease to goodwill of approximately $25.5 million.
NIC delivers user-friendly digital services that make it easier and more efficient for citizens and businesses to interact with government - providing valuable conveniences like applying for unemployment insurance, submitting business filings, renewing licenses, accessing information and making secure payments without visiting a government office. In addition, NIC has extensive expertise and scale in the government payments arena which will accelerate our strategic payments initiatives. Therefore, the goodwill of approximately $1.4 billion arising from this acquisition is primarily attributed to our ability to generate increased revenues, earnings and cash flow by expanding our addressable market and client base.
The following unaudited pro forma consolidated operating results information has been prepared as if the acquisition of NIC had occurred on January 1, 2020, after giving effect to certain adjustments, including amortization of intangibles, interest, transaction costs, and tax effects.
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Revenues$459,873 $420,336 $1,322,055 $1,152,675 
Net income$44,170 $50,257 $103,330 $130,555 
Basic earnings per share$1.08 $1.25 $2.53 $3.26 
Diluted earnings per share$1.04 $1.21 $2.45 $3.15 
The pro forma information above does not include acquisitions that are not considered material to our results of operations. The pro forma information does not purport to represent what our results of operations actually would have been had such transaction occurred on the date specified or to project our results of operations for any future period.
On 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 cash price was approximately $6.2 million, net of cash acquired.
On March 31, 2021, we acquired substantially all assets of DataSpec, Inc. (DataSpec), a provider of a SaaS solution that allows for secure electronic claims submission to the federal Department of Veterans Affairs and reporting capabilities, in addition to scheduling, calendaring, and payments. The total cash purchase price was approximately $5.8 million.
12


The operating results of Arx, DataSpec, ReadySub, and VendEngine are included with the operating results of the Enterprise Software segment since their date of acquisition. The impact of the Arx, DataSpec, ReadySub, and VendEngine acquisitions, individually and in the aggregate, on our operating results, assets and liabilities is not material. The operating results of NIC are disclosed separately as a reportable segment. Revenues from NIC included in Tyler's results of operations totaled approximately $249.7 million and net income was approximately $27.2 million from the date of acquisition through September 30, 2021. In 2021, we incurred fees of approximately $22.7 million for financial advisory, legal, accounting, due diligence, valuation and other various services necessary to complete these acquisitions. The Company also incurred $1.6 million of expense related to a separation agreement with NIC's former Chief Executive Officer. These costs were expensed in 2021 and are included in selling, general and administrative expenses in the accompanying condensed consolidated statement of income.
As of September 30, 2021, the purchase price allocations for Arx, DataSpec, NIC, ReadySub and VendEngine are not yet complete; therefore, the preliminary valuation estimates of fair value assumed at the acquisition date for intangible assets, receivables, deferred revenue and related deferred taxes are subject to change as valuations are finalized. Our balance sheet as of September 30, 2021, reflects the allocation of the purchase price to the net assets acquired based on their estimated fair value at the date of each acquisition. The fair value of the assets and liabilities acquired are based on valuations using Level III, unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
(4)     Shareholders’ Equity
The following table details activity in our common stock:
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
SharesAmountSharesAmountSharesAmountSharesAmount
Purchases of treasury shares $  $(2)(32)$(12,975)(59)$(15,484)
Stock option exercises 103 17,045 72 8,395 313 46,433 989 100,732 
Employee stock plan purchases9 3,557 11 3,032 26 9,757 31 8,209 
Restricted stock units vested, net of withheld shares upon award settlement5 $(1,451)2 $(316)104 $(17,461)45 $(7,208)
As of September 30, 2021, we have authorization from our board of directors to repurchase up to 2.4 million additional shares of our common stock.
(5)    Deferred Commissions
Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized commensurate with the recognition of associated revenue over a period of benefit that we have determined to be three to seven years. Deferred commissions were $36.2 million and $32.3 million as of September 30, 2021, and December 31, 2020, respectively. Amortization expense related to deferred commissions was $3.5 million and $9.6 million for the three and nine months ended September 30, 2021, respectively, and $3.0 million and $8.9 million for the three and nine months ended September 30, 2020, respectively. There were no indicators of impairment in relation to the costs capitalized for the periods presented. Deferred commissions have been included with prepaid expenses for the current portion and non-current other assets for the long-term portion in the accompanying condensed consolidated balance sheets. Amortization expense related to deferred commissions is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.
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(6)    Other Assets
As of September 30, 2021, we have $114.3 million in investment grade corporate and municipal bonds with varying maturity dates through 2027. We intend to hold these bonds to maturity and have classified them as such. It is not more likely than not that we will be required to sell these bonds before recovery of their amortized costs. The portfolio consists of fixed income and high credit investments with fair values that approximate costs. 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 September 30, 2021, we have an accrued interest receivable balance of approximately $689,000 which is included in accounts receivable, net. We do not measure an allowance for credit losses for accrued interest receivables. We record any losses within the maturity period of the investment and any write-offs to accrued interest receivables are recorded as a reduction to interest income in the period of the loss. During the three and nine months ended September 30, 2021, we have recorded no 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 $10 million in common stock representing an 18% interest in BFTR, LLC., a wholly owned subsidiary of Bison Capital Partners V L.P. BFTR, LLC, a privately held Australian company specializing in digitizing the spoken word in court and legal proceedings. The investment in common stock is accounted for under the equity method because we do not have the ability to exercise significant influence over the investee; and as the securities do not have readily determinable fair values, our investment is carried at cost less any impairment write-downs. Annually, our equity method investments are assessed for impairment. We do not reassess the fair value of equity method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments. No events or changes 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)    Debt
2021 Credit Agreement
In connection with the completion of the acquisition of NIC on the Closing Date the Company, as borrower, entered into a new $1.4 billion Credit Agreement (the “2021 Credit Agreement”) with the various lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender, and Issuing Lender. The 2021 Credit Agreement provides for (1) a senior unsecured revolving credit facility in an aggregate principal amount of up to $500 million, including sub-facilities for standby letters of credit and swingline loans (the “Revolving Credit Facility”), (2) an amortizing five-year term loan in the aggregate amount of $600 million (the “Term Loan A-1”), and (3) a non-amortizing three-year term loan in the aggregate amount of $300 million (the “Term Loan A-2”) and, together (the “Term Loans”). The 2021 Credit Agreement matures on April 20, 2026, and the loans may be prepaid at any time, without premium or penalty, subject to certain minimum amounts and payment of any LIBOR breakage costs. In addition to the required amortization payments on the Term Loan A-1 of 5% annually, certain mandatory quarterly prepayments of the Term Loans and the Revolving Credit Facility will be required (i) upon the issuance or incurrence of additional debt not otherwise permitted under the 2021 Credit Agreement and (ii) upon the occurrence of certain asset sales and insurance and condemnation recoveries, subject to certain thresholds, baskets, and reinvestment provisions as provided in the 2021 Credit Agreement.
Borrowings under the Revolving Credit Facility and the Term Loan A-1 bear interest, at the Company’s option, at a per annum rate of either (1) the Administrative Agent’s prime commercial lending rate (subject to certain higher rate determinations) (the “Base Rate”) plus a margin of 0.125% to 0.75% or (2) the one-, three-, six-, or, subject to approval by all lenders, twelve-month LIBOR rate plus a margin of 1.125% to 1.75%. The Term Loan A-2 bears interest, at the Company’s option, at a per annum rate of either (1) the Base Rate plus a margin of 0% to 0.5% or (2) the one-, three-, or 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 the Company’s total net leverage ratio, as determined pursuant to the 2021 Credit Agreement. The 2021 Credit Agreement has customary benchmark replacement language with respect to the replacement of LIBOR once LIBOR becomes unavailable. In addition to paying interest on the outstanding principal of loans under the Revolving Credit Facility, the Company is required to pay a commitment fee on the average daily unused portion of the Revolving Credit Facility, initially 0.25% per annum, ranging from 0.15% to 0.30% based upon the Company’s total net leverage ratio.
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The net proceeds from the borrowings under the 2021 Credit Agreement were $1.1 billion, net of debt discounts of $7.2 million and debt issuance costs of $4.9 million and $