Business Context and Reporting Period
Company: Agilysys, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2006 (Fiscal Third Quarter)
Business Overview: Agilysys operates as a distributor and reseller of enterprise computer technology solutions through two primary segments: the KeyLink Systems Distribution Business (reseller channel) and the IT Solutions Business (direct sales to end-users). The company is headquartered in Boca Raton, Florida.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Dec 31, 2006 |
Three Months Ended Dec 31, 2005 |
Nine Months Ended Dec 31, 2006 |
Nine Months Ended Dec 31, 2005 |
|---|---|---|---|---|
| Net Sales | $584,961 | $532,219 | $1,358,788 | $1,347,778 |
| Gross Profit | $77,377 | $70,101 | $184,877 | $173,997 |
| Gross Margin % | 13.2% | 13.2% | 13.6% | 12.9% |
| Operating Income | $32,828 | $26,355 | $53,778 | $45,471 |
| Net Income | $19,963 | $15,174 | $32,206 | $22,115 |
| Diluted EPS | $0.64 | $0.49 | $1.04 | $0.70 |
| Cash & Equivalents | $101,010 (as of Dec 31, 2006) | |||
| Total Debt | $0.2 million (as of Dec 31, 2006) |
Liquidity: The company maintains a $200 million unsecured revolving credit facility with no outstanding borrowings as of December 31, 2006. Cash and cash equivalents decreased from $147.9 million to $101.0 million during the nine-month period, primarily due to debt retirements and working capital changes.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 9.9% quarter-over-quarter and 0.8% year-to-date. Growth was driven by hardware and software sales, particularly in the KeyLink Systems Distribution segment.
- Profitability: Operating income increased 24.6% for the quarter and 18.3% year-to-date. This improvement was aided by a significant reduction in restructuring charges ($0.1 million in Q3 2006 vs. $5.1 million in Q3 2005).
- Debt Reduction: Total debt dropped significantly from $59.7 million (March 31, 2006) to $0.2 million (December 31, 2006). This was achieved by retiring $59.4 million in Senior Notes in August 2006 and redeeming $109.0 million in Mandatorily Redeemable Convertible Trust Preferred Securities earlier in the fiscal year.
- Accounting Changes: The company adopted FASB Statement 123R (Share-Based Payment) on April 1, 2006. This resulted in a $2.4 million reduction in net income for the nine-month period compared to prior accounting methods.
Guidance, Outlook, and Material Events
Proposed Sale of KeyLink Systems Distribution Business
On January 2, 2007, Agilysys signed a definitive agreement to sell its KeyLink Systems Distribution Business to Arrow Electronics, Inc. for $485 million in cash, subject to working capital adjustments. This business accounted for approximately 73% of consolidated sales in the trailing 12 months. The transaction is expected to close by March 31, 2007, pending shareholder and regulatory approval.
Use of Proceeds
Management plans to use the net proceeds (estimated at $440 million cash on hand post-closing) for:
- An estimated $100 million self-tender offer to repurchase up to six million shares of common stock.
- Investment in the growth of the remaining IT Solutions Business (organic and via acquisitions).
- General corporate purposes.
Recent Acquisitions
On January 23, 2007, the company acquired Visual One Systems Corporation for $14.2 million in cash to expand its hospitality industry software portfolio.
Risks and Contingencies
- Transaction Risk: Failure to close the KeyLink sale could harm business relationships and leave the company with channel conflicts.
- Indemnification: Agilysys agreed to indemnify Arrow for breaches of representations, with a threshold of 1% of the purchase price ($4.9 million) and a cap of 20% ($97 million) for certain claims.
- Supplier Dependence: The company remains highly dependent on key suppliers, notably IBM and HP, which accounted for 86% of sales volume in fiscal 2006.
Investor Verification Checklist
- Transaction Closing: Verify the status of the KeyLink Systems sale to Arrow Electronics, including shareholder approval results from the March 12, 2007 special meeting.
- Share Repurchase: Monitor the commencement and terms of the proposed $100 million self-tender offer.
- Pro Forma Impact: Review the pro forma financial statements (available in the proxy statement) to understand the standalone financial profile of the remaining IT Solutions Business, which is expected to show operating losses initially before restructuring savings are realized.
- Restructuring Liability: Confirm the resolution of the $5.1 million remaining restructuring liability related to the 2003 facility exit, which may be reversed as a credit if the facility is utilized post-sale.
- Supplier Agreements: Assess the terms of the new long-term product procurement agreement with Arrow Electronics to ensure competitive pricing and availability.