Business Context and Reporting Period
Agilysys, Inc. develops and markets enterprise software, hardware, services, and solutions for the hospitality and retail industries. This Form 10-Q covers the three and nine months ended December 31, 2011, representing the third quarter and first nine months of fiscal 2012. The request metadata identifies “2010 Q3,” but the filing itself is for December 31, 2011.
Following the August 1, 2011 sale of the Technology Solutions Group (TSG), continuing operations comprise the Hospitality Solutions Group (HSG) and Retail Solutions Group (RSG). TSG results are presented as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended December 31, 2011 | Three Months Ended December 31, 2010 | Nine Months Ended December 31, 2011 | Nine Months Ended December 31, 2010 |
|---|---|---|---|---|
| Total net sales | $51.6 million | $59.0 million | $156.9 million | $155.7 million |
| Product sales | $25.7 million | $34.0 million | $80.4 million | $81.7 million |
| Services sales | $25.9 million | $25.0 million | $76.5 million | $74.1 million |
| Gross margin | $19.9 million; 38.6% | $19.1 million; 32.4% | $59.0 million; 37.6% | $55.9 million; 35.9% |
| Operating loss | $(7.0) million; (13.7%) | $(5.3) million; (8.9%) | $(21.2) million; (13.5%) | $(16.5) million; (10.6%) |
| Loss from continuing operations | $(5.8) million | $(2.3) million | $(16.2) million | $(15.5) million |
| Net income (loss) | $(6.5) million | $2.0 million | $(5.8) million | $(10.5) million |
| Basic and diluted net loss per share | $(0.29) | $0.09 | $(0.26) | $(0.46) |
All amounts are from the filing and are presented in millions except per-share data.
Liquidity, Cash Flow, Debt, and Capital Allocation
- Cash and cash equivalents were $44.1 million at December 31, 2011, compared with $70.6 million at March 31, 2011.
- Short-term investments were $40.0 million at December 31, 2011; total cash and short-term investments were approximately $84.1 million.
- Cash used in operating activities was $9.8 million for the first nine months of fiscal 2012, improving from $16.3 million used in the prior-year period.
- Investing activities provided $21.6 million, primarily reflecting $59.5 million of net proceeds from the TSG sale, partly offset by $40.0 million invested in Treasury notes and $3.1 million of capital expenditures.
- Financing activities used $14.1 million, including $12.1 million for share repurchases, $1.1 million for employee tax-withholding repurchases, and $0.8 million of capital lease payments.
- Total debt was approximately $1.3 million at December 31, 2011, consisting of capital lease obligations. The $50 million revolving credit facility was terminated on July 29, 2011 following the TSG sale.
- Management stated that operating cash flow, cash on hand, and access to capital markets should provide adequate liquidity for short- and long-term requirements.
Material Changes Versus the Prior Comparable Period
- First-nine-month sales increased 0.7%, but third-quarter sales declined 12.6%, primarily because of lower product and hardware volumes.
- Services revenue increased 3.3% for the first nine months and 3.3% in the third quarter, while product revenue declined 1.6% and 24.3%, respectively.
- Gross margin improved 170 basis points to 37.6% for the first nine months and 620 basis points to 38.6% in the third quarter, driven by a higher mix of services and improved services labor utilization.
- Operating losses widened because of restructuring charges and higher corporate costs. First-nine-month restructuring charges increased to $8.0 million from $0.4 million; third-quarter charges were $3.2 million versus essentially zero in the prior-year quarter.
- HSG first-nine-month sales decreased 7.8% and operating income decreased 53.8%. RSG sales increased 7.5% and operating income increased 30.9%.
- Net income comparisons were affected by the TSG divestiture. Discontinued operations contributed $10.4 million for the first nine months of fiscal 2012, including a $19.5 million gain on sale, compared with $5.0 million in the prior-year period. The third quarter included a $1.2 million after-tax loss related to the TSG sale settlement and no TSG revenue.
Guidance, Outlook, Risks, and Unusual Items
- The fiscal 2012 restructuring plan affected approximately 160 employees and includes relocation of corporate services from Solon, Ohio, to Alpharetta, Georgia.
- Management expected approximately $8.0 million of additional restructuring charges through the remainder of fiscal 2012 and the first quarter of fiscal 2013.
- Management expected annual cost savings of approximately $14 million to $16 million, with roughly half reflected in the third-quarter run rate and most remaining savings expected in fiscal 2013.
- The Company recorded accelerated depreciation of $1.3 million in the quarter and $2.7 million year to date because of the planned Solon facility relocation.
- Prior-period financial information was revised for nonmaterial revenue-recognition errors involving pricing concessions, post-contract support, professional services, contract accounting, specified enhancements, and billing errors. The filing states that the revisions did not affect operating cash flows.
- The Company repurchased 1.47 million shares for $12.1 million during the first nine months. An additional 129,044 shares were repurchased for $1.0 million through February 3, 2012, completing the current authorization.
- Risks include uncertain demand for technology products and services, competition, supply disruption, litigation and claims, technology changes, ERP implementation and cost-reduction execution, acquisition integration, macroeconomic conditions, the TSG divestiture, facility relocation, restructuring execution, and concentrated ownership by MAK Capital.
- The Company had minimum vendor purchase commitments of $20.0 million per year through fiscal 2012. Management stated that legal matters were not expected to have a material adverse effect, although outcomes and timing cannot be predicted with certainty.
- The IRS was examining the tax year ended March 31, 2010. A reduction in unrecognized tax benefits of zero to $0.5 million was considered reasonably possible over the following 12 months.
Important Facts for Investors to Verify
- Confirm that comparisons use continuing operations and properly exclude TSG, which was sold on August 1, 2011.
- Assess whether the higher gross margin from services mix can offset declining product and hardware revenue.
- Track the timing and cash cost of the remaining approximately $8.0 million of restructuring charges against the projected $14 million to $16 million savings.
- Evaluate liquidity after the decline in cash, the absence of the revolving credit facility, ongoing operating cash use, and capital allocation to share repurchases.
- Review the effect of revenue-recognition revisions and the related deferred revenue changes on future reported revenue.
- Monitor the working-capital settlement with OnX, facility relocation costs, vendor commitments, tax examinations, and other contingencies.
- Verify management’s expectation that the HSG and RSG businesses can produce sustainable growth after the TSG divestiture.