Agilysys, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2011, representing fiscal 2012 second quarter and first half. The supplied request metadata identifies “2010 Q2,” but the filing itself is a September 30, 2011 Form 10-Q.
Business Context
Agilysys develops and markets enterprise software, hardware, services, and solutions for the hospitality and retail industries. Continuing operations comprise the Hospitality Solutions Group (HSG) and Retail Solutions Group (RSG). The Technology Solutions Group (TSG) was sold to OnX on August 1, 2011 and is presented as discontinued operations.
Financial Performance
| Metric | Three months ended September 30, 2011 | Three months ended September 30, 2010 | Six months ended September 30, 2011 | Six months ended September 30, 2010 |
|---|---|---|---|---|
| Net sales | $53.6 million | $49.3 million | $107.5 million | $96.1 million |
| Gross margin | $21.6 million; 40.3% | $17.8 million; 36.0% | $41.1 million; 38.3% | $36.7 million; 38.2% |
| Operating loss from continuing operations | $(5.2) million; (9.7%) | $(6.7) million; (13.5%) | $(12.1) million; (11.3%) | $(11.2) million; (11.6%) |
| Loss from continuing operations | $(3.2) million | $(4.9) million | $(8.7) million | $(13.2) million |
| Net income (loss) | $7.2 million | $(2.2) million | $2.5 million | $(12.5) million |
| Basic and diluted EPS | $0.32 | $(0.10) | $0.11 | $(0.55) |
Revenue growth reflected higher hardware, software, and services volumes. For the first six months, products increased 16.0% and services increased 7.6%. Service gross margins improved substantially, while product margins declined because of a higher proportion of lower-margin hardware sales.
- HSG: First-half revenue was essentially flat at $43.6 million, while operating income declined to $1.9 million from $2.5 million.
- RSG: First-half revenue increased 21.7% to $63.9 million and operating income increased 49.7% to $4.3 million.
- Corporate/Other: First-half operating loss increased to $18.3 million from $16.5 million.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $93.7 million at September 30, 2011, up from $70.6 million at March 31, 2011.
- Continuing-operations operating cash flow was $(5.1) million, compared with $(15.0) million in the prior-year period.
- Investing cash flow from continuing operations was $60.0 million, primarily from $59.5 million of net proceeds from the TSG sale.
- Financing cash flow was $(8.2) million, including $6.6 million for common-share repurchases.
- Total debt was approximately $1.6 million, consisting of capital lease obligations. The $50.0 million credit facility was terminated on July 29, 2011 following the TSG sale.
- Total assets were $215.1 million and shareholders’ equity was $145.2 million at September 30, 2011.
- Inventory increased by $2.7 million because equipment purchased for customer orders had not shipped by period-end. Days sales outstanding improved to 52 days from 62 days at March 31, 2011.
Material Changes Versus Prior Comparable Period
- Continuing-operations revenue increased 8.6% in the quarter and 11.8% in the first half.
- Quarterly gross margin expanded 430 basis points to 40.3%; first-half gross margin increased 10 basis points to 38.3%.
- Operating losses remained significant despite improved revenue and gross margin. First-half operating loss worsened by $0.9 million because of increased restructuring charges and other expenses.
- Net income benefited from the TSG disposal. Discontinued operations contributed $10.5 million in the quarter and $11.1 million in the first half, including a $12.6 million after-tax gain on sale.
- TSG generated a net loss of $2.1 million in the quarter and $1.5 million in the first half before the gain on sale, compared with prior-year net income of $2.7 million and $0.7 million, respectively.
- The Company repurchased 800,000 shares for $6.6 million during the quarter at an average price of $8.27 per share.
Guidance, Outlook, Risks, and Unusual Items
- Management expects an additional $9.0 million to $11.0 million of restructuring charges through the remainder of fiscal 2012 and the first quarter of fiscal 2013.
- Annual cost savings from the restructuring program are estimated at $14.0 million to $16.0 million, primarily beginning in fiscal 2013. Approximately 160 employees are or will be affected.
- The headquarters relocation from Solon, Ohio to Alpharetta, Georgia is expected to be completed by March 31, 2012. Accelerated depreciation of $1.4 million was recorded in the first half.
- Subsequent to quarter-end, the Company agreed to terminate the Solon headquarters lease for a $2.0 million payment plus approximately $0.1 million of brokerage fees, and expected approximately $0.5 million of additional severance related to an executive departure.
- The Company retained a $20.0 million minimum vendor purchase commitment for fiscal 2012; OnX assumed the remaining $310.0 million of the former $330.0 million annual commitment.
- Management cited uncertain economic conditions and demand for technology products and services, competition, supply disruption, litigation and claims, ERP-related risks, concentrated ownership, foreign-exchange movements, and risks associated with the TSG sale and restructuring.
- The Company stated that it expects cash on hand and operating cash flows to satisfy liquidity needs, but continuing operations used cash during the first half and remain loss-making.
- Management reported effective disclosure controls, no material changes in internal control over financial reporting, and no material changes to previously disclosed risk factors.
Most Important Facts for Investors to Verify
- Whether the improved quarterly gross margins and revenue growth are sustainable after the TSG divestiture and hardware mix changes.
- The timing and cash cost of the remaining $9.0 million to $11.0 million restructuring program versus the projected $14.0 million to $16.0 million savings.
- Whether HSG can recover first-half operating performance and whether RSG growth continues.
- The Company’s ability to generate positive operating cash flow without relying on divestiture proceeds.
- The final working-capital adjustment, if any, related to the TSG sale and any remaining transition obligations.
- Potential tax effects, including the IRS examination and unrecognized tax benefits, as well as the availability of deferred tax assets.
- Execution of the headquarters relocation, lease termination, vendor purchase commitment, and share-repurchase authorization.