Agilysys, Inc. Form 10-Q Summary
Reporting period: Three months ended June 30, 2011, the first quarter of fiscal 2012; comparative period ended June 30, 2010. The filing metadata identifies “2010 Q1,” but the filing itself clearly covers June 30, 2011. Agilysys provided IT hardware, software, and services primarily to hospitality, retail, corporate, and public-sector customers through its Hospitality Solutions Group (HSG), Retail Solutions Group (RSG), and Technology Solutions Group (TSG).
Financial performance and position
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Product revenue | $118.1 million | $103.5 million | 14.1% increase |
| Services revenue | $33.6 million | $28.4 million | 18.3% increase |
| Total revenue | $151.6 million | $131.9 million | 15.0% increase |
| Gross margin | $38.4 million | $33.9 million | 13.5% increase |
| Gross margin percentage | 25.3% | 25.7% | 40-basis-point decrease |
| Operating loss | $5.4 million | $6.6 million | Improved by $1.2 million |
| Net loss | $4.8 million | $10.3 million | Improved by $5.5 million |
| Basic and diluted loss per share | $0.21 | $0.45 | Improved by $0.24 |
| Cash used in operating activities | $21.2 million | $15.3 million | $5.9 million higher use |
- Product gross margin remained 16.8%; services gross margin declined to 55.5% from 58.1%, primarily due to project mix and pricing pressure.
- SG&A increased 3.4% to $41.4 million, while restructuring charges increased to $2.4 million from $0.4 million.
- The prior-year period included a $2.1 million gain from the redemption of corporate-owned life insurance policies; Q1 FY2012 recorded $0.1 million of other expense.
- At June 30, 2011, cash and cash equivalents were $51.7 million, compared with $74.4 million at March 31, 2011. Total assets were $301.1 million and shareholders’ equity was $145.1 million.
- Total debt was approximately $2.6 million, consisting primarily of capital lease obligations. No borrowings were outstanding under the credit facility, although letters of credit were outstanding.
- Working-capital usage drove operating cash outflows, including increases of $6.7 million in accounts receivable and $5.1 million in inventory. Capital expenditures were $0.8 million.
Material changes versus the prior comparable period
- Revenue growth was led by RSG, up 38.7% to $32.9 million, and TSG, up 14.9% to $97.8 million. HSG declined 9.1% to $21.0 million.
- TSG moved from a $1.8 million operating loss to $2.6 million of operating income. HSG operating income declined to $0.5 million from $2.2 million, while RSG operating income increased to $2.1 million from $1.8 million.
- Hardware revenue increased $17.7 million, services revenue increased $5.2 million, and software revenue declined $3.2 million because two large prior-year remarketed software sales did not recur.
- Operating loss improved despite higher SG&A and restructuring costs, supported by increased gross profit and approximately $1.8 million of cost savings realized in the quarter from a broader $7.0 million annualized savings program.
- The company corrected a prior-period tax accounting error in Q1 FY2011 that increased income tax expense and net loss by $3.8 million, or $0.17 per share, without changing pretax loss.
Outlook, strategic actions, risks, and unusual items
- On May 28, 2011, Agilysys agreed to sell TSG for $64.0 million in cash, subject to adjustment. The sale closed August 1, 2011, after the reporting date, with net proceeds of approximately $59.5 million after specified fees. Q1 results still include TSG and do not present it as discontinued operations.
- Following the TSG sale, management prioritized improving operating performance, profitable growth, targeted investment, and returning excess cash to shareholders.
- Restructuring actions included relocating headquarters from Solon, Ohio, to Alpharetta, Georgia, and the departure of the President and CEO. Approximately 160 employees were affected. The company recorded $2.4 million of charges in Q1 and expected an additional $14 million to $16 million of charges through Q1 FY2013, with expected cost savings of $14 million to $16 million primarily in fiscal 2013.
- The $50.0 million secured credit facility was terminated July 29, 2011, after the TSG sale. The company expected to expense approximately $0.4 million of unamortized financing fees in Q2 FY2012.
- On August 1, 2011, the board authorized repurchases of up to 1.6 million common shares through March 31, 2012, unless renewed.
- Management stated that cash from operations, cash on hand, and access to capital markets were expected to provide adequate liquidity. However, operating cash flow was negative and cash declined materially during the quarter.
- Risks identified include uncertain IT demand and macroeconomic conditions, competitive pressures, supply disruptions, customer concentration, concentrated ownership by MAK Capital, execution of restructuring and headquarters relocation, consequences of the TSG sale, litigation and claims, technology changes, ERP-related issues, and difficulty achieving projected cost savings.
- Verizon represented 19.2% of total company revenue and 29.8% of TSG revenue in Q1 FY2012, creating customer-concentration exposure.
- The company expected to retain $20.0 million of a vendor purchase commitment through fiscal 2012; OnX assumed the remaining $310.0 million upon completion of the TSG divestiture.
Important facts for investors to verify
- Verify post-closing results, accounting presentation, and cash proceeds from the TSG divestiture beginning in Q2 FY2012.
- Assess whether the projected $14 million to $16 million of restructuring costs generate the anticipated $14 million to $16 million of savings, primarily in fiscal 2013.
- Monitor cash conversion, accounts receivable and inventory levels, and liquidity after termination of the credit facility.
- Evaluate the sustainability of revenue growth, particularly the dependence on large hardware orders and the decline in software revenue.
- Track services gross margins, pricing pressure, customer concentration, and the company’s ability to improve profitability after the TSG sale.
- Review tax examinations, unrecognized tax benefits, legal contingencies, purchase commitments, and the potential effects of the authorized share repurchase program.