AGYS

Business Context and Reporting Period

Company: Agilysys, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009 (First Quarter of Fiscal 2010)
Business Overview: Agilysys provides IT solutions to corporate and public-sector customers, operating in three segments: Hospitality Solutions Group (HSG), Retail Solutions Group (RSG), and Technology Solutions Group (TSG). The company is headquartered in Solon, Ohio.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 27.6% year-over-year, driven primarily by a 28.0% drop in product sales due to reduced IT spending and lower hardware volumes. Service sales declined 25.7%.
• Improved Operating Loss: The operating loss narrowed significantly from $65.5 million to $12.7 million. This improvement is largely attributable to the absence of significant non-cash charges in the current quarter compared to the prior year, which included $33.6 million in asset impairment charges and $23.1 million in restructuring charges.
• Segment Performance:
  • HSG: Sales down 35.2%; operating loss improved from $5.9 million to $1.9 million.
  • RSG: Sales down 36.0%; turned from an operating loss of $14.4 million to an operating income of $1.6 million.
  • TSG: Sales down 23.2%; operating loss improved from $32.0 million to $2.5 million.
• Cash Flow: Operating cash flow swung from a use of $65.6 million to a generation of $79.7 million, driven by a $47.0 million decrease in accounts receivable and a $48.6 million increase in accounts payable following the termination of an inventory financing agreement.

Guidance, Outlook, Risks, and Unusual Items

• Dividend Elimination: Subsequent to the period end (August 5, 2009), the Board of Directors voted to eliminate the quarterly cash dividend to preserve approximately $2.7 million in annualized cash due to weak operating performance and failure to meet the fixed charge coverage ratio required by the credit facility.
• Credit Facility Compliance: The company did not meet the fixed charge coverage ratio of 1.15x required to pay dividends under its $50 million revolving credit facility. A waiver was obtained to pay the dividend on August 3, 2009, but borrowing availability was reduced from $50 million to $35 million due to noncompliance.
• Restructuring: The company incurred insignificant restructuring charges ($14,000) in the current quarter, primarily related to ongoing lease obligations from prior year actions. The prior year quarter included $23.1 million in restructuring charges.
• Discontinued Operations: Results for TSG's China and Hong Kong operations are classified as discontinued operations following their sale in January 2009.
• Legal Proceedings: The company won a lawsuit against former shareholders of CTS, awarded $2.3 million in damages plus attorney fees, though no amounts have been received as of the filing date.
• Internal Controls: Management concluded that disclosure controls and procedures were not effective due to a material weakness in revenue recognition controls identified in the prior fiscal year. Remedial measures are being implemented.

Investor Verification Checklist

• Dividend Status: Confirm the permanent elimination of the cash dividend and its impact on shareholder returns.
• Credit Covenant Compliance: Verify the company's ability to maintain the fixed charge coverage ratio required by the Bank of America credit facility to avoid further borrowing restrictions.
• Revenue Recognition Controls: Assess the progress of remedial measures regarding the material weakness in revenue recognition controls.
• Customer Concentration: Note that Verizon Communications accounted for 28.8% of total company revenues in the quarter; monitor dependency on this single customer.
• Legal Recovery: Track the collection status of the $2.3 million judgment against former CTS shareholders.