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AGYS > SEC Filings for AGYS > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for AGILYSYS INC

Form 10-Q for AGILYSYS INC


2-Aug-2013

Quarterly Report


Item 2. Managements' Discussion and Analysis of Financial Condition and Results of Operations

In "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A"), management explains the general financial condition and results of operations for Agilysys and subsidiaries including:

- what factors affect our business;
- what our earnings and costs were;
- why those earnings and costs were different from the year before;
- where the earnings came from;
- how our financial condition was affected; and
- where the cash will come from to fund future operations.

The MD&A analyzes changes in specific line items in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Cash Flows and provides information that management believes is important to assessing and understanding our consolidated financial condition and results of operations. This Quarterly Report on Form 10-Q updates information included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013, filed with the Securities and Exchange Commission (SEC). This discussion should read in conjunction with the Condensed Consolidated Financial Statements and related Notes that appear in Item 1 of this Quarterly Report as well as our Annual Report for the year ended March 31, 2013. Information provided in the MD&A may include forward-looking statements that involve risks and uncertainties. Many factors could cause actual results to be materially different from those contained in the forward-looking statements. See "Forward-Looking Information" on page 29 of this Quarterly Report and Item 1A "Risk Factors" in Part I of our Annual Report for the fiscal year ended March 31, 2013 for additional information concerning these items. Management believes that this information, discussion, and disclosure is important in making decisions about investing in Agilysys.

Overview

Agilysys is a leading developer and marketer of proprietary enterprise software, services and solutions to the hospitality industry. The company specializes in market-leading point-of-sale, property management, inventory & procurement and mobile & wireless solutions that are designed to streamline operations, improve efficiency and enhance the guest experience. Agilysys serves casinos, resorts, hotels, foodservice venues, stadiums and cruise lines. Agilysys operates extensively throughout North America, Europe and Asia, with corporate services located in Alpharetta, GA, EMEA headquarters in Cheshire, UK, and APAC offices in Singapore and Hong Kong.

Following the divestiture of the Retail Solutions Group (RSG) in July 2013, Agilysys operates as one operating segment and as a pure play software-driven solutions provider to the hospitality industry. Our top priority is increasing shareholder value by improving operating and financial performance and profitability growing the business through superior products and services. To that end, we expect to invest a certain portion of our cash on hand to develop and market new software products, to fund enhancements to existing software products, to expand our customer breadth, both geographically and vertically, and to make select accretive acquisitions that can compliment or integrate with existing products.

The primary objective of our ongoing strategic planning process is to create shareholder value by exploiting growth opportunities and strengthening our competitive position within the specific technology solutions and in the end markets we service. The plan builds on our existing strengths and targets industry leading growth and peer beating financial and operating results driven by new technology trends and market opportunities. Industry leading growth and peer beating financial and operational results will be achieved through tighter coupling and management of operating expenses of the business and sharpening the focus of our investments to concentrate on growth opportunities with the highest return by seeking the highest margin revenue opportunities in the markets in which we compete.

Our strategic plan specifically focuses on:

• Strong customer focus, with clear and realistic service commitments.


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• Growing sales of our proprietary offerings: products, support, maintenance and subscription services and professional services.

• Diversifying our customer base across geographies and industries.

• Capitalizing on our intellectual property and emerging technology trends.

Revenue - Defined

As required by the SEC, we separately present revenue earned as products revenue, support, maintenance and subscription services revenue or professional services revenue in our Condensed Consolidated Statements of Operations. In addition to the SEC requirements, we may, at times, also refer to revenue as defined below. The terminology, definitions, and applications of terms we use to describe our revenue may be different from those used by other companies and caution should be used when comparing these financial measures to those of other companies. We use the following terms to describe revenue:

• Revenue - We present revenue net of sales returns and allowances.

• Products revenue - Revenue earned from the sales of hardware equipment and proprietary and remarketed software.

• Support, maintenance and subscription services revenue - Revenue earned from the sale of proprietary and remarketed ongoing support, maintenance and subscription or hosting services.

• Professional services revenue - Revenue earned from the delivery of implementation, integration and installation services for proprietary and remarketed products.

Matters Affecting Comparability

On July 1, 2013, we completed the sale of RSG to Kyrus Solutions, Inc., an affiliate of Clearlake Capital Group, L.P. For financial reporting purposes, RSG's operating results for fiscal 2013 through the completion of the sale were classified within discontinued operations. Accordingly, the discussion and analysis presented below, reflects the continuing business of Agilysys.


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Results of Operations

First Fiscal Quarter 2014 Compared to First Fiscal Quarter 2013

Net Revenue and Operating Loss

The following table presents our consolidated revenue and operating results for
continuing operations for the three months ended June 30, 2013 and 2012:
                                                   Three months ended
                                                        June 30,                 Increase (decrease)
(Dollars in thousands)                             2013           2012             $              %
Net revenue:
Products                                       $    7,820     $   6,778      $    1,042          15.4  %
Support, maintenance and subscription services     13,175        12,169           1,006           8.3  %
Professional services                               3,505         3,442              63           1.8  %
Total net revenue                                  24,500        22,389           2,111           9.4  %
Cost of goods sold:
Products                                            3,787         3,581             206           5.8  %
Support, maintenance and subscription services      2,307         2,624            (317 )       (12.1 )%
Professional services                               2,267         2,291             (24 )        (1.0 )%
Total net cost of goods sold                        8,361         8,496            (135 )        (1.6 )%
Gross profit                                       16,139        13,893           2,246          16.2  %
Gross profit margin                                  65.9 %        62.1  %
Operating expenses:
Product development                                 6,476         4,420           2,056          46.5  %
Sales and marketing                                 3,248         4,201            (953 )       (22.7 )%
General and administrative                          4,809         5,279            (470 )        (8.9 )%
Depreciation of fixed assets                          488           585             (97 )       (16.6 )%
Amortization of intangibles                           794           855             (61 )        (7.1 )%
Asset impairments and related charges                   -           208            (208 )          nm
Restructuring, severance and other charges             55         1,125          (1,070 )       (95.1 )%
Operating income (loss)                        $      269     $  (2,780 )    $    3,049        (109.7 )%
Operating income (loss) percentage                    1.1 %       (12.4 )%


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The following table presents the percentage relationship of our Condensed Consolidated Statement of Operations line items to our consolidated net revenues for continuing operations for the periods presented:

                                                 Three months ended
                                                      June 30,
                                                  2013         2012
Net revenue:
Products                                          31.9 %      30.3  %
Support, maintenance and subscription services    53.8        54.4
Professional services                             14.3        15.4
Total                                            100.0       100.0
Cost of goods sold:
Products                                          15.5        16.0
Support, maintenance and subscription services     9.4        11.7
Professional services                              9.3        10.2
Total                                             34.1        37.9
Gross profit                                      65.9        62.1
Operating expenses:
Product development                               26.4        19.7
Sales and marketing                               13.3        18.8
General and administrative                        19.6        23.6
Depreciation of fixed assets                       2.0         2.6
Amortization of intangibles                        3.2         3.8
Asset impairments and related charges                -         0.9
Restructuring, severance and other charges         0.2         5.0
Operating income (loss)                            1.1 %     (12.4 )%

Net revenue. Total net revenue increased $2.1 million, or 9.4%, during the first quarter of fiscal 2014 compared to the first quarter of fiscal 2013. Products revenue increased $1.0 million, or 15.4%, primarily as a result of continued growth in our proprietary software licenses and associated remarketed product sales. Support and maintenance and subscription services revenue increased $1.0 million, or 8.3%, as a result of continued focus on selling subscription based services revenue, and ongoing support from our growing proprietary product sales. Professional services revenue increased slightly, with revenue from implementation services increasing consistent with growth in our proprietary software licenses offset by slightly lower customer development revenue during the current year quarter.

Gross profit and gross profit margin. Our total gross profit increased $2.2 million, or 16.2%, for first quarter of fiscal 2014 and total gross profit margin increased 380 basis points to 65.9%. Products gross profit increased $0.8 million and gross profit margin increased 440 basis points to 51.6% mainly as a result of certain developed technology amortization reaching its useful life during the fourth quarter of fiscal 2013. Support, maintenance and subscription services gross profit increased $1.3 million and gross margin increased 410 basis points to 82.5% as less labor resources were needed for maintenance of our products. Professional services gross margin increased less than $0.1 million and gross profit margin increased 190 basis points to 35.3% as a result of efficient management of project labor within implementation services.

Operating expenses

Operating expenses, excluding the charges for asset impairments and related charges and restructuring, severance and other charges, increased $0.5 million, or 3.1%, in the first quarter of fiscal 2014 compared with the first quarter of fiscal 2013.


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Product development. Product development includes all costs associated with research and development. Product development increased $2.1 million, or 46.5% in the first quarter of fiscal 2014 compared with the first quarter of fiscal 2013. This increase is driven by the continued investment in internal and third party resources to enhance the existing products as well as the early stage development of our future platforms.

Sales and marketing. Sales and marketing decreased $1.0 million, or 22.7%, in the first quarter of fiscal 2014 compared with the first quarter of fiscal 2013. The decrease is due to incremental incentive compensation expense incurred in the first quarter of fiscal 2013 to finalize fiscal 2012 compensation plans. In addition, expenses were lower due to the timing of one of our largest trade shows not occurring in the same quarter as fiscal 2013.

General and administrative. General and administrative decreased $0.5 million, or 8.9%, in the first quarter of fiscal 2014 compared to the first quarter of fiscal 2013. This is a result of initiatives implemented with the sale of RSG, which resulted in lower employee related costs and certain efficiencies in back-office processes.

Depreciation of fixed assets. Depreciation of fixed assets decreased $0.1 million.

Amortization of intangibles. Amortization of intangibles decreased $0.1 million in the first quarter of fiscal 2014. This decrease is due to certain internal use software reaching their useful lives during fiscal 2013.

Restructuring, severance and other charges. In the first quarter of fiscal 2014, following the sale of RSG, we recorded restructuring charges for severance and related benefits in order to better align corporate functions with our HSG operating unit and to reduce costs of approximately $0.1 million. In the first quarter of fiscal 2013, we recorded additional expense of $1.1 million for severance and related benefits for the fiscal 2012 restructuring activity. We expect to incur less than $1.0 million in additional restructuring charges during the remainder of fiscal 2014 for severance and related employee benefits. Our restructuring actions are discussed further in Note 5, Restructuring Charges.

Other (Income) Expenses
                                               Three months ended
                                                    June 30,               (Unfavorable) favorable
(Dollars in thousands)                        2013             2012             $             %
Other (income) expenses:
Interest income                           $      (13 )     $       (4 )   $         9        225.0 %
Interest expense                                  61              264             203         76.9 %
Other (income) expenses, net                     (35 )            144             179        124.3 %
Total other (income) expenses, net        $       13       $      404     $       391         96.8 %

Interest income. Interest income increased during the first quarter of fiscal 2014 compared to the first quarter of fiscal 2013.

Interest expense. Interest expense consists of costs associated with capital leases and loans on corporate-owned life insurance policies. Interest expense decreased in the first quarter of fiscal 2014 compared to the first quarter of fiscal 2013 due to expiration and non-renewal of certain capital leases.

Other (income) expenses, net. Other (income) expenses increased $0.2 million in the first quarter of fiscal 2014. This is primarily due to losses recognized as a result of movements in foreign currencies relative to the U.S. dollar in the first quarter of fiscal 2013.


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Income Taxes
                          Three months ended
                                                    (Unfavorable)
                               June 30,               favorable
(Dollars in thousands)     2013          2012          $         %

Income tax benefit $ (105 ) $ (529 ) $ (424 ) nm Effective tax rate 41 % 16.6 %

nm - not meaningful.

For the first quarter of fiscal 2014, the effective tax rate was different than the statutory rate due primarily to the intra-period tax allocation rules associated with the discontinued operations. Other items affecting the rate include a decrease in unrecognized tax benefits attributable to the expiration of statute of limitations, recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, and other U.S. permanent book to tax differences.

For the first quarter of fiscal 2013, the effective tax rate was different than the statutory rate due primarily to the intra-period tax allocation rules associated with the discontinued operations. Other items affecting the rate include recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance, and other U.S. permanent book to tax differences.

Although the timing and outcome of tax settlements are uncertain, it is reasonably possible that during the next 12 months a reduction in unrecognized tax benefits may occur in the range of zero to $0.7million of tax and zero to $0.3 million of interest based on the outcome of tax examinations and as a result of the expiration of various statutes of limitations. We are routinely audited; due to the ongoing nature of current examinations in multiple jurisdictions, other changes could occur in the amount of gross unrecognized tax benefits during the next 12 months which cannot be estimated at this time.

Because of our losses in prior periods, we have recorded a valuation allowance offsetting substantially all of our deferred tax assets. The amount of the valuation allowance, however, could be reduced in the near term. The exact timing and the portion of the valuation allowance released are subject to change based on the level of profitability that we are able to achieve for the remainder of fiscal 2014 and our visibility into future period results. We expect that any release of the valuation allowance will be recorded as an income tax benefit or an adjustment to paid-in capital at the time of release, significantly increasing our reported net income. Our recorded tax rate may increase in subsequent periods following a significant release of the valuation allowance and our net income may be negatively affected in periods following the release. Any valuation allowance release will not affect the amount of cash paid for income taxes.

Acquisitions

On June 10, 2013, Agilysys purchased certain assets and assumed certain liabilities of TimeManagement Corporation (TMC), a privately-owned Minneapolis-based technology provider with solutions that streamline workforce management environments for hospitality operators. This technology based acquisition is consistent with the core value we provide to the industry and integrates with our point-of-sale, inventory and procurement systems, including InfoGenesis™ point of sale system and Eatec® inventory and procurement solution. The purchase consideration consisted of $1.8 million in cash paid, subject to a post closing working capital adjustment, and $1.8 million of contingent consideration. The fair value of the contingent consideration was estimated to be $1.8 million at the date of acquisition and is expected to be paid out over a six year period. The fair value of the contingent consideration was determined by calculating the probability-weighted earn-out payments based on the assessment of the likelihood that certain milestones would be achieved. The acquisition was funded with cash on hand. Management concluded that this acquisition was not a material acquisition under the provision of ASC 805, Business Combinations. The operations of the purchased business have been included in our Condensed Consolidated Financial Statements from the date of acquisition.
The following is a summary of the preliminary estimated fair values of the assets acquired and liabilities assumed from the acquisition:


(In thousands)
Current assets                          $   361
Property and equipment                      126
Goodwill                                  3,372
Developed technology                        605
Total assets acquired                     4,464
Total liabilities assumed (all current)     914
Net assets acquired                     $ 3,550

The goodwill of approximately $3.4 million arising from the acquisition consists largely of synergies and economies of scale expected from combining the operations of Agilysys and TMC. The goodwill from this acquisition is deductible for tax purposes over a period of 15 years.
The following is a summary of the intangible asset acquired and the weighted-average useful life over which it will be amortized.

                                          Weighted-average
                      Purchased assets      useful life

Developed technology $             605        5 years

Discontinued Operations

Sale of Assets of RSG - Fiscal 2014

On July 1, 2013, we completed the sale of our RSG business to, Kyrus, an affiliate of Clearlake Capital Group, L.P., for total consideration of approximately $34.5 million in cash, subject to a possible adjustment based on final working capital. Upon the close of the transaction, subsequent to June 30, 2013, the aggregate purchase price was reduced by fees of approximately $1.5 million for transaction related costs, resulting in net proceeds received of approximately $33.0 million. In addition to the purchase agreement, we entered into a transition services agreement (TSA) with Kyrus, under which we provide certain transitional administrative and supportive services to Kyrus through December 31, 2013 with the possibility of a one month extension.

For the three months ended June 30, 2013 and 2012 the income from discontinued operations was comprised of the following:

                                        Three months ended June 30,
(In thousands)                            2013                2012
Discontinued operations:
Net revenue                         $       24,315       $       29,513

Income from operations of RSG                  895       $        1,344
Income tax (benefit) expense                   (60 )                482
Income from discontinued operations $          955       $          862


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Liquidity and Capital Resources

Overview

Our operating cash requirements consist primarily of working capital needs, operating expenses, capital expenditures, and payments of principal and interest on indebtedness outstanding, which primarily consists of lease and rental obligations at June 30, 2013. We believe that cash flow from operating activities, cash on hand of $70.6 million as of June 30, 2013 and access to capital markets will provide adequate funds to meet our short-and long-term liquidity requirements.

As of June 30, 2013 and March 31, 2013, our total debt was approximately $0.1 million, comprised of capital lease obligations in both periods.

At June 30, 2013, 100% of our cash and cash equivalents were deposited in bank accounts of which 89.9% is located in the United States. Therefore, we believe that credit risk is limited with respect to our cash and cash equivalents balances.

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