AGYS-12.31.12-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2012
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________.

Commission file number 0-5734
 
AGILYSYS, INC.
(Exact name of registrant as specified in its charter)
 
Ohio
 
34-0907152
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
425 Walnut Street, Suite 1800,
Cincinnati, Ohio
 
45202
(Address of principal executive offices)
 
(ZIP Code)
 
 
 
(770) 810-7800
(Registrant’s telephone number, including area code)
 
 
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
 
Accelerated filer
x
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of Common Shares of the registrant outstanding as of February 1, 2013 was 22,136,981.

Table of Contents

AGILYSYS, INC.
Index
 
 
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
 
 
Item 3
 
 
 
 
 
Item 4
 
 
 
 
 
 
 
 
 
 
Item 1    
 
 
 
 
 
Item 1A
 
 
 
 
 
Item 2
 
 
 
 
 
Item 3
 
 
 
 
 
Item 4
 
 
 
 
 
Item 5
 
 
 
 
 
Item 6
 
 
 
 
 
 
 



2
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AGILYSYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In thousands, except share data)
December 31,
2012
 
March 31,
2012
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
79,838

 
$
97,587

Accounts receivable, net of allowances of $759 and $632, respectively
51,923

 
32,531

Inventories
18,192

 
15,710

Prepaid expenses
2,863

 
2,975

Other current assets
1,538

 
5,492

Total current assets
154,354

 
154,295

Property and equipment, net
15,231

 
16,504

Goodwill
14,259

 
15,198

Intangible assets, net
15,922

 
14,135

Other non-current assets
4,005

 
4,007

Total assets
$
203,771

 
$
204,139

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
42,298

 
$
24,938

Deferred revenue
23,717

 
28,441

Accrued liabilities
13,428

 
23,983

Capital lease obligations, current
342

 
647

Total current liabilities
79,785

 
78,009

Deferred income taxes, non-current
5,186

 
5,135

Capital lease obligations, non-current
428

 
347

Other non-current liabilities
5,151

 
6,210

Commitments and contingencies (see Note 7)

 

Shareholders' equity:
 
 
 
Common shares, without par value, at $0.30 stated value; 80,000,000 shares authorized; 31,606,831 shares issued; and 22,136,981 and 21,875,850 shares outstanding and December 31, 2012 and March 31, 2012, respectively
9,482

 
9,482

Treasury shares, 9,469,850 and 9,730,981 at December 31, 2012 and March 31, 2012, respectively
(2,840
)
 
(2,919
)
Capital in excess of stated value
(14,919
)
 
(16,032
)
Retained earnings
122,248

 
123,876

Accumulated other comprehensive (loss) income
(750
)
 
31

Total shareholders' equity
113,221

 
114,438

Total liabilities and shareholders' equity
$
203,771

 
$
204,139


See accompanying notes to condensed consolidated financial statements.

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AGILYSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three months ended
 
Nine months ended
 
December 31,
 
December 31,
(In thousands, except per share data)
2012
 
2011
 
2012
 
2011
Net revenue:
 
 
 
 
 
 
 
Products
$
40,210

 
$
25,725

 
$
89,262

 
$
80,387

Support, maintenance and subscription services
19,405

 
18,275

 
57,347

 
53,704

Professional services
7,596

 
7,582

 
26,494

 
22,767

Total net revenue
67,211

 
51,582

 
173,103

 
156,858

Cost of goods sold:
 
 
 
 
 
 
 
Products
32,225

 
20,128

 
70,108

 
63,733

Support, maintenance and subscription services
6,911

 
6,223

 
20,779

 
19,270

Professional services
4,626

 
5,298

 
16,308

 
14,835

Total net cost of goods sold
43,762

 
31,649

 
107,195

 
97,838

Gross profit
23,449

 
19,933

 
65,908

 
59,020

 
34.9
%
 
38.6
%
 
38.1
%
 
37.6
%
Operating expenses:
 
 
 
 
 
 
 
Product development
8,612

 
7,722

 
24,241

 
23,378

Sales and marketing
5,425

 
5,408

 
16,039

 
16,868

General and administrative
7,167

 
7,319

 
20,596

 
23,466

Depreciation of fixed assets
633

 
1,063

 
2,024

 
3,177

Amortization of intangibles
832

 
914

 
2,554

 
2,782

Asset impairments and related charges
—

 
—

 
208

 
—

Restructuring, severance and other charges
(31
)
 
4,556

 
1,524

 
10,590

Operating income (loss)
811

 
(7,049
)
 
(1,278
)
 
(21,241
)
Other (income) expenses:
 
 
 
 
 
 
 
Interest income
—

 
(4
)
 
(8
)
 
(54
)
Interest expense
56

 
60

 
225

 
937

Other expenses, net
220

 
22

 
202

 
293

Income (loss) before income taxes
535

 
(7,127
)
 
(1,697
)
 
(22,417
)
Income tax expense (benefit)
19

 
(1,353
)
 
(69
)
 
(6,209
)
Income (loss) from continuing operations
516

 
(5,774
)
 
(1,628
)
 
(16,208
)
(Loss) income from discontinued operations, net of taxes
—

 
(735
)
 
—

 
10,403

Net income (loss)
$
516

 
$
(6,509
)
 
$
(1,628
)
 
$
(5,805
)
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
21,900

 
22,148

 
21,873

 
22,650

Net income (loss) per share - basic:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.02

 
$
(0.26
)
 
$
(0.07
)
 
$
(0.72
)
(Loss) income from discontinued operations
—

 
(0.03
)
 
—

 
0.46

Net income (loss) per share
$
0.02

 
$
(0.29
)
 
$
(0.07
)
 
$
(0.26
)
 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding
22,088

 
22,148

 
21,873

 
22,650

Net income (loss) per share - diluted:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.02

 
$
(0.26
)
 
$
(0.07
)
 
$
(0.72
)
(Loss) income from discontinued operations
—

 
(0.03
)
 
—

 
0.46

Net income (loss) per share
$
0.02

 
$
(0.29
)
 
$
(0.07
)
 
$
(0.26
)

See accompanying notes to condensed consolidated financial statements.

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AGILYSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)

 
Three months ended
 
Nine months ended
 
December 31,
 
December 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Net income (loss)
$
516

 
$
(6,509
)
 
$
(1,628
)
 
$
(5,805
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Unrealized foreign currency translation adjustments
(826
)
 
—

 
(777
)
 
(27
)
Unrealized gain (loss) on sale of securities
—

 
101

 
(4
)
 
(153
)
Total comprehensive loss
$
(310
)
 
$
(6,408
)
 
$
(2,409
)
 
$
(5,985
)


See accompanying notes to condensed consolidated financial statements.

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AGILYSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine months ended
(In thousands)
December 31,
 
2012
 
2011
Operating activities
 
 
 
Net loss
$
(1,628
)
 
$
(5,805
)
Less: Income from discontinued operations
—

 
10,403

Loss from continuing operations
(1,628
)
 
(16,208
)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities
 
 
 
Restructuring, severance and other charges
1,524

 
10,590

Payments for restructuring, severance and other charges
(6,550
)
 
(3,916
)
Asset impairments and related charges
208

 
—

Depreciation
2,024

 
3,177

Amortization
3,304

 
4,757

Share-based compensation
1,274

 
2,350

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(19,369
)
 
1,746

Inventories
(2,479
)
 
(773
)
Accounts payable
16,610

 
2,771

Deferred revenue
(4,673
)
 
(10,677
)
Accrued liabilities
(7,071
)
 
(4,846
)
Income taxes (receivable) payable
(319
)
 
1,635

Other changes, net
(243
)
 
(375
)
Net cash used in operating activities from continuing operations
(17,388
)
 
(9,769
)
Net cash used in operating activities from discontinued operations
—

 
(27,923
)
Net cash used in operating activities
(17,388
)
 
(37,692
)
Investing activities
 
 
 
Proceeds from sale of marketable securities
4,347

 
5,025

Proceeds from sale of TSG
—

 
59,470

Additional investments in marketable securities
—

 
(40,039
)
Capital expenditures
(4,051
)
 
(3,089
)
Additional (investments in) proceeds from corporate-owned life insurance policies
(85
)
 
235

Net cash provided by investing activities from continuing operations
211

 
21,602

Net cash provided by investing activities from discontinued operations
—

 
—

Net cash provided by investing activities
211

 
21,602

Financing activities
 
 
 
Principal payments under long-term obligations
(545
)
 
(823
)
Exercise of employee stock options
67

 
210

Repurchase of common shares to satisfy employee tax withholding
(148
)
 
(1,328
)
Repurchase of common shares
—

 
(12,127
)
Net cash used in financing activities from continuing operations
(626
)
 
(14,068
)
Net cash used in financing activities from discontinued operations
—

 
—

Net cash used in financing activities
(626
)
 
(14,068
)
Effect of exchange rate changes on cash
54

 
(135
)
Cash flows used in continuing operations
(17,749
)
 
(2,370
)
Cash flows used in discontinued operations
—

 
(27,923
)
Net decrease in cash and cash equivalents
(17,749
)
 
(30,293
)
Cash and cash equivalents at beginning of period
97,587

 
74,354

Cash and cash equivalents at end of period
$
79,838

 
$
44,061


See accompanying notes to condensed consolidated financial statements.

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AGILYSYS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Table amounts in thousands, except per share data)


1. Nature of Operations and Financial Statement Presentation
Nature of Operations
Agilysys is a leading provider of innovative technology solutions for the hospitality and retail markets. Our intuitive solutions include property and lodging management, inventory and procurement, point-of-sale (“POS”), document management, mobile, wireless and other types of guest-engagement software. We also provide support, maintenance, resold hardware products and software hosting services. Our customers include retailers, casinos, resorts, restaurants and other customer-facing service providers, and a significant portion of our consolidated revenue is derived from contract support, maintenance agreements and professional services.

We operate extensively throughout North America, with additional sales and support offices in the United Kingdom and Asia. We have two operating segments: Hospitality Solutions Group (“HSG”) and Retail Solutions Group (“RSG”).

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include our accounts consolidated with our wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Our fiscal year ends on March 31st. References to a particular year refer to the fiscal year ending in March of that year. For example, fiscal 2012 refers to the fiscal year ending March 31, 2012.

Our unaudited interim financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, the instructions to the Quarterly Report on Form 10-Q (“Quarterly Report”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10-01 of Regulation S-X under the Exchange Act. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations relating to interim financial statements.

The Condensed Consolidated Balance Sheet as of December 31, 2012, as well as the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended December 31, 2012 and 2011, and the Condensed Consolidated Statements of Cash Flow for the nine months ended December 31, 2012 and 2011, have been prepared without audit. However, these financial statements have been prepared on the same basis as those in the audited annual financial statements. In the opinion of management, all adjustments necessary to fairly present the results of operations, financial position, and cash flows have been made. Further, we have evaluated all significant events occurring subsequent to the date of the Condensed Consolidated Financial Statements and through the filing of this Quarterly Report.

These unaudited interim financial statements should be read together with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended March 31, 2012, filed with the Securities and Exchange Commission (“SEC”) on June 12, 2012.

Unless otherwise stated, current and prior period results in our condensed consolidated financial statements and these notes reflect our results from continuing operations and exclude the effect of discontinued operations (see Note 3).


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2. Summary of Significant Accounting Policies
A detailed description of our significant accounting policies can be found in the audited financial statements for the fiscal year ended March 31, 2012, included in our Annual Report on Form 10-K. Except as described below, there have been no material changes our significant accounting policies and estimates from those disclosed therein.

Use of estimates.  Preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results could differ from those estimates.

Reclassifications.  As a result of our reorganization in fiscal 2012, revenue and cost of goods sold are being reported in three categories: Products, Support, maintenance and subscription services and Professional services. In addition, operating expenses are differentiated in the following subcategories: Product development, Sales and marketing and General and administrative. Prior period presentation has been modified to conform to the current presentation.

Correction of Error.  In the third quarter of fiscal 2012, we identified errors in the manner in which we recognized revenue for certain software license and professional service arrangements in prior periods. We re-assessed our accounting for contracts relating to such arrangements. Upon completion of such evaluation, it was determined that the previous accounting treatment did not take into account all the necessary revenue recognition criteria related to pricing concessions, implied postcontract support, professional services that were essential to the functionality of the software, application of contract accounting and specified enhancements, and certain billing errors. As a result, we determined that certain previously recognized revenue should instead have been deferred and recognized in future periods when the applicable criteria related to the above considerations have been met.

In accordance with accounting guidance found in ASC 250-10 (SEC Staff Accounting Bulletin No. 99, Materiality), we assessed the materiality of the errors and concluded that the errors were not material to any of our previously issued financial statements. Correction of the errors was also not material to the fiscal 2012 results. As permitted by the accounting guidance found in ASC 250-10 (SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), we elected to present revised financial information as of and for the interim periods ended June 30, 2011 and September 30, 2011, and revised our previously issued fiscal year 2012 interim financial statements to correct the effect of these errors for when such financial statements are included in future filings. The adjustments to the quarter ended June 30, 2011 are comprised of (a.) the out of period impact for errors accumulated prior to fiscal 2012 of $1.0 million of corrections to revenue from continuing operations and $1.1 million of corrections to the loss from continuing operations and (b.) $0.3 million to revenue from continuing operations and $0.3 million to loss from continuing operations to revise the financial statements for revenue recognized in the quarter ended June 30, 2011 that should have been deferred to future periods.  The adjustments to the quarter ended September 30, 2011 represent the revision to the financial statements for similar matters arising in the quarter.

The following tables present the effect of this revision on our Condensed Consolidated Statements of Operations for all periods affected:
 
Quarter Ended June 30, 2011
 
Quarter Ended September 30, 2011
(In thousands except per share amounts)
As
Previously
Reported
 
Adjustment
 
As
Revised
 
As
Previously
Reported
 
Adjustment
 
As
Revised
Net revenue
$
53,886

 
$
(1,295
)
 
$
52,591

 
$
53,587

 
$
(902
)
 
$
52,685

Costs of goods sold
34,359

 
144

 
34,503

 
31,972

 
(286
)
 
31,686

Net loss from continued operations
(5,440
)
 
(1,439
)
 
(6,879
)
 
(3,238
)
 
(316
)
 
(3,554
)
Loss per share for continuing operations – Basic and diluted
(0.24
)
 
(0.06
)
 
(0.30
)
 
(0.14
)
 
(0.02
)
 
(0.16
)

The revision did not have an effect on our operating cash flows for the three months ended June 30, 2011 or the six months ended September 30, 2011.

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During the first quarter of fiscal 2013, we recorded out-of-period adjustments to increase revenues, restructuring, severance and other charges and asset impairments and related charges by $0.3 million, $0.7 million and $0.2 million, respectively. The net impact of the adjustments increased our operating loss by $0.6 million and represents a correction of error. In fiscal 2012, we erroneously omitted certain revenue transactions, the costs associated with certain terminated individuals and certain third party development costs for our previously impaired developed technology. Pre-tax loss in the first quarter of fiscal 2013 increased by $0.6 million, or $(0.03) per share, due to these adjustments. Management performed an evaluation under Staff Accounting Bulletin No. 108 and concluded the effect of this adjustment was immaterial to prior year’s financial statements as well as the full-year fiscal 2013 financial statements.

Capitalized Software Development Costs.  The capitalization of software development cost begins when a product’s technological feasibility has been established. Capitalization ends when the resulting product is available for general market release. Amortization of the capitalized software is classified within products cost of goods sold in the Condensed Consolidated Statements of Operations. For each capitalized software product, the annual amortization is equal to the greater of: (i) the amount computed using the ratio that the software product’s current fiscal year gross revenue bears to the total current fiscal year and anticipated future gross revenues for that product or (ii) the amount computed based on straight-line method over the remaining estimated economic life of the product, which is a range between three and eight years. The amount by which unamortized software costs exceeds the net realizable value, if any, is recognized as a charge to income in the period it is determined. We capitalized approximately $1.5 million and $0.4 million during the three months ended December 31, 2012 and 2011, respectively, and $3.4 million and $1.4 million during the nine months ended December 31, 2012 and 2011, respectively. Amortization of capitalized software was $0.2 million and $0.5 million for the three months ended December 31, 2012 and 2011, respectively, and $0.7 million and $1.4 million for the nine months ended December 31, 2012 and 2011, respectively.

Adopted and Recently Issued Accounting Pronouncements.

In September 2011, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update, ASU, No. 2011-08, Testing for Goodwill Impairment, which modifies the process of testing goodwill for impairment. The update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity would not be required to calculate the fair value of a reporting unit unless the entity determines it is more likely than not, based on a qualitative assessment, the fair value of goodwill is less than its carrying amount. The guidance also includes a number of events and circumstances to consider in conducting the qualitative assessment. This guidance is effective for fiscal years beginning on or after December 15, 2011. We adopted this guidance as of April 1, 2012 and it did not have a material impact on our consolidated financial statements or related disclosures.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which modifies the requirements for presenting net income and other comprehensive income and requires that all non-owner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendment requires presentation of each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. In December 2011, the FASB issued amendments to the guidance to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income in all periods presented. This guidance is effective for fiscal years and interim periods beginning on or after December 15, 2011. We adopted this guidance as of April 1, 2012 and it did not have an impact on our consolidated financial statements or related disclosures.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other-Testing Indefinite-Lived Intangible Assets for Impairment, to allow entities to use a qualitative approach to test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If it is concluded that this is the case, it is then necessary to perform the currently prescribed quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value. Otherwise, the quantitative impairment test is not

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required. This guidance is effective for fiscal years beginning after September 15, 2012 and early adoption is permitted. ASU No. 2012-02 is not expected to have a material impact on our consolidated financial statements or related disclosures.
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities, which modifies the disclosure requirements for offsetting financial instruments and derivative instruments. The update requires an entity to disclose information about offsetting and related arrangements and the effect of those arrangements on its financial position. This guidance is effective for reporting periods beginning on or after January 1, 2013, and is not expected to have a material impact on our consolidated financial statements or related disclosures.

Management continually evaluates the potential impact, if any, of all recent accounting pronouncements on our consolidated financial statements or related disclosures and, if significant, makes the appropriate disclosures required by such new accounting pronouncements.

3. Discontinued Operations
Sale of Assets and Operations of TSG – Fiscal 2012
In 2011, we sold our TSG business for an aggregate purchase price of $62.8 million in cash to OnX Enterprise Solutions Limited and its subsidiary OnX Acquisition LLC (together, “OnX”), a leading IT solutions provider based in Toronto, Canada. In addition to the purchase agreement, we entered into a transition services agreement (“TSA”) with OnX, under which we provided certain transitional administrative and supportive services to OnX through January 31, 2012. In July 2011, our shareholders approved the sale and the transaction closed on August 1, 2011, the date on which certain other contingencies specified in the sale agreement were satisfied. The sale of TSG represented a disposal of a component of an entity. As such, the operating results of TSG have been reported as a component of discontinued operations in the Condensed Consolidated Statements of Operations for the periods presented.

Components of Results of Discontinued Operations
For the three and nine months ended December 31, 2011 the income from discontinued operations was comprised of the following:
 
December 31, 2011
(In thousands)
Three months
 
Nine months
Discontinued operations:
 
 
 
Net revenue
$
—

 
$
123,807

 
 
 
 
Loss from operations of TSG
$
—

 
$
(1,781
)
(Loss) gain on sale of TSG
(1,200
)
 
19,486

(Loss) income on sale of TSG
(1,200
)
 
17,705

Income tax (benefit) expense
(465
)
 
7,302

(Loss) income from discontinued operations
$
(735
)
 
$
10,403


There was no activity related to Discontinued Operations in the corresponding fiscal 2013 periods.

4. Restructuring Charges
We recognize restructuring charges when a plan that materially changes the scope of our business or the manner in which that business is conducted is adopted and communicated to the impacted parties, and the expenses have been incurred or are reasonably estimable. In addition, we assess the property and equipment associated with the related facilities for impairment. The remaining useful lives of property and equipment associated with the related operations are re-evaluated based on the respective restructuring plan, resulting in the acceleration of depreciation and amortization of certain assets.


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Fiscal 2012 Restructuring Activity
In the first quarter of fiscal 2012, we announced restructuring actions, including the relocation of our corporate services from Solon, Ohio to Alpharetta, Georgia, designed to better align those services with our operating units and reduce costs following the sale of TSG. These restructuring actions were mostly completed by March 31, 2012 and impacted approximately 130 employees. To date, we have recorded $12.1 million in restructuring charges, of which $1.2 million was recorded in the first nine months of fiscal 2013, related to the fiscal 2012 restructuring activity. These charges were primarily comprised of severance and related benefits. On a segment basis, these restructuring costs totaled $2.6 million, $0.6 million, and $8.9 million for HSG, RSG and Corporate/Other, respectively. As of December 31, 2012, we had a remaining liability of approximately $0.6 million recorded for fiscal 2012 restructuring activity. As a result of taking these restructuring actions, we expect to realize between $14.0 million and $16.0 million in cost savings, of which approximately half has been recognized in the fiscal 2012 run rate. The remaining savings have been realized during fiscal 2013.

Fiscal 2009 Restructuring Activity

During fiscal 2009, we took steps to realign our cost and management structure. Since 2009, as previously disclosed, we have incurred charges totaling approximately $19.0 million related to the fiscal 2009 restructuring activity. As of December 31, 2012, we had a remaining liability of approximately $0.3 million recorded for fiscal 2009 restructuring activity. We expect to incur minimal additional restructuring charges between fiscal 2013 and fiscal 2014 for ongoing facility obligations.

Following is a reconciliation of the beginning and ending balances of the restructuring liability:
 
Balance at
 
 
 
 
 
Balance at
 
March 31,
 
 
 
 
 
December 31,

(In thousands)
2012
 
Provision
 
Payments
 
2012
Fiscal 2012 Restructuring Plan:
 
 
 
 
 
 
 
Severance and employment costs
$
5,507

 
$
1,236

 
$
(6,118
)
 
$
625

Facilities costs
297

 
(57
)
 
(240
)
 
—

Fiscal 2009 Restructuring Plan:
 
 
 
 
 
 
 
Facilities costs
495

 
3

 
(192
)
 
306

Total restructuring costs
$
6,299

 
$
1,182

 
$
(6,550
)
 
$
931



Approximately $0.1 million of the remaining severance and other employment costs will be paid in fiscal 2013 and $0.5 million will be paid in fiscal 2014. Approximately $0.1 million of the remaining facilities obligations will be paid during fiscal 2013 and $0.2 million will be paid in fiscal 2014.



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5. Additional Balance Sheet Information
Additional information related to the Condensed Consolidated Balance Sheets is as follows:
(In thousands)
December 31,
2012
 
March 31,
2012
Other non-current assets:
 
 
 
Corporate owned life insurance policies
$
3,589

 
$
3,458

Other
416

 
549

Total
$
4,005

 
$
4,007

Accrued liabilities:
 
 
 
Salaries, wages, and related benefits
$
6,732

 
$
7,397

BEP obligations (1)
—

 
2,948

SERP obligations (1)
—

 
3,323

Other taxes payable
3,232

 
1,976

Restructuring liabilities
931

 
5,447

Professional fees
718

 
1,700

Income taxes payable
644

 
322

Other
1,171

 
870

Total
$
13,428

 
$
23,983

Other non-current liabilities:
 
 
 
Income taxes payable/uncertain tax positions
$
2,456

 
$
3,135

Deferred rent
2,419

 
2,013

Restructuring liabilities
—

 
852

Other
276

 
210

Total
$
5,151

 
$
6,210


(1) BEP and SERP obligations were fulfilled in April 2012.

6. Income Taxes

The following table compares our income tax expense (benefit) and effective tax rates for the three months and nine months ended December 31, 2012 and 2011:
 
Three months ended
 
Nine months ended
 
December 31,
 
December 31,
(Dollars in thousands)
2012
2011
 
2012
2011
Income tax expense (benefit)
$
19

$
(1,353
)
 
$
(69
)
$
(6,209
)
Effective tax rate
3.7
%
19
%
 
4.1
%
27.7
%

For the three and nine months ended December 31, 2012, the effective tax rate was different than the statutory rate due primarily to recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance. Other items affecting the rate include a decrease in unrecognized tax benefits attributable to the expiration of statute of limitations, foreign and state taxes and other U.S. permanent book to tax differences.

For the three and nine months ended December 31, 2011, 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, foreign and state taxes and other U.S. permanent book to tax differences.



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7. Commitments and Contingencies

Agilysys is the subject of various threatened or pending legal actions and contingencies in the normal course of conducting its business. We provide for costs related to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on our future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount or timing of the resolution of such matters. While it is not possible to predict with certainty, management believes that the ultimate resolution of such individual or aggregated matters will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

On April 6, 2012, Ameranth, Inc. filed a complaint against us for patent infringement in the United States District Court for the Southern District of California. The complaint alleges, among other things, that point-of-sale and property management and other hospitality information technology products, software, components and/or systems sold by us infringe three patents owned by Ameranth purporting to cover generation and synchronization of menus, including restaurant menus, event tickets, and other products across fixed, wireless and/or internet platforms as well as synchronization of hospitality information and hospitality software applications across fixed, wireless and internet platforms. The complaint seeks monetary damages, injunctive relief, costs and attorneys fees. We dispute the allegations of wrongdoing and intend to vigorously defend ourselves in this matter.

On July 9, 2012, a putative class action lawsuit was filed against us in the United States District Court for the Northern District of California alleging violations of federal and state wage and hour laws, rules and regulations pertaining primarily to pay for missed meals and rest periods and failure to reimburse business expenses.  The lawsuit purports to be a class action and seeks substantial damages. At this time, we are not able to predict the outcome of this lawsuit, or any possible monetary exposure associated with the lawsuit. Our management believes that the plaintiffs' allegations are without merit and that their claims are not appropriate for class action treatment. We are vigorously defending these claims.



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8. Earnings (Loss) per Share

The following data shows the amounts used in computing (loss) earnings per share and the effect on income and the weighted average number of shares of dilutive potential common shares.
 
Three months ended
 
Nine months ended
 
December 31,
 
December 31,
(In thousands, except per share data)
2012
 
2011
 
2012
 
2011
Numerator:
 
 
 
 
 
 
 
Income (loss) from continuing operations - basic and diluted
$
516

 
$
(5,774
)
 
$
(1,628
)
 
$
(16,208
)
(Loss) income from discontinued operations - basic and diluted
—

 
(735
)
 
—

 
10,403

Net income (loss) - basic and diluted
$
516

 
$
(6,509
)
 
$
(1,628
)
 
$
(5,805
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
21,900

 
22,148

 
21,873

 
22,650

   Effect of dilutive securities:
 
 
 
 
 
 
 
      Stock options and SSARs
108

 
—

 
—

 
—

      Unvested restricted shares
80

 
—

 
—

 
—

Weighted average shares outstanding - diluted
22,088

 
22,148

 
21,873

 
22,650

 
 
 
 
 
 
 
 
Earnings (loss) per share - basic:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.02

 
$
(0.26
)
 
$
(0.07
)
 
$
(0.72
)
(Loss) income from discontinued operations
—

 
(0.03
)
 
—

 
0.46

Net income (loss) per share
$
0.02

 
$
(0.29
)
 
$
(0.07
)
 
$
(0.26
)
 
 
 
 
 
 
 
 
Earnings (loss) per share - diluted:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.02

 
$
(0.26
)
 
$
(0.07
)
 
$
(0.72
)
(Loss) income from discontinued operations
$
—

 
$
(0.03
)
 
$
—

 
$
0.46

Net income (loss) per share
$
0.02

 
$
(0.29
)
 
$
(0.07
)
 
$
(0.26
)
 
 
 
 
 
 
 
 
Anti-dilutive stock options, SSARs, restricted shares and performance shares
1,437

 
2,078

 
1,799
 
2,679

Basic earnings (loss) per share is computed as net income available to common shareholders divided by the weighted average basic shares outstanding. The outstanding shares used to calculate the weighted average basic shares excludes 236,919 and 115,969 of restricted shares and performance shares at December 31, 2012 and 2011, respectively, as these shares were issued but were not vested and, therefore, not considered outstanding for purposes of computing basic earnings per share at the balance sheet dates.

Diluted earnings (loss) per share includes the effect of all potentially dilutive securities on earnings per share. We have stock options, stock-settled appreciation rights ("SSARs") and unvested restricted shares that are potentially dilutive securities. When a loss is reported, the denominator of diluted earnings per share cannot be adjusted for the dilutive impact of share-based compensation awards because doing so would be anti-dilutive. In addition, when a loss from continuing operations is reported, adjusting the denominator of diluted earnings per share would also be anti-dilutive to the loss per share, even if the entity has net income after adjusting for a discontinued operation. Therefore, for the three months ended December 31, 2011 and nine months ended December 31, 2012 and 2011, basic weighted-average shares outstanding were used in calculating the diluted net loss per share.






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9. Share-based Compensation

We may grant non-qualified stock options, incentive stock options, stock-settled stock appreciation rights, restricted shares, and restricted share units for up to 3.0 million common shares under our 2011 Stock Incentive Plan (“the 2011 Plan”). The maximum number of shares subject to stock options or SSARs that may be granted to an individual in a calendar year is 800,000 shares, and the maximum number of shares subject to restricted shares or restricted share units that may be granted to an individual in a calendar year is 400,000 shares. The maximum aggregate number of restricted shares or restricted share units that may be granted under the 2011 Plan is 1.0 million.

We have a shareholder-approved 2006 Stock Incentive Plan (the “2006 Plan”), as well as, a 2000 Stock Option Plan for Outside Directors and a 2000 Stock Incentive Plan that still have vested awards outstanding. Awards are no longer being granted from these incentive plans.

We may distribute authorized but unissued shares or treasury shares to satisfy share option and appreciation right exercises or restricted share and performance share awards.

We record compensation expense related to stock options, stock-settled stock appreciation rights, restricted shares, and performance shares granted to certain employees and non-employee directors based on the fair value of the awards on the grant date. The fair value of restricted share and performance share awards is based on the closing price of our common shares on the grant date. The fair value of stock option and stock-settled appreciation right awards is estimated on the grant date using the Black-Scholes-Merton option pricing model, which includes assumptions regarding the risk-free interest rate, dividend yield, life of the award, and the volatility of our common shares.

The following table summarizes the share-based compensation expense for options, SSARs, restricted and performance awards included in the Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2012 and 2011:
 
Three months ended
 
Nine months ended
 
December 31,
 
December 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Product development
$
145

 
$
37

 
$
367

 
$
208

Sales and marketing
44

 
34

 
101

 
194

General and administrative
254

 
290

 
806

 
1,948

Total share-based compensation expense
$
443

 
$
361

 
$
1,274

 
$
2,350



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Table of Contents

Stock Options
The following table summarizes the activity during the nine months ended December 31, 2012 for stock options awarded under the 2006 Plan:
 
Number
of
Options
 
Weighted-
Average
Exercise
Price
 
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
(In thousands, except share and per share data)
 
 
(per share)
 
(in years)
 
 
Outstanding at April 1, 2012
971,001

 
$
13.52

 
 
 
 
Granted
—

 
—

 
 
 
 
     Exercised
(66,667
)
 
2.51

 
 
 
 
     Cancelled/expired
(134,834
)
 
14.55

 
 
 
 
Outstanding and exercisable at December 31, 2012
769,500

 
$
14.30

 
3.2
 
$
234


A total of 46,519 shares, net of 11,660 shares withheld to cover the applicable exercise price of the award and 8,488 shares withheld to cover the employee's minimum applicable income taxes, were issued from treasury shares to settle stock options exercised during the first nine months of fiscal 2013.

Stock-Settled Stock Appreciation Rights

Stock-Settled Appreciation Rights (“SSARs”) are rights granted to an employee to receive value equal to the difference in the price of our common shares on the date of the grant and on the date of exercise. This value is settled in common shares of Agilysys.

The following table summarizes the activity during the nine months ended December 31, 2012 for SSARs awarded under the 2011 and the 2006 Plan:
 
Number
of Rights
 
Weighted-
Average
Exercise
Price
 
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
(In thousands, except share and per share data)
 
 
(per right)
 
(in years)
 
 
Outstanding at April 1, 2012
606,834

 
$
6.91

 
 
 
 
Granted
318,607

 
7.52

 
 
 
 
Exercised
(138,207
)
 
6.56

 
 
 
 
Forfeited
(66,561
)
 
7.43

 
 
 
 
Outstanding at December 31, 2012
720,673

 
$
7.20

 
7.2
 
$
854

Exercisable at December 31, 2012
305,499

 
$
6.68

 
4.4
 
$
517


As of December 31, 2012, total unrecognized stock based compensation expense related to non-vested SSARs was $1.2 million, which is expected to be recognized over a weighted-average vesting period of 2.0 years.

A total of 19,035 shares, net of 9,236 shares withheld to cover the employee’s minimum applicable income taxes, were issued from treasury shares to settle SSARs exercised during the nine months ended December 31, 2012. The shares withheld were returned to treasury shares.

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Restricted Shares

We granted shares to certain of our Directors, executives and key employees under the 2011 Plan, the vesting of which is service-based. The following table summarizes the activity during the nine months ended December 31, 2012 for restricted shares awarded under the 2011 Plan:
 
Number
of Shares
 
Weighted-
Average
Grant-
Date Fair
Value
 
 
 
(per share)
Outstanding at April 1, 2012
48,558

 
$
7.80

Granted
190,376

 
7.80
Vested
(7,000
)
 
7.42
Forfeited
(12,743
)
 
7.42
Outstanding at December 31, 2012
219,191

 
$
7.84


The weighted-average grant date fair value of the restricted shares is determined based upon the closing price of our common shares on the grant date. Compensation expense related to restricted share awards is recognized ratably over the restriction period based upon the closing market price of our common shares on the grant date. As of December 31, 2012, total unrecognized stock based compensation expense related to non-vested restricted stock was $1.0 million, which is expected to be recognized over a weighted-average vesting period of 1.9 years. We do not include restricted stock in the calculation of earnings per share until the shares are vested.

Performance Shares

In the first nine months of fiscal 2013, we granted shares to certain of our key employees under the 2011 Plan, the vesting of which is contingent upon meeting various company-wide performance goals within a two-year period.

The following table summarizes the activity during the nine months ended December 31, 2012 for performance shares awarded under the 2011 Plan:
 
Number
of
Shares
 
Weighted-
Average
Grant-
Date Fair
Value
 
 
 
(per share)
Outstanding at April 1, 2012
$
—

 
$
—

Granted
17,728

 
8.64

Outstanding at December 31, 2012
$
17,728

 
$
8.64


The weighted-average grant date fair value of the performance shares is determined based upon the closing price of our common shares on the grant date and assumed that performance goals would be met at target. Compensation expense related to performance share awards is recognized ratably over the vesting period based upon the closing market price of our common shares on the grant date. As of December 31, 2012, total unrecognized stock based compensation expense related to non-vested performance shares was $0.1 million, which is expected to be recognized over a weighted-average vesting period of 1.4 years.




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Table of Contents

10. Fair Value Measurements

We estimate the fair value of financial instruments using available market information and generally accepted valuation methodologies. We assess the inputs used to measure fair value using a three-tier hierarchy. The hierarchy indicates the extent to which pricing inputs used in measuring fair value are observable in the market. Level 1 inputs include unadjusted quoted prices for identical assets or liabilities and are the most observable. Level 2 inputs include unadjusted quoted prices for similar assets and liabilities that are either directly or indirectly observable, or other observable inputs such as interest rates, foreign currency exchange rates, commodity rates, and yield curves. Level 3 inputs are not observable in the market and include our own judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the tables below.
 
There were no significant transfers between Levels 1, 2, and 3 during the nine months ended December 31, 2012.

The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:
 
Fair value measurement used
 
Recorded
value
as of
 
Active
markets
for
identical
assets or
liabilities
 
Quoted
prices in
similar
instruments
and
observable
inputs
 
Active
markets for
unobservable
inputs
(In thousands)
December 31, 2012
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Corporate-owned life insurance — non-current
$
3,589

 
$
—

 
$
—

 
$
3,589



 
Fair value measurement used
 
Recorded
value
as of
 
Active
markets
for
identical
assets or
liabilities
 
Quoted
prices in
similar
instruments
and
observable
inputs
 
Active
markets for
unobservable
inputs
(In thousands)
March 31, 2012
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Available for sale restricted marketable securities — current
$
4,408

 
$
4,408

 
$
—

 
$
—

Corporate-owned life insurance — non-current
3,458

 
—

 
—

 
3,458

Liabilities:
 
 
 
 
 
 
 
BEP —current
2,948

 
—

 
2,948

 
—


We maintained an investment in available for sale marketable securities, in a Rabbi Trust recorded in “Other current assets”, in which cost approximated fair value. The recorded value of our investment in available for sale marketable securities is based on quoted prices in active markets and, therefore, is classified within Level 1 of the fair value hierarchy. The Rabbi Trust was used to fund the BEP and SERP obligations, which were fulfilled in April 2012. The Rabbi Trust was subsequently closed.

The recorded value of the corporate-owned life insurance policies is adjusted to the cash surrender value of the policies obtained from the third party life insurance providers, which are not observable in the market, and therefore, are

18
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classified within Level 3 of the fair value hierarchy. Changes in the cash surrender value of these policies are recorded within “Other expenses (income), net” in the Condensed Consolidated Statements of Operations.

The recorded value of the BEP obligation is measured as employee deferral contributions and our matching contributions less distributions made from the plan, and adjusted for the returns on the hypothetical investments selected by the participants, which are indirectly observable and therefore, classified within Level 2 of the fair value hierarchy. The BEP obligation was fulfilled in April 2012 with funds held in the Rabbi Trust.

The following table presents a summary of changes in the fair value of the Level 3 assets and liabilities for the nine months ended December 31, 2012 and 2011:

 
Level 3 assets and
liabilities
(In thousands)
2012
 
2011
Corporate-owned life insurance:
 
 
 
Balance on April 1
$
3,458

 
$
3,323

Unrealized gain relating to instruments held at reporting date
46

 
83

Purchases, sales, issuances and settlements, net
85

 
(235
)
Balance on December 31
$
3,589

 
$
3,171


The following tables present information about our financial and nonfinancial assets and liabilities measured at fair value on a nonrecurring basis and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value:
 
Fair value measurement used
 
Recorded
value as
of
 
Active
markets
for
identical
assets or
liabilities
 
Quoted
prices in
similar
instruments
and
observable
inputs
 
Active
markets for
unobservable
inputs
(In thousands)
December 31,
2012
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Goodwill
$
14,259

 
$
—

 
$
—

 
$
14,259

Intangible assets
15,922

 
—

 
—

 
15,922

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Restructuring liabilities — current
$
931

 
$
—

 
$
—

 
$
931

Other employee benefit plan obligations — non-current
196

 
—

 
—

 
196



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Table of Contents

 
Fair value measurement used
 
Recorded
value as
of
 
Active
markets
for
identical
assets or
liabilities
 
Quoted
prices in
similar
instruments
and
observable
inputs
 
Active
markets for
unobservable
inputs
(In thousands)
March 31,
2012
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets:
 
 
 
 
 
 
 
Goodwill
$
15,198

 
$
—

 
$
—

 
$
15,198

Intangible assets
14,135

 
—

 
—

 
14,135

Liabilities:
 
 
 
 
 
 
 
SERP obligations — current
$
3,323

 
$
—

 
$
—

 
$
3,323

Restructuring liabilities — current
5,447

 
—

 
—

 
5,447

Other employee benefit plans obligations — non-current
196

 
—

 
—

 
196

Restructuring liabilities — non-current
852

 
—

 
—

 
852


Intangible assets are valued at their estimated fair value at time of acquisition. We evaluate the fair value of our definite-lived and indefinite-lived intangible assets on an annual basis, or in interim periods if indicators of potential impairment exist. The income approach using “the relief from royalty method” was used to value indefinite-lived intangible assets.

The recorded value of SERP and other benefit plans obligations is based on estimates developed by management by evaluating actuarial information and includes assumptions such as discount rates, future compensation increases, expected retirement dates, payment forms, and mortality. The recorded value of these obligations is measured on an annual basis, or upon the occurrence of a plan curtailment or settlement. The SERP obligation was fulfilled in April 2012 with funds held in the Rabbi Trust.

Restructuring liabilities primarily consist of one-time termination benefits to former employees and ongoing costs related to long-term operating lease obligations. The recorded value of the termination benefits to employees is adjusted to the expected remaining obligation each period based on the arrangements made with the former employees. The recorded value of the ongoing lease obligations is based on the remaining lease term and payment amount, net of sublease income plus interest, discounted to present value. Changes in subsequent periods resulting from revisions to either the timing or amount of estimated cash flows over the remaining future periods are measured using the credit-adjusted, risk-free rate that was used to measure the restructuring liabilities initially.

The inputs used to value the our goodwill, intangible assets, employee benefit plan obligations, and restructuring liabilities are not observable in the market and therefore, these amounts are classified within Level 3 in the fair value hierarchy.


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Table of Contents

The following table presents a summary of changes in the fair value of the Level 3 assets and liabilities for the nine months ended December 31, 2012 and 2011:
 
 
Level 3 assets and liabilities
 
Nine months ended December 31, 2012
(In thousands)
Goodwill
 
Intangible
assets
 
SERP
obligations
 
Other
employee
benefit
plans
obligations
 
Restructuring
liabilities
Balance at April 1, 2012
$
15,198

 
$
14,135

 
$
3,323

 
$
196

 
$
6,299

Foreign currency translation adjustments
(939
)
 
—

 
—

 
—

 
—

Amortization
—

 
(1,621
)
 
—

 
—

 
—

Purchases
—

 
—

 
—

 
—

 
1,182

Provisions, payments and other charges (net)
—

 
3,408

 
(3,323
)
 
—

 
(6,550
)
Balance at December 31, 2012
$
14,259

 
$
15,922

 
$
—

 
$
196

 
$
931


 
Level 3 assets and liabilities
 
Nine months ended December 31, 2011
(In thousands)
Goodwill
 
Intangible
assets
 
SERP
obligations
 
Other
employee
benefit
plans
obligations
 
Restructuring
liabilities
Balance at April 1, 2011
$
15,211

 
$
22,535

 
$
5,791

 
$
305

 
$
733

Foreign currency translation adjustments
(107
)
 
—

 
—

 
—

 
—

Amortization
—

 
(1,532
)
 
—

 
—

 
—

Purchases
—

 
—

 
—

 
—

 
4,716

Provisions, payments and other charges (net)
—

 
959

 
61

 
—

 
(998
)
Balance at December 31, 2011
$
15,104

 
$
21,962

 
$
5,852

 
$
305

 
$
4,451


Unrealized losses related to goodwill represent fluctuations due to the movement of foreign currencies relative to the U.S. dollar and are recorded within “Accumulated other comprehensive (loss) income” in the Condensed Consolidated Balance Sheets.

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11. Business Segments

Description of Business Segments

Agilysys has two reportable business segments: HSG and RSG. The reportable segments are each managed separately and are supported by various practices as well as company-wide functional departments. These functional support departments include general accounting and finance, accounts payable, tax, information technology, legal, payroll, and benefits and a portion of these costs are reported in Corporate/Other. Corporate/Other is not a reportable business segment as defined by GAAP. As a result of the sale of the TSG business during fiscal 2012, and the TSA with OnX, Corporate/Other costs have been adjusted for the period presented to remove the portion of the functional support department costs that were transferred to OnX.

Measurement of Segment Operating Results and Segment Assets

We evaluate performance and allocate resources to our reportable segments based on operating income. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies elsewhere in the footnotes to the consolidated financial statements. Intersegment sales are recorded at pre-determined amounts to allow for intercompany profit to be included in the operating results of the individual reportable segments. Such intercompany profit is eliminated for consolidated financial reporting purposes.

For the three and nine months ended December 31, 2012, revenue from one RSG customer represented 20.9% and 11.3% of consolidated net revenue, respectively.

Our Chief Executive Officer, who is the Chief Operating Decision Maker, does not evaluate a measurement of segment assets when evaluating the performance of our reportable segments. As such, information relating to segment assets is not provided in the financial information below.

The following tables present segment profit and related information for each of our reportable segments for the three and nine months ended December 31, 2012 and 2011.


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Table of Contents

 
Reportable Segments
 
Corporate/
 
 
(In thousands)
HSG
 
RSG
 
Other
 
Consolidated
Three months ended December 31, 2012
 
 
 
 
 
 
 
Total revenue:
 
 
 
 
 
 
 
Products
$
12,251

 
$
27,959

 
$
—

 
$
40,210

Support, maintenance and subscription services
12,461

 
7,171

 
—

 
19,632

Professional services
3,478

 
4,128

 
—

 
7,606

Elimination of intersegment revenue
—

 
(237
)
 
—

 
(237
)
Revenue from external customers
$
28,190

 
$
39,021

 
—

 
$
67,211

 
 
 
 
 
 
 
 
Gross profit
$
16,168

 
$
7,281

 
$
—

 
$
23,449

Gross profit margin
57.4
%
 
18.7
%
 
 
 
34.9
%
 
 
 
 
 
 
 
 
Operating income (loss)
$
3,998

 
$
3,020

 
$
(6,207
)
 
$
811

Interest expense, net
—

 
—

 
56

 
56

Other expenses, net
—

 
—

 
220

 
220

Income (loss) before income taxes
$
3,998

 
$
3,020

 
$
(6,483
)
 
$
535

 
 
 
 
 
 
 
 
Other charges:
 
 
 
 
 
 
 
Depreciation of fixed assets and amortization of intangibles
$
665

 
$
150

 
$
650

 
$
1,465

Restructuring, severance and other charges
$
6

 
$
—

 
$
(37
)
 
$
(31
)
 
 
 
 
 
 
 
 
Three Months Ended December 31, 2011
 
 
 
 
 
 
 
Total revenue:
 
 
 
 
 
 
 
Products
$
6,618

 
$
19,107

 
$
—

 
$
25,725

Support, maintenance and subscription services
12,243

 
6,257

 
—

 
18,500

Professional services
2,819

 
4,763

 
—

 
7,582

Elimination of intersegment revenue
—

 
(225
)
 
—

 
(225
)
Revenue from external customers
$
21,680

 
$
29,902

 
—

 
$
51,582

 
 
 
 
 
 
 
 
Gross profit
$
13,957

 
$
5,976

 
$
—

 
$
19,933

Gross profit margin
64.4
%
 
20.0
%
 
 
 
38.6
%
 
 
 
 
 
 
 
 
Operating income (loss)
$
1,864

 
$
1,439

 
$
(10,352
)
 
$
(7,049
)
Interest expense, net
—

 
—

 
56

 
56

Other expenses, net
—

 
—

 
22

 
22

Income (loss) before income taxes
$
1,864

 
$
1,439

 
$
(10,430
)
 
$
(7,127
)
 
 
 
 
 
 
 
 
Other charges:
 
 
 
 
 
 
 
Depreciation of fixed assets and amortization of intangibles
$
693

 
$
153

 
$
1,131

 
$
1,977

Restructuring, severance and other charges
$
11

 
$
16

 
$
4,529

 
$
4,556



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Reportable Segments
 
Corporate/
 
 
(In thousands)
HSG
 
RSG
 
Other
 
Consolidated
Nine Months Ended December 31, 2012
 
 
 
 
 
 
 
Total revenue:
 
 
 
 
 
 
 
Products
$
26,087

 
$
63,175

 
$
—

 
$
89,262

Support, maintenance and subscription services
37,817

 
20,237

 
—

 
58,054

Professional services
10,907

 
15,622

 
—

 
26,529

Elimination of intersegment revenue
(30
)
 
(712
)
 
—

 
(742
)
Revenue from external customers
$
74,781

 
$
98,322

 
$
—

 
$
173,103

 
 
 
 
 
 
 
 
Gross profit
$
46,690

 
$
19,218

 
$
—

 
$
65,908

Gross profit margin
62.4
%
 
19.5
%
 
 
 
38.1
%
 
 
 
 
 
 
 
 
Operating income (loss)
$
10,254

 
$
6,862

 
$
(18,394
)
 
$
(1,278
)
Interest expense, net
—

 
—

 
217

 
217

Other expenses, net
—

 
—

 
202

 
202

Income (loss) before income taxes
$
10,254

 
$
6,862

 
$
(18,813
)
 
$
(1,697
)
 
 
 
 
 
 
 
 
Other charges:
 
 
 
 
 
 
 
Depreciation of fixed assets and amortization of intangibles
$
1,989

 
$
461

 
$
2,128

 
$
4,578

Asset impairments and related charges
$
208

 
—

 
—

 
$
208

Restructuring, severance and other charges
$
921

 
—

 
$
603

 
$
1,524

 
 
 
 
 
 
 
 
Nine Months Ended December 31, 2011
 
 
 
 
 
 
 
Total revenue:
 
 
 
 
 
 
 
Products
$
18,399

 
$
61,988

 
$
—

 
$
80,387

Support, maintenance and subscription services
35,291

 
19,033

 
—

 
54,324

Professional services
9,800

 
12,967

 
—

 
22,767

Elimination of intersegment revenue
—

 
(620
)
 
—

 
(620
)
Revenue from external customers
$
63,490

 
$
93,368

 
$
—

 
$
156,858

 
 
 
 
 
 
 
 
Gross profit
$
40,187

 
$
18,833

 
$
—

 
$
59,020

Gross profit margin
63.3
%
 
20.2
%
 

 
37.6
%
 
 
 
 
 
 
 
 
Operating income (loss)
$
2,075

 
$
5,169

 
$
(28,485
)
 
$
(21,241
)
Interest expense, net
—

 
—

 
883

 
883

Other expenses, net
—

 
—

 
293

 
293

Income (loss) before income taxes
$
2,075

 
$
5,169

 
$
(29,661
)
 
$
(22,417
)
 
 
 
 
 
 
 
 
Other charges:
 
 
 
 
 
 
 
Depreciation of fixed assets and amortization of intangibles
$
1,931

 
$
457

 
$
3,571

 
$
5,959

Restructuring, severance and other charges
$
817

 
$
381

 
$
9,392

 
$
10,590




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Table of Contents

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, 2012, 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, 2012. 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 40 of this Quarterly Report and Item 1A “Risk Factors” in Part I of our Annual Report for the fiscal year ended March 31, 2012 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 and retail industries. We specialize in market-leading point-of-sale, property management, inventory and procurement, and mobile and wireless solutions that are designed to streamline operations, improve efficiency and enhance the consumer's experience. Our customers include casinos, resorts, hotels, foodservice venues, stadiums, cruise lines, grocery stores, convenience stores, general and specialty retail businesses and partners. A significant portion of our consolidated revenue is derived from contract support, maintenance agreements and professional services.
We operate extensively throughout North America, with additional sales and support offices in the United Kingdom, Singapore and Hong Kong. We have two operating segments: Hospitality Solutions Group (“HSG”) and Retail Solutions Group (“RSG”).
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 acquisitions.
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 August 1, 2011, we completed the sale of our Technology Solutions Group (“TSG”) business to OnX Enterprise Solutions Limited and its subsidiary OnX Acquisition LLC (together “OnX”). For financial reporting purposes, TSG’s operating results for fiscal 2012 through the completion of the sale were classified within discontinued operations. Accordingly, the discussion and analysis presented below, reflects the continuing business of Agilysys.



26
Table of Contents

Results of Operations