UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 2013 | |
or | |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For 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 | 45,202 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (770) 810-7800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common Shares, without par value | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
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 þ 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 ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 þ Non-accelerated filer ¨ Smaller reporting company ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
The aggregate market value of Common Shares held by non-affiliates as of September 30, 2012 was $124,082,511.
As of May 31, 2013, 22,417,165 shares of the registrant's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be used in connection with its 2013 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
AGILYSYS, INC.
Annual Report on Form 10-K
Year Ended March 31, 2013
Table of Contents
Page | ||
PART I | ||
ITEM 1. | Business | |
ITEM 1A. | Risk Factors | |
ITEM 1B. | Unresolved Staff Comments | |
ITEM 2. | Properties | |
ITEM 3. | Legal Proceedings | |
ITEM 4. | Mine Safety Disclosures | |
PART II | ||
ITEM 5. | Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities | |
ITEM 6. | Selected Financial Data | |
ITEM 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
ITEM 7A. | Quantitative and Qualitative Disclosures about Market Risk | |
ITEM 8. | Financial Statements and Supplementary Data | |
ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
ITEM 9A. | Controls and Procedures | |
ITEM 9B. | Other Information | |
PART III | ||
ITEM 10. | Directors, Executive Officers and Corporate Governance | |
ITEM 11. | Executive Compensation | |
ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters | |
ITEM 13. | Certain Relationships and Related Transactions, and Director Independence | |
ITEM 14. | Principal Accountant Fees and Services | |
PART IV | ||
ITEM 15. | Exhibits and Financial Statements | |
SIGNATURES | ||
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Forward Looking Information
This Annual Report and other publicly available documents, including the documents incorporated herein and therein by reference, contain, and our officers and representatives may from time to time make, "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as: "anticipate," "intend," "plan," "goal," "seek," "believe," "project," "estimate," "expect," "strategy," "future," "likely," "may," "should," "will" and similar references to future periods. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. These statements are based on management's current expectations, intentions, or beliefs and are subject to a number of factors, assumptions, and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause or contribute to such differences or that might otherwise impact the business include the risk factors set forth in Item 1A of this Annual Report. We undertake no obligation to update any such factor or to publicly announce the results of any revisions to any forward-looking statements contained herein whether as a result of new information, future events, or otherwise.
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Part I
Item 1. Business.
Overview
We are a leading developer and marketer of proprietary enterprise software, services and solutions to the hospitality and retail industries. We specialize in the development of market-leading point-of-sale (POS), property management, inventory & procurement and mobile & wireless solutions that are designed to streamline operations, improve efficiency and enhance the guest experience. In addition, we provide support, maintenance, resold hardware products and software hosting or subscription services. Our customers include casinos, resorts, hotels, foodservice venues, stadiums, cruise lines, grocery stores, convenience stores, general & 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, Europe and Asia, with corporate services located in Atlanta, GA, EMEA headquarters in Cheshire, UK and APAC offices in both Singapore and Hong Kong. We have two operating segments: Hospitality Solutions Group (HSG) and Retail Solutions Group (RSG). Our principal executive offices are located at 425 Walnut Street, Suite 1800, Cincinnati, Ohio, 45202 and our corporate services are located at 1000 Windward Concourse, Suite 250, Alpharetta, Georgia, 30005.
Reference herein to any particular year or quarter refers to periods within our fiscal year ended March 31. For example, fiscal 2013 refers to the fiscal year ended March 31, 2013.
History and Significant Events
Organized in 1963 as Pioneer-Standard Electronics, Inc., an Ohio corporation, we began operations as a distributor of electronic components and, later, enterprise computer solutions. Exiting the former in fiscal 2003 with the sale of our Industrial Electronic Division, we used the proceeds to reduce debt, fund growth of our enterprise solutions business and acquire businesses focused on higher-margin and more specialized solutions for the hospitality and retail industries. At the same time, we changed our name to Agilysys, Inc.
In fiscal 2004, we acquired Kyrus Corporation and became the leading provider of IBM retail solutions and services in the supermarket, chain drug, general retail, and hospitality segments. In that same year, the acquisition of Inter-American Data, Inc. allowed us to become the leading developer and provider of technology solutions for property and inventory management in the casino and resort industries.
In calendar 2007, we divested KeyLink Systems and exited the enterprise computer distribution business. We used the proceeds from that sale to return cash to shareholders and fund a number of acquisitions that broadened our solutions and capabilities portfolios. We acquired InfoGenesis and Visual One Systems Corp. in calendar 2007, significantly expanding our specialized offerings to the hospitality industry through enterprise-class, point-of-sale (POS) and software solutions tailored for a variety of applications in cruise, golf, spa, gaming, lodging, resort, and catering. These offerings feature highly intuitive, secure and robust solutions, easily scalable across multiple departments or property locations. In fiscal 2008, we began reporting three primary operating segments: Hospitality Solutions Group (HSG), Retail Solutions Group (RSG) and Technology Solutions Group (TSG).
In fiscal 2012, we sold our TSG segment and restructured our business model to focus on higher-margin opportunities in the hospitality and retail sectors, which we believe hold greater potential for profitable growth. We also reduced our real-estate footprint and lowered overhead costs by relocating corporate services from Solon, Ohio to Alpharetta, Georgia, moving our senior management team closer to our operating units.
Today, we are focused on providing state-of-the-art, end-to-end solutions that enhance guest experiences and allow our customers to promote their respective brands. We help our customers win the guest recruitment battle and, in turn, grow revenue, reduce costs and increase efficiency. This is accomplished by developing and deploying intuitive solutions that increase speed and accuracy, thereby enabling more effective management, intelligent upselling, reduced shrinkage, improved brand recognition and better control of the customer relationship. Our strategy is to increase the proportion of revenue we derive from ongoing support and maintenance agreements, software as a subscription services, cloud applications and professional services.
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Divestiture of Retail Solutions Group (RSG)
On May 31, 2013, we entered into a definitive agreement to sell our Retail Solutions Group business to an affiliate of Clearlake Capital Group, L.P., for total consideration of $34.6 million in cash, subject to customary closing conditions and expect to recognize a gain in this transaction. Additionally, we expect to utilize existing net operating losses against our gain. Following completion of the transaction, which we expect to occur in our fiscal second quarter, our business will be focused exclusively on our Hospitality Solutions Group and the growth opportunities in this market.
Acquisition of TimeManagement Corporation (TMx)
On June 10, 2013, we acquired the assets of TimeManagement Corporation, a privately-owned Minneapolis-based provider of enterprise-wide software and service solutions that streamline workforce management environments for hospitality operators.
Products, Support and Professional Services
We are a leading developer and marketer of end-to-end technology solutions for the hospitality and retail industries, including hardware and software products; support, maintenance and subscription services; and professional services. Areas of specialization are point-of-sale, property management, inventory and procurement, mobile and wireless solutions designed to streamline operations, improve efficiency and enhance the guest experience.
To align with our strategic restructuring in fiscal 2012 and enhance transparency into the business, we commenced presenting revenue and costs of goods sold in three categories:
• | Products (hardware and software) |
• | Support, maintenance and subscription services |
• | Professional services |
Total revenue from continuing operations for these three specific areas of offerings follows:
Year ended March 31, | |||||||||
(In thousands) | 2013 | 2012 | 2011 | ||||||
Products | $ | 123,798 | $ | 105,601 | $ | 104,769 | |||
Support, maintenance and subscription services | 77,145 | 72,711 | 70,729 | ||||||
Professional services | 35,197 | 30,577 | 27,183 | ||||||
Total | $ | 236,140 | $ | 208,889 | $ | 202,681 | |||
Products: Products revenue includes resold hardware and proprietary and remarketed software that are deployed as an integral component of the solutions we provide. Our proprietary product suite is comprised of:
HSG Property Management Systems (“PMS”)
• | Agilysys Lodging Management System® (LMS) is web-enabled and runs 24/7 to automate every aspect of hotel operations in properties of 1,000 rooms or more. Its foundation expands to incorporate modules for sales and catering, activities scheduling, attraction ticketing and more. |
• | Agilysys Visual One™ PMS is installed in hotels ranging from 50-1,500 rooms. For complex resorts that require an enterprise-wide system, Visual One provides an integrated solution with interfaces to leading global distribution systems (GDSs) and other Agilysys products. |
HSG Point-of-Sale
• | Agilysys InfoGenesis™ POS is award-winning point-of-sale software that combines powerful reporting and configuration capabilities in the back office with a fast, intuitive and easy-to-use terminal application. The flexible system is easy to set up, and its scalable architecture enables customers to add workstations without having to build out expensive infrastructure. The system's detailed and high-quality reporting capabilities give insight into sales data and guest purchasing trends. Other features include packages and prix fixe menus, signature capture and multi-language capability. InfoGenesis POS is available as an on-premise solution or through a subscription service. |
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• | Agilysys InfoGenesis™ Mobile is a mobile POS solution that seamlessly integrates with Agilysys InfoGenesis POS software. The application is reliable and easy to learn, with a user interface that's simple to use and configure. Users can tap, drag or swipe using an intuitive multi-touch interface to create and tender checks. Orders are automatically sent to the kitchen, enabling faster service and increased table turns. InfoGenesis Mobile is a flexible, cost-effective tool to help service teams become more efficient and productive. Simplified ordering and faster guest service provides a competitive edge in a crowded marketplace. |
• | Agilysys Elevate™, a next generation POS solution, is a web-based system that operates in the cloud for ease of deployment and remote updates. Users can access data in real time from any location. Leveraging the best of modern interface features, Elevate delivers a clean, smooth and intuitive user experience. With the software's offline capabilities, including credit card payment acceptance, data is automatically synchronized once connectivity is restored. |
• | Agilysys Meritage is a POS application that allows guests to browse a media-rich menu and place orders directly from an Apple® iPad® into the Agilysys InfoGenesis™ POS system for fulfillment and delivery. The solution can operate either as a standalone system or it can be integrated with InfoGenesis POS software. In its integrated version, it gives management access to the POS back office, offering rich reporting and configuration capabilities. Meritage may be used purely as a self-service solution, although it is intended to be complementary to restaurant guests or used for room service. The functionality that allows communication between the guest and waitstaff enables messaging between the two, which helps staff provide the best possible guest experience. |
• | Agilysys InfoGenesis™ Normandy mobile POS solution is an order-taking application intended to modernize and extend the functionality of your current POS software. Designed to operate on mobile handheld devices, InfoGenesis Normandy seamlessly integrates with both Agilysys InfoGenesis POS and Agilysys InfoGenesis Meritage solutions. The application facilitates communication between waitstaff and the kitchen or bar by automatically sending orders to each area, enabling faster service and increased table turns. |
• | Agilysys MPOS is a handheld point-of-sale solution that integrates with InfoGenesis POS to enable guest service in any location. |
• | Agilysys eMenu is an online ordering application that enables our customers to capitalize on the popularity of Web and kiosk ordering while maintaining their existing company brand and workflow. |
• | Agilysys eCash takes traditional cashless payment and stored value card capabilities and integrates them directly with InfoGenesis POS, increasing consumers' payment options. |
InfoGenesis POS, eMenu and eCash are available through traditional software licensing or via subscription.
RSG Point of Sale NextVision Mobile Application Suite
• | NextGateway supports a wide array of feature plug-ins such as store activity reporting, item price information, printer integration, emailing receipts and options for accessing and sharing local store and enterprise data. |
• | NextManager uses the Company's new gateway framework to implement store reporting, terminal monitoring and manager alerts. |
• | NextPosition 3T enables full mobile point-of sale functionality for Toshiba Global Commerce Solutions 4690-based Supermarket Application and ACE applications. |
• | NextPosition 3S is a mobile point-of-sale software system available on iOS and Android mobile devices designed to work with the SAP® Point-of-Sale application 2.3 allowing retailers to extend their fixed point-of-sale and deliver true point-of-service experience to customers. |
HSG Inventory & Procurement
• | Agilysys Stratton Warren System (SWS) integrates with all leading financial and POS software products. The software manages the entire procurement process via e-commerce, from the point of business development to managing enterprise-wide backend systems and daily operations. |
• | Agilysys Eatec® provides core purchasing, inventory, recipe, forecasting, production and sales analysis functions and is unique in offering catering, restaurant, buffet management and nutrition modules in a single web-enabled solution. |
• | Agilysys EatecTouch is an optional software applet that operates on any Windows®-based POS terminal, providing users with access to the Eatec application from any terminal location. |
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• | Agilysys EatecPocket is a Microsoft® Windows® Mobile compatible application designed to work on a handheld wireless device, enabling users to perform inventory transactions. The software incorporates barcode scanner functionality for mobile updates of the database. |
Eatec and Stratton Warren System solutions are available through traditional software licensing or via subscription.
HSG Document Management
• | Agilysys DataMagine™ is a U.S.-patented imaging module and archiving solution that allows users to securely capture and retrieve documents and system-generated information. DataMagine integrates with all Agilysys products, adding functionality and increasing benefit to customers. |
HSG Activities
• | Agilysys GolfPro is a module that offers golf property managers complete pro shop management with tee time scheduling, member profile/billing, tournament management and Web and e-mail access bundled into one solution. |
• | Agilysys Spa Management software covers all aspects of running a spa business, from scheduling guests for services to managing staff schedules. The software also integrates with Agilysys PMS solutions. |
• | Agilysys LMS ARTS® interfaces with hotel guest data, allowing reservationists to pre-plan activities when booking a guest's room. The application also places canceled activities back into inventory for resale, resulting in optimum property utilization and profitability. |
• | Agilysys Visual One Activities software streamlines the management of all of the amenities and activities a property has to offer. Staff can easily schedule and personalize reservations for guests; activities then appear on itinerary/confirmations. |
Support, Maintenance and Subscription Services: Contracted technical support, maintenance and subscription services are a significant portion of our consolidated revenue and typically generate higher profit margins than products revenue. Growth has been driven by a strategic focus on developing and promoting these offerings while market demand for proper maintenance and updates that enhance reliability, as well as the desire for flexibility in purchasing options, continue to reinforce this trend. Our commitment to exceptional service has enabled us to become a trusted partner with customers who wish to optimize the level of service they provide to their guests and maximize commerce opportunities both on- and off-premise.
Professional Services: We have industry-leading expertise in designing, implementing, integrating and installing customized solutions into both legacy and newly created platforms. For existing enterprises, we seamlessly integrate new systems and for start-ups and fast-growing customers, we become a partner that can manage large-scale rollouts and tight construction schedules. Our extensive experience ranges from staging equipment to phased rollouts as well as training staff in a manner that saves our customers time and money.
Prior to the divestiture of TSG, we purchased IT products and services from the Hewlett-Packard Company (HP), International Business Machines Corporation (IBM), Oracle Corporation (Oracle) and other original equipment manufacturers (OEMs), and resold the components to customers. Operating results from the former TSG business are reported as components of discontinued operations.
In August 2012, Toshiba TEC Corporation acquired IBM's Retail Store Solutions business. Since the completion of the acquisition, we have maintained a strong relationship with Toshiba TEC and intend to continue to be a leading provider of related solutions and services in the supermarket, drug chain, general-retail and other hospitality segments.
Segment Reporting
We have two reportable business segments: HSG and RSG. See Note 16 to Consolidated Financial Statements titled Business Segments for a discussion of our segment reporting.
Hospitality Solutions Group (HSG)
HSG develops, markets and sells property and lodging management, point-of-sale, and inventory and procurement applications to customers in the hospitality industry, including operators of hotels, casinos, destination resorts, cruise lines and foodservice management establishments. We offer solutions that provide comprehensive control of the customer's property operations - from reservations, check in, point-of-sale and other guest-engagement activities to inventory, procurement and document management.
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Retail Solutions Group (RSG)
RSG is one of North America's largest systems integrators retail point-of-sale, self-service and wireless solutions and provides proprietary business consulting, implementation and hardware maintenance and support services. Additionally, our extensive experience in the integration of wireless infrastructure with legacy systems enables our customers to capture the promise of today's mobile technology. Our mobile solutions extend the customer's operations to portable devices, increasing customer satisfaction and productivity with integrated software that reduces security exposure. We also sell POS and mobile POS (MPOS) solutions to facilitate the check-out process as well as other self-service capabilities.
RSG's expertise also encompasses a suite of support and professional services including consultation, analysis, design, installation and implementation, as well as onsite maintenance and ongoing help-desk support. Our comprehensive portfolio of support services provides total lifecycle management for our customers' in-store solutions to help increase their return on investment and lower their total cost of ownership.
Representative Agilysys clients include:
Ameristar Casinos, Inc. | Copper Mountain | Royal Caribbean Cruises, Ltd. |
AVI Foodsystems, Inc. | The Cosmopolitan of Las Vegas | Royal Caribbean International |
Banner Health | CSU Fullerton Auxiliary Services Corporation | Royal Lahaina Resort |
Bed Bath & Beyond | Delhaize America | Rudy's Country Store and BBQ |
Benchmarc Restaurants | Helzberg Diamonds | Sands Casino Resort Bethlehem |
BJ's Wholesale Club | Hialeah Park | SAVOR |
Black Rock Resort | Ho-Chunk Gaming | The Sea Pines Resort |
Boyd Gaming Corporation | The Landmark London Hotel | Sephora |
BR Guest Hospitality | Maryland Live! Casino | Sugar Factory |
The Breakers Palm Beach | Norwegian Cruise Line | The Venetian Resort Hotel Casino |
The Broadmoor's Ranch at Emerald Valley | Oxford Casino | Vail Resorts |
Cannizaro House | Pinehurst Resort | Valley View Casino & Hotel |
Casino del Sol | Rosen Hotels & Resorts | Wakefern Food Corp |
Charming Charlie | ||
Industry and Markets
The hospitality and retail industries encompass a wide variety of market sectors and customers. We operate extensively throughout North America and maintain additional sales and support offices in the United Kingdom, Singapore and Hong Kong. Sales to customers outside of the United States represent less than 10%.
The hospitality industry is made up of a number of defined markets including lodging, casinos, cruise ships, resorts and spas, franchise operators, restaurant chains, stadiums, and arenas, among others. The industry is highly fragmented. For example, in the lodging segment, no single hotel brand accounts for more than 4% of all hotel rooms in the United States. According to Smith Travel Research, the U.S. lodging industry generated approximately $115 billion in room revenue in calendar 2012, with an average of approximately 61.4% of 4.8 million available rooms occupied. This compares with 58.9% in 2011 and a market-cycle peak occupancy rate of 63.1% in 2006. Travelers booked a record 1.09 billion U.S. room nights in 2012, up approximately 3% from 2011 and more than the previous record of 1.03 billion room nights in 2007.
The hospitality industry is economically sensitive. Business and destination resort travel are correlated with the economic conditions in their respective markets. Competition is intense for consumer spending, and hospitality industry participants are seeking ways to enhance the experience of their guests. We are seizing this opportunity by providing our customers with guest connectivity and engagement tools which enable them to enhance their brands and better manage their operations' growth and profitability. In addition to product solutions that are designed and customized to meet unique facility or multi-facility needs, we also provide an array of support and subscription options for maintaining systems and professional services for implementation and rollouts.
We have a significant customer base in the commercial casino and gaming sector. According to the American Gaming Association, over 30% of the U.S. adult population visited a casino at least once in 2012. Amenities in contemporary casinos extend well beyond gaming to include a variety of entertainment and leisure options as well as modern convention centers and meeting facilities to attract the business market. International gaming markets are growing rapidly both in size and new jurisdictions. Asian gaming markets continue to generate robust growth. Gross gaming revenue in Macau exceeds that of the Las Vegas Strip, with a number of the current and planned properties in the region operated by U.S.-based companies. As the market share leader in providing Property Management Systems (PMS) to casinos on the Las Vegas Strip, we are well positioned to benefit from these strong and long-standing relationships
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as our customer base expands into international markets. Additionally, as modern facilities evolve toward cashless operations and digital track-and-log of unique guest behavior, we are able to provide the requisite technologies and expertise to satisfy their needs.
We also have expertise in serving the unique needs of Cruise ship operators. According to the Cruise Industry Overview-2012 State of the Cruise Industry report and Cruise Market Watch, cruise lines continued the growth trends of 2011 in 2012. The worldwide cruise ship fleet currently stands at 284 ships, up from 270 in 2011 and the current order book, which extends through 2016, includes 20 new builds. The industry carried over 20 million passengers in 2012, up from 19.3 million passengers in 2011.
Similarly, the modern retail industry is rapidly transitioning to a higher level of engagement with customers. Retailers selling directly to consumers include softline purveyors (clothing, accessory/shoe and department stores) and hardline purveyors (home improvement, home furnishings and electronics stores) as well as purveyors of consumer staples such as groceries. Integrating our innovative technology with marketing is allowing Retail Solutions Group customers to enjoy the benefits of gift cards and loyalty programs. Other solutions such as mobile POS enable retailers to reduce wait times, increase accuracy and accelerate management reporting. For rapidly expanding retailers and retailers that are engaged in large store-wide POS technology refreshment, we manage large-scale implementation and roll-out-including procurement, staging and installation, post-sale service and maintenance contracts-to ensure a reliable and secure environment.
Customers
Our customers include large, medium-sized and boutique companies, and divisions or departments of large corporations in the hospitality and retail industries. We concentrate on serving the needs of customers in a range of customer-focused settings where brand differentiation is important, particularly in the lodging, casino, destination resort, cruise line, foodservice and retail industries where competition for guest recruitment is intense.
For fiscal 2013, revenue from one RSG customer represented 12.7% of consolidated net revenue.
Seasonality
The HSG and RSG operating units have traditionally experienced seasonal revenue weakness during our fiscal first quarter ending June 30 and, prior to the sale of TSG, we traditionally experienced a seasonal increase in revenue during our fiscal third quarter ending December 31. Additionally, the timing of large one-time orders, such as those associated with substantial retail product rollouts, occasionally creates volatility in our quarterly results.
Competition
Our solutions face a highly competitive market. Competition exists with respect to developing and maintaining relationships with customers, pricing for products and solutions, and customer support and service. Furthermore, our RSG business segment occasionally competes with some of our own suppliers.
HSG competes with other full-service providers that sell and service bundled POS and PMS solutions comprised of hardware, software, support and services. These companies, some of which are much larger than we are, include MICROS Systems, Inc., NCR, Par Technology, Multi-System, Inc., and Infor. We also compete with software companies like IDeaS Revenue Solutions, POSitouch, Northwind and Xpient Solutions and, to a lesser extent, hardware vendors such as IBM, HP, Dell, Casio, and Toshiba. In addition, we compete with PMS systems that are designed and maintained in-house by large hotel chains.
RSG competes in a highly fragmented and regionalized marketplace. We compete primarily with regional integrators, regional and national value-added resellers, solution providers and niche vendors.
Environmental Matters
We believe we are in compliance in all material respects with all applicable environmental laws. Presently, we do not anticipate that such compliance will have a material effect on capital expenditures, earnings or competitive position with respect to any of our operations.
Employees
As of May 31, 2013, we had 765 employees. We are not a party to any collective bargaining agreements, have had no strikes or work stoppages and consider our employee relations to be good.
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Access to Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports are available free of charge through our corporate website, http://www.agilysys.com, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). The information posted on our website is not incorporated into this Annual Report on Form 10-K (Annual Report). Reports, proxy and information statements, and other information regarding issuers that file electronically, are maintained on the SEC website, http://www.sec.gov.
Item 1A. Risk Factors.
Risks Relating to Our Business
The proposed sale of our RSG business segment creates uncertainty and potential liability for the Company.
On May 31, 2013, we and an affiliate of Clearlake Capital Group, L.P. (“Buyer”), entered into an asset purchase agreement pursuant to which we agreed to sell certain assets of its RSG business to Buyer for a purchase price of $34.6 million, subject to adjustment based on final working capital. The closing of the RSG sale is subject to certain conditions and is expected to occur in our fiscal second quarter, which ends September 30, 2013. There is no assurance that the RSG Sale will close.
The purchase agreement provides that, upon a termination in certain specified circumstances relating to acquisition proposals, we may become obligated to pay Buyer a termination fee of $2.0 million and reimburse expenses up to $1.3 million.
If we do not close the RSG sale, we will have incurred significant costs for which we will have received little or no benefit, and we may also incur negative reactions from the financial markets and our shareholders, potential investors, customers and employees. In addition, completing the RSG sale may divert our management's attention from our existing business. Conversely, if the RSG sale is closed, we will operate with less revenue, as the RSG business accounted for approximately 58.4% of our revenue in fiscal 2013.
Each of the above described risk factors associated with the RSG sale may adversely affect our cash flow, operating results and financial condition, and each of these factors may also adversely affect the trading price of common shares.
Continuing challenging global economic conditions could adversely affect our business and financial results.
Global economic conditions continue to be challenging. Our revenue and profitability depend significantly on general economic conditions and the level of capital available to our customers. Our business trends and revenue growth continue to be affected by the challenging economic climate. These difficult economic conditions and the uncertainty about future economic conditions may adversely affect our customers' level of spending, ability to obtain financing for purchases, ability to make timely payments to us and adoption of new technologies, which could require us to increase our allowance for doubtful accounts, negatively impact our days sales outstanding, lead to increased price competition and adversely affect our results of operations.
Our future success will depend on our ability to develop new products, product upgrades and services that achieve market acceptance.
Our business is characterized by rapid and continual changes in technology and evolving industry standards. We believe that in order to remain competitive in the future we will need to continue to develop new products, product upgrades and services, requiring the investment of significant financial resources. If we fail to accurately anticipate our customer's needs and technological trends, or are otherwise unable to complete the development of a product or product upgrade on a timely basis, we will be unable to introduce new products or product upgrades into the market on a timely basis, if at all, and our business and operating results would be materially and adversely affected.
The development process for most new products and product upgrades is complicated, involves a significant commitment of time and resources and is subject to a number of risks and challenges including:
• | Managing the length of the development cycle for new products and product enhancements, which has frequently been longer than we originally expected; |
• | Adapting to emerging and evolving industry standards and to technological developments by our competitors and customers; and |
• | Extending the operation of our products and services to new and evolving platforms, operating systems and hardware products, such as mobile devices. |
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If we are not successful in managing these risks and challenges, or if our new products, product upgrades, and services are not technologically competitive or do not achieve market acceptance, our business and operating results could be adversely affected.
We face extensive competition in the markets in which we operate, and our failure to compete effectively could result in price reductions and/or decreased demand for our products and services.
Several companies offer products and services similar to ours. The rapid rate of technological change in the hospitality market makes it likely we will face competition from new products designed by companies not currently competing with us. We believe our competitive ability depends on our product offerings, our experience in the hospitality industry, our product development and systems integration capability, and our customer service organization. There is no assurance, however, that we will be able to compete effectively in the hospitality technology market in the future.
If we fail to meet our customers' performance expectations, our reputation may be harmed, and we may be exposed to legal liability.
Our ability to attract and retain customers depends to a large extent on our relationships with our customers and our reputation for high quality professional services and integrity. As a result, if a customer is not satisfied with our services or solutions, our reputation may be damaged. Moreover, if we fail to meet our clients' performance expectations, we may lose clients and be subject to legal liability, particularly if such failure adversely impacts our clients' businesses.
In addition, many of our projects are critical to the operations of our customers' businesses. While our contracts typically include provisions designed to limit our exposure to legal claims relating to our products and services, these provisions may not adequately protect us or may not be enforceable in all cases. The general liability insurance coverage that we maintain, including coverage for errors and omissions, is subject to important exclusions and limitations. We cannot be certain that this coverage will continue to be available on reasonable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. A successful assertion of one or more large claims against us that exceeds our available insurance coverage or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect our profitability.
We are subject to pricing pressures for our products and services which could cause us to lose market share and decrease revenue and profitability.
We compete for customers based on several factors, including price. In some cases, we may have to reduce our pricing to obtain business. If we are not able to maintain favorable pricing for our products and services, our profit margin and our profitability could suffer.
Our cloud-based solutions present execution and competitive risks.
Our solutions offered in the cloud accessible via the web without hardware installation or software downloads present new and difficult technology challenges. These offerings depend on integration of third-party hardware, software and cloud hosting vendors working together with our products. As a result, we may be subject to claims if customers experience service disruptions, breaches or other quality issues related to our cloud-based solutions.
Actual or perceived security vulnerabilities in our software products may result in reduced sales or liabilities.
Our software may be used in connection with processing sensitive data (e.g., credit card numbers), and is sometimes used to store such data. It may be possible for the data to be compromised if our customer does not maintain appropriate security procedures. In those instances, the customer may attempt to seek damages from us. While we believe that all of our current software complies with applicable industry security requirements and that we take appropriate security measures to reduce the possibility of breach through our support and other systems, we cannot assure that our customers' systems will not be breached, or that all unauthorized access can be prevented. If a customer, or other person, seeks redress from us as a result of a security breach, our business could be adversely affected.
Hosting of software applications presents increased security risks.
As we expand our software hosting capabilities and offer more of our software applications to our customers on a hosted basis, our responsibility for data and system security with respect to data held in our hosting centers increases significantly. While we believe that our current software applications comply with applicable laws and industry security requirements, and while we believe that we use appropriate security measures to reduce the possibility of unauthorized access or misuse of data in the hosting center, we cannot
11
provide absolute assurance that our hosted systems will not be breached, or that all unauthorized access can be prevented. If a security breach were to occur, a customer, regulatory agency, or other person could seek redress from us, which could adversely affect our business.
Additionally, as we expand our software hosting capabilities and offer more of our software applications to our customers on a hosted basis, our potential liability increases significantly. Specifically, an outage in our data centers can affect numerous customers. While we believe that our data centers have been designed and engineered to reduce the likelihood of outages, we cannot provide assurance that our hosted systems will not suffer from unanticipated outages or deficient performance. If an unanticipated outage were to occur, a customer could suffer economic damages and seek redress from us, which could adversely affect our business.
We may not be able to enforce or protect our intellectual property rights.
We rely on a combination of copyright, patent, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We cannot be certain that the steps we have taken will prevent unauthorized use of our technology. Any failure to protect our intellectual property rights would diminish or eliminate the competitive advantages that we derive from our proprietary technology.
We may be subject to claims of infringement of third-party intellectual property rights.
While we do not believe that our products and services infringe any patents or other intellectual property rights, from time to time, we receive claims that we have infringed the intellectual property rights of others. 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 alleging that point-of-sale and property management and other hospitality information technology products sold by us infringe three patents owned by Ameranth.
This lawsuit and any other such claim, with or without merit, could result in costly litigation and distract management from day-to-day operations. If we are found liable, we could be obligated to pay significant damages or enter into license agreements.
We are subject to litigation, which may be costly.
As a company that does business with many customers, employees and suppliers, we are subject to litigation. The results of such litigation are difficult to predict, and we may incur significant legal expenses if any such claim were filed. While we generally take steps to reduce the likelihood that disputes will result in litigation, litigation is very commonplace and could have an adverse effect on our business.
If we acquire new businesses, we may not be able to successfully integrate them or attain the anticipated benefits.
As part of our operating history and growth strategy, we have acquired other businesses. In the future, we may continue to seek acquisitions. We can provide no assurance that we will be able to identify and acquire targeted businesses or obtain financing for such acquisitions on satisfactory terms. The process of integrating acquired businesses into our operations may result in unforeseen difficulties and may require a disproportionate amount of resources and management attention. If integration of our acquired businesses is not successful, we may not realize the potential benefits of an acquisition or suffer other adverse effects.
Our dependence on certain strategic partners makes us vulnerable to the extent we rely on them.
We rely on a concentrated number of vendors for the majority of our hardware and for certain software and related services needs. We do not have long term agreements with many of these vendors. If we can no longer obtain these hardware, software or services needs from our major suppliers due to mergers, acquisitions or consolidation within the marketplace, material changes in their partner programs, their refusal to continue to supply to us on reasonable terms or at all, and we cannot find suitable replacement suppliers, it may have a material adverse impact on our future operating results and gross margins.
If we fail to retain key employees, our business may be harmed.
Our success depends on the skill, experience and dedication of our employees. If we are unable to retain and attract sufficiently experienced and capable personnel, especially in product development, sales and management, our business and financial results may suffer. For example, if we are unable to retain and attract a sufficient number of skilled technical personnel, our ability to develop high quality products and provide high quality customer service may be impaired. Experienced and capable personnel in the technology industry remain in high demand, and there is continual competition for their talents. When talented employees leave, we may have difficulty replacing them, and our business may suffer. There can be no assurance that we will be able to successfully retain and attract the personnel that we need.
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If we fail to maintain an effective system of internal controls, we may not be able to detect fraud, which could have a material adverse effect on our business.
While we believe our internal control over financial reporting is effective, a controls system cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that control issues and instances of fraud, if any, within our company have been detected.
We have encountered risks associated with maintaining large cash balances.
While we have attempted to invest our cash balances in investments generally considered to be relatively safe, we nevertheless confront credit and liquidity risks. Bank failures could result in reduced liquidity or the actual loss of money held in deposit accounts in excess of federally insured amounts, if any.
We may incur additional goodwill and intangible asset impairment charges that adversely affect our operating results.
We review our goodwill and other intangible asset balances for impairment on at least an annual basis. During the fourth quarter of fiscal 2012, we concluded that certain software developed technology within HSG was no longer available for sale. As a result we recorded an impairment charge of $9.7 million, which impacted HSG's operations. In fiscal 2011, we recognized non-cash impairment charges for goodwill and intangible assets totaling $1.0 million. Our future operating results and the market price of our common stock could be materially adversely affected if we are required to further write down the carrying value of goodwill and/or other intangible assets associated with any of our reporting units in the future.
We may have exposure to greater than anticipated tax liabilities.
Some of our products and services may be subject to sales taxes in states where we have not collected and remitted such taxes from our customers. We have reserves for certain state sales tax contingencies based on the likelihood of obligation. These contingencies are included in “Accrued liabilities” in our Consolidated Balance Sheets. We believe we have appropriately accrued for these contingencies. In the event that actual results differ from these reserves, we may need to make adjustments, which could materially impact our financial condition and results of operations.
Risks Relating to the Industries We Serve
Our business depends to a significant degree on the hospitality and retail industries, and a weakening could adversely affect our business and results of operations.
Because our customer base is concentrated in the hospitality and retail industries, our business is largely dependent on the health of those industries. Our sales are dependent in large part on the health of the hospitality and retail industries, which in turn is dependent on the domestic and international economy. Instabilities or downturns in the hospitality and retail industries could disproportionately impact our revenue, as clients may exit the industry or delay, cancel or reduce planned expenditures for our products. A general downturn in the hospitality and retail industries could disproportionately impact our revenue, as clients may exit the industry or delay, cancel or reduce planned expenditures for our products.
Higher oil and gas prices worldwide could have a material adverse impact on the hospitality industry, and indirectly, on our business.
Material increases in oil and gas prices tend to reduce discretionary spending by consumers, such as on travel and dining, as well as on retail spending generally. Reductions in discretionary spending by consumers adversely affect our customers and, indirectly, our business. Moreover, increases in oil and gas prices also directly adversely affect our customer base in other ways. For example, oil and gas price increases can result in higher ingredient and food costs for our restaurant customers.
Consolidation in the industries that we serve could adversely affect our business.
Customers that we serve may seek to achieve economies of scale and other synergies by combining with or acquiring other companies. Many of the industries that we serve have experienced recent consolidations, including the hotel, casino, quick serve restaurant and grocery industries. Although recent consolidations in these industries have not materially adversely affected our business, there is no assurance that future consolidation will not have such affect. For example, if one of our current customers merges or consolidates with a company that relies on another provider's products or services, it could decide to reduce or cease its purchases of products or services from us, which could have an adverse effect our business.
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Risks Relating to Our Stock
Our stock has been volatile and we expect that it will continue to be volatile.
Our stock price has been volatile, and we expect it will continue to be volatile. For example, during the year ended March 31, 2013, the trading price of our common stock ranged from a high of $10.05 to a low of $6.81. The volatility of our stock price may be due to factors other than those specific to our business, such as economic news or other events generally affecting the trading markets. Additionally, our ownership base has been and may continue to be concentrated in a few shareholders, which could increase the volatility of our common share price over time.
Our largest shareholder, MAK Capital, currently holds approximately 32% of our common shares, which could impact corporate policy and strategy, and MAK Capital's interests may differ from those of other shareholders.
Pursuant to the approval by shareholders of a control share acquisition proposal, MAK Capital holds approximately 32% of our outstanding common shares. As a significant shareholder whose responses could potentially affect the interests of Agilysys and the other shareholders, our Board may consider MAK Capital's potential response to a particular decision of the Board in considering the range of possible corporate policies and strategies in the future, potentially influencing corporate policy and strategic planning.
MAK entered into a Voting Trust Agreement with Computershare, as trustee, which provides that, for both strategic and other transactions requiring at least two-thirds of the voting power to approve, the trustee will vote a certain percentage of MAK Capital's shares in favor of, against, or abstaining from voting in the same proportion as all other shares voted by shareholders (including MAK Capital's shares not being voted by the trustee). If the Voting Trust Agreement, as amended, that MAK entered into with Computershare were to terminate for any reason, MAK Capital would have a level of control that would highly influence the approval or disapproval of transactions requiring under Ohio law the approval of two-thirds of the outstanding common shares, such as a business combination, or majority share acquisition involving the issuance of common shares entitling the holders to exercise one-sixth or more of the voting power of Agilysys, each of which requires approval by two-thirds of the outstanding common shares. MAK Capital might also be able to initiate or substantially assist any such transaction. Even with the limitations on MAK Capital's voting power imposed by the Voting Trust Agreement, as amended, it would be more difficult for the other shareholders to approve such a transaction if MAK Capital opposed it, and MAK Capital's interests may differ from those of other shareholders.
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Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Agilysys' corporate services are located in Alpharetta, Georgia where we lease approximately 23,000 square feet of office space. In addition, we lease approximately 27,000 square feet of office space in Las Vegas, Nevada, 6,400 square feet of office space in Bellevue, Washington and 77,500 square feet of warehouse and office space in Taylors, South Carolina. Our major leases contain renewal options for periods of up to 10 years. We believe that our current facilities and office space are sufficient to meet our needs and do not anticipate any difficulty securing additional space as needed.
Item 3. Legal Proceedings.
We are involved in legal actions that arise in the ordinary course of business. It is the opinion of management that the resolution of any current pending litigation will not have a material adverse effect on our financial position or results of operations.
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. The parties to the lawsuit are currently engaged in discovery. At this time, we are not able to predict the outcome of this lawsuit, or any possible monetary exposure associated with the lawsuit. However, we dispute the allegations of wrongdoing and are vigorously defending ourselves in this matter.
On February 28, 2013 we participated in a mediation that resulted in a tentative agreement to resolve the wage and hour putative class action lawsuit filed against the company on July 9, 2012, in the United States District Court for the Northern District of California. A motion for preliminary approval of a proposed settlement in the amount of $1.5 million was filed with the court on June 6, 2013.
Item 4. Mine Safety Disclosures.
Not applicable.
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Part II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
Our common shares, without par value, are traded on the NASDAQ Stock Market LLC under the symbol “AGYS”. The high and low sales prices for the common shares for each quarter during the past two fiscal years are presented in the table below.
Fiscal 2013 | High | Low | |||||
Fourth quarter | $ | 10.05 | $ | 8.21 | |||
Third quarter | $ | 8.78 | $ | 7.23 | |||
Second quarter | $ | 9.05 | $ | 8.00 | |||
First quarter | $ | 9.25 | $ | 6.81 | |||
Fiscal 2012 | High | Low | |||||
Fourth quarter | $ | 9.60 | $ | 6.92 | |||
Third quarter | $ | 9.00 | $ | 6.50 | |||
Second quarter | $ | 10.00 | $ | 6.60 | |||
First quarter | $ | 8.62 | $ | 4.43 | |||
The closing price of the common shares on May 31, 2013, was $11.46 per share. There were 1,947 shareholders of record.
We did not pay dividends in fiscal 2013 or 2012 and are unlikely to do so in the foreseeable future. The current policy of the Board of Directors is to retain any available earnings for use in the operations of our business.
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Shareholder Return Performance Presentation
The following chart compares the value of $100 invested in our common shares, including reinvestment of dividends, with a similar investment in the Russell 2000 Index (the “Russell 2000”) and with the companies listed in the SIC Code 5045-Computer and Computer Peripheral Equipment and Software for the period March 31, 2008 through March 31, 2013. The stock price performance in this graph is not necessarily indicative of the future performance of our common shares.
Comparison of 5 Year Cumulative Total Return
INDEXED RETURNS | ||||||||||||||||
Fiscal Years Ended March 31, | ||||||||||||||||
Base Period | ||||||||||||||||
Company Name / Index | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | ||||||||||
Agilysys, Inc. | $100.00 | $ | 37.86 | $ | 99.47 | $ | 51.12 | $ | 80.07 | $ | 88.53 | |||||
Russell 2000 | $100.00 | $ | 62.50 | $ | 101.72 | $ | 127.96 | $ | 127.71 | $ | 148.52 | |||||
Peer Group | $100.00 | $ | 76.86 | $ | 111.20 | $ | 135.01 | $ | 131.87 | $ | 117.68 | |||||
This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended or incorporated by reference into any of our filings under the Securities Act of 1933, as amended, of the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
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Item 6. Selected Financial Data.
The following selected consolidated financial and operating data was derived from our audited consolidated financial statements and the current and prior period operating results of TSG have been classified within discontinued operations for all periods presented as discussed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The selected financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, and Item 7 contained in Part II of this Annual Report.
Year ended March 31, | |||||||||||||||
(In thousands, except per share data) | 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||
Operating results | |||||||||||||||
Net revenue | $ | 236,140 | $ | 208,889 | $ | 202,681 | $ | 193,506 | $ | 220,888 | |||||
Gross profit | 90,170 | 79,836 | 75,639 | 74,008 | 86,099 | ||||||||||
Operating loss | (1,111 | ) | (41,190 | ) | (21,625 | ) | (14,880 | ) | (184,371 | ) | |||||
Loss from continuing operations, net of taxes | (1,298 | ) | (34,239 | ) | (22,975 | ) | (7,630 | ) | (178,644 | ) | |||||
Income (loss) from discontinued operations, net of taxes | — | 11,456 | (32,500 | ) | 11,177 | (105,490 | ) | ||||||||
Net (loss) income | $ | (1,298 | ) | $ | (22,783 | ) | $ | (55,475 | ) | $ | 3,547 | $ | (284,134 | ) | |
Per share data (1) | |||||||||||||||
Basic and diluted | |||||||||||||||
Loss from continuing operations | $ | (0.06 | ) | $ | (1.53 | ) | $ | (1.01 | ) | $ | (0.34 | ) | $ | (7.91 | ) |
Income (loss) from discontinued operations | — | 0.51 | (1.43 | ) | 0.49 | (4.67 | ) | ||||||||
Net (loss) income | $ | (0.06 | ) | $ | (1.02 | ) | $ | (2.44 | ) | $ | 0.15 | $ | (12.58 | ) | |
Weighted-average shares outstanding - basic and diluted | 21,880 | 22,432 | 22,785 | 22,627 | 22,587 | ||||||||||
Balance sheet data at year end | |||||||||||||||
Cash and cash equivalents | $ | 82,931 | $ | 97,587 | $ | 74,354 | $ | 65,535 | $ | 36,451 | |||||
Working capital | 72,121 | 76,286 | 83,005 | 88,978 | 72,150 | ||||||||||
Total assets (2) | 196,964 | 204,139 | 312,398 | 330,449 | 374,436 | ||||||||||
Total debt | 687 | 994 | 1,906 | 819 | 623 | ||||||||||
Total shareholders’ equity | 113,856 | 114,438 | 148,104 | 198,924 | 192,717 | ||||||||||
(1) 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 all periods presented, basic weighted-average shares outstanding were used in calculating the diluted net loss per share.
(2) The decrease in assets from fiscal 2011 to 2012 is due to the sale of TSG.
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Item 7. 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 Consolidated Statements of Operations and 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 discussion should read in conjunction with the Consolidated Financial Statements and related Notes that appear in Item 15 of this Annual Report titled, "Financial Statements and Supplementary Data." 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 3 of this Annual Report and Item 1A “Risk Factors” in Part I of this Annual Report 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 the development of market-leading point-of-sale (POS), property management, inventory & procurement and mobile & wireless solutions that are designed to streamline operations, improve efficiency and enhance the guest experience. In addition, we provide support, maintenance, resold hardware products and software hosting or subscription services. Our customers include casinos, resorts, hotels, foodservice venues, stadiums, cruise lines, grocery stores, convenience stores, general & 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, Europe and Asia, with corporate services located in Atlanta, GA, EMEA headquarters in Cheshire, UK and APAC offices in both 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.
• | 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 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
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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.
Results of Operations
Fiscal 2013 Compared with Fiscal 2012
Net Revenue and Operating Loss
The following table presents our consolidated revenue and operating results for the fiscal years ended March 31, 2013 and 2012:
Year ended March 31, | Increase (decrease) | |||||||||||||
(Dollars in thousands) | 2013 | 2012 | $ | % | ||||||||||
Net revenue: | ||||||||||||||
Products | $ | 123,798 | $ | 105,601 | $ | 18,197 | 17.2 | % | ||||||
Support, maintenance and subscription services | 77,145 | 72,711 | 4,434 | 6.1 | % | |||||||||
Professional services | 35,197 | 30,577 | 4,620 | 15.1 | % | |||||||||
Total net revenue | 236,140 | 208,889 | 27,251 | 13.0 | % | |||||||||
Cost of goods sold: | ||||||||||||||
Products, inclusive of developed technology amortization | 96,618 | 83,550 | 13,068 | 15.6 | % | |||||||||
Support, maintenance and subscription services | 27,760 | 25,706 | 2,054 | 8.0 | % | |||||||||
Professional services | 21,592 | 19,797 | 1,795 | 9.1 | % | |||||||||
Total net cost of goods sold | 145,970 | 129,053 | 16,917 | 13.1 | % | |||||||||
Gross profit | 90,170 | 79,836 | 10,334 | 12.9 | % | |||||||||
Gross profit margin | 38.2 | % | 38.2 | % | ||||||||||
Operating expenses: | ||||||||||||||
Product development | 32,680 | 30,309 | 2,371 | 7.8 | % | |||||||||
Sales and marketing | 21,664 | 24,006 | (2,342 | ) | (9.8 | )% | ||||||||
General and administrative | 27,601 | 32,889 | (5,288 | ) | (16.1 | )% | ||||||||
Depreciation of fixed assets | 2,674 | 4,602 | (1,928 | ) | (41.9 | )% | ||||||||
Amortization of intangibles | 3,382 | 3,686 | (304 | ) | (8.2 | )% | ||||||||
Asset impairments and related charges | 120 | 9,681 | (9,561 | ) | nm | |||||||||
Legal settlements | 1,664 | — | 1,664 | nm | ||||||||||
Restructuring, severance and other charges | 1,496 | 15,853 | (14,357 | ) | (90.6 | )% | ||||||||
Operating loss | $ | (1,111 | ) | $ | (41,190 | ) | $ | 40,079 | (97.3 | )% | ||||
Operating loss percentage | (0.5 | )% | (19.7 | )% | ||||||||||
nm - not meaningful.
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The following table presents the percentage relationship of our Consolidated Statement of Operations line items to our consolidated net revenues for the periods presented:
Year ended March 31, | |||||
2013 | 2012 | ||||
Net revenue: | |||||
Products | 52.4 | % | 50.6 | % | |
Support, maintenance and subscription services | 32.7 | 34.8 | |||
Professional services | 14.9 | 14.6 | |||
Total net revenue | 100.0 | 100.0 | |||
Cost of goods sold: | |||||
Products, inclusive of developed technology amortization | 40.9 | 40.0 | |||
Support, maintenance and subscription services | 11.8 | 12.3 | |||
Professional services | 9.1 | 9.5 | |||
Total net cost of goods sold | 61.8 | 61.8 | |||
Gross profit | 38.2 | 38.2 | |||
Operating expenses: | |||||
Product development | 13.8 | 14.5 | |||
Sales and marketing | 9.2 | 11.5 | |||
General and administrative | 11.7 | 15.7 | |||
Depreciation of fixed assets | 1.1 | 2.2 | |||
Amortization of intangibles | 1.4 | 1.8 | |||
Asset impairments and related charges | 0.1 | 4.6 | |||
Legal settlements | 0.7 | — | |||
Restructuring, severance and other charges | 0.6 | 7.6 | |||
Operating loss | (0.5 | )% | (19.7 | )% | |
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The following table presents our revenue and operating results by business segment for the fiscal years ended March 31, 2013 and 2012:
Year ended March 31, | Increase (decrease) | |||||||||||||
(Dollars in thousands) | 2013 | 2012 | $ | % | ||||||||||
Hospitality (HSG) | ||||||||||||||
Revenue from external customers: | ||||||||||||||
Products | $ | 33,517 | $ | 25,608 | $ | 7,909 | 30.9 | % | ||||||
Support, maintenance and subscription services | 50,206 | 47,612 | 2,594 | 5.4 | % | |||||||||
Professional services | 14,585 | 13,155 | 1,430 | 10.9 | % | |||||||||
Total revenue from external customers | 98,308 | 86,375 | 11,933 | 13.8 | % | |||||||||
Gross profit | $ | 63,260 | $ | 55,354 | $ | 7,906 | 14.3 | % | ||||||
Gross profit margin | 64.3 | % | 64.1 | % | ||||||||||
Operating income (loss) | $ | 14,428 | $ | (6,552 | ) | $ | 20,980 | (320.2 | )% | |||||
Retail (RSG) | ||||||||||||||
Revenue from external customers: | ||||||||||||||
Products | $ | 90,281 | $ | 79,993 | $ | 10,288 | 12.9 | % | ||||||
Support, maintenance and subscription services | 26,939 | 25,099 | 1,840 | 7.3 | % | |||||||||
Professional services | 20,612 | 17,422 | 3,190 | 18.3 | % | |||||||||
Total revenue from external customers | 137,832 | 122,514 | 15,318 | 12.5 | % | |||||||||
Gross profit | $ | 26,910 | $ | 24,482 | $ | 2,428 | 9.9 | % | ||||||
Gross profit margin | 19.5 | % | 20.0 | % | ||||||||||
Operating income | $ | 10,840 | $ | 5,481 | $ | 5,359 | 97.8 | % | ||||||
Total reportable business segments | ||||||||||||||
Total revenue from external customers | $ | 236,140 | $ | 208,889 | $ | 27,251 | 13.0 | % | ||||||
Gross profit | $ | 90,170 | $ | 79,836 | $ | 10,334 | 12.9 | % | ||||||
Gross profit margin | 38.2 | % | 38.2 | % | ||||||||||
Operating income (loss) | $ | 25,268 | $ | (1,071 | ) | $ | 26,339 | nm | ||||||
Corporate/Other | ||||||||||||||
Operating loss | $ | (26,379 | ) | $ | (40,119 | ) | $ | 13,740 | (34.2 | )% | ||||
Total Company | ||||||||||||||
Total revenue from external customers | $ | 236,140 | $ | 208,889 | $ | 27,251 | 13.0 | % | ||||||
Gross profit | $ | 90,170 | $ | 79,836 | $ | 10,334 | 12.9 | % | ||||||
Gross profit margin | 38.2 | % | 38.2 | % | ||||||||||
Operating loss | $ | (1,111 | ) | $ | (41,190 | ) | $ | 40,079 | (97.3 | )% | ||||
nm - not meaningful.
Net revenue. Total net revenue increased $27.3 million, or 13.0%, during fiscal 2013 compared to fiscal 2012. Products revenue increased $18.2 million, or 17.2%, support and maintenance and subscription services revenue increased $4.4 million, or 6.1%, and professional services revenue increased $4.6 million, or 15.1%.
HSG’s revenue increased $11.9 million, or 13.8%, in fiscal 2013 compared to fiscal 2012. The $7.9 million, or 30.9%, increase in products revenue was the result of a couple of large remarketed product sales, continued organic growth in our proprietary software licenses and the negative impact in fiscal 2012 of certain errors identified in the manner in which we recognized revenue for certain software license and professional services arrangements in prior periods. The out of period impact for errors accumulated in fiscal 2012 was approximately $1.2 million. The $2.6 million, or 5.4%, increase in support, maintenance and subscription services was the result of continued focus on selling subscription based services revenue which is typically recognized over a five year period, and ongoing support from proprietary products. The $1.4 million, or 10.9%, increase in professional services is due to the growth in services consistent with growth in our proprietary software licenses.
RSG’s revenue increased $15.3 million, or 12.5%, in fiscal 2013 compared to fiscal 2012. The $10.3 million, or 12.9%, increase in products revenue as a result of increased hardware sales. The increase in support, maintenance and subscription services revenue of
22
$1.8 million, or 7.3%, is the result of additional multi-year support contracts. Professional services revenue increased $3.2 million, or 18.3%, due to the addition of several multi-location, multi-year contracts for certain of our service offerings.
Gross profit and gross profit margin. Our total gross profit increased $10.3 million, or 12.9%, in fiscal 2013 while total gross profit margin remained at 38.2%. Products gross profit increased $4.7 million and gross profit margin increased 80 basis points to 21.4%. Support, maintenance and subscription services gross profit increased $2.8 million while gross margin decreased 40 basis points to 64.4%. Professional services gross margin increased $2.8 million and gross profit margin increased 340 basis points to 38.7%.
HSG’s gross profit increased $7.9 million, or 14.3%, in fiscal 2013 while gross profit margin remained relatively flat, increasing 20 basis points to 64.3% in fiscal 2013. Products gross profit margin increased 80 basis points mainly as a result of an increase in proprietary software sales which carry a higher margin, partially offset by a couple of large lower-margin remarketed products sales during the last half of fiscal 2013 which negatively impacted our overall margin by 5 basis points. Support, maintenance and subscription services gross profit margins increased 120 basis points due to economy of scale. Professional services gross profit margin increased 600 basis points as a result of efficient management of project labor within implementation services.
RSG’s gross profit increased $2.4 million, or 9.9%, in fiscal 2013 while gross profit margin decreased 50 basis points to 19.5% in fiscal 2013. Products gross profit margin remained the same with incentives from vendors for over-achievements of our goals offsetting a lower margin large hardware sale. The support gross profit margins decreased due to the mix within remarketed and proprietary product support. Professional services gross margin had an increase of 210 basis points due to the mix and seasonality within our offerings.
Operating expenses
Operating expenses, excluding the charges for asset impairments and related charges, legal settlements and restructuring, severance and other charges, decreased $7.5 million, or 7.8%, in fiscal 2013 compared with fiscal 2012. On a segment basis, HSG decreased $2.1 million, RSG decreased $2.3 million and Corporate decreased $3.1 million.
Product development. Product development includes all costs associated with research and development. Product development increased $2.4 million, or 7.8% in fiscal 2013 compared with fiscal 2012. Product development expenses increased $2.5 million in HSG and decreased $0.1 million in RSG in fiscal 2013 compared to fiscal 2012. This increase in HSG is driven by the continued investment in internal and external resources to enhance the existing products and the early stage development of our future platforms. The decrease in RSG is mainly driven by the capitalization of internal labor costs associated with certain proprietary software product offerings.
Sales and marketing. Sales and marketing decreased $2.3 million, or 9.8% in fiscal 2013 compared with fiscal 2012. Sales and marketing expenses decreased $0.9 million in HSG and $1.4 million in RSG in fiscal 2013 compared to fiscal 2012. The decrease in HSG and RSG is associated with the savings realized from the fiscal 2012 restructuring.
General and administrative. General and administrative decreased $5.3 million, or 16.1%, in fiscal 2013 compared to fiscal 2012. HSG decreased $3.6 million, RSG decreased $0.6 million and Corporate decreased $1.1 million. This is a result of lower employee related costs created by efficiencies in back-office processes generated through the fiscal 2012 restructuring, offset by an increase in operating expenses associated with investments in resources to improve operational efficiencies.
Depreciation of fixed assets. Depreciation of fixed assets decreased $1.9 million on a consolidated basis driven by our Corporate Services facility relocating from Solon, Ohio to Alpharetta, Georgia and the closures of Emeryville, California and Frederick, Maryland in the fourth quarter of fiscal 2012.
Amortization of intangibles. Amortization of intangibles decreased $0.3 million in fiscal 2013. This decrease is due to certain internal use software and developed technology reaching their useful lives during fiscal 2013.
Asset Impairments and related charges. During the fourth quarter of 2012, it was determined that certain developed technologies would no longer be offered for sale. As a result during fiscal 2012, we impaired the entire remaining assets of $8.6 million, and accrued the costs associated with a transition plan for all of the existing customers off of this platform of $1.1 million. In fiscal 2013, we recorded in an additional $0.1 million related to the costs associated with this asset impairment.
Legal settlements. During the fourth quarter of fiscal 2013, we recorded $1.7 million in legal settlements related to pending lawsuits.
Restructuring, severance and other charges. Restructuring, severance and other charges decreased $14.4 million in fiscal 2013 compared to fiscal 2012. In fiscal 2012, we announced restructuring actions and recorded $15.9 million in restructuring charges, primarily comprised of severance and related benefits, and we incurred $4.4 million of accelerated depreciation due to the relocation
23
of our previous corporate services in Solon, Ohio location and closing our facilities in Emeryville, California and Frederick, Maryland. In fiscal 2013, we recorded an additional $1.1 million restructuring charges associated with the remaining severance and related benefits of the fiscal 2012 restructuring charge. In addition, we recorded $0.3 million in severance costs during the second quarter. Our restructuring actions are discussed further in Note 4, Restructuring Charges.
Other (Income) Expenses
Year ended March 31, | (Unfavorable) favorable | |||||||||||||
(Dollars in thousands) | 2013 | 2012 | $ | % | ||||||||||
Other (income) expenses: | ||||||||||||||
Interest income | $ | (14 | ) | $ | (103 | ) | $ | (89 | ) | (86.4 | )% | |||
Interest expense | 346 | 978 | 632 | 64.6 | % | |||||||||
Other expenses (income), net | 139 | 181 | 42 | 23.2 | % | |||||||||
Total other (income) expenses, net | $ | 471 | $ | 1,056 | $ | 585 | 55.4 | % | ||||||
Interest income. Interest income decreased during fiscal 2013 compared to fiscal 2012 as a result of higher interest earned in fiscal 2012 from our interest bearing cash accounts.
Interest expense. Interest expense consists of costs associated with capital leases, loans on corporate-owned life insurance policies and the amortization of deferred financing fees. Interest expense decreased $0.6 million during fiscal 2013 compared to fiscal 2012 primarily driven by the credit facility we terminated in July 2011 which resulted in immediate expense of approximately $0.4 million in unamortized deferred financing fees related to the credit facility.
Other expenses, net. In fiscal 2013 compared to fiscal 2012, the decrease of other expenses primarily consists of losses recognized in connection with our marketable securities (Rabbi Trust), partially offset by movements in foreign currencies relative to the U.S. dollar and gains related to change in surrender value of company-owned life insurance policies.
Income Taxes
Year ended March 31, | (Unfavorable) favorable | ||||||||||||
(Dollars in thousands) | 2013 | 2012 | $ | % | |||||||||
Income tax (benefit) expense | $ | (284 | ) | $ | (8,007 | ) | $ | (7,723 | ) | nm | |||
Effective tax rate | 18.0 | % | 19.0 | % | |||||||||
nm - not meaningful
For fiscal 2013, 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 fiscal 2012, 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.
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 $0.4 million of tax and zero to $0.2 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.
24
Fiscal 2012 Compared to Fiscal 2011
Net Revenue and Operating Loss
The following table presents our consolidated revenue and operating results for the fiscal years ended March 31, 2012 and 2011:
Year ended March 31, | Increase (decrease) | |||||||||||||
(Dollars in thousands) | 2012 | 2011 | $ | % | ||||||||||
Net revenue: | ||||||||||||||
Products | $ | 105,601 | $ | 104,769 | $ | 832 | 0.8 | % | ||||||
Support, maintenance and subscription services | 72,711 | 70,729 | 1,982 | 2.8 | % | |||||||||
Professional services | 30,577 | 27,183 | 3,394 | 12.5 | % | |||||||||
Total net revenue | 208,889 | 202,681 | 6,208 | 3.1 | % | |||||||||
Cost of goods sold: | ||||||||||||||
Products, inclusive of developed technology amortization | 83,550 | 80,090 | 3,460 | 4.3 | % | |||||||||
Support, maintenance and subscription services | 25,706 | 25,507 | 199 | 0.8 | % | |||||||||
Professional services | 19,797 | 21,445 | (1,648 | ) | (7.7 | )% | ||||||||
Total net cost of goods sold | 129,053 | 127,042 | 2,011 | 1.6 | % | |||||||||
Gross profit | 79,836 | 75,639 | 4,197 | 5.5 | % | |||||||||
Gross profit margin | 38.2 | % | 37.3 | % | ||||||||||
Operating expenses: | ||||||||||||||
Product development | 30,309 | 27,531 | 2,778 | 10.1 | % | |||||||||
Sales and marketing | 24,006 | 22,212 | 1,794 | 8.1 | % | |||||||||
General and administrative | 32,889 | 37,121 | (4,232 | ) | (11.4 | )% | ||||||||
Depreciation of fixed assets | 4,602 | 3,914 | 688 | 17.6 | % | |||||||||
Amortization of intangibles | 3,686 | 5,122 | (1,436 | ) | (28.0 | )% | ||||||||
Asset impairments and related charges | 9,681 | 959 | 8,722 | nm | ||||||||||
Restructuring, severance and other charges | 15,853 | 405 | 15,448 | 3,814.3 | % | |||||||||
Operating loss | $ | (41,190 | ) | $ | (21,625 | ) | $ | (19,565 | ) | 90.5 | % | |||
Operating loss percentage | (19.7 | )% | (10.7 | )% | ||||||||||
nm - not meaningful.
25
The following table presents the percentage relationship of our Consolidated Statement of Operations line items to our consolidated net revenues for the periods presented:
Year ended March 31, | |||||
2012 | 2011 | ||||
Net revenue: | |||||
Products | 50.6 | % | 51.7 | % | |
Support, maintenance and subscription services | 34.8 | 34.9 | |||
Professional services | 14.6 | 13.4 | |||
Total net revenue | 100.0 | 100.0 | |||
Cost of goods sold: | |||||
Products, inclusive of developed technology amortization | 40.0 | 39.5 | |||
Support, maintenance and subscription services | 12.3 | 12.6 | |||
Professional services | 9.5 | 10.6 | |||
Total net cost of goods sold | 61.8 | 62.7 | |||
Gross profit | 38.2 | 37.3 | |||
Operating expenses: | |||||
Product development | 14.5 | 13.6 | |||
Sales and marketing | 11.5 | 11.0 | |||
General and administrative | 15.7 | 18.3 | |||
Depreciation of fixed assets | 2.2 | 1.9 | |||
Amortization of intangibles | 1.8 | 2.5 | |||
Asset impairments and related charges | 4.6 | 0.5 | |||
Restructuring, severance and other charges | 7.6 | 0.2 | |||
Operating loss | (19.7 | )% | (10.7 | )% | |
26
The following table presents our revenue and operating results by business segment for fiscal years ended March 31, 2012 and 2011:
Year ended March 31, | Increase (decrease) | |||||||||||||
(Dollars in thousands) | 2012 | 2011 | $ | % | ||||||||||
Hospitality (HSG) | ||||||||||||||
Revenue from external customers: | ||||||||||||||
Products | $ | 25,608 | $ | 35,306 | $ | (9,698 | ) | (27.5 | )% | |||||
Support, maintenance and subscription services | 47,612 | 45,053 | 2,559 | 5.7 | % | |||||||||
Professional services | 13,155 | 13,650 | (495 | ) | (3.6 | )% | ||||||||
Total revenue from external customers | 86,375 | 94,009 | (7,634 | ) | (8.1 | )% | ||||||||
Gross profit | $ | 55,354 | $ | 54,669 | $ | 685 | 1.3 | % | ||||||
Gross profit margin | 64.1 | % | 58.2 | % | ||||||||||
Operating (loss) income | $ | (6,552 | ) | $ | 5,836 | $ | (12,388 | ) | (212.3 | )% | ||||
Retail (RSG) | ||||||||||||||
Revenue from external customers: | ||||||||||||||
Products | $ | 79,993 | $ | 69,463 | $ | 10,530 | 15.2 | % | ||||||
Support, maintenance and subscription services | 25,099 | 25,676 | (577 | ) | (2.2 | )% | ||||||||
Professional services | 17,422 | 13,533 | 3,889 | 28.7 | % | |||||||||
Total revenue from external customers | 122,514 | 108,672 | 13,842 | 12.7 | % | |||||||||
Gross profit | $ | 24,482 | $ | 20,970 | $ | 3,512 | 16.7 | % | ||||||
Gross profit margin | 20.0 | % | 19.3 | % | ||||||||||
Operating income | $ | 5,481 | $ | 3,164 | $ | 2,317 | 73.2 | % | ||||||
Total reportable business segments | ||||||||||||||
Total revenue from external customers | $ | 208,889 | $ | 202,681 | $ | 6,208 | 3.1 | % | ||||||
Gross profit | $ | 79,836 | $ | 75,639 | $ | 4,197 | 5.5 | % | ||||||
Gross profit margin | 38.2 | % | 37.3 | % | ||||||||||
Operating income | $ | (1,071 | ) | $ | 9,000 | $ | (10,071 | ) | (111.9 | )% | ||||
Corporate/Other | ||||||||||||||
Operating loss | $ | (40,119 | ) | $ | (30,625 | ) | $ | (9,494 | ) | 31.0 | % | |||
Total Company | ||||||||||||||
Total revenue from external customers | $ | 208,889 | $ | 202,681 | $ | 6,208 | 3.1 | % | ||||||
Gross profit | $ | 79,836 | $ | 75,639 | $ | 4,197 | 5.5 | % | ||||||
Gross profit margin | 38.2 | % | 37.3 | % | ||||||||||
Operating loss | $ | (41,190 | ) | $ | (21,625 | ) | $ | (19,565 | ) | 90.5 | % | |||
Net revenue. Total net revenue increased $6.2 million or 3.1% during fiscal 2012 compared to fiscal 2011. Products revenue, support, maintenance and subscription services revenue and professional services revenue increased $0.8 million, $2.0 million and $3.4 million, respectively.
HSG's revenue decreased $7.6 million or 8.1% in fiscal 2012 compared to fiscal 2011. The decrease in products revenue of approximately $9.7 million was driven by lower volumes in our remarketed products as well as a decline in perpetual software licenses with a shift in strategy to focus on selling subscription based services revenue which is typically recognized over a five year period. In addition, products revenue was negatively impacted by the errors identified in the manner in which we recognized revenue for certain software license and professional services arrangements in prior periods. The out of period impact for errors accumulated prior to fiscal 2012 was approximately $1.0 million. The $2.6 million or 5.7% increase in support, maintenance and subscription services in fiscal 2012 was the result of growth in both subscription based revenue and ongoing support from traditional proprietary products.
RSG's revenue increased $13.8 million or 12.7 % in fiscal 2012 compared to fiscal 2011. The increase in products and professional services revenue of approximately $10.5 million or 15.2 % and $3.9 million or 28.7%, respectively, are the result of higher volumes associated with several multi-location, multi-year contracts for remarketed products. We experienced a decline in support, maintenance and subscription services revenue of approximately $0.6 million or 2.2 % as a result of not renewing certain support contracts that were less accretive to gross profit than desired.
27
Gross profit and gross profit margin. Our total gross profit increased $4.2 million or 5.5% for fiscal 2012 and total gross profit margin increased 90 basis points. Products gross profit decreased $3.1 million and gross profit margin decreased 300 basis points. Support, maintenance and subscription services gross profit increased $2.2 million and gross margin percentage increased 90 basis points. Professional services gross margin increased $5.0 million and gross profit margin increased 1,410 basis points.
HSG's gross profit increased $0.7 million or 1.3% for fiscal 2012 and gross profit margin improved 590 basis points to 64.1% in fiscal 2012 from 58.2% in fiscal 2011. This is primarily due to professional services gross profit margin improvement of 2,070 basis points as a result of efficient management of project labor within implementation services. In addition, products gross profit margin improved 80 basis points as a result of selling higher margin opportunities. The support, maintenance and subscription services gross profit margin declined less than 100 basis points as a result of additional labor resources being dedicated to product enhancement.
RSG's gross profit increased $3.5 million or 16.7% for fiscal 2012 and gross profit margin increased 70 basis points to 20.0% in fiscal 2012 compared with 19.3% in fiscal 2011. This is primarily due to higher professional service margins yielding an improvement of 1,040 basis points as a result of improved labor efficiencies. The support gross profit margins increased approximately 130 basis points in line with our continued strategic initiatives focused on more profitable revenue streams. Products gross profit margin declined less than 100 basis points consistent with price compression associated with remarketed products in the market.
Operating expenses
Operating expenses, excluding the one-time charges for asset impairments and related charges and restructuring and related charges, decreased $0.4 million, or 0.4% in fiscal 2012 compared with fiscal 2011. On a segment basis, HSG and RSG increased $2.1 million and $0.6 million, respectively, and Corporate decreased $3.1 million.
Product development. Product development includes all costs associated with research and development. Product development increased $2.8 million or 10.1% in fiscal 2012 compared with fiscal 2011. Product development expenses increased $2.0 million in HSG and $0.8 million in RSG in fiscal 2012 compared to fiscal 2011. This increase at both segments is driven by the continued investment in internal resources to enhance the existing products and develop our future platforms as well as at RSG by the incremental costs associated with employee incentives due to over-achievement of operating unit targets.
Sales and marketing. Sales and marketing increased $1.8 million or 8.1% in fiscal 2012 compared with fiscal 2011. Sales and marketing expenses increased $1.1 million in HSG and $0.7 million in RSG in fiscal 2012 compared to fiscal 2011. This increase in HSG is a result of investment in domestic and international sales resources as well, as a one-time specific bad debt expense of $0.4 million. The increase in RSG is associated with employee incentives due to over-achievement of operating unit targets.
General and administrative. General and administrative decreased $4.2 million or 11.4% in fiscal 2012 compared to fiscal 2011. General and administrative expenses decreased $1.1 million in HSG, $1.2 million in RSG and $1.9 million in Corporate. HSG and RSG expenses decreased as a result of lower employee related costs created by efficiencies in back-office processes. The Corporate savings are a result of the restructuring and moving the corporate services from Solon, Ohio to Alpharetta, Georgia as well as certain one-time professional fees incurred in 2011 that did not repeat in fiscal 2012 associated with the post-implementation efforts of the Oracle ERP system.
Depreciation of fixed assets. Depreciation of fixed assets increased $0.7 million on a consolidated basis driven by the $0.3 million for leasehold improvements at our new corporate services offices in Alpharetta, Georgia and $0.3 million for additional depreciation related to the asset retirement obligation.
Amortization of intangibles. Amortization of intangibles decreased $1.4 million or 28.0% in fiscal 2012. This decrease is due to certain internal use software reaching their useful lives in fiscal 2011.
Asset impairments and related charges. We recorded asset impairments and related charges of $9.7 million and $1.0 million in fiscal 2012 and fiscal 2011, respectively. During the fourth quarter of 2012, it was determined that certain developed technologies would no longer be offered for sale. As a result, we have impaired the entire remaining assets of $8.6 million, and accrued the costs associated with a transition plan for all of the existing customers off of this platform of $1.1 million. In fiscal 2011, we concluded that certain internally developed software within HSG was no longer being sold. As a result, we recorded an impairment charge of $0.1 million. Also in fiscal 2011, we concluded that we were no longer using certain indefinite-lived intangible assets related to HSG trade names. Accordingly, we recorded an impairment charge of $0.9 million.
Restructuring and related charges. We recorded restructuring and related charges of $15.9 million and $0.4 million during fiscal 2012 and 2011, respectively. Under the fiscal 2012 restructuring plan we recorded restructuring charges comprised of primarily $3.5 million of lease termination and related facility closing costs and $8.0 million of severance and related benefits in each segment. In addition, we incurred accelerated depreciation of $4.4 million of property and equipment that was due to the relocation of our previous
28
corporate services in Solon, Ohio to Alpharetta, Georgia, and closing our facilities in Emeryville, California and Frederick, Maryland in the fourth quarter of fiscal 2012. Our restructuring actions are discussed further in the subsection of this MD&A titled, Restructuring and Related Charges and in Note 4 to the Consolidated Financial Statements titled, Restructuring and Related Charges.
The restructuring charges recorded in fiscal 2011 consist of settlement costs of $0.4 million related to the payment of an obligation under Agilysys' nonqualified executive retirement defined benefit pension plan for an executive officer (the “SERP”) who was part of the fiscal 2009 restructuring actions.
Other (Income) Expenses
Year ended March 31, | (Unfavorable) favorable | |||||||||||||
(Dollars in thousands) | 2012 | 2011 | $ | % | ||||||||||
Other (income) expenses | ||||||||||||||
Interest income | $ | (103 | ) | $ | (73 | ) | $ | 30 | 41.1 | % | ||||
Interest expense | 978 | 1,297 | 319 | 24.6 | % | |||||||||
Other expenses (income), net | 181 | (2,294 | ) | (2,475 | ) | 107.9 | % | |||||||
Total other expenses (income), net | $ | 1,056 | $ | (1,070 | ) | $ | (2,126 | ) | 198.7 | % | ||||
Interest income. Interest income increased slightly during fiscal 2012 compared to fiscal 2011 as a result of interest earned from the investment in treasury notes with the cash proceeds from the sale of TSG during the third quarter of fiscal 2012.
Interest expense. Interest expense consists of costs associated with our Credit Facility, the amortization of deferred financing fees, loans on corporate-owned life insurance policies, and capital leases. Interest expense decreased $0.3 million in fiscal 2012 compared to fiscal 2011 due to the termination of the Credit Facility. We terminated the Credit Facility in July 2011 and immediately expensed approximately $0.4 million in unamortized deferred financing fees related to the former Credit Facility.
Other (income) expenses, net. In fiscal 2012, the $0.2 million of other expense primarily consists of losses recognized as a result of movements in foreign currencies relative to the U.S. dollar. In fiscal 2011, the $2.3 million in other income primarily included a gain of $2.1 million recorded on the $2.2 million in proceeds received as a death benefit from certain corporate-owned life insurance policies.
Income Taxes
Year ended March 31, | (Unfavorable) favorable | ||||||||||||
(Dollars in thousands) | 2012 | 2011 | $ | % | |||||||||
Income tax (benefit) expense | $ | (8,007 | ) | $ | 2,420 | $ | (10,427 | ) | nm | ||||
Effective tax rate | 19.0 | % | (11.8 | )% | |||||||||
nm - not meaningful
For fiscal 2012 and 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 and recognition of net operating losses as deferred tax assets, which were offset by increases in the valuation allowance. Other items effecting the rate in the fiscal 2012 include foreign and state taxes, a decrease in unrecognized tax benefits attributable to expiration of statute of limitations, and other U.S. permanent book to tax differences.
In fiscal 2011, an increase in the valuation allowance was recorded due to the correction of an error. In 2009, we erroneously considered the tax effect of indefinite-lived intangible assets as a source of future taxable income when we established a valuation allowance against our U.S. deferred tax assets. During fiscal 2011, we recorded an adjustment to correct this error, increasing income tax expense by $3.8 million. The adjustment increased our valuation allowance against our U.S. deferred tax asset
Other items effecting the rate in fiscal 2011 include non-taxable life insurance proceeds, a decrease in unrecognized tax benefits attributable to the expiration of statute of limitations, and other U.S. permanent book to tax differences.
Discontinued Operations
On May 28, 2011, Agilysys entered into a definitive agreement to sell the TSG business for an aggregate purchase price of $64.0 million in cash, subject to a possible downward adjustment based on final working capital, 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 with OnX, under which we provided certain transitional
29
administrative and supportive services to OnX through January 31, 2012. On July 28, 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, along with the gain on sale, have been reported as a component of discontinued operations in our Consolidated Statements of Operations for the periods presented. In addition, the assets and liabilities of the TSG business are classified as discontinued operations in our Consolidated Balance Sheets for the periods presented.
Upon the close of the transaction, the aggregate purchase price of $64.0 million was reduced by the payment of agreed-upon fees of $3.3 million for severance costs, $2.4 million for transaction fees, $1.3 million for third-party services in support of the transition and $1.2 million for a working capital adjustment resulting in net proceeds received by us of $55.8 million. Additional information regarding the discontinued operations is provided in Note 3 to the Consolidated Financial Statements titled, Discontinued Operations.
Restructuring and Related 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.
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 $12.0 million in restructuring charges, of which $1.1 million was recorded in the 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 $8.8 million for HSG, RSG and Corporate/Other, respectively. As of March 31, 2013, we had a remaining liability of approximately $0.4 million recorded for fiscal 2012 restructuring activity. As a result of taking these restructuring actions, we realized between $14.0 million and $16.0 million in cost savings, of which approximately half was 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 March 31, 2013, we had a remaining liability of approximately $0.2 million recorded for fiscal 2009 restructuring activity. We expect to incur minimal additional restructuring charges during fiscal 2014 for ongoing facility obligations.
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 March 31, 2013. We believe that cash flow from operating activities, cash on hand of $82.9 million as of March 31, 2013 and access to capital markets will provide adequate funds to meet our short-and long-term liquidity requirements.
As of March 31, 2013 and March 31, 2012, our total debt was approximately $0.7 million and $0.8 million, respectively, comprised of capital lease obligations in both periods.
At March 31, 2013, 100% of our cash and cash equivalents were deposited in bank accounts. Therefore, we believe that credit risk is limited with respect to our cash and cash equivalents balances.
Revolving Credit Facility
As previously reported, we executed a Loan and Security Agreement dated May 5, 2009, the Credit Facility, with Bank of America, N.A., as agent for the lenders. Our obligations under the Credit Facility were secured by our assets (as defined in the Credit Facility). The Credit Facility provided $50 million of credit for borrowings and letters of credit and would mature May 5, 2012. On July 29, 2011, we terminated the Credit Facility in conjunction with the sale of TSG.
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Cash Flow
Year ended March 31, | |||||||||||
(In thousands) | 2013 | 2012 | 2011 | ||||||||
Net cash (used in) provided by continuing operations: | |||||||||||
Operating activities | $ | (10,705 | ) | $ | 5,301 | $ | (8,914 | ) | |||
Investing activities | (3,053 | ) | 60,339 | (4,796 | ) | ||||||
Financing activities | (877 | ) | (15,413 | ) | (608 | ) | |||||
Effect of exchange rate changes on cash | (21 | ) | 5 | 403 | |||||||
Cash flows (used in) provided by continuing operations | (14,656 | ) | 50,232 | (13,915 | ) | ||||||
Net operating and investing cash flows (used in) provided by discontinued operations | — | (26,999 | ) | 22,734 | |||||||
Net (decrease) increase in cash and cash equivalents | $ | (14,656 | ) | $ | 23,233 | $ | 8,819 | ||||
Cash flow used in operating activities from continuing operations. Cash flows used in operating activities were $10.7 million in fiscal 2013. The use of cash included $13.2 million of non-recurring payments; $6.3 million for BEP and SERP payments and $6.9 million in restructuring payments. Also contributing to the use of cash is the increase in accounts receivable of $13.3 million due to the timing of annual support billings, a change in payment terms and large remarketed sales and an increase in deferred revenue of $2.6 million. This is offset by the increase in adjustments to net loss of $12.2 million related to legal settlements, depreciation and amortization and stock based compensation. Additional offsets to the use of cash include an increase in accounts payable of $4.3 million related to the purchase of products to support the large remarketed product sales and a decrease in inventory of $3.5 million.
The $5.3 million in cash provided by operating activities in fiscal 2012 was comprised of $34.2 million in losses from continuing operations, offset by $ 32.8 million in non-cash adjustments to the net loss from continuing operations, and a $6.7 million benefit from changes in operating assets and liabilities. Significant non-cash adjustments to the losses from continuing operations were $9.7 million in asset impairments and related charges, $10.5 million in depreciation and amortization expenses, $10.0 million in restructuring and related charges, net of payments and $2.9 million in share-based compensation expense. Significant changes in operating assets and liabilities primarily consisted of a $6.0 million increase in accounts payable, a $4.4 million increase in deferred revenue, a $4.8 million increase in inventories and a $1.5 million increase in income taxes payable. Included in the changes to operating assets and liabilities was the payment of $5.0 million for employee related benefit plans. The improvement driven by deferred revenue is the result of increased sales in ongoing maintenance, support and subscription revenue, mainly within the HSG operating segment. The benefit from taxes payable (receivable) was primarily the result of a $1.0 million income tax refund received during fiscal 2012.
The $8.9 million in cash used in operating activities in fiscal 2011 was comprised of $23.0 million in losses from continuing operations and $2.1 million of changes to operating assets and liabilities, partially offset by $16.2 million in non-cash adjustment to the loss from continuing operations. Significant non-cash adjustments to the loss from continuing operations were $11.2 million in depreciation and amortization, $4.4 million in deferred income taxes and $2.8 million in share-based compensation, partially offset by $2.1 million gain on redemption of corporate-owned life insurance policies. Significant changes in operating assets and liabilities consisted of a $20.5 million decrease in accounts payable and a $2.5 million decrease in accrued liabilities. This is offset by a $10.3 million decrease in accounts receivable, a $7.6 million increase in income taxes payable (receivable) and a $2.9 increase in deferred revenue. The movement in accounts receivable and in accounts payable is primarily is a result of settling intercompany balances between continuing operations and discontinued operations. The $7.6 million benefit in income taxes was primarily a result of income tax refunds received during fiscal 2011.
Cash flow (used in) provided by investing activities from continuing operations. In fiscal 2013, the $3.1 million in cash used in investing activities was primarily comprised of $3.0 million used for the purchase of property and equipment and $4.4 million for the development of proprietary software, offset by $4.3 million in funds from the marketable securities (Rabbi Trust). The $3.0 million in capital expenditures was primarily used for capitalized product development technology, leasehold improvements and computer equipment. The funds from the Rabbi Trust were used to settle employee benefit obligations.
In fiscal 2012, the $60.3 million in cash provided by investing activities was primarily comprised of $55.8 million in net proceeds received from the sale of TSG and $9.2 million in proceeds from our investment in marketable securities, which were used to settle employee benefit obligations, partially offset by $4.9 million used for the purchase of software, property and equipment. The $4.9 million in capital expenditures was primarily capitalized product development expense and the build out of corporate facilities space in Alpharetta, Georgia.
In fiscal 2011, the $4.8 million in cash used in investing activities was primarily comprised of $16.0 million in proceeds received from the redemption of certain corporate-owned life insurance policies, which were offset by $1.1 million of additional investments in corporate-owned life insurance policies, $13.7 million of additional investments in marketable securities, and $6.1 million for the
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purchase of software, property and equipment. The proceeds from the redemption of certain corporate-owned life insurance policies was used to settle employee benefit plan obligations during fiscal 2011 and the remainder was invested in marketable securities. The $6.1 million in capital expenditures in fiscal 2011 primarily consisted of amounts capitalized with respect to our development of enhancements related to the property management software, Guest360™ and additional costs related to the implementation of the Oracle ERP software.
Cash flow used in financing activities from continuing operations. During fiscal 2013, the $0.9 million used in financing activities was primarily comprised of payments on capital lease obligations and the repurchase of shares to satisfy employee tax withholding related to equity awards.
The $15.4 million used in financing activities was comprised of $13.2 million for repurchases of our common shares, $1.4 million for the repurchases of our common shares to satisfy employee tax withholding on the vesting or exercise of stock compensation awards and $1.0 million for payments on capital lease obligations.
The $0.6 million in cash used in financing activities in fiscal 2011 represented $0.4 million in principal payments on capital lease obligations and $0.2 million related to shares withheld for income taxes on the vesting or exercise of stock compensation awards.
Investments
Investments in Corporate-Owned Life Insurance Policies and Marketable Securities
Agilysys invests in corporate-owned life insurance policies and marketable securities primarily to satisfy future obligations of certain employee benefit plans. Certain of these corporate-owned life insurance policies were held in a Rabbi Trust and were classified within “Other non-current assets” in the Consolidated Balance Sheets. Our investment in corporate-owned life insurance policies was recorded at their cash surrender value, which approximates fair value, at the balance sheet date. In additions, certain of these corporate-owned life insurance policies are endorsement split-dollar life insurance arrangements. We entered into a separate agreement with each of the former executives covered by these arrangements whereby we split a portion of the policy benefits with the former executive's designated beneficiary.
In fiscal 2012 and 2011, Agilysys' investment in marketable equity securities were held within the Rabbi Trust and classified as available for sale. However, these investments were restricted by the terms of the Rabbi Trust agreement and could only be used to satisfy the benefit obligations of our nonqualified benefit plans or to satisfy the obligations of our general creditors under an insolvency. The benefit obligations were fulfilled in April 2012 and the Rabbi Trust was subsequently closed. Additional information regarding the investments in corporate-owned life insurance policies and marketable securities is provided in Note 11, Employee Benefit Plans, in our Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Contractual Obligations
The following table provides aggregate information regarding our contractual obligations as of March 31, 2013.
(In thousands) | Total | 2014 | 2015-2016 | 2017-2018 | Thereafter | ||||||||||
Operating leases (1) | $ | 13,093 | $ | 3,547 | $ | 5,619 | $ | 2,223 | $ | 1,704 | |||||
Restructuring liabilities | 584 | 584 | — | — | — | ||||||||||
Capital leases | 806 | 378 | 389 | 39 | — | ||||||||||
Asset retirement obligation | 744 | 30 | 314 | 400 | — | ||||||||||
Total contractual obligations | $ | 15,227 | $ | 4,539 | $ | 6,322 | $ | 2,662 | $ | 1,704 | |||||
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(1) | Operating lease obligations are presented net of contractually binding sub-lease arrangements. Additional information regarding our operating lease obligations is contained in Note 12, Commitments and Contingencies. |
At March 31, 2013, we had a $4.2 million liability reserve for unrecognized income tax positions which is not reflected in the table above. The timing of potential cash outflows related to the unrecognized tax positions is not reasonably determinable and therefore, is not scheduled. Substantially all of this reserve is included in Other non-current liabilities. Additional information regarding unrecognized tax positions is contained in Note 10, Income Taxes. | |
We believe that cash on hand, funds from continuing operations, and access to capital markets will provide adequate funds to finance capital spending and working capital needs and to service our obligations and other commitments arising during the foreseeable future.
Critical Accounting Policies
MD&A is based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses and related disclosure of contingent assets and liabilities. We regularly evaluate our estimates, including those related to bad debts, inventories, investments, intangible assets, income taxes, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Our most significant accounting policies relate to the sale, purchase, and promotion of our products and services. The policies discussed below are considered by management to be critical to an understanding of our Consolidated Financial Statements because their application places the most significant demands on management's judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs.
For all of these policies, management cautions that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment.
Revenue recognition. We derive revenue from the sale of products (i.e., server, storage, and point of sale hardware, and software), support, maintenance and subscription services and professional services. Revenue is recorded in the period in which the goods are delivered or services are rendered and when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sales price to the customer is fixed or determinable, and collection is reasonably assured. We reduce revenue for estimated discounts, sales incentives, estimated customer returns, and other allowances. Discounts are offered based on the volume of products and services purchased by customers. Shipping and handling fees billed to customers are recognized as revenue and the related costs are recognized in cost of goods sold. Revenue is recorded net of any applicable taxes collected and remitted to governmental agencies.
We frequently enter into multiple-element arrangements with customers including hardware, software, professional consulting services and maintenance support services. For arrangements involving multiple deliverables, when deliverables include software and non-software products and services, we evaluate and separate each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (a) the delivered item has value to the customer on a stand-alone basis; and (b) if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in our control.
For arrangements entered into or materially modified after April 1, 2011, consideration is allocated to each unit of accounting based on the unit's relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to each deliverable: (i) vendor-specific objective evidence of selling price (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of selling price (BESP). VSOE generally exists only when we sell the deliverable separately and is the price actually charged by us for that deliverable. VSOE is established for our software maintenance services and we use TPE or BESP to establish selling prices for our non-software related services. BESP is primarily used for elements that are not consistently priced within a narrow range or TPE is not available. We determine BESP for a deliverable by considering multiple factors including product class, geography, average discount, and management's historical pricing practices. Amounts allocated to the delivered hardware and software elements are recognized at the time of sale provided the other conditions for revenue recognition have been met. Amounts allocated to the undelivered maintenance and other services elements are recognized as the services are provided or on a straight-line basis over the service period. In certain instances, customer acceptance is required prior to the passage of title and risk of loss of the delivered products. In such cases, revenue is not recognized until the customer acceptance is obtained. Delivery and acceptance
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generally occur in the same reporting period. For arrangements entered into prior to April 1, 2011, we have not applied BESP. In such arrangements, if we have the requisite evidence of selling price for the undelivered elements but not for the delivered elements, we apply the residual method to allocate arrangement consideration.
In situations where our solutions contain software that is more than incidental, revenue related to the software and software-related elements is recognized in accordance with authoritative guidance on software revenue recognition. For the software and software-related elements of such transactions, revenue is allocated based on the relative fair value of each element, and fair value is determined by VSOE. If we cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. When the fair value of a delivered element has not been established, but fair value exists for the undelivered elements, we use the residual method to recognize revenue. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.
Revenue recognition for complex contractual arrangements, especially those with multiple elements, requires a significant level of judgment and is based upon a review of specific contracts, past experience, the selling price of undelivered elements when sold separately, creditworthiness of customers, international laws and other factors. Changes in judgments about these factors could impact the timing and amount of revenue recognized between periods.
Revenue for hardware sales is recognized when the product is shipped to the customer and when obligations that affect the customer's final acceptance of the arrangement have been fulfilled. A majority of our hardware sales involves shipment directly from its suppliers to the end-user customers. In these transactions, we are responsible for negotiating price both with the supplier and the customer, payment to the supplier, establishing payment terms and product returns with the customer, and we bear the credit risk if the customer does not pay for the goods. As the principal contact with the customer, we recognize revenue and cost of goods sold when we are notified by the supplier that the product has been shipped. In certain limited instances, as shipping terms dictate, revenue is recognized upon receipt at the point of destination or upon installation at the customer site.
We offer proprietary software as well as remarketed software for sale to our customers. We offer our customers the right to license the software under a variety of models. Our customers can license our software under a perpetual model for an upfront fee or a subscription model. For subscription arrangements, we allow customers the right to use software, receive unspecified products as well as unspecified upgrades and enhancements and entitle the customer to receive hosting services for a specified term. The subscription revenue is generally recognized ratably over the term of the arrangement, typically three to five years. Revenue from subscription service arrangements is included in Support, maintenance and subscription services in the Consolidated Statements of Operations. A majority of our software sales do not require significant production, modification, or customization at the time of shipment (physically or electronically) to the customer. Substantially all of our software license arrangements do not include acceptance provisions. As such, revenue from both proprietary and remarketed software sales is typically recognized when the software has been shipped. For software delivered electronically, delivery is considered to have occurred when the customer either takes possession of the software via downloading or has been provided with the requisite codes that allow for immediate access to the software based on the U.S. Eastern time zone time stamp.
We also offer proprietary and third-party services to our customers. Proprietary services generally include: consulting, installation, integration and training. Many of our software arrangements include consulting services sold separately under consulting engagement contracts. When the arrangements qualify as service transactions, consulting revenue from these arrangements are accounted for separately from the software revenue. The significant factors considered in determining whether the revenue should be accounted for separately include the nature of the services (i.e., consideration of whether the services are essential to the functionality of the software), degree of risk, availability of services from other vendors, timing of payments, and the impact of milestones or other customer acceptance criteria on revenue realization. If there is significant uncertainty about the project completion or receipt of payment for consulting services, the revenue is deferred until the uncertainty is resolved.
For certain long-term proprietary service contracts with fixed or “not to exceed” fee arrangements, we estimate proportional performance using the hours incurred as a percentage of total estimated hours to complete the project consistent with the percentage-of-completion method of accounting. Accordingly, revenue for these contracts is recognized based on the proportion of the work performed on the contract. If there is no sufficient basis to measure progress toward completion, the revenue is recognized when final customer acceptance is received. Adjustments to contract price and estimated service hours are made periodically, and losses expected to be incurred on contracts in progress are charged to operations in the period such losses are determined. The aggregate of collections on uncompleted contracts in excess of related revenue is shown as a current liability.
If an arrangement does not qualify for separate accounting of the software and consulting services, then the software revenue is recognized together with the consulting services using the percentage-of-completion or completed contract method of accounting. Contract accounting is applied to arrangements that include: milestones or customer-specific acceptance criteria that may affect the
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collection of revenue, significant modification or customization of the software, or provisions that tie the payment for the software to the performance of consulting services.
We also offer proprietary and third-party support to our customers. Support generally includes: support and maintenance of software and hardware products and subscription services. Revenue relating to proprietary support services is recognized evenly over the coverage period of the underlying agreement within support, maintenance and subscription revenue. In instances where we offer third-party support contracts to our customer, the supplier is the primary obligor in the transaction although we bear credit risk in the event of nonpayment by the customer. Since we are acting as an agent or broker with respect to such sales transactions, we report revenue at the time of the sale, only in the amount of the “commission” (equal to the selling price less the cost of sale) received rather than reporting revenue in the full amount of the selling price with separate reporting of the cost of sale.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability or unwillingness of our customers to make required payments. These allowances are based on both recent trends of certain customers estimated to be a greater credit risk, as well as historical trends of the entire customer pool. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. To mitigate this credit risk we perform periodic credit evaluations of our customers.
Inventories. Inventories are stated at the lower of cost or market, net of related reserves. The cost of inventory is computed using a weighted-average costing method. Our inventory is monitored to ensure appropriate valuation. Adjustments of inventories to lower of cost or market, if necessary, are based upon contractual provisions governing turnover and assumptions about future demand and market conditions. If assumptions about future demand change and/or actual market conditions are less favorable than those projected by management, additional adjustments to inventory valuations may be required. We provide a reserve for obsolescence, which is calculated based on several factors including an analysis of historical sales of products and the age of the inventory. Actual amounts could be different from those estimated.
Income Taxes. Income tax expense includes U.S. and foreign income taxes and is based on reported income before income taxes. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities are determined based on the enacted tax rates expected to apply in the periods in which the deferred tax assets or liabilities are anticipated to be settled or realized.
We regularly review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The determination as to whether a deferred tax asset will be realized is made on a jurisdictional basis and is based on the evaluation of positive and negative evidence. This evidence includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies.
We recorded a valuation allowance of $79.2 million as of March 31, 2013 and $78.7 million as of March 31, 2012, related to substantially all of our deferred income tax assets in jurisdictions where there is uncertainty as to the ultimate realization of a benefit from those assets. In the event that we determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the tax valuation allowance would decrease tax expense in the period such determination was made.
We recognize the tax benefit from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from uncertain tax positions are measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. No tax benefits are recognized for positions that do not meet this threshold. Interest related to uncertain tax positions is recognized as part of the provision for income taxes and is accrued beginning in the period that such interest would be applicable under relevant tax law until such time that the related tax benefits are recognized. Our income taxes are described further in Note 10 to Consolidated Financial Statements titled, Income Taxes.
Goodwill and Long-Lived Assets. Goodwill represents the excess purchase price paid over the fair value of the net assets of acquired companies. Goodwill is subject to impairment testing at least annually, unless it is determined after a qualitative assessment that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount. Goodwill is measured for impairment on an annual basis, or in interim periods if indicators of potential impairment exist.
For fiscal 2013, we conducted a qualitative assessment (“Step Zero Analysis”) to determine whether it would be necessary to perform the two-step goodwill impairment test. It was determined based on the Step Zero Analysis that it is more likely than not that the fair value of the HSG business segment exceeded its carrying amount as of February 1, 2013.
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In prior years, we conducted our annual goodwill impairment test on February 1st of each fiscal year. The fair values of the reporting units for fiscal 2012 were estimated using a combination of an income approach and a market approach, weighted 80% and 20%, respectively.
The income approach is based on projected future debt-free cash flow that is discounted to present value using factors that consider the timing and risk of the future cash flows. This approach is appropriate because it provides a fair value estimate based upon the reporting unit's expected long-term operating and cash flow performance. The income approach is based on a reporting unit's projection of operating results and cash flows that is discounted using a weighted-average cost of capital. The projection is based upon our best estimate of projected economic and market conditions over the related period including growth rates, estimate of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, terminal value margin rates, future capital expenditures, and changes in future working capital requirements based on management projections.
The market approach is based on direct transactional evidence, or where such transactional evidence does not exist, the observed earnings and revenue trading multiples, or “equity value,” or “enterprise value” of comparable “peer group” companies is used. The reporting units are assessed based on qualitative and quantitative comparisons against the peer group, including size, expected growth, profitability, and product diversification. This approach provides that if the respective reporting unit is comparable to the peer group, then a similar multiple of equity value is a reasonable indication of the value of the reporting unit.
We believe this methodology provides reasonable estimates of a reporting unit's fair value and that this estimate is consistent with how a market participant would view the reporting unit's fair value. Fair value computed by this methodology is arrived at using a number of factors, including projected future operating results and business plans, economic projections, anticipated future cash flows, comparable marketplace data within a consistent industry grouping, and the cost of capital. We weigh the income approach more heavily than the market approach in its analysis because management believes that there is not a strong comparability with the peer group companies, and therefore, the income approach provides a better measure of fair value. There are inherent uncertainties, however, related to these factors and to management's judgment in applying them to this analysis. Nonetheless, we believe that this method provides a reasonable approach to estimate the fair value of its reporting units. Our goodwill and long-lived assets are described further in Note 6 to Consolidated Financial Statements titled, Goodwill and Intangible Assets.
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. Our restructuring reserves principally include estimates related to employee separation costs and the consolidation and impairment of facilities that will no longer be used in continuing operations. Actual amounts could be different from those estimated. Facility reserves are calculated using a present value of future minimum lease payments, offset by an estimate for future sublease income provided by external brokers. Present value is calculated using a credit-adjusted risk-free rate with a maturity equivalent to the lease term.
Share-Based Compensation. We have a stock incentive plan under which we may grant non-qualified stock options, incentive stock options, stock-settled stock appreciation rights, time-vested restricted shares, restricted share units, performance-vested restricted shares, and performance shares. Shares issued pursuant to awards under this plan may be made out of treasury or authorized but unissued shares.
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. Additional information regarding the assumptions used to value share-based compensation awards is provided in Note 14 to the accompanying Consolidated Financial Statements titled, Share-Based Compensation.
Capitalized Software Development Costs. We capitalize certain costs related to the development of computer software. Capitalization of these costs begins when a detail program design or working model has been produced as evidenced by the completion of design, planning, coding and testing, such that the product meets its design specifications and has thereby established technological feasibility. Capitalization of these costs ends when the resulting product is available for general release to the public. Amortization of the capitalized software is classified within products cost of goods sold in the 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 $5.1 million, $2.5 million and $1.7 million during fiscal
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2013, 2012 and 2011, respectively. Amortization of capitalized software was $0.8 million, $1.6 million and $1.7 million during fiscal 2013, 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 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 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. We adopted this guidance on January 1, 2013, and it did not have impact on our consolidated financial statements or related disclosures.
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which amends certain provisions in ASC 220 Comprehensive Income. These provisions require the disclosure of significant amounts that are reclassified out of other comprehensive income into net income in its entirety during the reporting period. These provisions are effective for fiscal and interim periods beginning after December 15, 2012. We adopted this guidance as of April 1, 2013 and we do not expect it 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 its financial position, results of operations, cash flows, or related disclosures and, if significant, makes the appropriate disclosures required by such new accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We have assets, liabilities, and cash flows in foreign currencies creating foreign exchange risk. We sell products and services internationally and enter into transactions denominated in foreign currencies. As a result, we are subject to the variability that arises from exchange rate movements. For the fiscal years 2013, 2012 and 2011, revenue from international operations was 4%, 5% and 6%, respectively of total revenue. The effects of foreign currency on operating results did not have a material impact on our results of operations for the 2013, 2012 and 2011 fiscal years. At March 31, 2013, a hypothetical 10% weakening of the U.S. dollar would not materially affect our financial statements.
We believe that inflation has had a nominal effect on our results of operations in fiscal years 2013, 2012 and 2011 and do not expect inflation to be a significant factor in fiscal 2014.
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Until July 2011, we maintained a $50.0 million Loan and Security Agreement with Bank of America, N.A., as lender, dated May 5, 2009 (“Credit Facility”). We terminated the Credit Facility in July 2011 in conjunction with the sale of TSG. As a result of the proceeds that we received from the sale of TSG, we determined that we no longer required the liquidity provided by the Credit Facility. As a result of the termination of the Credit Facility, we expensed approximately $0.4 million in unamortized deferred financing fees that related to the Credit Facility during the second quarter of fiscal 2012.
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Item 8. Financial Statements and Supplementary Data.
Agilysys, Inc. and Subsidiaries
ANNUAL REPORT ON FORM 10-K
Year Ended March 31, 2013
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
Report of Independent Registered Public Accounting Firm - PricewaterhouseCoopers LLP | |
Report of Independent Registered Public Accounting Firm - Ernst & Young LLP | |
Consolidated Balance Sheets as of March 31, 2013 and 2012 | |
Consolidated Statements of Operations for the years ended March 31, 2013, 2012, and 2011 | |
Consolidated Statements of Comprehensive Loss for the years ended March 31, 2013, 2012, and 2011 | |
Consolidated Statements of Cash Flows for the years ended March 31, 2013, 2012 and 2011 | |
Consolidated Statements of Shareholders' Equity for the years ended March 31, 2013, 2012 and 2011 | |
Notes to Consolidated Financial Statements | |
Schedule II - Valuation and Qualifying Accounts for the years ended March 31, 2013, 2012 and 2011 | |
39
Report of Independent Registered Public Accounting Firm
To Board of Directors and Shareholders
of Agilysys, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, cash flows and shareholders' equity listed in the accompanying index present fairly, in all material respects, the financial position of Agilysys, Inc. and its subsidiaries at March 31, 2013 and March 31, 2012, and the results of their operations and their cash flows for the two years in the period ended March 31, 2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2013, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
June 14, 2013
40
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
of Agilysys, Inc. and Subsidiaries
We have audited the accompanying consolidated statement of operations, comprehensive loss, shareholders' equity, and cash flows of Agilysys, Inc. and Subsidiaries for the year ended March 31, 2011. Our audits also included the accompanying financial statement schedule listed in the index at Item 15(a)(2) for the year ended March 31, 2011. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of their operations and their cash flows of Agilysys, Inc. and Subsidiaries for the year ended March 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the year ended March 31, 2011, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/S/ Ernst & Young LLP
Cleveland, Ohio
June 14, 2011,
except for the effects of reclassifications
and discontinued operations described in |
Notes 2 and 3, as to which the date is
June 12, 2012
41
AGILYSYS, INC.
CONSOLIDATED BALANCE SHEETS
As of March 31, | |||||||
(In thousands, except share data) | 2013 | 2012 | |||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 82,931 | $ | 97,587 | |||
Accounts receivable, net of allowances of $887 and $632, respectively | 45,626 | 32,531 | |||||
Inventories | 12,239 | 15,710 | |||||
Prepaid expenses | 4,081 | 2,975 | |||||
Other current assets | 884 | 5,492 | |||||
Total current assets | 145,761 | 154,295 | |||||
Property and equipment, net | 15,543 | 16,504 | |||||
Goodwill | 14,128 | 15,198 | |||||
Intangible assets, net | 17,288 | 14,135 | |||||
Other non-current assets | 4,244 | 4,007 | |||||
Total assets | $ | 196,964 | $ | 204,139 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 30,177 | $ | 24,938 | |||
Deferred revenue | 25,676 | 28,441 | |||||
Accrued liabilities | 17,481 | 23,983 | |||||
Capital lease obligations, current | 306 | 647 | |||||
Total current liabilities | 73,640 | 78,009 | |||||
Deferred income taxes, non-current | 4,002 | 5,135 | |||||
Capital lease obligations, non-current | 381 | 347 | |||||
Other non-current liabilities | 5,085 | 6,210 | |||||
Commitments and contingencies (see Note 12) | |||||||
Shareholders' equity: | |||||||
Common shares, without par value, at $0.30 stated value; 80,000,000 shares authorized; 31,606,831 shares issued; and 22,145,915 and 21,875,850 shares outstanding at March 31, 2013 and 2012, respectively | 9,482 | 9,482 | |||||
Treasury shares, 9,460,916 and 9,730,981 at March 31, 2013 and 2012, respectively | (2,838 | ) | (2,919 | ) | |||
Capital in excess of stated value | (14,267 | ) | (16,032 | ) | |||
Retained earnings | 122,578 | 123,876 | |||||
Accumulated other comprehensive (loss) income | (1,099 | ) | 31 | ||||
Total shareholders' equity | 113,856 | 114,438 | |||||
Total liabilities and shareholders' equity | $ | 196,964 | $ | 204,139 | |||
See accompanying notes to consolidated financial statements.
42
AGILYSYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended March 31, | |||||||||||
(In thousands, except per share data) | 2013 | 2012 | 2011 | ||||||||
Net revenue: | |||||||||||
Products | $ | 123,798 | $ | 105,601 | $ | 104,769 | |||||
Support, maintenance and subscription services | 77,145 | 72,711 | 70,729 | ||||||||
Professional services | 35,197 | 30,577 | 27,183 | ||||||||
Total net revenue | 236,140 | 208,889 | 202,681 | ||||||||
Cost of goods sold: | |||||||||||
Products, inclusive of developed technology amortization | 96,618 | 83,550 | 80,090 | ||||||||
Support, maintenance and subscription services | 27,760 | 25,706 | 25,507 | ||||||||
Professional services | 21,592 | 19,797 | 21,445 | ||||||||
Total net cost of goods sold | 145,970 | 129,053 | 127,042 | ||||||||
Gross profit | 90,170 | 79,836 | 75,639 | ||||||||
Gross profit margin | 38.2 | % | 38.2 | % | 37.3 | % | |||||
Operating expenses: | |||||||||||
Product development | 32,680 | 30,309 | 27,531 | ||||||||
Sales and marketing | 21,664 | 24,006 | 22,212 | ||||||||
General and administrative | 27,601 | 32,889 | 37,121 | ||||||||
Depreciation of fixed assets | 2,674 | 4,602 | 3,914 | ||||||||
Amortization of intangibles | 3,382 | 3,686 | 5,122 | ||||||||
Asset impairments and related charges | 120 | 9,681 | 959 | ||||||||
Legal settlements | 1,664 | — | — | ||||||||
Restructuring, severance and other charges | 1,496 | 15,853 | 405 | ||||||||
Operating loss | (1,111 | ) | (41,190 | ) | (21,625 | ) | |||||
Other (income) expenses: | |||||||||||
Interest income | (14 | ) | (103 | ) | (73 | ) | |||||
Interest expense | 346 | 978 | 1,297 | ||||||||
Other expenses (income), net | 139 | 181 | (2,294 | ) | |||||||
Loss before income taxes | (1,582 | ) | (42,246 | ) | (20,555 | ) | |||||
Income tax (benefit) expense | (284 | ) | (8,007 | ) | 2,420 | ||||||
Loss from continuing operations | (1,298 | ) | (34,239 | ) | (22,975 | ) | |||||
Income (loss) from discontinued operations, net of taxes | — | 11,456 | (32,500 | ) | |||||||
Net loss | $ | (1,298 | ) | $ | (22,783 | ) | $ | (55,475 | ) | ||
Weighted average shares outstanding - basic and diluted | 21,880 | 22,432 | 22,785 | ||||||||
Net (loss) income per share - basic and diluted: | |||||||||||
Loss from continuing operations | $ | (0.06 | ) | $ | (1.53 | ) | $ | (1.01 | ) | ||
Income (loss) from discontinued operations | — | 0.51 | (1.43 | ) | |||||||
Net loss per share | $ | (0.06 | ) | $ | (1.02 | ) | $ | (2.44 | ) | ||
See accompanying notes to consolidated financial statements.
43
AGILYSYS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Year ended March 31, | ||||||||||||
(In thousands) | 2013 | 2012 | 2011 | |||||||||
Net loss | $ | (1,298 | ) | $ | (22,783 | ) | $ | (55,475 | ) | |||
Other comprehensive loss, net of tax: | ||||||||||||
Unrealized foreign currency translation adjustments | (1,126 | ) | 76 | 565 | ||||||||
Unrealized (loss) gain on sale of securities | (4 | ) | (4 | ) | 714 | |||||||
Total comprehensive loss | $ | (2,428 | ) | |||||||||