PAR Technology Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. PAR operates Hospitality, Government, and Logistics Management businesses. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $59.8 | $61.2 | $173.9 | $175.5 |
| Gross profit | $15.3 | $16.1 | $37.4 | $45.3 |
| Gross margin | 25.5% | 26.3% | 21.5% | 25.8% |
| Operating income (loss) | $2.0 | $1.0 | ($25.0) | $2.6 |
| Net income (loss) | $1.2 | $0.5 | ($16.2) | $2.0 |
| Diluted EPS | $0.08 | $0.04 | ($1.08) | $0.13 |
- Q3 revenue declined about 2% year over year; nine-month revenue declined about 1%. Q3 product revenue fell 11%, while service revenue grew 11%; contract revenue decreased slightly.
- For the first nine months, product margin improved to 36.8% from 34.5%, but service margin fell to 14.9% from 32.3%, chiefly due to a $7.7 million service-parts inventory write-down. Contract margin was 6.2%, roughly flat.
- Nine-month results included $29.4 million of pre-tax charges, including $20.8 million of non-cash goodwill and intangible impairment, inventory write-downs, and severance and office-closure costs. The filing reports goodwill impairment of $20.263 million and intangible impairment of $0.580 million.
Cash, debt, and liquidity
- Operating cash flow was $3.9 million for the nine months, versus $6.9 million a year earlier. Investing cash use was $7.8 million, including $7.0 million of capitalized software costs; financing provided $0.4 million. Cash declined $3.4 million to $3.4 million.
- At September 30, current assets were $83.0 million and current liabilities $43.6 million. Total debt, including line-of-credit borrowings, was approximately $4.7 million; the company also reported $1.5 million outstanding on its credit line.
- The credit facility provides up to $20 million of borrowing availability, with an option to increase it to $30 million, and expires in June 2014. PAR reported compliance with amended covenants at quarter-end. Management said cash, credit facilities, and expected operating cash flow should cover requirements for at least 12 months, while noting additional funding could be needed or elected.
- Management estimated fiscal 2011 capital requirements at $8–$9 million. Nine-month capital expenditures and capitalized software totaled $7.8 million.
Business developments, outlook, and risks
- Hospitality Q3 revenue was $42.9 million, down from $44.2 million; Government revenue was $15.8 million, down from $16.1 million; Logistics Management revenue rose to $1.1 million from $0.9 million. Government contract starts and renewals were affected by delayed funding and lower systems-integration revenue.
- Management said domestic McDonald’s upgrade activity was nearing completion, weighing on product sales, while Yum! Brands rollouts, channel sales, and international product revenue partly offset the decline. PAR cited an improving pipeline among second-tier Hospitality customers and continued, but extended, adoption of its Logistics Management technology.
- The company recorded the impairment after a significant second-quarter share-price decline. It stated that its long-term business outlook had not materially deteriorated and that its September review found no new impairment trigger. The impairment valuation used projected cash flows, long-term growth assumptions of 4%–5%, and discount rates of 17%–27%.
- Customer and contract concentration is significant: McDonald’s represented 30% of Q3 revenue, Yum! Brands 15%, and the U.S. Department of Defense 26%. Risks include major-customer purchasing changes, Hospitality-market weakness, government contract funding, technology development and commercialization, competition, and foreign operations. The filing reported no material change to previously disclosed risk factors and no off-balance-sheet arrangements.
- No specific revenue or earnings guidance was provided. Management discussed expected capital needs and liquidity, and said inflation had little effect during the period; it did not expect a 100-basis-point interest-rate change or current foreign-currency exposure to have a significant impact.
Investor verification points
- Review the assumptions and sensitivity of the goodwill and intangible-asset valuations, especially projected results and discount rates.
- Assess whether Hospitality margins recover after the inventory write-down and as major customer upgrade programs change.
- Monitor cash conversion, software-development spending, credit-line use, covenant compliance, and the stated 12-month liquidity outlook.
- Track Government contract funding and revenue concentration among McDonald’s, Yum! Brands, and the Department of Defense.