PAR Technology Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited results compare with the three months ended March 31, 2011. PAR operates Hospitality and Government segments; results exclude its divested Logistics Management Systems business (LMS), which is reported as discontinued operations.
Financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $55.6 million | $54.2 million |
| Gross margin | $15.1 million; 27.1% | $14.5 million; 26.7% |
| Operating income | $1.2 million | $1.2 million |
| Continuing-operations income | $1.0 million; $0.07 diluted EPS | $0.7 million; $0.05 diluted EPS |
| Net income | $2.5 million; $0.16 diluted EPS | $0.4 million; $0.03 diluted EPS |
| Operating cash flow | $5.2 million total; $7.5 million continuing operations | $(4.1) million total; $(3.6) million continuing operations |
Revenue rose 2.6%. Product revenue fell 7% to $20.2 million, service revenue fell 1.7% to $15.4 million, and contract revenue increased to $20.0 million from $16.8 million. Product margin improved to 45.6% from 39.3%; service margin was 31.3% versus 31.6%; contract margin declined to 5.3% from 6.0%.
Hospitality revenue was $35.5 million, down from $37.4 million; segment operating income rose to $0.4 million from $0.3 million. Government revenue increased to $20.0 million from $16.8 million, with operating income of $1.0 million versus $1.0 million. Continuing-operations income benefited from higher other income, principally the unrealized gain on ORBCOMM shares, and lower interest expense. Net income also included a $2.6 million pretax gain on the LMS sale.
Balance sheet and liquidity
At March 31, 2012, cash and cash equivalents were $14.7 million, investments were $1.7 million, and current assets totaled $82.3 million against current liabilities of $39.5 million. Total assets were $119.4 million and shareholders’ equity was $75.2 million. Reported debt was $2.3 million, including $1.0 million current and $1.2 million long-term; the company had no outstanding borrowings on its $20 million revolving credit line, with an option to increase it to $30 million.
Total cash increased $7.0 million during the quarter. Continuing investing activities provided $2.1 million, including $4.0 million proceeds from the LMS sale; financing activities used $0.5 million, primarily for debt repayment. The company reported $2.3 million of cash used in discontinued operations.
Material changes, outlook, and risks
- PAR completed the sale of substantially all LMS assets to ORBCOMM on January 12, 2012. Closing consideration was $4.0 million cash and $2.123 million in ORBCOMM shares; $1.274 million of the share value was held in escrow. Up to $3.95 million of additional contingent consideration is possible, but none was recorded because achievement of the targets was not considered probable.
- Management estimated fiscal 2012 capital requirements at no more than approximately $3 million and said cash, expected operating cash flow, and available credit should meet requirements for the next 12 months. This is an expectation, not a guarantee.
- Management cited continued investment in ATRIO cloud-based hotel software, restaurant software development, distribution channels, and international expansion. It described large international QSR customers as performing well, while smaller regional operators faced economic pressure.
- Risks include economic and hospitality-sector weakness, changes in U.S. defense procurement and spending, contract and technology execution, competition, customer concentration, and foreign operations. McDonald’s represented 16% of revenue, Yum! Brands 14%, and the U.S. Department of Defense 36%.
- Management warned that continued market volatility could reduce sales, operating income, and cash flow and could contribute to future goodwill impairment. It reported no material change in previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- How much of reported earnings reflects ongoing operations versus the LMS disposal gain and ORBCOMM unrealized investment gain.
- Whether LMS earns the subscriber and sales targets required for any contingent consideration, and the timing and release of escrowed shares.
- Whether Government contract growth and Hospitality product launches offset customer-related declines and lower contract margins.
- Current credit-facility covenant compliance, scheduled debt repayments, and management’s liquidity assumptions.
- Customer concentration and the potential effect of changes in U.S. defense spending or major Hospitality customer purchasing.