PAR Technology Corporation — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results; amounts below are in U.S. dollars unless stated otherwise. LMS results are presented as discontinued operations, and prior periods were reclassified for comparison.
Business context
PAR operates Hospitality and Government businesses. Hospitality provided approximately 70% of 2011 continuing revenue through restaurant and hotel/resort/spa technology, products, and support services. Government provided approximately 30% through technical, communications, and IT services, primarily for U.S. government customers. In January 2012, PAR completed the sale of substantially all LMS assets to ORBCOMM.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Continuing revenue | $229.4 million | $235.0 million |
| Gross margin | $50.5 million; 22.0% of revenue | $61.9 million; 26.3% of revenue |
| Operating income (loss), continuing operations | ($20.8 million) | $6.8 million |
| Income (loss), continuing operations | ($13.4 million) | $5.0 million |
| Net income (loss), including discontinued operations | ($15.5 million); ($1.04) diluted EPS | $3.1 million; $0.21 diluted EPS |
| Operating cash flow, continuing operations | $13.7 million | $16.0 million |
| Cash and cash equivalents at year-end | $7.7 million | $6.8 million |
| Total debt at year-end | $2.7 million | $4.5 million |
Product revenue fell 7.8% to $91.0 million, service revenue declined 1.1% to $69.5 million, and Government contract revenue rose 4.4% to $68.9 million. Product margin improved to 36.4% from 34.9%; service margin dropped to 18.3% from 33.0%; Government contract margin increased to 6.7% from 6.4%.
Cash used in investing activities from continuing operations was $8.3 million, including $7.4 million of capitalized software development costs; cash used in financing activities was $1.6 million. Current assets were $77.0 million and current liabilities were $38.6 million. The company had no balance outstanding on its $20 million revolving credit facility at year-end; the facility expires in June 2014. Management stated existing cash, credit availability, and expected operating cash flow should cover requirements for the next 12 months. Expected 2012 capital requirements were approximately $3 million or less.
Government contract backlog was $134.4 million at year-end, of which $51.4 million was funded. Approximately $72 million was expected to be completed in 2012 as funding is committed.
Material changes and unusual items
- Continuing revenue declined 2.4% year over year. Lower domestic McDonald’s product sales after completion of a major North American upgrade program were partly offset by growth in other customer, dealer-channel, and international sales.
- PAR recorded a $20.2 million non-cash goodwill impairment and a $580,000 impairment of indefinite-lived intangible assets following a second-quarter stock-price decline. Restaurant goodwill was fully impaired; Hotel/Resort/Spa goodwill was approximately $6.1 million at year-end, with estimated fair value only about 6% above carrying value.
- Service margin was materially affected by a $7.7 million second-quarter write-down of service-parts inventory tied to discontinued products and accelerated customer hardware upgrades. The cash flow statement also reports a $10.9 million provision for obsolete inventory.
- SG&A decreased 6.5% to $35.8 million, while reported R&D expense decreased 13% to $13.8 million partly because more software development costs were capitalized. Capitalized software spending rose to $7.4 million from $2.1 million.
- LMS generated $6.4 million of 2011 revenue and a $2.2 million after-tax loss, presented as discontinued operations. Its sale closed January 12, 2012 for $6.0 million in cash and common stock, with up to $3.95 million of contingent consideration. PAR anticipated a disposition gain of $2.5–$2.9 million, subject to final conditions.
- Fourth-quarter revenue was $60.1 million. Continuing-operations income was $1.8 million; net income was $709,000, or $0.05 diluted EPS, after a $1.1 million discontinued-operations loss.
Outlook, risks, and contingencies
Management identified ATRIO, its newly introduced next-generation hotel/resort/spa platform, as a potential source of PSMS revenue growth in 2012. This is an expectation, not formal numerical earnings guidance. Management also cited uncertainty in U.S. defense spending and weaker conditions among some smaller regional quick-service restaurant customers.
Key risks include customer concentration—McDonald’s and Yum! Brands together represented 42% of revenue in 2011—and dependence on the hospitality industry; government contract funding, modification, or termination; intense competition and pricing pressure; technology development and product acceptance; international, currency, and supplier risks; and potential future impairment. The company reported compliance with amended debt covenants at year-end. Ordinary-course litigation and government contract audits were disclosed; management did not expect them to materially affect financial position, results, or cash flows. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the expected LMS gain and contingent sale proceeds were ultimately realized, and how much consideration was paid in cash versus stock.
- Whether ATRIO gained customers and generated the growth anticipated, and whether the Hotel/Resort/Spa reporting unit maintained its limited fair-value cushion.
- How service margins and inventory exposure evolved after the $7.7 million service-parts write-down and customer upgrade programs.
- Whether Government backlog converted to funded work and revenue, given that only $51.4 million of the $134.4 million backlog was funded at year-end.
- Whether customer concentration, government budget changes, and continued investment in software affected revenue, cash flow, and covenant compliance.