PAR Technology Corporation — Q3 2012 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2012. PAR operates Hospitality technology and support businesses and a Government segment providing systems, software, and technical services. The company sold substantially all assets of its Logistics Management Systems business (LMS) on January 12, 2012; LMS is reported as discontinued operations.
Financial performance
Amounts are in millions, except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $61.1 | $58.7 | $178.7 | $169.3 |
| Gross margin | $14.0 (23.0%) | $15.1 (25.7%) | $41.1 (23.0%) | $36.4 (21.5%) |
| Operating income (loss), continuing operations | $1.2 | $2.7 | $1.8 | $(23.2) |
| Income (loss), continuing operations | $1.3 | $1.6 | $1.8 | $(15.2) |
| Net income (loss) | $1.4 | $1.2 | $3.3 | $(16.2) |
| Diluted EPS | $0.09 | $0.08 | $0.22 | $(1.08) |
- Revenue mix: Q3 product revenue was $22.3 million, service revenue $16.7 million, and contract revenue $22.0 million. Year-to-date amounts were $62.7 million, $48.1 million, and $68.0 million, respectively.
- Cash flow: Nine-month operating cash flow was $11.2 million, including $13.7 million from continuing operations and $2.5 million used by discontinued operations. Investing activities provided $0.7 million and financing activities used $1.4 million. Cash rose to $18.2 million from $7.7 million at year-end 2011.
- Liquidity and debt: Current assets were $84.5 million and current liabilities $41.4 million at September 30. Long-term debt was $1.1 million, with $0.2 million current, for total debt of about $1.3 million. No balance was outstanding on the $20 million revolving credit facility, which could be increased to $30 million; the facility expires June 2014. PAR reported compliance with amended covenants.
- Margins: Q3 product margin was 34.3% (35.5% prior year), service margin 29.6% (28.8%), and contract margin 6.4% (6.9%). Year-to-date margins were 36.6%, 29.7%, and 5.6%, respectively.
Material changes versus prior comparable periods
- Q3 revenue increased 4%, but continuing-operations income declined from $1.6 million to $1.3 million. Hospitality revenue declined, while Government contract revenue rose; total gross margin dollars also fell.
- Hospitality product and service revenue weakness reflected the completion of McDonald’s technology upgrades and lower installation and call-center revenue. Increased sales to Yum! Brands, Subway, and international customers, including SureCheck-related activity, partly offset the declines.
- Government revenue growth was primarily attributable to a new U.S. Army Intelligence, Surveillance, and Reconnaissance systems integration contract. Contract margins declined because of mix and the start of certain fixed-price contracts.
- Nine-month continuing results improved substantially from 2011, which included $20.8 million of goodwill and intangible impairment and other non-recurring charges, including inventory write-downs, severance, and office closure costs. The 2012 nine-month discontinued-operations result includes a $2.6 million gain on the LMS sale.
- Year-to-date operating cash flow increased from $3.9 million to $11.2 million, aided by receivables collections and higher deferred service revenue. Cash investing included $4.0 million of LMS sale proceeds and $1.9 million from investment maturities.
Outlook, commentary, risks, and unusual items
- Management said existing cash, operating cash flow, and available credit were expected to meet requirements for the next 12 months. Anticipated fiscal 2012 capital requirements were approximately $3 million. No specific revenue or earnings guidance was provided.
- PAR is investing in ATRIO cloud-based hospitality software, SureCheck, software enhancements, distribution channels, and international expansion. Management described the QSR market as generally holding up for large international operators, but noted weaker conditions among some smaller regional operators.
- Risks highlighted include customer purchasing concentration, hospitality-sector and broader economic weakness, technology development and commercialization, government contract funding and procurement uncertainty, competition and pricing pressure, and foreign operations. The U.S. Department of Defense represented 36% of Q3 revenue and 38% of nine-month revenue; McDonald’s represented 20% and 18%, respectively. Management reported no material change to previously disclosed risk factors.
- PAR may receive up to $3.95 million in contingent LMS-sale consideration based on subscriber and sales targets through 2014; no amount was recognized because management did not consider achievement probable. $956,000 of sale-related proceeds remained in escrow at quarter-end. PAR also recorded a $210,000 realized loss on liquidation of its ORBCOMM stock investment during the nine months.
- Management warned that economic volatility could reduce product sales, operating income, and cash flow and could affect goodwill valuation; future impairment charges remain possible. The company reported no off-balance-sheet arrangements. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether growth and execution on the U.S. Army ISR contract can offset continued Hospitality product and service declines, and how contract pass-through revenue affects reported margins.
- Customer concentration and exposure to McDonald’s, Yum! Brands, and the U.S. Department of Defense, including renewal, purchasing, and government funding risks.
- Hospitality margin trends, inventory levels, delayed shipments noted by management, and the commercial progress and costs of ATRIO, SureCheck, and other software investments.
- Collection and release of the $956,000 escrow balance and the probability and timing of contingent LMS-sale proceeds, which are not reflected in reported results.
- Liquidity and covenant compliance, the future availability of the revolving facility, and whether assumptions supporting goodwill and intangible-asset carrying values remain appropriate.