PAR

PAR Technology Corp. 10-Q Summary: Period Ended June 30, 2010

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2010, and the six-month period ended on the same date. PAR Technology Corporation operates two primary reportable segments: Hospitality (providing technology solutions for restaurants, hotels, and resorts) and Government (providing technical expertise and IT outsourcing to the U.S. Department of Defense and other agencies). The company also maintains a Logistics Management business.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Mix: Product revenues increased significantly (34% in Q2, 18% YTD) driven by sales to major restaurant customers and channel partners. Conversely, Service revenues declined (12% in Q2, 8% YTD) due to the completion of a specific installation initiative in 2009. Contract revenues decreased (11% in Q2, 12% YTD) due to the non-recurrence of low-margin pass-through revenue and contract completions.
• Profitability: Net income surged 257% in Q2 and 195% YTD compared to 2009. This was driven by improved gross margins (Product margin up to 35% in Q2; Service margin up to 35.4% in Q2) and a lower effective tax rate (11.5% in Q2 vs. 36.2% in 2009) due to the reversal of a $230,000 valuation allowance.
• Expenses: Selling, general, and administrative (SG&A) expenses increased due to investments in sales and marketing. Research and development (R&D) expenses rose to support luxury hotel software and logistics initiatives. Amortization of intangible assets decreased as certain assets became fully amortized.
• Liquidity: The company reduced borrowings under its line of credit by $1.3 million and long-term debt by $663,000 during the first six months of 2010. Operating cash flow decreased year-over-year primarily due to timing differences in receivables and payables.

Outlook, Risks, and Management Commentary

• Outlook: Management remains optimistic about recovery prospects, citing an aggressive upgrade schedule with a large international customer and an improving pipeline with second-tier customers. Capital requirements for fiscal 2010 are estimated at $3 million to $4 million.
• Segment Performance: The Hospitality segment returned to profitability in Q2 ($371k operating income) after a loss in the prior year. The Government segment remains stable but saw revenue declines due to contract completions and funding cutbacks.
• Risks: The filing highlights risks associated with economic volatility, reduced consumer spending, and credit availability. There is a concentration risk with major customers: McDonald's (29% of total revenue in Q2) and the U.S. Department of Defense (29% of total revenue in Q2).
• Unusual Items: The effective tax rate variance was significantly impacted by the reversal of a valuation allowance on deferred tax assets. Other income increased due to finance charges on a specific receivable and gains on asset sales.

Investor Verification Checklist

• Verify the sustainability of the Product revenue growth (34% Q2 increase) given the decline in Service and Contract revenues.
• Assess the impact of the tax rate reversal ($230k valuation allowance) on future effective tax rates and net income projections.
• Monitor the concentration risk regarding McDonald's and the U.S. Department of Defense, which collectively account for 58% of Q2 revenue.
• Review the capital expenditure increase ($2.3M YTD vs. $0.8M YTD 2009) related to next-generation enterprise solutions and its impact on future cash flows.
• Confirm the status of the line of credit ($700k outstanding of $20M available) and compliance with leverage covenants.