PAR Technology Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. PAR operates Hospitality, Government, and Logistics Management businesses, providing technology products and services, government technical and support services, and asset-tracking solutions.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $58.3m | $56.2m | $114.1m | $114.3m |
| Gross profit / margin | $7.2m / 12.4% | $15.1m / 26.8% | $22.2m / 19.4% | $29.2m / 25.5% |
| Operating income (loss) | ($27.7m) | $0.8m | ($27.0m) | $1.6m |
| Net income (loss) | ($17.8m) | $0.8m | ($17.4m) | $1.4m |
| Diluted EPS | ($1.19) | $0.06 | ($1.17) | $0.10 |
Q2 revenue increased 4%; first-half revenue was nearly flat. First-half operating cash flow was $0.1m, versus $4.4m a year earlier. Investing cash use was $5.7m, including $5.1m of capitalized software development; financing provided $2.3m. Cash declined to $3.7m from $6.8m at year-end 2010.
At June 30, current assets were $90.4m and current liabilities $50.6m (current ratio approximately 1.8). Debt comprised $1.9m current long-term debt, $3.0m drawn on the line of credit, and $1.8m long-term debt. The filing also reports $5.2m of variable-rate debt. Shareholders’ equity was $70.6m.
Material changes and unusual items
- PAR recorded $29.4m of Q2 pre-tax non-recurring charges: $20.8m of non-cash goodwill and intangible-asset impairment, $7.7m of service-parts inventory write-downs, and severance and office-closure costs. The filing attributes the goodwill impairment primarily to the decline in PAR’s share price, not a material deterioration in long-term business outlook. Goodwill fell to $6.9m from $27.0m at year-end.
- Hospitality Q2 revenue rose to $40.2m from $38.4m, while segment operating loss was $27.8m, largely reflecting impairment charges and inventory write-downs. Government revenue was $16.3m versus $16.3m; segment operating income was $0.9m. Logistics Management revenue rose to $1.8m from $1.5m, but the segment reported a $0.5m operating loss.
- Q2 product revenue grew 4%, supported by international sales and Logistics Management. Service revenue rose 7% for the quarter, but first-half service revenue fell 5%. Contract revenue was flat for Q2 and down 2% for the first half amid slow authorization of new and renewal government contract funding.
- Q2 product margin improved to 37.4% from 35.0%; service margin fell to negative 14.7% from 35.4%, chiefly due to the inventory write-down and lower-margin service mix. Contract margin declined to 5.7% from 6.5%.
Liquidity, outlook, and risks
A June 2011 credit agreement provides a $20m revolving facility, with an option to increase it to $30m, and expires in June 2014. PAR had $3m drawn at quarter-end. A July amendment excluded specified Q2 non-recurring charges from debt-covenant calculations through June 30, 2012; PAR reported compliance with the amended covenants as of June 30. Management estimated fiscal 2011 capital requirements of $7m–$8m and said cash, credit facilities, and expected operating cash flow should meet requirements for at least 12 months, while noting additional financing could be needed.
Management cited regional quick-service restaurant weakness, completion of a major customer’s upgrade program, delayed government contract starts and uncertainty in defense spending, and the extended adoption cycle for Logistics Management technology. McDonald’s and Yum! Brands represented 29% and 12% of Q2 revenue, respectively; the U.S. Department of Defense represented 28%. The filing warns that economic conditions, customer demand, government funding, competition, technology development, foreign operations, and currency movements could affect results. No specific earnings or revenue guidance is provided.
Important facts for investors to verify
- Whether the upgrade-related inventory write-down and impairment charges are truly non-recurring, and whether service margins recover as customer upgrades progress.
- Cash generation, inventory levels, and software-development spending, particularly given first-half operating cash flow of only $0.1m and cash of $3.7m.
- Compliance with credit-facility covenants and borrowing availability under the amended agreement, as well as funding needs relative to the stated $7m–$8m capital requirement.
- Progress and timing of government contract awards and funding, and the pace of Hospitality and Logistics Management growth as major customer upgrade programs change.
- Assumptions underlying the impairment valuation, including reporting-unit discount rates of 17%–27% and long-term growth assumptions of 4%–5%.