PAR Technology Corp. 10-Q Summary: Period Ended September 30, 2010
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2010, and the nine-month period ended on the same date. PAR Technology Corporation is a provider of hospitality technology solutions (software, hardware, and services) and applied technology services primarily for the U.S. Department of Defense. The company operates two reportable segments: Hospitality and Government.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2010 | 9 Months Ended Sep 30, 2010 |
|---|---|---|
| Net Revenues | $61,171 | $175,504 |
| Gross Margin | $16,073 (26.3%) | $45,253 (25.8%) |
| Operating Income | $1,018 | $2,642 |
| Net Income | $538 | $1,969 |
| Diluted EPS | $0.04 | $0.13 |
| Cash from Operations (9mo) | $6,929 | |
| Cash and Equivalents (Sep 30, 2010) | $4,088 | |
| Total Debt (Current + Long-term) | $5,363 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 23% year-over-year for the quarter ($61.2M vs. $49.9M) and 6% for the nine-month period ($175.5M vs. $164.8M).
- Profitability Turnaround: The company reported a net income of $538,000 for the quarter, compared to a net loss of $778,000 in the same period in 2009. For the nine months, net income was $1.97M versus a loss of $293,000 in 2009.
- Segment Performance:
- Hospitality: Revenues surged 41% in the quarter ($44.2M vs. $31.3M), driven by an 83% increase in product sales to major restaurant customers and channel partners.
- Government: Revenues declined 7% in the quarter ($16.1M vs. $17.3M) due to contract completions and funding cutbacks.
- Expense Trends: Selling, general, and administrative (SG&A) expenses rose 16% in the quarter due to sales and marketing investments. R&D expenses increased 28% to support new software development.
Outlook, Risks, and Management Commentary
- Outlook: Management anticipates capital requirements of $500,000 to $1 million for the remainder of fiscal 2010. They believe existing cash, credit facilities, and operating cash flow will meet requirements for the next 12 months.
- Strategic Focus: The company is investing in next-generation software for restaurants and hotels, expanding its distribution channel, and building global infrastructure. The Logistics Management business is in an extended adoption phase but adding new accounts.
- Risks:
- Economic Conditions: Volatility in financial markets and high unemployment could reduce consumer spending and impact hospitality customers, particularly regional organizations.
- Customer Concentration: McDonald's Corporation accounted for 38% of Hospitality segment revenue in the quarter; Yum! Brands accounted for 10%. The U.S. Department of Defense accounted for 26% of Government segment revenue.
- Goodwill Impairment: While no impairment was identified in the period, management notes that economic conditions could impact the fair value of reporting units used in annual impairment tests.
- Unusual Items: Other income increased significantly due to foreign currency gains and finance charge income on a specific receivable. Interest expense increased slightly due to higher average borrowing rates and non-recurring interest on past-due taxes in a foreign jurisdiction.
Investor Verification Checklist
- Customer Concentration: Verify the stability of revenue from McDonald's (38% of Hospitality segment) and the U.S. Department of Defense (26% of Government segment).
- Inventory Build-up: Review the $9.2 million cash outflow for inventory in the nine-month cash flow statement; inventory levels rose from $32.9M to $41.1M.
- Debt Covenants: Confirm continued compliance with leverage and fixed charge coverage ratios on the $20M line of credit expiring in June 2011.
- Government Contract Pipeline: Assess the impact of contract completions and funding cutbacks on future Government segment revenue.
- CEO Transition: Note the July 2010 announcement regarding the CEO's intention to retire and review succession plans.