PAR Technology Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited results cover Restaurant/Retail and Government operations; the previously sold hotel/spa technology business is reported as discontinued operations. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $62.3 | $52.7 | $128.1 | $108.0 |
| Gross profit / margin | $15.2 / 24.4% | $10.4 / 19.8% | $30.9 / 24.1% | $21.1 / 19.5% |
| Operating income | $2.8 | $0.4 | $5.0 | $0.4 |
| Net income | $2.0 | $0.1 | $3.4 | $0.1 |
| Diluted EPS | $0.12 | $0.01 | $0.21 | $0.01 |
- Q2 revenue grew 18.2%; first-half revenue grew 18.7%. Product revenue rose 52.4% in Q2 and 60.6% in the first half, while service revenue increased 27.4% and 25.0%, respectively.
- Contract revenue fell 25.1% in Q2 and 29.5% in the first half, primarily as a large multi-year program management office contract wound down.
- Q2 segment revenue was $47.7 million for Restaurant/Retail and $14.5 million for Government. Operating income was $1.8 million and $1.6 million, respectively. For the first half, Restaurant/Retail operating income was $4.2 million; Government operating income was $3.1 million.
- Margins improved across product, service, and contract offerings. Management attributed gains to higher volume and fixed-cost absorption, a shift toward SaaS, and a more favorable Government contract mix.
Cash, liquidity and debt
- Cash and cash equivalents were $3.3 million at June 30, versus $9.1 million at December 31, 2016. Current assets were $70.2 million and current liabilities $41.0 million.
- Cash flow from operations was negative $5.7 million for the first half, including negative $6.1 million from continuing operations and positive $0.5 million from discontinued operations. Working-capital uses included receivables, inventory, accounts payable, and lower customer deposits/deferred service revenue.
- Investing activities used $5.6 million, including $3.5 million in capital expenditures and $2.1 million in capitalized software costs. Financing activities provided $5.6 million, including $1.0 million of net line-of-credit borrowing and $3.8 million received on the former hotel/spa business sale.
- At June 30, $1.0 million was drawn on the $15.0 million revolving credit facility, with $14.0 million available. The balance sheet also reports $0.5 million of mortgage debt; the credit facility and mortgage were subject to covenants, which the company said it met at quarter-end.
- Management expects operating cash flow and available credit capacity to meet operating needs for the next 12 months, while noting that actual needs depend on growth, product investment, market acceptance, and potential investigation-related penalties.
Material developments, outlook and risks
- Management described growth investment in Brink POS and SureCheck software, SaaS offerings, sales capacity, and product development. It noted that POS hardware commoditization may increase competition and pressure margins; its strategy is to expand recurring software revenue. No numerical revenue or earnings guidance was provided.
- First-half expenses included $1.6 million related to the internal investigation and SEC subpoena. Potential liability from the China and Singapore matters cannot currently be reasonably estimated.
- The company disclosed questionable import/export and sales documentation activities, including customs documentation issues and payments to customs officials without adequate supporting documentation. It is cooperating with the SEC and DOJ; the SEC issued a subpoena on May 1, 2017. Possible sanctions, fines, penalties, or remedial measures could materially affect the business and financial results.
- Management concluded disclosure controls were ineffective as of June 30, 2017 because material weaknesses remained in the control environment, monitoring, and compliance policies, procedures, and training. Management said no material financial-statement adjustments or restatements were required and described ongoing remediation.
- Revenue concentration is significant: McDonald’s represented 36% of Q2 and 40% of first-half revenue; Yum! Brands represented 14% and 13%; the U.S. Department of Defense represented 23% in both periods.
- The company received $4.2 million of the holdback from the 2015 hotel/spa business sale in May 2017. No 2016 earn-out was received; management did not consider 2017 or 2018 earn-out achievement probable at quarter-end.
- On August 10, 2017, after quarter-end, the company amended its credit documents to allow more flexibility in asset use and waive a default relating to the location of certain collateral.
Important facts for investors to verify
- Whether Restaurant/Retail product growth, Brink deployments, and SaaS recurring revenue can continue, and how hardware mix affects margins.
- Customer concentration and the timing or renewal of major Restaurant/Retail and Government contracts.
- Investigation developments, potential costs or sanctions, and progress in remediating internal-control and compliance weaknesses.
- Cash conversion, working-capital requirements, capital spending, and continued access to the revolving facility while meeting its covenants.
- The filing’s cash-flow table reports $6.1 million of cash used in continuing operating activities; MD&A prose gives a different $5.7 million figure. Confirm the intended presentation against the filed statements.