PAR Technology Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are against Q1 2016 unless otherwise noted. PAR provides Restaurant/Retail technology and services and Government technical and contract services. Financial statements are unaudited.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Revenue | $65.9 million | $55.3 million | Up 19.0% |
| Gross margin | $15.7 million; 23.8% | $10.6 million; 19.2% | Improved 4.6 percentage points |
| Operating income | $2.2 million | $0.1 million | Operating margin approximately 3.4% vs. 0.1% |
| Continuing-operations income | $1.3 million; $0.08 diluted EPS | $15,000; $0.00 diluted EPS | Substantial improvement |
| Net income | $1.4 million; $0.09 diluted EPS | $15,000; $0.00 diluted EPS | Includes $183,000 after-tax discontinued-operations income |
| Operating cash flow | $(1.2) million | $(1.1) million | Cash used in both periods |
| Cash and equivalents | $5.5 million | $9.1 million at Dec. 31, 2016 | Down $3.6 million during the quarter |
| Debt and line of credit | $1.5 million total | $0.6 million at Dec. 31, 2016 | Includes $1.0 million line borrowing and $0.5 million mortgage |
Investing activities used $3.35 million, including $2.34 million of capital expenditures and $1.01 million of capitalized software costs. Financing activities provided $0.95 million. Current assets were $73.1 million and current liabilities $46.2 million at quarter-end. The company reported up to $14.0 million of availability under its $15.0 million revolving facility and said it was compliant with its covenants.
Business and period comparisons
- Restaurant/Retail revenue rose to $51.5 million from $33.8 million; segment operating income was $2.4 million versus a $0.5 million loss. Product revenue growth reflected the timing of major hardware installations for a tier 1 customer and continued Brink POS deployments. Service growth reflected installation activity, Brink deployments, and depot repair contracts.
- Government revenue declined to $14.3 million from $21.5 million, primarily as a large multi-year Program Management Office contract wound down. Segment operating income was $1.5 million versus $1.8 million.
- Product revenue increased 68.5% to $37.2 million; product margin was 25.9% versus 25.5%. Service revenue increased 22.5% to $14.3 million; service margin improved to 31.1% from 26.5%. Contract revenue fell 33.5% to $14.3 million, while contract margin improved to 11.0% from 8.7% due to a shift toward higher-value offerings.
- SG&A rose to $9.6 million from $7.5 million, including higher commissions and bonus accruals. R&D increased to $3.6 million from $2.8 million, primarily for Brink and SureCheck software development. PAR recorded $1.0 million of expenses related to its internal investigation during the quarter.
Outlook, risks and unusual items
- Management expects operating cash flows and available credit capacity to meet operating needs for the next 12 months. No quantitative revenue or earnings guidance was provided.
- PAR is investigating potentially improper import/export and sales-documentation activities at its China and Singapore offices, including customs practices and questionable payments. It voluntarily notified and is cooperating with the SEC and DOJ; the SEC issued a document subpoena on May 1, 2017. Potential sanctions, fines, penalties, or remedial measures cannot currently be reasonably estimated and could materially affect the business, liquidity, results, and reputation.
- Management concluded disclosure controls were ineffective as of March 31, 2017 because material weaknesses remained in the control environment, monitoring, and compliance policies and training. The filing says no material adjustments or restatements of previously issued financial statements were required. Remediation efforts are underway, with further expense expected.
- Customer concentration increased: McDonald’s represented 44% of Q1 2017 revenue, versus 17% a year earlier; the U.S. Department of Defense represented 22%, versus 39%. Management also cited increasing POS hardware commoditization and potential margin pressure, and uncertainty in defense procurement and spending.
- The company recognized $183,000 of after-tax discontinued-operations income from an adjustment to the receivable related to the 2015 sale of PSMS. The remaining note receivable was approximately $3.8 million and due May 5, 2017; up to $1.5 million of additional contingent sale consideration was not recorded because achievement was not considered probable.
Important facts for investors to verify
- Subsequent collection and any adjustments to the approximately $3.8 million PSMS sale receivable, and whether contingent consideration becomes probable.
- Developments in the China and Singapore investigation, SEC/DOJ actions, remediation costs, and any possible sanctions or business restrictions.
- Progress in remediating material weaknesses and restoring effective disclosure controls and internal control over financial reporting.
- Whether elevated Restaurant/Retail hardware deployments and customer concentration persist, and whether recurring software revenue can offset hardware commoditization.
- Cash conversion, working-capital trends, planned capital and software investment, and continued compliance with credit-facility covenants.