PAR Technology Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Figures are unaudited and in U.S. dollars; financial amounts below are in millions unless noted. PAR reports Hospitality and Government segments. Its hotel/spa technology business was sold in November 2015 and is presented as discontinued operations.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $61.5 | $58.1 | $169.5 | $172.2 |
| Gross margin | $12.6; 20.5% | $11.7; 20.2% | $33.7; 19.9% | $33.4; 19.4% |
| Operating income | $0.8 | $1.9 | $1.2 | $4.5 |
| Continuing-operations net income | $0.5 | $1.3 | $0.6 | $2.7 |
| Net income (loss), including discontinued operations | $0.5 | $(1.5) | $0.6 | $(1.8) |
| Continuing-operations diluted EPS | $0.03 | $0.08 | $0.04 | $0.17 |
- Q3 revenue rose 5.9%; product revenue increased 5.5%, service revenue 8.6%, and contract revenue 5.0%. For the nine months, revenue fell 1.6%: product revenue declined 1.1%, service revenue rose 4.2%, and contract revenue declined 5.0%.
- Q3 product margin was 28.4% (28.5% prior year), service margin 28.9% (26.9%), and contract margin 7.0% (7.5%). For the nine months, product margin fell to 26.4% from 28.3%; service margin rose to 28.6% from 26.5%; contract margin increased to 7.9% from 6.5%.
- SG&A increased to $8.7 million in Q3 and $23.3 million year to date, reflecting investigation costs, a $0.8 million write-off of a capitalized human capital management system, and year-to-date ERP costs. R&D also increased, primarily for Hospitality software development.
- At September 30, cash was $2.9 million, versus $8.0 million at year-end 2015. Current assets were $82.0 million and current liabilities $47.0 million. Inventory increased to $29.8 million from $21.5 million.
- Nine-month operating cash flow was negative $2.8 million, including $2.4 million used by continuing operations, versus $1.7 million generated in the prior-year period. Investing activities used $4.7 million, including $1.8 million of capital expenditures and $1.9 million of capitalized software costs.
- Debt included $4.8 million outstanding on the credit line, $0.6 million of mortgage debt, and $0.6 million of other long-term debt (including current and noncurrent portions). The credit facility provides up to $25 million, subject to asset-based borrowing availability and covenants.
Material changes and business developments
- Hospitality Q3 revenue was $38.4 million, up from $36.0 million; Government revenue was $23.1 million, up from $22.0 million. Year-to-date Hospitality revenue was $105.4 million, while Government revenue declined to $64.0 million from $67.4 million.
- Management attributed Q3 growth to hardware sales to large global customers, Brink POS deployments, recurring software-as-a-service revenue, and higher Government materials and subcontract revenue. Year-to-date product softness reflected lower Pixel Point channel-partner and international sales; Government contract revenue declined with lower materials and subcontract activity.
- The 2015 sale of the hotel/spa business generated a $4.5 million note receivable, reported at an estimated fair value of $4.4 million and due May 2017. Up to $1.5 million of contingent sale consideration was not recognized because management did not consider the targets probable. The company paid a $0.98 million working-capital adjustment in 2016.
Outlook, risks, and unusual items
- Management estimated 2016 capital requirements would not exceed $7.0 million and believed cash, the credit facility, and expected operating cash flow would cover requirements for the next 12 months, while noting additional financing might be needed. No specific earnings or revenue guidance was provided.
- The credit facility’s minimum fixed-charge coverage covenant start date was extended to November 30, 2016 in a November 14 amendment, subsequent to quarter-end. Earlier amendments had also extended covenant timing. The company had received notice of events of default related to unauthorized former-CFO transactions; the lender waived those events subject to conditions.
- Management concluded disclosure controls were ineffective at September 30, 2016 and identified material weaknesses involving oversight of sales operations in China and Singapore, monitoring, employee control culture, import/export and sales-documentation procedures, and third-party arrangements. Remediation was ongoing.
- The company was investigating potential improper import/export or sales documentation activity in China and Singapore and had reported the matter to the SEC. The filing says further government investigations or sanctions are uncertain; potential costs and business, financial, reputational, and financial-reporting effects could be material.
- A separate investigation concerned the former CFO’s $776,000 unauthorized investments, written off in 2015. The company expected possible insurance recovery but would not recognize proceeds until received; it anticipated ongoing legal, accounting, and other professional expenses.
- Customer concentration is significant: McDonald’s represented 26% of Q3 revenue and 23% year to date; the U.S. Department of Defense represented 38% in both periods. Discontinued operations produced no Q3 loss in 2016 versus a $2.8 million loss in Q3 2015.
Most important facts for investors to verify
- Liquidity and borrowing availability under the $25 million asset-based credit facility, covenant compliance after the November 2016 extension, and the company’s ability to generate operating cash.
- Progress and cost of remediation for the disclosed control weaknesses, and outcomes of the China/Singapore and former-CFO investigations, including any regulatory action or insurance recovery.
- Whether Hospitality software and service growth can offset weaker product mix and Government contract-revenue variability, given customer concentration.
- The filing’s MD&A states nine-month continuing-operations diluted EPS was $0.05, while the financial statements report $0.04 basic and diluted EPS; verify the correct figure.