PAR Technology Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unless otherwise noted, financial amounts are in U.S. dollars; statement amounts below are shown in millions.
Business context
PAR operates Hospitality, which provides technology and support to restaurants, hotels and other hospitality customers, and Government, which provides ISR systems, software and technical services, primarily to U.S. federal agencies. Hospitality generated 64% of nine-month revenue; Government generated 37%.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $56.3 | $55.5 | $170.2 | $181.7 |
| Gross margin | $13.3 (23.5%) | $12.4 (22.2%) | $37.5 (22.0%) | $39.0 (21.4%) |
| Operating income (loss) | $(0.2) | $0.0 | $(2.3) | $(0.9) |
| Net income (loss) | $(0.1) | $0.4 | $(1.6) | $0.1 |
| Diluted EPS | $(0.01) | $0.03 | $(0.10) | $0.02 |
| Operating cash flow | Not provided for the quarter | $3.0 | $(5.0), including discontinued operations |
Quarterly revenue rose 1.4%, but nine-month revenue fell 6.3%. For the quarter, product and service revenue declined 2.9% and 3.8%, respectively, while contract revenue increased 10.8%, chiefly from the timing of U.S. Army ISR task orders. Over nine months, product revenue fell 7.7%, service revenue fell 5.9%, and contract revenue fell 5.2%. Management attributed declines to completed large customer rollouts, changes in service-support models, and reduced or nonrenewed government contract funding.
Quarterly product and service margins improved to 35.7% and 28.7%; contract margin declined to 6.7%. For the nine months, product and service margins improved to 32.5% and 29.6%, while contract margin declined to 6.3%. Despite higher gross margin dollars in Q3, higher operating expenses contributed to a quarterly operating loss. Hospitality reported operating losses of $0.9 million in Q3 and $4.7 million year to date; Government reported operating income of $1.3 million and $3.7 million, respectively.
Balance sheet, liquidity and debt
- At September 30, cash was $10.3 million, current assets $76.8 million and current liabilities $53.9 million, versus $10.0 million, $72.3 million and $40.2 million at December 31, 2013.
- Total debt was approximately $16.3 million, including $6.0 million drawn on the revolving line and $10.4 million of current and long-term debt. Debt at December 31, 2013 was approximately $1.1 million.
- Nine-month operating cash flow was $3.0 million; investing cash outflow was $8.9 million, including $5.0 million paid for Brink and $2.3 million of capitalized software; financing provided $5.9 million, principally from credit-facility borrowings. Cash increased $0.3 million from year-end.
- PAR replaced its prior facilities with a three-year, asset-based credit facility of up to $25 million. The September 30 draw was approximately $5.9 million at 3.25%; the company reported covenant compliance. Management said cash, anticipated operating cash flow and available credit should meet requirements for the next 12 months, while noting additional financing might be required or elected.
- Management anticipated fiscal 2014 capital requirements of approximately $4–6 million. This is a capital-requirements estimate, not earnings or revenue guidance.
Material developments, outlook and risks
- Brink acquisition: PAR closed its purchase of Brink Software on September 18. The preliminary aggregate purchase price was $14.4 million, including $5.0 million paid at closing, estimated future consideration and contingent consideration. Guaranteed cash payments total $10 million over three years; up to $7 million more may be payable through 2018 based on targets. Preliminary allocation included $7.3 million goodwill, $7.2 million amortizable intangibles and $4.5 million fair value for contingent consideration. Valuations remain preliminary; acquisition results were not material to the quarter. Acquisition-related costs of about $91,000 were expensed through September 30.
- Management described strength in markets served but cited economic uncertainty, weaker conditions among some smaller regional quick-service restaurant customers, and potential effects on product purchases, operating income, cash flow and goodwill valuations. It noted possible future goodwill impairment.
- Risks include concentration in major customers and government funding: McDonald’s accounted for 20% of Q3 revenue, Yum! Brands 10%, and the U.S. Department of Defense 36%. Other cited risks include technology development and commercialization, competition and pricing, foreign operations, and government contract renewals and procurement levels.
- PAR is investing in Hospitality software, including cloud-based offerings, and pursuing broader retail and grocery distribution to diversify customers and increase recurring and subscription revenue. No specific revenue or earnings forecast was provided.
- The filing reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls. Inflation had little reported effect; management considered a 100-basis-point interest-rate change and current foreign-currency exposure not material.
Important facts for investors to verify
- Final Brink purchase-price allocation, contingent-payment assumptions, and whether performance targets trigger payments up to the $7 million maximum.
- Ability to sustain positive operating cash flow and meet liquidity needs while integrating Brink and servicing materially higher debt.
- Whether Hospitality can improve profitability and offset lower product and service revenue, and whether Government contract funding and task-order timing remain supportive.
- Customer concentration, major-account deployment timing, and the effect of any reductions in McDonald’s, Yum! Brands or U.S. government demand.
- Potential impairment of goodwill or other assets if demand, projected cash flows or economic conditions weaken.