PAR Technology Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. PAR operates Restaurant/Retail (POS software, hardware and services) and Government (defense and federal agency solutions) segments. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $45.7 | $44.2 | $100.4 | $88.9 |
| Gross profit | $9.1 | $8.3 | $20.1 | $17.9 |
| Gross margin | 19.9% | 18.8% | 20.0% | 20.1% |
| Operating loss | $(5.7) | $(3.5) | $(11.2) | $(5.6) |
| Net loss | $(9.0) | $(1.1) | $(19.9) | $(3.8) |
| Diluted loss per share | $(0.49) | $(0.07) | $(1.10) | $(0.24) |
Q2 revenue rose 3.4%; first-half revenue rose 12.9%. Q2 Restaurant/Retail revenue declined 2% to $27.6 million, while Government revenue grew 13% to $18.1 million. For the first half, Restaurant/Retail revenue increased 12% to $65.0 million and Government revenue increased 14% to $35.4 million. Growth included contributions from the Restaurant Magic and Drive-Thru acquisitions.
Q2 product revenue fell 16.3% to $12.3 million; service revenue increased 13.3% to $15.3 million; and contract revenue rose 13.1% to $18.1 million. Management attributed weaker product sales largely to COVID-related installation delays and reduced hardware refresh activity. Service growth reflected acquisitions and recurring software revenue; contract growth reflected ISR work.
Q2 gross margin improved year over year, but first-half margin was nearly flat. For the first half, product margin fell to 19.6% from 25.1%, service margin rose to 33.8% from 26.1%, and contract margin declined to 7.1% from 9.9%. SG&A and R&D increased; first-half R&D was $9.4 million versus $5.8 million. Restaurant/Retail reported a first-half operating loss of $13.8 million; Government operating income was $2.5 million.
Cash, liquidity and debt
At June 30, 2020, cash and equivalents were $58.8 million, versus $28.0 million at year-end 2019. Current assets were $127.2 million and current liabilities $37.3 million. Long-term debt carrying value was $103.8 million, with a further $0.6 million current portion; total debt carrying value was approximately $104.5 million, versus $63.0 million at December 31, 2019.
For the six months, operating cash flow was negative $13.6 million (versus negative $6.5 million); investing cash flow was negative $4.6 million; and financing cash flow was positive $49.1 million. Operating cash use reflected the net loss and working-capital needs, including increased inventory and lower customer deposits. Inventory was $26.0 million, up from $19.3 million at year-end.
In February 2020, PAR issued $120 million of 2.875% convertible notes due 2026 and used approximately $66.3 million, along with 722,423 treasury shares, to repurchase approximately $66.3 million principal amount of its 4.5% notes due 2024. The transaction resulted in an $8.1 million debt-extinguishment loss. At quarter-end, $13.75 million principal of the 2024 notes and $120 million principal of the 2026 notes remained outstanding. Management said available cash was expected to meet operating needs for the next 12 months.
Outlook, risks and notable items
COVID-19 disrupted Restaurant/Retail customers and operations: closures, delayed adoptions and installations, and paused Brink POS installations affected April and May; recurring software fees were not charged to temporarily closed sites. Installations resumed in June, and management reported site closures were down to 6% of the March 15 level as of July 30. The Government segment had not experienced a material adverse impact to date. Management said the pandemic’s duration and financial effects remained uncertain; the filing provides no quantified revenue or earnings guidance.
PAR reduced discretionary spending, froze non-essential hiring, reduced and furloughed some Restaurant/Retail and corporate staff, and deferred employer Social Security taxes under the CARES Act. It estimated total deferrals of $1.8–$2.2 million by year-end; $0.6 million had been deferred by June 28.
Government contract value remaining was approximately $129.6 million at June 30, of which $35.5 million was funded. The filing notes concentration: the U.S. Department of Defense accounted for 40% of Q2 revenue. Principal uncertainties include COVID-19 effects, customer and government spending, contract audits and estimates, and execution of product and software investments. A putative Illinois biometric privacy lawsuit remained pending; the company considered it without merit and recorded no accrual. Management considered the related legal proceedings and estimated Singapore penalty not material.
Important facts for investors to verify
- How quickly Restaurant/Retail installations, recurring fees and hardware demand recover, and whether subsequent COVID-19 restrictions reverse the reported improvement.
- Whether rising recurring software revenue and acquisitions translate into sustainable operating improvement, given higher R&D and operating losses.
- Cash burn, inventory levels and receivables/credit-loss exposure; Restaurant/Retail inventory reserves were $11.7 million and expected credit losses $2.0 million at quarter-end.
- Convertible-note dilution and future financing costs, including conversion terms, remaining principal and the effect of debt discount accretion.
- Government contract funding, backlog conversion, customer concentration and any audit adjustments; the $129.6 million contract value included only $35.5 million funded.
- Performance against management’s 12-month liquidity expectation and the timing of debt, purchase and contingent-consideration obligations.