PAR Technology Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results; dollar amounts below are in millions unless noted.
Business context
PAR reports Restaurant/Retail and Government segments. Restaurant/Retail sells restaurant and retail hardware, cloud and on-premise software, and related services; Government provides technical and support services, largely to U.S. government customers.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $48.9 | $61.5 | $177.1 | $169.5 |
| Gross profit | $9.4 | $12.6 | $40.2 | $33.7 |
| Operating income (loss) | $(2.6) | $0.8 | $2.4 | $1.2 |
| Net income (loss) | $(1.5) | $0.5 | $1.9 | $0.6 |
| Diluted EPS | $(0.10) | $0.03 | $0.11 | $0.04 |
| Operating cash flow | Not presented for quarter | $(7.3) | $(2.8) |
Consolidated gross margin was approximately 19.1% in Q3 2017 versus 20.5% in Q3 2016, and 22.7% for the first nine months versus 19.9% in 2016. Product, service, and contract margins were 23.4%, 24.1%, and 8.8% for Q3; nine-month margins were 25.1%, 30.3%, and 10.3%, respectively.
Q3 revenue fell 20.4%: product revenue declined 19.6% to $20.7 million and Government contract revenue declined 35.5% to $14.9 million, while service revenue increased 5.5% to $13.3 million. Management attributed lower product sales primarily to the wind-down of major hardware installations for a tier-one Restaurant/Retail customer, and lower contract revenue to the shift away from higher-revenue, lower-margin PMO work toward ISR and other value-added work.
Nine-month revenue rose 4.5%. Product revenue increased 30.8% to $90.6 million and service revenue rose 18.2% to $42.7 million, offset in part by a 31.6% decline in contract revenue to $43.8 million. Management cited tier-one sales and Brink POS deployments as drivers of product growth; channel sales of Pixel Point products were lower.
Financial position and liquidity
At September 30, 2017, cash was $1.2 million, down from $9.1 million at December 31, 2016. Current assets were $60.5 million and current liabilities were $33.3 million. Total debt was approximately $1.9 million, including $1.45 million drawn on the revolving credit facility and $0.43 million of mortgage debt. The $15 million facility had $13.5 million available; the company reported compliance with its covenants. The mortgage bears fixed interest of 4% and matures November 1, 2019.
Nine-month operating cash use increased to $7.3 million from $2.4 million in 2016, primarily reflecting hardware deployed against customer deposits received in late 2016 and lower accounts payable. Investing cash use was $7.2 million, including $3.9 million in capital expenditures and $3.3 million of capitalized software costs. Management said operating cash flows and facility capacity should be sufficient for the next 12 months, while noting funding needs depend on business conditions and potential penalties.
Outlook, unusual items, and risks
- No specific revenue or earnings guidance was provided. Management’s strategy is to expand Brink POS and SureCheck, grow recurring SaaS revenue, and pursue higher-value Government work. It cautioned that POS hardware commoditization could pressure pricing and margins, and that U.S. defense workforce policy, procurement cycles, and spending are uncertain.
- Q3 product margin included a $0.7 million inventory-reserve adjustment, reducing margin by 360 basis points; service margin included a $0.4 million cost adjustment, reducing margin by 316 basis points. Nine-month expenses related to the internal investigation and SEC subpoena were $2.3 million, including $0.7 million in Q3 SG&A.
- The company is investigating possible improper import/export and sales-documentation practices in China and Singapore, voluntarily notified and cooperating with the SEC and DOJ, and received an SEC subpoena in May 2017. Potential liability cannot be reasonably estimated; sanctions, fines, or remedial measures could materially affect results, liquidity, reputation, or operations.
- Management concluded material weaknesses in internal controls remained at September 30, 2017, including deficiencies in control culture, monitoring, and compliance policies and training. Disclosure controls were deemed ineffective; management said no material financial-statement adjustment or restatement was required and described ongoing remediation.
- For the 2015 sale of the hotel/spa technology business, PAR received $4.2 million of the holdback in May 2017. No 2016 earn-out was received, and no 2017–2018 earn-out was recorded because achievement was not considered probable.
- The company planned to adopt the new revenue-recognition standard in 2018 using the modified retrospective method. It was still assessing the quantitative impact, though it did not then expect a significant change in revenue-recognition timing.
Investor facts to verify
- Whether Restaurant/Retail sales and margins recover after the tier-one hardware-installation wind-down, and whether recurring SaaS growth offsets hardware commoditization.
- Whether the Government segment’s transition to ISR and other higher-value work sustains improved contract margins despite lower revenue.
- Cash conversion, working-capital movements, and use of the revolving facility given low cash and continuing operating cash outflow.
- Developments, costs, and potential consequences of the China/Singapore investigation, SEC/DOJ inquiries, and remediation of material weaknesses.
- The eventual quantified effects of adopting the revenue-recognition standard and any potential PSMS earn-out or purchase-price adjustments.