PAR Technology Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Unaudited consolidated results; amounts below are in millions unless stated otherwise. PAR operates Hospitality technology and services and Government technical-services businesses.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $63.292 | $57.402 | $122.916 | $113.943 |
| Gross margin dollars | $14.527 | $12.261 | $27.516 | $24.274 |
| Operating income (loss) | $0.605 | ($1.013) | ($0.064) | ($2.127) |
| Net income (loss) | $0.101 | ($0.519) | ($0.284) | ($1.508) |
| Diluted EPS | $0.01 | ($0.03) | ($0.02) | ($0.10) |
| Cash from operating activities | Not stated by quarter | ($0.554) | $5.771 |
- Q2 revenue rose 10.3%; first-half revenue increased 7.9%. For the first half, product revenue was $47.488 million, service revenue $30.031 million, and contract revenue $45.397 million.
- Q2 gross margin was 22.9% of revenue, versus 21.4% a year earlier; first-half gross margin was 22.4%, versus 21.3%. Q2 product margin declined to 29.6% from 31.1%, while service margin improved to 34.7% from 27.4% and contract margin to 6.4% from 5.3%. First-half product, service, and contract margins were 30.5%, 34.3%, and 6.0%, respectively.
- Hospitality generated Q2 revenue of $41.731 million and an operating loss of $0.634 million; Government generated $21.561 million and operating income of $1.288 million. First-half Hospitality operating loss was $2.275 million; Government operating income was $2.533 million.
- First-half operating cash use reflected working-capital movements, particularly lower accounts payable and higher accounts receivable; increased deferred service revenue and customer deposits partly offset these uses. Investing cash use was $2.388 million, including $0.959 million in capital expenditures and $1.429 million in capitalized software. Financing cash use was $1.811 million.
Liquidity, debt, and balance sheet
- At June 30, 2015, cash and equivalents were $5.136 million, down from $10.167 million at December 31, 2014. Current assets were $74.474 million and current liabilities $55.026 million.
- Balance-sheet debt consisted of $3.176 million current long-term debt, $3.276 million drawn on the credit line, and $2.528 million long-term debt. The Brink acquisition note had a $5.0 million principal balance and $4.9 million carrying value and is included in reported debt.
- The revolving facility provides up to $25 million, subject to asset-based availability. The drawn balance was approximately $3.3 million at 3.50%; the company reported compliance with covenants at quarter-end. A March 2015 amendment reduced the EBITDA requirement and extended the fixed-charge-coverage ratio.
- Management expected fiscal 2015 capital requirements of approximately $2–$4 million and believed cash, credit availability, and expected operating cash flow would meet needs for the next 12 months, while noting additional funding could be required or elected.
Material changes, outlook, and risks
- Improved profitability versus the prior-year quarter reflected higher revenue and better service and contract margins, along with lower SG&A. Lower-margin hardware mix reduced product margins. R&D increased, including investment in Brink POS and other Hospitality software and next-generation hardware.
- Management is developing cloud-based Hospitality offerings, including Brink POS and ATRIO, expanding recurring software-as-a-service revenue, and pursuing Government contract renewals and new business. No specific revenue or earnings forecast is provided.
- A goodwill impairment triggering event was identified in Q2 for a reporting unit because of potential fair-value decline. The impairment amount, if any, was not yet estimable; a formal test was planned before the required Q4 annual test and could result in a material charge.
- PAR acquired Brink in September 2014 to expand cloud-based POS offerings. It had $3 million payable at the September 18, 2015 closing and $2 million due September 18, 2016; contingent consideration could reach $7 million, with estimated fair value of approximately $5 million. The filing also describes a $1 million escrow provision for potential indemnification claims.
- Customer concentration is significant: the U.S. Department of Defense represented 34% of Q2 revenue and 37% of first-half revenue; McDonald’s represented 22% and 19%, and Yum! Brands 13% and 10%, respectively. Risks cited include major-customer purchasing changes, Hospitality-sector weakness, technology commercialization, Government contract funding, competition, foreign operations, and currency fluctuations.
- Management said economic uncertainty and weaker conditions among certain smaller QSR customers could affect sales, cash flows, and asset valuations. Inflation had little reported effect; the company said a 100-basis-point interest-rate change would not be material. No off-balance-sheet arrangements were reported, and no material risk-factor changes from the prior 10-K were disclosed.
Investor verification priorities
- Track the planned goodwill impairment test, reporting-unit assumptions, and any resulting charge.
- Verify Brink closing and payment obligations, contingent consideration, and any indemnification claims or escrow usage.
- Monitor operating cash conversion, receivables, payables, deferred revenue, and credit-facility covenant compliance as cash balances have declined.
- Assess whether Hospitality margin recovery and recurring software revenue offset lower-margin hardware mix and increased development costs.
- Evaluate exposure to the DoD and major Hospitality customers, including contract funding, renewals, and purchasing trends.