PAR Technology Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. PAR operates Hospitality and Government segments. Hospitality provides technology products and services for restaurants, hotels, resorts and related markets; Government provides defense and federal technology and support services.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $56.5 | $66.7 |
| Gross profit | $12.0 | $13.2 |
| Gross margin | 21.2% | 19.8% |
| Operating loss | $(1.1) | $(1.2) |
| Loss from continuing operations | $(1.0) | $(0.4) |
| Net loss per diluted share | $(0.06) | $(0.03) |
| Cash from operating activities | $1.9 | $(4.2) |
Revenue fell 15.2%. Product revenue declined 22.3% to $18.6 million, service revenue declined 11% to $14.3 million, and contract revenue declined 11% to $23.7 million. Gross profit declined about 8.8%, while gross margin improved approximately 1.5 percentage points. Selling, general and administrative expense decreased to $9.3 million from $10.2 million; research and development expense decreased to $3.9 million from $4.1 million.
Pre-tax loss was nearly unchanged at $1.2 million, but the income tax benefit declined to $0.2 million from $0.9 million. The filing attributes the lower 2014 effective tax benefit rate (18.2%, versus 69.8%) to the expected mix of domestic and foreign taxable income; the prior-year benefit included a retroactive research tax credit. Q1 2013 also included a $15,000 loss from discontinued operations.
Segments and cash, debt and liquidity
- Hospitality: Revenue was $32.8 million, down from $39.9 million. Operating loss widened to $2.1 million from $1.7 million.
- Government: Revenue was $23.7 million, down from $26.7 million. Operating income rose to $1.5 million from $1.2 million. The U.S. Department of Defense accounted for 42% of consolidated revenue, compared with 40% a year earlier.
- Cash and working capital: Cash was $10.3 million at March 31, 2014, versus $10.0 million at year-end 2013. Current assets were $75.1 million and current liabilities $43.9 million. Operating cash generation was primarily supported by noncash items and a $4.1 million increase in deferred service revenue, partly offset by higher receivables.
- Investing and financing: Investing activities used $1.6 million, including $0.6 million of capital expenditures and $1.0 million of capitalized software costs. Financing activities used $0.1 million, primarily for debt repayment.
- Debt and credit access: Long-term debt totaled approximately $1.0 million, including $0.2 million current. No amount was drawn on the $20 million revolving credit line, which had an option to increase to $30 million. The existing facility was due to expire in June 2014; PAR had signed a commitment letter for a generally consistent revolving facility with availability for up to 36 months after closing. The company reported compliance with covenants at quarter-end.
Outlook, commentary and risks
Management expected fiscal 2014 capital requirements of approximately $3–5 million and believed cash, credit facilities and anticipated operating cash flow would be sufficient for the next 12 months. This is not a specific earnings or revenue forecast. The company noted that additional funding might be required or elected, and that future financing may not be available on acceptable terms.
Management cited timing of major-customer system deployments as the principal driver of lower product revenue; dealer-channel product revenue grew 24%, and SureCheck hardware revenue increased. Lower service revenue reflected fewer installation services, partly offset by depot-repair work. Contract revenue was affected by the timing of U.S. Army ISR task orders, partly offset by higher Defense communications support work. Improved service margins reflected better installation processes and lower field-repair costs; higher contract margins reflected favorable contract modifications, partly offset by investment in ISR technology.
Key risks include customer purchasing concentration and deployment timing, economic weakness in smaller regional quick-service restaurant markets, government funding and procurement uncertainty, competition and pricing pressure, technology development and commercialization, and foreign operations. The filing warns that weaker results could affect goodwill valuation and potentially lead to future impairment. No material changes to previously disclosed risk factors were reported. PAR reported no off-balance-sheet arrangements; the filing’s commitments and contingencies caption does not provide a clear amount or specific material contingency. Management said inflation had little effect in the quarter and foreign-exchange exposure was not expected to have a significant impact. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the replacement revolving credit facility closed on the expected terms before the existing facility’s June 2014 expiration.
- Whether Hospitality revenue and operating performance recovered after the quarter’s deployment-related decline, and whether growth in dealer channels, SureCheck and cloud-based ATRIO continued.
- Whether Government revenue and margins were affected by the timing or funding of ISR task orders and other federal contracts.
- Whether operating cash flow remained positive after the quarter’s working-capital benefit, including the increase in deferred service revenue.
- Whether customer concentration, particularly the Defense Department’s 42% revenue share and major Hospitality customers, created further volatility.
- Whether weaker legacy-product demand or other operating changes led to goodwill or intangible-asset impairment, and whether performance-based award assumptions were achieved.