PAR Technology Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited consolidated results. PAR provides Hospitality technology products and services and Government solutions and services. The Logistics Management business sold in January 2012 is presented as discontinued operations.
Financial performance
Amounts are in U.S. dollars; financial statement amounts below are shown in millions.
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $66.7 | $55.6 |
| Gross profit / gross margin | $13.2 / 19.8% | $15.1 / 27.1% |
| Operating income (loss), continuing operations | ($1.2) | $1.2 |
| Continuing operations income (loss), net | ($0.4) | $1.0 |
| Net income (loss), including discontinued operations | ($0.4) | $2.5 |
| Basic and diluted EPS | ($0.03) | $0.16 |
| Operating cash flow, continuing operations | ($4.1) | $7.5 |
| Cash and cash equivalents at quarter-end | $14.1 | $14.7 |
- Revenue increased 20%. Product revenue rose 18% to $23.9 million, service revenue rose 4% to $16.0 million, and contract revenue increased to $26.7 million from $20.0 million.
- Hospitality revenue was $39.9 million versus $35.5 million, but segment operating results declined to a $1.7 million loss from $0.4 million income. Government revenue rose to $26.7 million from $20.0 million, with operating income of $1.2 million versus $1.0 million.
- Product margin fell to 31.2% from 45.6%, service margin to 27.9% from 31.3%, and contract margin to 4.7% from 5.3%. Management cited product mix and lower SureCheck software sales, an unfavorable service mix, and investment in ISR capabilities.
- Cash used in investing activities was $0.8 million, mainly reflecting $0.7 million of capitalized software costs and $0.2 million of capital expenditures. Cash used in financing activities was $0.04 million.
- At March 31, cash was $14.1 million; current assets were $84.9 million and current liabilities $41.6 million. Total debt was approximately $1.2 million, including $0.2 million current and $1.0 million long-term.
Changes, outlook, and risks
- The revenue increase reflected Hospitality technology rollouts for YUM! Brands, CKE/Carl’s Jr. and international McDonald’s and YUM! units, plus a new U.S. Army ISR systems integration contract. Contract revenue included subcontract pass-through activity, which management noted affected contract cost composition.
- Other income declined from $0.6 million to a $0.03 million expense. Q1 2012 included a $0.36 million unrealized gain on ORBCOMM shares; management also cited unfavorable foreign-currency adjustments in 2013.
- The 2013 income tax benefit was $0.85 million, including a $0.39 million benefit from retroactive provisions of the American Taxpayer Relief Act. The reported effective tax benefit rate was 70%.
- Management estimated fiscal 2013 capital requirements at approximately $5–$6 million and expected existing cash, available credit and anticipated operating cash flow to cover requirements for the next 12 months, while noting additional financing might be sought or elected.
- The $20 million revolving credit facility, with an option to increase to $30 million, had no borrowings outstanding and expires in June 2014. PAR reported compliance with amended covenants at quarter-end. A mortgage bears a 4.05% fixed rate through October 2014 and matures in 2019.
- Key risks include uncertain U.S. defense spending and contract funding, economic weakness in parts of the Hospitality market, competitive and pricing pressure, technology development and commercialization, foreign operations, and dependence on large customers. The U.S. Department of Defense generated 40% of Q1 revenue; McDonald’s and YUM! Brands generated 13% and 15%, respectively.
- Management warned that continued economic volatility could reduce sales, operating income and cash flow and potentially affect goodwill impairment estimates. No numerical revenue or earnings guidance was provided. Management stated there were no material changes to previously disclosed risk factors and no off-balance-sheet arrangements.
- Unusual items include the 2012 discontinued-operations gain on sale of LMS, which contributed $1.43 million to Q1 2012 net income; Q1 2013 discontinued operations recorded a $0.02 million loss. PAR had not recognized up to $3.95 million of possible ORBCOMM contingent sale consideration because 2012 targets were not met and remaining targets were not considered probable. An $0.83 million escrow receivable remained recorded.
Important facts for investors to verify
- Whether Hospitality margins and segment profitability recover as product mix, software sales and investments evolve.
- Cash conversion and working-capital movements, particularly vendor-payment timing and the ISR contract’s cash requirements.
- Government contract funding and customer concentration, including the large share of revenue from the Department of Defense.
- Credit-facility covenant compliance, available borrowing capacity and management’s stated 12-month liquidity outlook.
- Collectability and release terms for the $0.83 million escrow and whether any remaining ORBCOMM contingent consideration becomes probable.
- Potential impairment exposure for goodwill and legacy-product assets if market conditions or sales weaken.