PAR Technology Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. PAR provides restaurant and retail technology and government mission systems and services.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $46.4m | $48.9m | $154.6m | $177.1m |
| Gross margin | $8.5m (18.4%) | $9.2m (18.9%) | $31.7m (20.5%) | $38.9m (22.0%) |
| Operating income (loss) | $(2.7)m | $(2.6)m | $(3.6)m | $2.4m |
| Net income (loss) | $(16.7)m | $(1.5)m | $(18.0)m | $1.9m |
| Diluted EPS | $(1.04) | $(0.10) | $(1.12) | $0.12 |
- Q3 revenue fell 5.3%; nine-month revenue fell 12.7%. Product revenue declined 25.4% for the quarter and 30.8% year to date, primarily reflecting lower traditional tier 1 customer hardware sales and comparison with large 2017 projects. Service revenue rose 1.2% in Q3 but fell 4.9% year to date. Contract revenue grew 16.9% in Q3 and 17.2% year to date.
- Restaurant/Retail revenue was $28.9m in Q3 and $103.3m year to date, down from $34.0m and $133.3m. Government revenue was $17.4m and $51.3m, up from $14.9m and $43.8m. Brink SaaS and support growth and Government growth partly offset weaker legacy hardware and support revenue.
- The Q3 net loss includes a $14.9m full valuation allowance against deferred tax assets, a one-time, noncash tax charge. PAR cited cumulative losses and concluded realization of the deferred tax assets was not more likely than not. The filing reports a nine-month $14.2m income tax provision.
- Q3 product, service, and contract margins were 21.9%, 23.9%, and 11.0%, respectively, versus 23.4%, 23.1%, and 8.8%. Nine-month margins were 25.2%, 26.1%, and 10.4%, versus 25.1%, 27.1%, and 10.3%. Product margin pressure included increased SureCheck inventory reserves; service margin year-to-date was affected by call-center investment and lower hardware support absorption.
- Cash used in continuing operations was $2.0m for the first nine months, compared with $7.8m in 2017. Investing activities used $4.9m, including $3.0m of capital expenditures and $3.1m of capitalized software costs; financing provided $6.6m. Cash declined $0.8m to $5.8m.
- At September 30, cash was $5.8m, working capital was $20.0m, and the revolving credit facility had $7.0m drawn and $18.0m available under its $25m commitment. Including the revolver, current and long-term debt totaled approximately $7.2m. The facility is secured by substantially all company assets and bears interest at LIBOR plus 1.5%. Total liabilities were $50.8m and shareholders’ equity was $52.0m.
Material changes, outlook, and risks
- PAR entered a new three-year, $25m revolving credit agreement with Citizens Bank in June 2018, replacing its prior JPMorgan facility. The company paid off a $0.2m real-estate-backed loan after selling the related property on October 1, 2018; sale proceeds were approximately $1.1m.
- Management stated that it expects operating losses to continue as it invests in Brink, and anticipated it would not meet the credit agreement’s financial maintenance covenants for Q4 2018. Failure to obtain a waiver or modification, secure alternative capital, or repay/refinance the facility could trigger default, acceleration, and loss of access to credit. The filing states these conditions raise substantial doubt about the company’s ability to continue as a going concern. Management cited possible financing, equity issuance, real-estate value, revenue growth, and expense reductions as mitigants, but gave no assurance these would be available or successful.
- No formal revenue or earnings guidance is provided. Management’s strategy depends on growth in Brink, continued Government performance, and access to capital; it said Brink investment may need to be reduced or delayed if financing or operating objectives are not achieved.
- The company continues to cooperate with the SEC, DOJ, and China and Singapore authorities regarding an internal investigation into possible improper import/export and sales documentation activities. The company could not estimate potential fines or penalties, which may be material. Related costs were $0.3m in Q3 and $0.9m year to date.
- Customer concentration remains significant: McDonald’s represented 15% of Q3 revenue and 20% year to date; the U.S. Department of Defense represented 38% and 33%, respectively. PAR also identified shareholder activism and possible tariffs on goods sourced from China as risks.
- PAR adopted ASC 606 using the modified retrospective method, with no retained-earnings impact reported. It expects adoption of the new lease standard in 2019 to materially increase balance-sheet assets and liabilities.
Important facts for investors to verify
- Whether PAR obtained credit covenant waivers or amendments, met subsequent covenant tests, and maintained access to its revolving facility.
- Whether cash generation, Brink revenue growth, and cost controls improved enough to fund planned investment and operating needs.
- The drivers and sustainability of Restaurant/Retail hardware declines, Brink SaaS growth, and Government contract growth and margins.
- Any changes to the deferred-tax valuation allowance and the company’s ability to realize deferred tax assets.
- Developments in the FCPA-related investigations, including any enforcement action, penalties, or material remediation costs.
- How customer concentration, inventory reserves, tariff exposure, and the expected lease-standard adoption affect results and liquidity.