PAR Technology Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts below are in millions except per-share data. PAR operates Hospitality and Government segments; results exclude its divested Logistics Management business, which is reported as discontinued operations.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $59.5 | $62.1 | $126.2 | $117.7 |
| Gross profit / margin | $13.5 / 22.6% | $12.0 / 19.3% | $26.6 / 21.1% | $27.1 / 23.0% |
| Operating income (loss), continuing operations | $0.3 | ($0.5) | ($0.9) | $0.7 |
| Income (loss), continuing operations | $0.2 | ($0.5) | ($0.1) | $0.5 |
| Net income (loss), including discontinued operations | $0.1 | ($0.5) | ($0.3) | $1.9 |
| Diluted EPS | $0.00 | ($0.03) | ($0.02) | $0.13 |
- Q2 revenue mix: Product revenue rose 10.5% to $22.3 million; service revenue fell 4.4% to $15.3 million; contract revenue declined 15.4% to $21.9 million. Product growth included sales to Yum! Brands, CKE/Carl’s Jr., third-party distributors, and McDonald’s China. Contract revenue was affected by timing on U.S. Army ISR systems-integration work.
- Six-month revenue mix: Product revenue increased 14.5% to $46.2 million, service revenue was approximately flat at $31.3 million, and contract revenue increased 5.9% to $48.7 million.
- Margins: Q2 product, service, and contract margins improved to 33.3%, 28.8%, and 7.4%, respectively. For the first half, product and service margins declined to 32.2% and 28.3%; contract margin improved to 5.9%. The company attributed first-half product margin pressure partly to the nonrecurrence of a large 2012 SureCheck sale.
- Cash flow: Continuing-operations operating cash flow was a use of $7.3 million in the first half, versus $10.0 million provided in the prior-year period. Investing activities used $2.1 million, including $1.6 million of capitalized software; financing activities used $0.02 million. Cash declined $9.9 million to $9.6 million.
- Liquidity and debt: Current assets were $84.3 million and current liabilities $40.9 million at June 30. Total debt was approximately $1.2 million, including $0.2 million current; no borrowings were outstanding on the $20 million revolving credit facility. The facility, which expires in June 2014, has an option to increase to $30 million. PAR reported compliance with amended covenants.
- Other balance-sheet items: Inventory increased to $28.2 million from $26.2 million at year-end; the first-half obsolete-inventory provision was $1.3 million. Deferred service revenue rose to $14.6 million from $12.5 million.
Material changes and management commentary
- Q2 revenue declined 4.1%, but continuing-operations income improved from a loss to a profit, supported by higher product and contract margins and a favorable change in other income. First-half revenue grew 7.2%, while continuing-operations results weakened to a $0.1 million loss.
- Hospitality revenue increased to $37.6 million in Q2, while segment operating loss narrowed to $1.0 million. Government revenue declined to $21.9 million in Q2, though segment operating income increased to $1.5 million. For the first half, both segments grew revenue; Government operating income improved, while Hospitality remained loss-making.
- Management is investing in ATRIO cloud-based hotel software, SureCheck food-safety and task-management products, distribution channels, international expansion, and ISR technologies. Management noted weaker conditions among some smaller regional quick-service restaurant operators.
- PAR expects fiscal 2013 capital requirements of approximately $7–$8 million and believes cash, available credit, and anticipated operating cash flow should cover requirements for the next 12 months, while noting it may seek additional funding. No specific revenue or earnings guidance was provided.
Risks, contingencies, and unusual items
- Customer concentration is significant: the U.S. Department of Defense represented 39% of first-half revenue; McDonald’s and Yum! Brands represented 16% and 15%, respectively. Changes in defense spending, contract funding, procurement timing, or major-customer purchasing could affect results.
- Management cited economic uncertainty, hospitality-market weakness, competition and pricing pressure, technology development and commercialization, foreign operations, and potential effects on goodwill and other asset valuations. The filing warns that continued market instability could lead to future impairment charges.
- The first-half effective tax benefit was 83%, including a $410,000 retroactive tax benefit under the American Taxpayer Relief Act; management said the expected effective federal rate excluding that credit was 26%. The Q2 effective tax expense was 50%.
- Discontinued Logistics Management operations generated losses of $0.2 million in Q2 and $0.2 million for the first half, versus a first-half gain of $1.4 million in 2012. The 2012 comparison also included $4.0 million of proceeds from the business sale.
- The credit facility’s amended covenant calculations exclude specified nonrecurring items through December 31, 2013. The company reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether Hospitality’s product growth and margin improvements persist, particularly as PAR scales ATRIO and other new offerings.
- Whether first-half operating cash outflow and inventory growth reverse as hardware product lines transition and government-contract payment timing normalizes.
- ISR contract timing, margins, and U.S. defense funding exposure, alongside the 39% first-half revenue concentration in the Department of Defense.
- Liquidity and covenant headroom under the credit facility, including the June 2014 expiration and management’s stated funding expectations.
- Tax-rate comparability after the one-time $410,000 retroactive tax benefit and the effect of discontinued operations on reported net income.