PAR Technology Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted. The company operates Restaurant/Retail and Government segments.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $45.4 | $46.4 | $134.3 | $154.6 |
| Gross margin | $9.2; 20.4% | $8.5; 18.4% | $27.6; 20.5% | $31.7; 20.5% |
| Operating loss | $(4.0) | $(2.7) | $(9.5) | $(3.6) |
| Net loss | $(5.9) | $(16.7) | $(9.7) | $(18.0) |
| Diluted loss per share | $(0.36) | $(1.04) | $(0.61) | $(1.12) |
Q3 revenue declined 2.2%; nine-month revenue declined 13.1%. Q3 product revenue increased 2.6% and service revenue 3.4%, while contract revenue fell 10.9%. For the nine months, product revenue fell 26.3%, service revenue rose 2.2%, and contract revenue fell 9.2%.
Q3 Restaurant/Retail revenue rose 3.1% to $29.8 million, including Brink revenue of $10.9 million versus $6.4 million a year earlier; Brink SaaS revenue increased 32% to $3.4 million. Government revenue fell 10.9% to $15.5 million, primarily reflecting ISR funding contraction and delivery timing. For the nine months, both segments declined: Restaurant/Retail 15.1% to $87.7 million and Government 9.2% to $46.6 million.
Q3 gross margin dollars increased despite lower revenue, with product margin at 22.9% versus 21.9% and service margin at 33.7% versus 23.9%; contract margin decreased to 5.8% from 11.0%. Nine-month product margin was 24.3% versus 25.2%, service margin 29.8% versus 26.1%, and contract margin 8.5% versus 10.4%.
Cash flow, balance sheet, and financing
- Nine-month operating cash outflow was $9.6 million, compared with $2.0 million in 2018. Investing cash outflow was $11.6 million, including $7.0 million for the 3M drive-thru business, $2.4 million of capital expenditures, and $2.3 million of capitalized software costs. Financing provided $65.0 million, primarily from the convertible notes issuance.
- Cash was $46.9 million at September 30, 2019, versus $3.5 million at year-end 2018. Current assets were $103.1 million and current liabilities $32.0 million. The filing reports no borrowings under the former revolving credit line at quarter-end; it was repaid and terminated after the notes issuance.
- The company issued $80.0 million of 4.5% senior unsecured convertible notes due 2024. The balance-sheet carrying amount was $60.1 million after discount and issuance costs; the notes’ estimated fair value was $88.6 million. The liability component’s implied effective rate was 10.24%. Interest expense was $3.0 million for the nine months, including $1.3 million of discount accretion.
- Total liabilities were $102.0 million and shareholders’ equity $50.6 million. Lease liabilities totaled $3.0 million following adoption of the new lease standard.
Changes, outlook, and risks
- Management attributed the nine-month sales decline mainly to reduced major hardware project activity in CORE; Brink growth partly offset the decline. Higher Brink sales and marketing and software development spending contributed to increased operating expenses. Q3 SG&A rose 18.8% to $9.5 million.
- Net loss comparisons are affected by unusual tax items: 2018 included a $14.9 million valuation allowance charge against deferred tax assets; 2019 included an approximately $4.0 million tax benefit from release of a valuation allowance associated with the convertible notes accounting.
- On September 30, PAR acquired 3M’s Drive-Thru Communications Systems assets for $7.0 million cash, assuming a $1.4 million warranty liability. Purchase-price allocations are preliminary. The company identifies integration and realization of expected benefits as acquisition risks.
- The SureCheck product group was classified as held for sale after a planned divestiture; related nine-month charges included $0.8 million for inventory reserves and $0.8 million for intangible impairment. The sale closed October 30, 2019.
- Management stated that available cash was expected to meet operating needs for the next 12 months. No quantified revenue or earnings guidance was provided. Management cited growth in Brink/SaaS and Government contract renewals as opportunities, while noting uncertainty around U.S. defense staffing, procurement cycles, and spending.
- Potential China and Singapore authority actions remain uncertain following an internal investigation. The SEC indicated in April 2019 it did not intend to recommend enforcement action, and DOJ advised it would not separately proceed; possible fines or penalties from China or Singapore authorities could be material and were not estimable.
- The Government segment had approximately $201.6 million of existing contract value net of work performed at quarter-end, of which $59.1 million was funded. Revenue concentration included the U.S. Department of Defense at 34% of Q3 revenue; McDonald’s and Yum! Brands represented 10% and 14%, respectively.
- After quarter-end, PAR entered an agreement to acquire AccSys LLC, with closing expected in Q4 2019. The filing provides no purchase price in the supplied text.
Key facts for investors to verify
- Whether operating cash use and weak operating results improve, particularly as Brink/SaaS growth scales and CORE hardware activity evolves.
- How the 3M business integrates, performs, and affects margins, and the final purchase-price allocation.
- The timing, funding, and delivery outlook for Government contracts, especially ISR programs, and the extent of customer concentration.
- The final proceeds and any remaining obligations from the SureCheck sale, and the terms and completion of the proposed AccSys acquisition.
- Convertible-note dilution and financing costs, including the potential effect of conversion and the substantial difference between principal and carrying value.
- Any developments involving China and Singapore authorities, which could result in material but currently unquantifiable penalties.