Business context and reporting period
PAR Technology Corporation filed this unaudited Form 10-Q for the three months ended March 31, 2018. Its two reportable segments are Restaurant/Retail, which provides POS, software, hardware and support solutions, and Government, which provides technical and engineering services and solutions, primarily to U.S. government customers.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $55.7 million | $65.9 million; down 15.5% |
| Gross profit and margin | $11.8 million; 21.3% | $15.1 million; 22.9% |
| Operating income | $0.1 million | $2.2 million |
| Net income | $68,000 | $1.4 million, including $183,000 from discontinued operations |
| Diluted EPS | $0.00 | $0.09 |
| Cash from operations | $(2.5) million | $(1.2) million |
| Cash and cash equivalents | $5.8 million at March 31 | $6.6 million at December 31, 2017 |
- Revenue by type: product $26.3 million, down 29.2%; service $13.2 million, down 8.0%; and contract $16.1 million, up 12.7% year over year.
- Restaurant/Retail revenue was $39.5 million versus $51.5 million; Government revenue was $16.1 million versus $14.3 million. Segment operating results were a $608,000 loss for Restaurant/Retail and $1.3 million income for Government.
- Product and service margins improved slightly to 26.2% and 27.7%, respectively. Contract margin fell to 8.1% from 11.0%.
- Operating cash use reflected lower earnings and working-capital movements. Investing cash use was $1.7 million, including $1.1 million of capitalized software costs. Financing provided $3.0 million, principally through borrowings. Cash declined by $838,000 during the quarter.
- At March 31, current assets were $69.4 million and current liabilities $42.1 million. Long-term debt was $133,000, the current portion of long-term debt $199,000, and line-of-credit borrowings $4.0 million. The line balance increased from $950,000 at year-end.
Material changes and management commentary
- Management attributed the product revenue decline primarily to the timing and comparison of major hardware installations for a tier 1 customer in Q1 2017. Service revenue declined with lower hardware support and installation activity, partly offset by Brink POS deployments. Contract growth reflected Mission Systems and ISR.
- Lower SG&A, including reduced internal-investigation costs and personnel savings, partly offset the lower gross profit. Investigation expenses were $300,000 versus $1.0 million a year earlier.
- PAR adopted ASC 606 on January 1, 2018 using the modified retrospective method; it reported no retained-earnings impact. The filing describes Restaurant/Retail hardware and software sales as generally recognized at a point in time and subscription/support services over time; Government contract revenue is generally recognized over time.
- Management’s strategy is to invest in Brink POS, SureCheck and cloud/SaaS offerings and expand sales channels; for Government, it aims to renew and extend contracts and pursue additional federal work. The filing provides no quantified revenue or earnings guidance.
Liquidity, risks and contingencies
- PAR’s $15.0 million revolving facility is subject to a borrowing base, financial covenants and other restrictions. The company failed to meet the required fixed-charge coverage ratio for Q4 2017 and, for Q1 2018, failed to meet both the consolidated indebtedness ratio and fixed-charge coverage requirements. JPMorgan Chase granted limited waivers; the May 8, 2018 waiver was effective through June 8, 2018.
- Management expected to refinance by the waiver expiration, said it was negotiating a new facility and believed operating cash flows and facility availability would meet needs for the next 12 months. It cautioned that refinancing was not assured and failure could materially harm liquidity and operations.
- An SEC subpoena followed the company’s voluntary disclosure of an internal investigation into conduct at its China and Singapore offices concerning possible FCPA and other legal or policy violations. The company could not predict government action or estimate a range of possible fines or penalties; these could be material.
- The 2015 sale of the Springer-Miller business included contingent earn-out consideration. No 2017 earn-out was received, and no 2018 or 2019 amount was recorded because achievement was not considered probable.
- McDonald’s represented 27% of Q1 revenue, Yum! Brands 11%, and the U.S. Department of Defense 29%, creating significant customer concentration.
Most important facts for investors to verify
- Whether PAR completed a refinancing before the June 8, 2018 waiver expired, and the new facility’s availability, pricing, covenants and collateral terms.
- Subsequent cash generation, working-capital needs and borrowing-base availability, given quarterly operating cash use and the increase in line borrowings.
- Restaurant/Retail demand and hardware project timing, Brink/SaaS deployment growth, and whether segment profitability improves.
- Developments in the China and Singapore investigation, including any government proceedings, sanctions, penalties or remediation costs.
- Government contract renewals and margins, customer concentration, and the company’s progress against its stated growth strategy.