PAR Technology Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. PAR provides restaurant and retail technology and U.S. government technical and engineering services. Figures are unaudited; amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $52.6 | $62.3 | $108.2 | $128.1 |
| Gross margin | $11.4; 21.6% | $14.6; 23.4% | $23.2; 21.4% | $29.6; 23.1% |
| Operating income (loss) | $(1.1) | $2.8 | $(1.0) | $5.0 |
| Net income (loss) | $(1.3) | $2.0 | $(1.3) | $3.4 |
| Diluted EPS | $(0.08) | $0.12 | $(0.08) | $0.21 |
| Operating cash flow | Not provided for quarter | $0.6 | $(5.7), including discontinued operations |
- Q2 product revenue fell 36% to $20.9 million; service revenue declined 7% to $13.9 million; contract revenue rose 22% to $17.7 million. For the first half, the respective changes were down 33%, down 8%, and up 17%.
- Restaurant/Retail revenue fell 27% in Q2 to $34.8 million; segment operating loss was $2.8 million versus income of $1.8 million. Government revenue grew 22% to $17.7 million, with operating income of $2.0 million versus $1.6 million.
- At June 30, cash was $8.7 million, current assets $73.0 million, and current liabilities $50.3 million. Total debt was approximately $6.1 million, including $5.8 million drawn on the revolving facility and approximately $0.3 million of mortgage debt. The $25 million facility had $19.2 million available.
- First-half investing cash outflow was $3.8 million; financing cash inflow was $5.5 million. Cash increased $2.1 million from year-end 2017 to $8.7 million.
Changes, outlook and risks
- Management attributed weaker results primarily to lower hardware projects and related support revenue from traditional large Restaurant/Retail customers, including comparisons against major 2017 installations. Brink SaaS growth partly offset the decline; its installed base grew 94% year over year. Government growth also provided an offset.
- Service margin declined to 26.8% in Q2 from 30.8%, reflecting call-center investment and lower hardware-support overhead absorption. First-half contract margin fell to 10.0% from 11.1%, mainly due to Mission Systems contract mix.
- PAR entered a new three-year, $25 million revolving credit agreement with Citizens Bank on June 5, 2018, secured by substantially all company and guarantor assets. The agreement includes leverage and minimum EBITDA covenants, among other restrictions. Borrowings bear interest at LIBOR plus 1.5%.
- Management stated that operating cash flow and available credit were expected to meet operating needs for the next 12 months. It noted that actual cash needs depend on growth, product investment, product acceptance, and potential government fines or penalties. No quantified revenue or earnings guidance was provided.
- The company continued to face SEC, DOJ and other authorities’ inquiries following an internal investigation into possible improper import/export and sales documentation activity at China and Singapore offices. Investigation-related expenses were $0.6 million for the first half, versus $1.6 million a year earlier. PAR could not predict outcomes or estimate reasonably possible penalties, which could be material.
- PAR adopted ASC 606 using the modified retrospective method on January 1, 2018, with no retained-earnings impact reported. Tax accounting effects under the 2017 Tax Act remained subject to finalization.
Important facts for investors to verify
- Whether Restaurant/Retail hardware and support revenue stabilize, and whether Brink SaaS growth can offset the decline.
- Government contract growth, margins, renewals, and exposure to federal procurement and spending changes.
- Compliance with the new credit facility’s financial covenants and the effect of borrowing costs on liquidity.
- Developments, potential penalties, and related costs in the China/Singapore investigation and government inquiries.
- Inventory and receivables quality: net inventories rose to $26.7 million from $21.7 million, and the doubtful-account allowance rose to $1.2 million from $0.9 million.