PAR Technology Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted. PAR reported hospitality and government continuing operations. Its hotel/spa technology business was sold in November 2015 and is presented as discontinued operations.
Financial performance and position
- Q2 revenue: $52.7 million, down 10.6% from $58.9 million. Product revenue was $21.4 million (down 15.1%), service revenue $11.8 million (down 2.4%), and contract revenue $19.4 million (down 10.0%).
- Six-month revenue: $108.0 million, down 5.4% from $114.1 million. Product revenue declined 5.9% to $43.5 million and contract revenue declined 9.8% to $40.9 million; service revenue increased 4.6% to $23.5 million.
- Profit: Q2 income from continuing operations was $0.1 million, or $0.01 diluted EPS, versus $1.2 million, or $0.08, a year earlier. Six-month continuing income was $0.1 million, or $0.01 diluted EPS, versus $1.4 million, or $0.09. Net income was $0.07 million for Q2 and $0.09 million for the first half; prior-year first-half net loss was $0.28 million, including discontinued-operation losses.
- Margins: Q2 gross margin was $10.4 million, approximately 19.8% of revenue, broadly unchanged year over year. For the first half, gross margin was $21.1 million, approximately 19.5%, versus $21.7 million, approximately 19.0%. Q2 product margin fell to 24.7% from 27.6%; service margin rose to 30.4% from 27.7%; contract margin rose to 8.0% from 6.4%.
- Cash flow: The cash flow statement reports $1.0 million of operating cash from continuing operations for the first half, versus $0.5 million used in the prior-year first half; total operating cash including discontinued operations was $0.7 million provided. Investing used $3.2 million, including $1.2 million of capitalized software and $1.0 million of capital expenditures. Cash declined $2.7 million to $5.4 million. The MD&A gives a different prior-year continuing-operations operating cash figure ($2.3 million used); the filing does not reconcile this difference clearly.
- Liquidity and debt: Current assets were $76.1 million and current liabilities $41.6 million. Total debt on the balance sheet was $2.6 million, including current and long-term portions. The company also had a $25 million asset-based credit facility; the filing does not clearly state the amount drawn at June 30. A $2.0 million principal payment to former Brink owners was due September 18, 2016. Management said cash, credit availability, and expected operating cash flow should cover requirements for the next 12 months; anticipated 2016 capital requirements were not expected to exceed $5 million.
Changes, outlook, and material risks
- Hospitality operating results weakened: Q2 segment revenue fell to $33.2 million from $37.4 million, and the segment recorded an $0.8 million operating loss versus $0.7 million income. Government revenue declined to $19.4 million from $21.6 million, while operating income increased to $1.5 million from $1.3 million.
- Management attributed lower product sales largely to timing of large customer hardware deployments and lower channel-partner volume; new Brink POS deployments partly offset the decline. Recurring software-as-a-service and repair-center revenue supported service growth. Government contract revenue was affected by lower materials and subcontract revenue, partly offset by direct labor billings.
- SG&A and R&D increased, partly due to costs from the former CFO investigation, initial enterprise resource system implementation, and hospitality software development. Product mix pressured product margins; favorable contract closeouts and mix supported contract margins.
- On the sale of the hotel/spa business, PAR recorded a roughly $4.4 million note receivable due May 2017 and may receive up to $1.5 million of additional contingent consideration. No contingent amount was recorded because achievement of the targets was not considered probable. A $0.98 million working-capital payment resulted in a $0.03 million discontinued-operations loss in 2016.
- The former CFO’s unauthorized investments totaled $0.776 million and were written off in 2015. The investigation concluded in Q1 2016, but the Audit Committee continued to consider remedies. Management stated disclosure controls were ineffective at June 30 because material weaknesses in financial reporting controls had not been conclusively remediated. Remediation included enhanced background checks and treasury approval procedures.
- The lender waived defaults related to the unauthorized transactions, subject to conditions. An August 5, 2016 amendment extended the start date for the minimum fixed-charge-coverage covenant to September 30, 2016. The amendment is a subsequent event and underscores covenant and liquidity risk.
- Management cited uncertainty in hospitality demand, government procurement and funding, major-customer purchases, competition, foreign exchange, and global economic conditions. Brexit-related currency and business uncertainty was specifically noted. PAR also cautioned that economic weakness could affect goodwill valuation and potentially lead to impairment. No formal revenue or earnings guidance was provided.
Most important facts for investors to verify
- Reconcile the prior-year operating cash-flow figure in the MD&A with the cash flow statement.
- Confirm credit-facility utilization, covenant compliance after the September 30, 2016 covenant commencement date, and the effect of the Fifth Amendment.
- Track remediation and testing of the disclosed material weaknesses and any further findings or recoveries related to the former CFO’s transactions.
- Assess whether hospitality sales and margins recover as large customer deployments normalize, and whether recurring software-service growth continues.
- Monitor collection of the hotel/spa sale note, the contingent consideration targets, and payment of the Brink note due September 2016.
- Evaluate customer concentration: McDonald’s represented 24% of Q2 revenue and the U.S. Department of Defense 37%.