PAR Technology Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. PAR provides hospitality technology products and services and government contracting services. Results exclude the hotel/spa business sold in November 2015, which is presented as discontinued operations.
Financial performance
- Revenue: $55.3 million, up 0.2% from $55.2 million. Product revenue rose 6.5% to $22.1 million and service revenue rose 10.0% to $11.7 million; contract revenue fell 9.7% to $21.5 million.
- Gross profit and margins: Gross profit increased to $10.6 million from $10.0 million; gross margin improved to about 19.2% from 18.1%. Product margin declined to 25.5% from 29.1% amid lower-margin hardware mix; service margin rose to 26.5% from 24.5%, and contract margin to 8.7% from 5.7%.
- Operating results: Operating income fell to $64,000 from $655,000. SG&A rose 13.2% to $7.5 million, including investigation and business-transformation costs; R&D increased to $2.8 million from $2.4 million.
- Net income: Income from continuing operations was $15,000, or $0.00 per diluted share, versus $192,000, or $0.01 per diluted share. Net income was $15,000, compared with a $385,000 net loss in Q1 2015, which included a $577,000 discontinued-operations loss. The effective tax rate was 34.8%, versus 47.1%.
- Segments: Hospitality revenue increased to $33.8 million from $31.4 million, but its operating loss widened to $500,000 from $317,000. Government revenue declined to $21.5 million from $23.8 million, while operating income increased to $1.8 million from $1.2 million.
- Cash flow: Continuing-operations operating cash use was $982,000, versus $363,000. Total operating cash use was $1.1 million, versus $798,000 provided in Q1 2015. Investing cash use was $981,000, including $659,000 of capitalized software costs. Cash declined $2.3 million to $5.8 million.
- Liquidity and debt: Current assets were $72.6 million and current liabilities $41.3 million at quarter-end. Debt reported on the balance sheet totaled $2.65 million ($2.13 million current and $521,000 long-term). The $25 million asset-based revolving credit facility had no balance outstanding. The lender waived defaults related to unauthorized investments, subject to conditions and a credit-agreement amendment.
Changes, outlook and material matters
- Management cited stronger product sales to major accounts and Brink-acquired customers, recurring software-service growth, and higher installation and repair revenue. Lower contract materials and subcontract revenue offset growth elsewhere.
- Management estimated fiscal 2016 capital requirements of approximately $3–$5 million and believed cash, the credit facility and expected operating cash flow would cover requirements for the next 12 months. This is liquidity commentary, not earnings guidance.
- In 2015, unauthorized transfers totaling $776,000 were made contrary to company policies. The company wrote off the amounts as of December 31, 2015, terminated its former CFO for cause in March 2016, and continued efforts to recover the funds. The investigation was reported to federal authorities; potential proceedings, costs, penalties and reputational effects remain uncertain.
- The company identified a material weakness in internal control over financial reporting, including deficiencies in hiring diligence and treasury-transaction approvals. Disclosure controls were deemed ineffective at March 31, 2016. A consultant was engaged and remediation had begun, but management said the weakness would remain until remediation was implemented and tested.
- The company noted that economic uncertainty could reduce product purchases and affect operating results, cash flows and goodwill valuations. Other key risks include major-customer concentration, hospitality-market competition and government procurement and funding uncertainty. The U.S. Department of Defense represented 39% of revenue; McDonald’s 17% and Yum! Brands 12%.
- The PSMS sale provided $12.1 million at closing and included a $4.5 million deferred amount, with an estimated $3.4 million note receivable at quarter-end. Up to $1.5 million of additional contingent consideration was possible, but none was recorded because achievement was not considered probable.
Investor verification points
- Track implementation and independent testing of internal-control remediation, and any further developments from regulators, law enforcement or efforts to recover the $776,000.
- Review the credit-facility waiver conditions, covenant compliance and availability of borrowing capacity.
- Monitor receivables and working-capital trends: accounts receivable rose to $34.0 million from $29.5 million, contributing to operating cash use.
- Assess whether hospitality software growth and improved service margins can offset hardware mix pressure, government-revenue declines and higher operating expenses.
- Verify collection of the deferred PSMS sale consideration and any future determination of contingent proceeds.