PAR Technology Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Unless noted, financial amounts are in millions. PAR provides Hospitality technology products and services and Government technical and contract services. Hotel/spa results are presented as discontinued operations.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Continuing-operations revenue | $58.1 | $52.6 | $172.2 | $158.6 |
| Gross profit | $11.9 | $11.2 | $34.1 | $30.8 |
| Gross margin | 20.6% | 21.2% | 19.8% | 19.4% |
| Operating income | $1.9 | $1.4 | $4.5 | $1.9 |
| Income from continuing operations | $1.3 | $0.7 | $2.7 | $1.1 |
| Discontinued-operations loss, net of tax | $(2.8) | $(0.8) | $(4.5) | $(2.7) |
| Net loss | $(1.5) | $(0.1) | $(1.8) | $(1.6) |
| Diluted EPS | $(0.10) | $(0.01) | $(0.11) | $(0.10) |
Revenue increased 10.3% in Q3 and 8.6% year to date. Q3 product revenue rose 13.6%, service revenue 5.5%, and contract revenue 9.5%; nine-month growth was strongest in products (+13.6%). Product margins weakened to 28.6% in Q3 and 28.5% year to date, reflecting lower-margin hardware mix and, in Q3, a prior-year software rollout that did not recur. Service margins improved to 28.5% in Q3 and 28.1% year to date, supported by software-as-a-service and repair-center activity. Contract margins were 7.5% in Q3 and 6.5% year to date.
Q3 continuing-operations diluted EPS was $0.08, versus $0.04 in 2014; nine-month continuing-operations diluted EPS was $0.17, versus $0.07. The larger discontinued-operation loss drove consolidated net losses in both periods.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $1.7, including $2.3 from continuing operations and $0.6 used by discontinued operations; total operating cash flow was $3.0 in 2014. Continuing-operations cash generation declined, principally due to working-capital movements, including lower accounts payable.
- Investing activities used $6.8, including $3.0 for the Brink acquisition, $1.5 of capital expenditures, and $1.5 of capitalized software costs. Financing activities used $1.7, primarily from reducing credit-facility borrowings.
- Continuing-operations cash was $2.1 at September 30, 2015, down from $9.9 at December 31, 2014. The cash-flow statement reports total cash of $2.4, including $0.3 attributed to discontinued operations.
- Current assets were $84.9 and current liabilities $51.6. These totals include assets and liabilities held for sale. Debt comprised $2.1 current long-term debt, $3.4 drawn on the revolving line, and $0.6 long-term debt.
- The revolving facility provides up to $25.0, subject to asset-based borrowing availability; $3.4 was outstanding at 3.50%. PAR was in compliance with its covenants at quarter end. Management said existing cash, credit availability, and expected operating cash flow should cover requirements for the next 12 months, while noting additional funding might be required or elected.
Material changes, outlook, and risks
- After a strategic review, PAR agreed on November 4, 2015 to sell substantially all assets of its PSMS hotel/spa business to affiliates of Constellation Software. The base price is $16.6 cash: $12.1 at closing and $4.5 due 18 months after closing, subject to potential indemnification claims. Up to another $1.5 is contingent on 2016–2018 revenue and earnings targets. The transaction was subsequent to quarter end; the filing does not state a completed closing.
- PAR recorded a $1.8 impairment charge on the disposal group. The final sale gain or loss remains subject to working-capital and other customary adjustments. The business reported a nine-month discontinued-operations loss of $4.5 after tax.
- Brink’s remaining 49% interest transferred to PAR in September 2015. PAR paid $3.0 at the second closing; $2.0 is payable in September 2016. Contingent consideration of up to $7.0 remains tied to targets through 2018; its recorded estimated fair value was $5.0.
- Management emphasized investment in Hospitality software, including Brink POS and other cloud-based offerings, and efforts to grow Government services and win contract renewals. No specific revenue or earnings guidance was provided. Planned fiscal 2015 capital requirements were estimated not to exceed approximately $2.0–$4.0.
- Risks include reliance on major customers and U.S. Government contracts, hospitality-market softness, product development and commercialization, competition and pricing, foreign operations and currency movements, and potential goodwill or other asset impairment. McDonald’s accounted for 21% of nine-month revenue and the U.S. Department of Defense for 39%. Management reported economic uncertainty and potential weakness among some smaller QSR customers.
- Management stated inflation had little effect during the periods and estimated a 100-basis-point interest-rate increase would not materially affect results. No material changes to previously disclosed risk factors were reported; disclosure controls were deemed effective.
Key facts for investors to verify
- Sale closing, net proceeds, indemnification exposure, contingent payments, and final gain or loss for PSMS.
- Whether cash generation and working capital improve, given lower cash and reduced continuing-operations operating cash flow.
- Hospitality product margins and whether recurring software/service growth offsets lower-margin hardware mix.
- Performance of Brink POS and achievement of targets underlying the $5.0 contingent consideration and potential additional purchase payments.
- Customer concentration, Government contract funding and renewals, credit-facility borrowing availability, and ongoing covenant compliance.
- Potential impairment exposure: management cautioned that economic weakness could affect estimates used in goodwill impairment testing.