PAR Technology Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; filed November 8, 2013. Amounts below are in millions unless stated otherwise. PAR operates Hospitality technology and services businesses and Government systems, software, and support-services businesses. The 2012 sale of its Logistics Management business is reported as discontinued operations.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $55.5 | $61.1 | $181.7 | $178.7 |
| Gross margin | $12.4; 22.2% | $14.0; 23.0% | $39.0; 21.4% | $41.1; 23.0% |
| Operating income (loss), continuing operations | $0.009 | $1.2 | $(0.9) | $1.8 |
| Income from continuing operations | $0.4 | $1.3 | $0.3 | $1.8 |
| Net income, including discontinued operations | $0.4 | $1.4 | $0.1 | $3.3 |
| Diluted EPS | $0.03 | $0.09 | $0.01 | $0.22 |
- Q3 revenue fell 9%, as lower service and Government contract revenue outweighed modest product growth. For the first nine months, revenue rose 2%: product revenue increased 10%, while service revenue fell 4% and contract revenue fell 2%.
- Q3 product and service margins declined to 31.7% and 24.9%, respectively, from 34.3% and 29.6%; contract margin improved to 8.4% from 6.4%. Nine-month margins were 32.0% for product, 27.2% for service, and 6.6% for contracts, versus 36.6%, 29.7%, and 5.6% a year earlier.
- Nine-month operating cash flow was a use of $5.0 million, compared with $11.2 million provided in 2012. Continuing operations used $4.6 million, largely reflecting the timing of vendor and Government-contract payments and lower accounts payable and accrued expenses.
- Cash and equivalents were $10.1 million at September 30, down from $19.5 million at year-end 2012. Investing activities used $4.0 million, including $3.2 million of capitalized software costs; financing activities used $0.07 million.
- Total debt was approximately $1.1 million ($0.2 million current and $1.0 million long-term). PAR had no balance outstanding on its $20 million revolving credit facility, which could be increased to $30 million and expires in June 2014. It reported compliance with amended covenants. Current assets were $80.0 million and current liabilities $35.8 million.
Business drivers and changes
- Hospitality revenue was $37.4 million in Q3, down from $39.1 million; segment operating loss was $1.3 million versus $0.1 million income. For nine months, Hospitality revenue rose to $114.9 million from $110.8 million, but its operating loss widened to $4.0 million from $1.1 million.
- Government revenue was $18.2 million in Q3, down from $22.0 million, while operating income rose to $1.4 million from $1.2 million. Nine-month revenue was $66.9 million versus $68.0 million, and operating income improved to $4.1 million from $3.5 million.
- International product sales, particularly McDonald’s deployments in China, supported product growth. Q3 service weakness reflected contract changes and lower installation activity; Government contract revenue was affected by timing of U.S. Army ISR task orders. Management cited unfavorable product and service mix, while contract margin benefited from favorable contract modifications.
- SG&A decreased to $8.6 million in Q3 and $28.3 million for nine months, reflecting domestic Hospitality cost reductions. R&D increased to $3.7 million and $11.6 million, respectively, as PAR invested in Hospitality hardware and software. Capitalized software costs increased to $3.2 million for nine months from $2.5 million.
Outlook, risks, and notable items
- No specific revenue or earnings guidance was provided. Management expected fiscal 2013 capital requirements of approximately $7–$8 million and believed cash, available credit, and anticipated operating cash flow would cover requirements for the next 12 months, while noting additional funding might be needed or elected.
- Management said large international QSR customers’ markets remained generally strong, but smaller regional operators faced economic headwinds. It was reassessing Hospitality offerings to improve efficiency and profitability and continued investing in ATRIO hotel software, SureCheck food-safety and task-management products, distribution channels, and international expansion.
- Government results face uncertainty from U.S. defense workforce policy, procurement cycles, spending levels, and sequestration. Other stated risks include dependence on major customers, technology development and commercialization, competition and pricing, economic weakness in QSR markets, and foreign operations. McDonald’s represented 25% of Q3 revenue and the U.S. Department of Defense 33%; customer concentration is significant.
- PAR recorded an income tax benefit of $0.9 million for the first nine months, including a $0.4 million benefit from retroactive tax relief under the American Taxpayer Relief Act. The unusually high reported effective tax benefit rate was also affected by the expected mix of domestic and foreign taxable income.
- Management warned that economic instability could reduce product purchases, income, and cash flow and potentially lead to impairment charges, including for goodwill or legacy-product assets. Goodwill was $6.9 million at period-end. No material changes to previously disclosed risk factors were reported; no off-balance-sheet arrangements were disclosed.
- Nine-month results included a $0.2 million loss from discontinued operations, versus $1.5 million income in 2012. PAR sold substantially all LMS assets in January 2012. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Hospitality’s operating losses and the deterioration in product and service margins persist, and whether new product investments translate into revenue and profitability.
- How Government contract task-order timing, defense spending, and customer concentration affect future revenue, margins, and cash flow.
- Whether working-capital outflows reverse and cash generation improves, given cash fell to $10.1 million despite no revolver borrowings.
- The June 2014 credit-facility expiration, covenant requirements, and management’s liquidity assumptions, alongside planned capital needs.
- The sustainability and composition of reported tax benefits, and potential impairment exposure if economic or legacy-product assumptions weaken.