PAR Technology Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. PAR provides Hospitality technology products and services and Government technology and support services. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $57.4 | $59.5 | $113.9 | $126.2 |
| Gross margin | $12.3; 21.4% | $13.5; 22.6% | $24.3; 21.3% | $26.6; 21.1% |
| Operating income (loss) | $(1.0) | $0.3 | $(2.1) | $(0.9) |
| Net income (loss) | $(0.5) | $0.1 | $(1.5) | $(0.3) |
| Continuing operations EPS | $(0.03) | $0.02 | $(0.10) | $(0.01) |
| Operating cash flow | Not separately presented | Not separately presented | $5.8 | $(7.3) |
Q2 revenue fell 3.6% year over year; first-half revenue declined 9.7%. Product revenue rose 3.1% in Q2, helped by a 48% increase in worldwide dealer-network sales, but fell 10% for the first half as prior-year major-account rollouts ended. Service revenue declined 2.6% in Q2 and over the first half, reflecting service-model transitions and fewer installations. Contract revenue fell 11% in Q2 and 11.2% for the first half, primarily due to timing and activity on U.S. Army ISR contracts.
Q2 product and service margins declined to 31.3% and 27.4%, respectively, from 33.3% and 28.8%; contract margin declined to 5.3% from 7.4%. For the first half, product margin declined to 30.9% from 32.2%, service margin improved to 30.1% from 28.3%, and contract margin improved to 6.2% from 5.9%.
Segments and material comparisons
- Hospitality revenue was $37.9 million in Q2, up slightly from $37.6 million; first-half revenue was $70.7 million, down from $77.5 million. Hospitality reported operating losses of $1.8 million in Q2 and $3.8 million for the first half.
- Government revenue was $19.5 million in Q2, down from $21.9 million; first-half revenue was $43.2 million, down from $48.7 million. Government operating income was $1.0 million in Q2 and $2.4 million for the first half.
- First-half results also reflect a lower tax benefit than in 2013; the prior-year period included a $410,000 benefit related to retroactive tax relief. Q2 2013 included a $191,000 discontinued-operations loss; first-half 2013 included a $206,000 loss.
Cash, debt, and liquidity
Cash and equivalents were $13.0 million at June 30, 2014, up from $10.0 million at year-end. First-half operating cash flow was $5.8 million, versus $7.3 million used a year earlier; management attributed 2014 cash generation mainly to noncash charges and working-capital movements, including higher deferred service revenue. Investing activities used $2.7 million, including $1.2 million of capital expenditures and $1.5 million of capitalized software costs. Financing activities used $79,000.
Total debt was approximately $1.0 million, including $169,000 current and $833,000 long-term; no balance was outstanding on the revolving credit line. The renewed revolving facility provides up to $20 million, with an option to increase to $30 million, and runs through June 2017. PAR reported compliance with its covenants. Management expects fiscal 2014 capital requirements of approximately $3–5 million and believes cash, operating cash flow, and available credit will meet requirements for the next 12 months.
Outlook, risks, and notable items
- No specific revenue or earnings guidance was provided. Management described continued strength in markets served but cited weaker activity among some smaller regional quick-service restaurant customers and uncertainty in government procurement, workforce policies, and spending.
- PAR is pursuing recurring and subscription-based Hospitality revenue, including grocery and retail deployments of SureCheck and cloud-based ATRIO property-management software. Management also noted that it is assessing product and service alignment to improve efficiency and profitability.
- Management warned that weaker sales or cash flows could affect goodwill valuation assumptions and potentially lead to future impairment charges. Risks include major-customer purchasing changes, technology development and commercialization, competition and pricing, economic conditions, government contracts, and foreign operations.
- Customer concentration is significant: the U.S. Department of Defense represented 34% of Q2 revenue and 38% of first-half revenue. McDonald’s and Yum! Brands also each represented at least 10% of revenue in the periods disclosed.
- The company reported that it did not meet NYSE continued-listing standards as of May 22, 2014; the excerpt does not specify the standard or subsequent resolution. Management stated disclosure controls were effective and there were no material changes in internal control during the quarter.
- New revenue-recognition guidance is required beginning in fiscal 2017; PAR was evaluating its effect. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- The status, applicable requirements, and any resolution of PAR’s NYSE continued-listing deficiency.
- Whether the decline in major-customer rollouts and U.S. Army ISR contract activity continues, and the resulting effect on revenue and margins.
- Hospitality’s ongoing operating losses, product mix, and progress in growing recurring software and subscription revenue.
- Government and major-customer concentration, including contract funding, renewals, and task-order timing.
- Working-capital cash-flow movements, covenant compliance, and the availability and terms of the renewed credit facility.
- Goodwill and legacy-product asset valuations, including whether economic or sales weakness prompts impairment charges.