PAR Technology Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparison is with FY2015. The filing was signed April 17, 2017. PAR provides restaurant and retail technology, including POS hardware and software, SaaS, and support services, and government technology and mission-support services.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $229.7 million | $229.0 million |
| Gross profit / margin | $46.2 million / 20.1% | $45.1 million / 19.7% |
| Operating income | $2.2 million | $6.6 million |
| Continuing-operations income | $2.5 million; $0.16 diluted EPS | $4.0 million; $0.26 diluted EPS |
| Net income (loss), including discontinued operations | $1.8 million; $0.11 diluted EPS | $(0.9) million; $(0.06) diluted EPS |
| Cash from continuing operating activities | $11.4 million | $2.6 million |
Restaurant/Retail revenue was $149.3 million, up 5.8%; Government revenue was $80.3 million, down 8.6%. Product revenue rose 6.2% to $100.3 million and service revenue rose 5.0% to $49.1 million; contract revenue fell 8.6% to $80.3 million. Product margin declined to 26.2% from 27.7%; service margin was 27.4% versus 27.5%; contract margin improved to 8.1% from 6.8%.
At year-end, cash was $9.1 million, current assets $82.0 million, and current liabilities $46.8 million. Long-term debt was $0.6 million, mainly a mortgage; the $15 million revolving facility had no outstanding balance and was reported available up to $15 million. PAR reported compliance with its credit covenants. Cash used in investing activities was $7.1 million, including $3.4 million of capital expenditures and $2.7 million of capitalized software; financing activities used $2.2 million. No off-balance-sheet arrangements were reported.
Material changes and unusual items
- Revenue was nearly flat, but operating income declined by $4.4 million. Corporate “Other” operating loss widened to $4.8 million from $0.5 million, while Government operating income increased to $6.2 million from $5.4 million and Restaurant/Retail operating income fell to $0.8 million from $1.7 million.
- SG&A increased to $31.4 million from $27.4 million. The filing attributes costs to investigations of $1.5 million related to a former CFO and $1.3 million related to China and Singapore; it also cites a $0.8 million human-capital-system write-off and $0.6 million for the initial ERP implementation phase.
- Other income was $1.3 million versus expense of $0.8 million, including a $1.1 million reduction in Brink contingent consideration and a $0.8 million insurance recovery related to the former CFO’s unauthorized fund transfers. A $0.5 million charge accelerated amortization for a discontinued software module.
- PAR sold substantially all assets of its hotel/spa technology business in November 2015. Discontinued-operations losses were $0.7 million in 2016 and $4.9 million in 2015. A $3.5 million note receivable from the sale was expected to be collected in May 2017, subject to adjustments; 2016 included reductions to the receivable.
Outlook, risks, and contingencies
Management expected operating cash flows and available credit to meet operating needs for the next 12 months. Its strategy emphasized growing recurring software and SaaS revenue, including Brink and SureCheck, while continuing investment in products and sales channels. Management cautioned that POS hardware commoditization may pressure pricing and margins. No numerical revenue or earnings guidance was provided.
- Investigations and compliance: The Audit Committee oversaw an investigation into China and Singapore import/export and sales documentation practices. The filing describes improper customs documentation and questionable payments, and states that some upper management knew or should have known of conduct in 2015 and early 2016. PAR notified the SEC and DOJ and said it was cooperating. Potential sanctions, fines, or remedial measures could be material; the company said it could not estimate their amount or outcome.
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2016 because of unremediated material weaknesses in oversight of foreign operations, monitoring, and compliance policies and training. Prior weaknesses concerning hiring checks and treasury procedures were reported as remediated. Management planned to roll out an enhanced compliance program in Q2 2017 and complete remediation efforts by the end of Q3 2017. The auditor gave an unqualified opinion on the financial statements but was not engaged to audit internal controls.
- Customer and contract concentration: McDonald’s represented 25% of revenue, Yum! Brands 11%, and the U.S. Department of Defense 35% in 2016. Government contracts may be modified or terminated, and fixed-price work carries cost-overrun risk.
- Other risks include intense competition, SaaS subscription renewals and revenue-recognition timing, supplier concentration for certain components, international regulatory exposure, and possible goodwill impairment. The Restaurant/Retail reporting unit’s estimated fair value exceeded carrying value by approximately 18%; no goodwill impairment was recorded.
Investor verification priorities
- Track remediation and independent testing of the disclosed material weaknesses, and any SEC, DOJ, or other agency findings, penalties, or required compliance measures.
- Reconcile operating-income deterioration with corporate costs, investigation expenses, segment results, and nonrecurring income items.
- Monitor Restaurant/Retail growth and SaaS recurring revenue against hardware mix, margins, inventory levels, and major-customer concentration.
- Confirm collection and final adjustments to the $3.5 million PSMS sale note receivable, and assess the related discontinued-operation effects.
- Review revolver availability and covenant compliance, particularly as the fixed-charge coverage threshold rises to 1.25-to-1.0 beginning with the quarter ending March 31, 2017.