PAR Technology Corporation — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. Comparisons are with FY 2014; results exclude the hotel/spa business from continuing operations after its sale and reclassify prior-period results accordingly.
Business context and performance
PAR operates Hospitality (restaurant and retail technology) and Government (U.S. defense and federal contract services). Hospitality generated about 62% of continuing revenue and Government about 38%. PAR sold substantially all assets of its hotel/spa technology business, PAR Springer-Miller Systems (PSMS), on November 4, 2015.
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Continuing revenue | $229.0 million | $217.9 million |
| Gross profit / margin | $46.1 million / 20.1% | $41.6 million / 19.1% |
| Operating income / margin | $6.6 million / 2.9% | $3.4 million / 1.6% |
| Continuing income | $4.0 million; $0.26 diluted EPS | $71,000; $0.00 diluted EPS |
| Net income (loss), including discontinued operations | $(0.9) million; $(0.06) diluted EPS | $(3.7) million; $(0.24) diluted EPS |
| Cash from continuing operating activities | $2.2 million | $9.6 million |
| Cash and cash equivalents at year-end | $8.0 million | $9.9 million |
Financial and operating changes
- Continuing revenue increased 5.1%. Hospitality revenue rose 8.4% to $141.2 million, while Government revenue was nearly flat at $87.9 million.
- Product revenue increased 11.7% to $94.4 million, led by global and domestic large accounts and Brink-related growth. Product margin fell to 27.8% from 30.3%, reflecting lower-margin peripherals and the nonrecurrence of a higher-margin 2014 software rollout.
- Service revenue increased 2.3% to $46.8 million; service margin improved to 29.8% from 23.4%, supported by software-as-a-service growth and repair-center activity. Contract margin rose to 6.8% from 6.1%.
- SG&A declined to $28.3 million from $29.0 million, while R&D increased to $10.2 million from $8.9 million, principally due to Brink POS development.
- PSMS contributed $14.5 million of discontinued-operation revenue and a $4.9 million after-tax loss in 2015, including a $2.4 million goodwill impairment on disposal. The sale consideration was $16.6 million: $12.1 million received at closing and an estimated $3.3 million fair value for the deferred payment. Up to $1.5 million of additional consideration is contingent and was not recognized.
- Continuing operating cash flow decreased to $2.2 million from $9.6 million. Investing activities provided $7.5 million, including the $12.1 million sale proceeds; financing activities used $7.7 million, including repayment of $5.0 million of net credit-facility borrowings and a $3.0 million Brink payment.
Debt, liquidity and outlook
Year-end debt was approximately $2.7 million, comprising the Brink purchase note and mortgage; there was no balance drawn on the $25 million asset-based revolving facility at December 31, 2015. Management estimated FY 2016 capital requirements at $3–5 million and said existing cash, expected operating cash flow and credit availability should meet requirements for the next 12 months. The facility is subject to borrowing-base limits and financial covenants. The filing provides no specific revenue or earnings guidance.
Government backlog was $101.2 million at year-end, of which $48.4 million was funded, versus $100.4 million and $53.9 million funded in 2014. About $64.8 million of 2015 backlog was expected to be completed in 2016 as funding is committed. Management cited continued investment in Brink cloud POS and SureCheck, while noting uncertainty around defense budgets, procurement and contract funding.
Material risks, contingencies and unusual items
- Material weakness in financial reporting controls: Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end. Weaknesses involved financial-employee background checks and documentation and review of treasury transaction approvals. The external auditor audited the financial statements but did not opine on internal control effectiveness.
- Unauthorized transfers and lender waiver: Unauthorized investments involving $776,000 of company funds occurred in September–November 2015 and were written off. The former CFO was terminated for cause in March 2016; an Audit Committee-directed investigation was completed, authorities including the SEC were notified, and PAR continued to seek recovery. The lender notified PAR of defaults; it waived them on March 24, 2016, subject to conditions including an independent controls review and implementation of recommendations. Potential investigations, sanctions, litigation or reputational effects remain uncertain.
- Customer concentration is substantial: the U.S. Department of Defense represented 38% of continuing revenue; McDonald’s 19% and Yum! Brands 10% in 2015. Government contracts can be reduced, modified or terminated, and fixed-price work carries cost-overrun risk.
- Other key risks include hospitality-sector cyclicality, intense competition and technology change, supplier concentration, international and currency exposure, and potential impairment of goodwill or software assets. Restaurant reporting-unit fair value exceeded carrying value by about 18%, leaving sensitivity to forecast performance.
- Other expense included the $776,000 investment write-off; the effective tax rate was 27.2%, compared with 98.1% in 2014, when a foreign-earnings repatriation drove significant tax expense. PAR reported a continuing-operations profit but an overall net loss due to discontinued operations.
Investor verification priorities
- Track recovery of the $776,000, any regulatory or legal developments, and whether the control remediation is implemented and tested effectively.
- Review compliance with the amended credit facility, its covenant and waiver conditions, borrowing availability, and the 2016 Brink note repayment.
- Assess operating cash-flow recovery and whether Hospitality growth and recurring software revenue translate into sustainable margins.
- Monitor Government contract funding and backlog conversion, and the continuing impact of reliance on the DoD and major restaurant customers.
- Verify collection of the deferred PSMS sale proceeds and any future contingent consideration; assess the divestiture’s effect on ongoing results.