PAR Technology Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone fourth-quarter report. PAR provides restaurant and retail point-of-sale, software and support solutions, plus technical and mission-support services to U.S. government customers.
Financial results and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $232.6 million | $229.7 million |
| Operating income (loss), continuing operations | $(0.1) million | $2.2 million |
| Net income (loss), continuing operations | $(3.6) million | $2.5 million |
| Net income (loss), including discontinued operations | $(3.4) million | $1.8 million |
| Cash from operating activities, continuing operations | $(0.1) million | $11.4 million |
| Cash and cash equivalents at year-end | $6.6 million | $9.1 million |
- Restaurant/Retail revenue rose 14.9% to $171.6 million; Government revenue fell 24.0% to $61.0 million. Restaurant/Retail represented about 74% of revenue.
- Product and service revenue increased 14.8% and 15.1%, respectively; contract revenue declined 24.0%. Reported product margin fell to 25.4% from 26.2%; service margin rose to 29.8% from 27.4%; contract margin rose to 11.0% from 8.1%.
- Restaurant/Retail reported an operating loss of $2.8 million, versus income of $0.8 million; Government operating income increased to $6.5 million from $6.2 million.
- Operating expenses increased: SG&A to $38.2 million from $31.4 million and R&D to $13.8 million from $11.6 million, reflecting investments in sales, support, corporate infrastructure, Brink and SureCheck.
- The continuing-operations tax provision was $4.0 million, including a $4.5 million one-time deferred-tax-asset adjustment associated with the Tax Cuts and Jobs Act. The reported effective tax rate was 1,032.8%; it is not representative of the underlying operating result.
- Cash used in investing activities was $8.9 million, including $5.1 million of capital expenditures and $3.8 million of capitalized software. Financing activities provided $6.1 million. Total operating cash flow, including discontinued operations, was $0.3 million.
- Year-end debt included $0.95 million drawn on a revolving credit facility and a $0.4 million mortgage. The facility had $14.05 million of stated availability, subject to its borrowing base and covenants. Operating lease commitments totaled $14.7 million.
Material changes and outlook
- Revenue grew only 1.3% overall as Restaurant/Retail growth was offset by the Government decline. Management attributed Government’s lower revenue primarily to reduced volume in PMO and Mission Systems contracts.
- Management is investing to expand cloud-based Brink and SureCheck offerings, recurring SaaS revenue, sales capacity and channel partnerships. It describes continued growth and contract renewals as strategic aims, but provides no numerical earnings or revenue guidance.
- Government backlog was approximately $111.1 million at year-end, of which $38.2 million was funded; approximately $55.8 million was expected to be completed in 2018 as funding is committed.
- Management expected operating cash flows and available credit capacity to meet operating needs for the next 12 months, while noting that needs depend on growth, investment and potential investigation-related fines or penalties.
- PAR failed its required fixed-charge coverage ratio for the quarter ended December 31, 2017. JPMorgan Chase waived the resulting event of default on March 14, 2018. The credit agreement also requires a consolidated indebtedness ratio no higher than 3.0:1.0 and fixed-charge coverage of at least 1.25:1.0.
- An internal investigation into China and Singapore import/export and sales-documentation practices remained unresolved. PAR had voluntarily notified the SEC and DOJ, received an SEC subpoena in May 2017, and recorded $2.9 million of investigation expenses in 2017. The company said it could not estimate potential sanctions or penalties.
- Management reported that previously identified material weaknesses in internal controls had been remediated; management and BDO concluded controls were effective as of year-end. BDO issued unqualified opinions on the financial statements and internal control over financial reporting.
- Customer concentration is substantial: McDonald’s represented 33% of 2017 revenue, Yum! Brands 14%, and the U.S. Department of Defense 26%. The filing also cites cybersecurity and privacy exposure, competitive pressure, government contract funding/termination and cost-overrun risks, and reliance on key suppliers and skilled employees.
- The company adopted the new revenue-recognition standard effective January 1, 2018 using the modified retrospective method; its impact assessment was still being finalized at filing. PAR reported no material litigation and no off-balance-sheet arrangements.
Key facts for investors to verify
- Whether PAR maintained compliance with credit-facility covenants after the March 2018 waiver, and the facility’s ongoing borrowing-base availability.
- Developments, costs and possible consequences of the SEC/DOJ investigation, including any potential fines, penalties or required remedial measures.
- Whether Brink and SureCheck growth and SaaS mix improve Restaurant/Retail operating performance and cash generation.
- Whether Government contract awards, renewals and funding support backlog conversion, particularly the unfunded portion.
- The final effects of adopting the revenue-recognition standard and the sustainability of deferred tax assets and tax-credit carryforwards.
- Exposure to major customers: their combined share was 47% of 2017 revenue, versus 36% in 2016.