PAR TECHNOLOGY CORP annual report, FY2013

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PAR Technology Corporation — FY2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013; this is an annual filing, not a standalone fourth-quarter report. PAR operates Hospitality technology businesses and Government contracting services.

Business context and results

  • Revenue: $241.4 million, down 1.5% from $245.2 million in 2012. Hospitality revenue was $152.4 million, down from $156.7 million; Government revenue was $89.0 million, up from $88.5 million.
  • Revenue mix: Product revenue was $90.8 million (up slightly); service revenue was $61.5 million (down 7%); Government contract revenue was $89.0 million (up 1%). International revenue grew 17%, primarily from McDonald’s sales in China.
  • Profitability: Gross profit was $52.8 million, or 21.9% of revenue, compared with $50.9 million, or 20.8%, in 2012. Operating loss from continuing operations narrowed to $0.7 million from $4.0 million. Continuing-operations net income was $0.6 million, or $0.04 per diluted share, versus a $1.8 million loss, or $0.12 per share. Total net income was $0.4 million, or $0.02 per share, versus a $0.3 million loss in 2012.
  • Segment performance: Hospitality reported an operating loss of $5.0 million, improved from a $8.3 million loss. Government operating income rose to $5.9 million from $5.0 million.
  • Costs and margins: Product margin increased to 31.4% from 27.9%, principally because 2012 included accelerated software amortization. Service margin declined to 29.0% from 30.3%; Government contract margin improved to 7.2% from 6.4%. SG&A fell 6% to $37.9 million, while R&D increased 14% to $15.6 million.
  • Cash flow and liquidity: Continuing operations used $2.8 million of operating cash, compared with $15.1 million provided in 2012. Investing activities used $5.8 million, including $4.7 million of capitalized software costs; financing activities used $0.1 million. Cash fell to $10.0 million from $19.5 million. Current assets were $72.3 million and current liabilities $40.2 million.
  • Debt: Long-term debt was $1.1 million, including current maturities; no balance was drawn on the $20 million revolving credit line at year-end. The existing facility was due to expire in June 2014. A March 2014 commitment letter provided for a new $20 million facility, with an option to increase it to $30 million, subject to closing.

Material changes and unusual items

  • Net results improved despite lower sales, reflecting lower SG&A, improved product and Government margins, and lower software amortization than in 2012.
  • Cash from continuing operations swung from a $15.1 million inflow to a $2.8 million outflow, primarily due to working-capital movements, including lower accounts payable and accrued expenses and the timing of payments to vendors and on Government contracts.
  • The 2013 tax benefit was $0.8 million; the reported effective tax benefit rate was unusually high because it included a $0.4 million retroactive tax credit enacted in January 2013. The filing says the effective federal rate excluding that credit was 175%, reflecting the small pretax loss and other tax items.
  • Discontinued Logistics Management operations recorded a $0.2 million loss in 2013, compared with $1.4 million of income in 2012, which included a gain on disposal. No contingent consideration from the sale was recorded because achievement of the remaining targets was not considered probable.
  • Government contract backlog declined to $95.6 million from $139.5 million; only $40.9 million of the 2013 balance was funded. Approximately $60.9 million was expected to be completed in 2014, subject to funding commitments.

Outlook, risks, and contingencies

  • Management expected 2014 capital requirements of approximately $3–5 million and believed cash, credit availability, and anticipated operating cash flow would meet requirements for the next 12 months. No specific revenue or earnings guidance was provided.
  • Management’s strategy includes investing in ATRIO cloud hotel software, SureCheck food-safety and task-management solutions, distribution channels, and international expansion. Management identified uncertainty in U.S. defense staffing, procurement, and spending as a potential Government-business headwind.
  • Customer concentration is significant: McDonald’s represented 19% of 2013 revenue, Yum! Brands 13%, and the U.S. Department of Defense 37%. The top two Hospitality customers together represented 33% of revenue.
  • Other key risks include Government contract funding changes or termination, fixed-price contract cost overruns, hospitality-industry weakness, competition and technology shifts, supplier disruptions, foreign operations, and potential impairment of goodwill or software assets. Hotel/Resort/Spa goodwill fair value exceeded carrying value by about 16%; management recorded no goodwill impairment in 2013 but warned that missed growth assumptions could lead to future impairment.
  • Management said ordinary-course legal proceedings and Government contract audits were not expected to have a material effect; audits were completed through fiscal 2011 without material adjustments. The filing reports no off-balance-sheet arrangements. The auditor issued an unqualified opinion on the financial statements; management concluded internal controls were effective.

Investor verification priorities

  1. Confirm the cash-flow reversal and whether operating cash generation recovered after the substantial working-capital outflows.
  2. Track Government backlog conversion, funding levels, and contract awards, particularly given the backlog decline and DoD’s 37% revenue contribution.
  3. Assess whether Hospitality service revenue and margins stabilize and whether ATRIO and SureCheck investments produce the growth assumed by management.
  4. Review major-customer purchasing trends and concentration, especially McDonald’s and Yum! Brands.
  5. Verify closing and terms of the replacement revolving credit facility, covenant compliance, and liquidity after the June 2014 maturity of the prior facility.
  6. Monitor software and goodwill carrying values, deferred tax asset recoverability, and any subsequent impairment or tax valuation changes.